Active trust development of local senior managers in international subsidiaries

Journal of Business Research 59 (2006) 73 – 80

Active trust development of local senior managers in international subsidiaries Julie Juan Li*, Kevin Zheng Zhou, Simon S.K. Lam, David K. Tse School of Business, The University of Hong Kong, Pokfulam, Hongkong, China Received 1 November 2003; received in revised form 1 November 2004; accepted 1 February 2005

Abstract How can overseas headquarters actively build the trust of their local senior managers? Building on the theory of active trust development, this study examines the roles of three strategies—localization, communication, and control—and their combinations in building the trust of local senior managers in international joint ventures (IJVs). On the basis of a survey of 138 IJVs operating in China, localization, communication, and control are important drivers of the development of local senior managers’ trust in overseas headquarters. Furthermore, the joint use of localization and communication represents a potent strategic combination for trust building. However, a localization strategy coupled with intense control hinders trust development. The findings provide important implications for foreign investors hoping to build the trust of local senior managers in uncertain environments such as China. D 2005 Elsevier Inc. All rights reserved. Keywords: Trust; Localization; Communication; Control; International joint ventures

Relationship building between partners is a challenge for all cooperative alliances (Das and Teng, 1998; Dyer and Chu, 2000) but especially for international joint ventures (IJVs) in emerging economies, in which trust is particularly difficult to build because of the high degree of risk and uncertainty incurred by the cross-national differences between partners with regard to culture, politics, and trade policy (Atuahene-Gima and Li, 2002; Child and Faulkner, 1998). Because firms increasingly rely on IJVs as strategic vehicles to maximize the economic benefits of emerging markets, it has become critical for overseas companies to understand how to develop the trust of local senior managers in IJVs (Luo, 2002). Researchers show great interest in trust, a form of social relations and processes that facilitates the coordination of exchanges. Various trust models have been proposed to illuminate how trust develops (e.g., McAllister, 1995; Rotter, 1971; Rousseau et al., 1998). Despite these efforts,

* Corresponding author. Tel.: +852 2964 5795; fax: +852 2858 5614. E-mail address: [email protected] (J.J. Li). 0148-2963/$ - see front matter D 2005 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2005.02.005

little systematic research has been done in the IJV context and trust ‘‘remains an under-theorized, under-researched, and therefore, poorly understood phenomenon’’ (Child, 2001, p. 274). In particular, the question of how companies actively build trust to strengthen their basis for cooperation in the global market remains unanswered. Child and Mollering (2003) propose a model that conceptualizes active trust development as a strategy by which foreign investors cultivate their trust in local staff. Drawing on Child and Mollering’s work, we examine the effectiveness of three strategies (i.e., localization, communication, and control) in enhancing local senior managers’ trust in their overseas headquarters. We assess how the combinations of these strategies impact trust building. Such knowledge may help us provide managers with a better understanding of which strategies to use and how to use them jointly to develop the trust of their local senior managers. We select China as our research context, because the idea of active trust development is highly relevant in emerging economies such as China, where trust is crucial to business relations but the institutions that give rise to trustful relations (e.g., law, regulations) are still inadequate (Child

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and Mollering, 2003; Luo, 2002). Taken together, this study aims to contribute to extant literature by examining the strategic roles of localization, communication, and control and exploring the simultaneous use of these strategies in the trust building of local senior managers in IJVs in emerging economies.

1. Conceptual development Scholars from various disciplines have investigated the concept and nature of trust from different angles. For example, the personality perspective, a classic approach, views trust as an individual characteristic and focuses on how individuals’ trusting dispositions are developed and influence the generation of trust (Hardin, 1993; Rotter, 1971). Accordingly, individuals’ propensity to trust represents the primary driver of the establishment of trust in an unfamiliar environment. The institutional perspective, in contrast, concentrates on situational factors (e.g., organizational and institutional structures and processes) to explain trust development. From this perspective, social institutions, such as regulations and laws, play the key role in trust building (Shapiro, 1987; Zucker, 1986). The sociological perspective suggests that trust evolves over time according to prior social interactions between exchange partners. Through ongoing interactions, exchange partners learn about each other and develop trust around norms of equity (Gulati, 1995). However, the rational choice perspective describes the development of trust in terms of an individual’s calculative decision-making processes (Coleman, 1990; Gambetta, 1988). According to Gambetta (1988), the trustor’s decision to engage in trust behaviors is made on the basis of whether the probability of receiving benefits from the trustee’s actions is high enough. A perspective that challenges the rational choice viewpoint is the emotionbased framework, which draws on sociological and social psychological literature to posit that, to a certain extent, an individual’s emotions give rise to trust (Mayer et al., 1995; McAllister, 1995). The merits and contributions of these trust development models have been well acknowledged in the literature. However, these models view trust building from the viewpoint of the trustor (i.e., the trusting party) and overlook the role of the trustee (i.e., the trusted party). In our research context, the trustor is the local senior manager, and the trustee is the overseas headquarters, namely, the parent companies headquartered in a country outside China. Although trust development may be affected by the trustor’s personality (personality model), cognition (rational choice model), affects (emotion model), exchange history (sociological model), and/or surrounding context (institutional model), the trustee also can play an active role in fostering a trust relationship (Giddens, 1994; Luhmann, 1988). As Luhmann (1988, p. 95) notes, ‘‘trust has to be achieved within a familiar world,’’ and trustees can purposely shape

the trust process toward familiarization. Accordingly, we consider how trustees (i.e., overseas headquarters) can actively and strategically build the trust of their trustors (i.e., local senior managers). 1.1. Active trust development model Recently, Child and Mollering (2003) advance their ‘‘active trust development’’ model, which defines trust as ‘‘a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behavior of another’’ (Rousseau et al., 1998, p. 395). According to their model, active trust development is an organizational strategy to build the foundation on which trust is based. Although various such strategies can be used, we focus on localization, communication, and control strategies because they are particularly relevant to international business activities (e.g., Das and Teng, 1998; Hu and Chen, 1996; Luo, 2002). In the IJV setting, trust building can be especially difficult because the context is ambiguous and uncertain and does not foster confidence. Giddens (1994) hence suggests that intense and intimate communication is necessary to trust development. Furthermore, promoting an effective localization program may reduce ambiguity and cultivate the familiarity that leads to trust (Child and Mollering, 2003). And tight control may decrease uncertainty and facilitate the knowledge transfer that gives rise to a foundation for trust building (Das and Teng, 1998). Thus, drawing on Child and Mollering’s model, we study how overseas headquarters strategically build the trust of IJV local senior managers in their overseas headquarters through localization, communication, control. Extending previous work, we examine how these strategies, when used jointly, affect trust building of local senior managers. 1.2. Main effects of trust-building strategies 1.2.1. Localization Effective localization refers to ‘‘the development of jobrelated skills within the local population and the delegation of decision-making authority to local employees, with the final objective of replacing expatriate managers with local managers’’ (Wong and Law, 1999, p. 26), as IJVs in China have been doing rapidly (Fryxell et al., 2004). Localization programs help foster the trust of local staff members for several reasons. First, the local staff is a valuable resource for foreign firms through which they can gain access to local knowledge and the local market. Without such knowledge, it is difficult for foreign firms to penetrate existing personal and business networks in an unfamiliar market (Wong and Law, 1999). However, with an effective localization program, foreign firms and local staff can gain a better understanding of each other, which leads to familiarity and the grounds for trust development (Luhmann, 1988). Second, in the eyes of local managers, part of an expatriate’s

J.J. Li et al. / Journal of Business Research 59 (2006) 73 – 80

job is to be a watchdog, monitoring the work pace and supervising the local staff’s activities (Fryxell et al., 2004). Because the presence of expatriates implies that local managers have less autonomy, it creates an atmosphere of distrust, whereas transferring management from expatriates to local managers may facilitate the creation and maintenance of trust. Third, localization signals a foreign firm’s commitment to a local market. Presumably, its willingness to increase its vulnerability by relying on local managers reflects the firm’s trust in the local staff and should lead to reciprocal trust from local employees (Child and Mollering, 2003). Therefore, we posit that H1. The more effective the localization program, the stronger the trust of local senior managers in the overseas headquarters. 1.2.2. Communication Communication is the formal and informal sharing of meaningful, timely information between partners (Anderson and Narus, 1990). When communication between exchange partners becomes more effective, relevant information sharing increases, and partners get to know each other better, which then fosters shared identification between those partners (Dutton et al., 1994). The shared identity that results from such an interaction, such as similar beliefs and judgments about future developments, leads to mutual trust (Kogut and Zander, 1996). Furthermore, when partners exchange messages about plans, programs, expectations, and goal setting, they can achieve an integrative agreement and prevent misunderstandings (Rapert et al., 2002). Communication thus enhances trust by aligning the partners’ perceptions and expectations, resolving disputes, and coordinating behavior (Das and Teng, 1998; Eisenberg and Goodall, 1993). In addition, communication improves trust by reducing role ambiguity, which is the degree of discrepancy between the information available and the information needed to perform a job (Sigh and Rhoads, 1991). This lack of clarity creates conflicts about goals and hinders trustful relations because partners often misunderstand their role requirements (Atuahene-Gima and Li, 2002). Finally, communication conveys considerable knowledge and provides cues for interpreting and understanding exchange partners’ behavior and motivations (Dyer and Chu, 2000), which leads to less opportunistic behavior and facilitates trust building. Therefore, we hypothesize that H2. The more effective the communication between the overseas headquarters and the local firm, the stronger the trust of local senior managers in the overseas headquarters. 1.2.3. Control The relationship between trust and control has been controversial. Control by an overseas headquarters necessarily affects the behavior and output of the local firms (Ouchi, 1977). As a coordination mechanism, control relies

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on asymmetric power, whereas trust employs shared values and norms, which may mean that control has a negative impact on or substitutes for trust (Argyris, 1952; Inkpen and Currall, 1997; Leifer and Mills, 1996). Some scholars, however, suggest that trust and control are complementary and that control may foster trust (e.g., Das and Teng, 1998). The logic is that control sets up the formal rules and standardized procedures that build the foundations for trust to develop (Sitkin, 1995). Child and Mollering (2003) further argue that such a foundation is critical for trust building in uncertain environments such as China. Given the transitional nature of the Chinese economy, we tend to agree that a proper control mechanism may foster trust in IJVs in China. Because Chinese local managers often are unfamiliar with modern management, marketing, financing, and international business practices (Deng, 1998; Harding, 1998), rules, procedures, and orders from overseas headquarters help guide their behaviors (Smith et al., 1996; Wong and Law, 1999). As a result, tight control facilitates coordination, knowledge transfer, and learning and, in turn, satisfactory alliance performance (Kumar and Seth, 1998). These positive outcomes then build local senior managers’ confidence and trust in overseas headquarters. In addition, in emerging economies, the business environment is highly uncertain and unfamiliar to foreign firms. Regulations and rules that are based on control not only provide stability and confidence in the relationship (Powell, 1996) but also help establish a ‘‘track record’’ for the local staff with good performances and facilitate the development of trust (Sitkin, 1995). Similarly, Child and Mollering (2003) suggest that bringing control in an uncertain context (e.g., China) helps establish familiarity and predictability, which are the necessary conditions for trust development. In their empirical study of strategic alliances, Aulakh et al. (1996) also find that control enhances trust. For these reasons, we propose that H3. The higher the level of control of the overseas headquarters over the local firm, the stronger the trust of local senior managers in the overseas headquarters. 1.3. Simultaneous use of trust-building strategies Although we discussed each strategy separately, organizations do not rely on just one strategy. Instead, they often use multiple strategies simultaneously to take advantage of their collective impacts (Barney, 1991). However, little work examines the simultaneous use of trust-building strategies for trust development. We attempt to fill this void by empirically investigating the combined use of localization, communication, and control strategies to cultivate the trust of local senior managers. Because localization is a pivotal, unavoidable strategic decision for foreign parent companies in China (Hu and Chen, 1996; Wong and Law, 1999), we center our discussion on the interaction between localization and the other two strategies.

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The objective of localization is to develop job-related skills within the local population, delegate decision-making authority to local employees, and replace expatriates with local managers (Wong and Law, 1999). However, local managers, because of their social, cultural, and historical background, may not understand overseas headquarters’ strategic goals or share foreign companies’ deeply embedded values and norms (Hu and Chen, 1996; McDermott and Boyer, 1999; Noble, 1999). Through effective communication, however, the company can facilitate the transfer of information about current and future tasks and promote a common understanding about the organization and its environment (e.g., Kumar and Seth, 1998), which enables local managers to share the values and goals of overseas headquarters (e.g., Rapert et al., 2002). Therefore, a high level of communication reinforces and enhances the effect of a localization strategy for trust building. We propose that H4. The collective use of communication strengthens the effect of localization on trust. The simultaneous use of localization and tight control, however, may have a negative effect on trust building among local senior managers. Whereas localization enables local senior managers to enjoy a high degree of task autonomy and independence, the extensive monitoring of their behavior and outcomes by overseas headquarters makes local senior managers unable to make decisions autonomously (Roth and Nigh, 1992). That is, on the one hand, overseas headquarters delegate more responsibilities and decision-making authorities to the local senior managers through increased localization (Wong and Law, 1999). On the other hand, extensive control discourages local managers to make decisions independently. In such conditions, local managers may perceive the overseas headquarters’ localization effort as a means to achieve efficiency rather than as a commitment to the career advancement of the local managers (Rapert et al., 2002; Wong and Law, 1999). Therefore, increased levels of control may offset the positive impact of a localization program on the trust of local senior managers. Thus, we expect that H5. The collective use of tight control weakens the effect of localization on trust. Because our literature review suggests no compelling argument about the interaction between communication and control, we do not formalize this hypothesis. Instead, the empirical analysis explores the possibility.

tional corporations have entered China as both IJVs and wholly owned subsidiaries, and China absorbs more than 20% of the total foreign direct investment worldwide (Zhou et al., 2005). Compared with wholly owned subsidiaries, IJVs are more difficult to manage because of their crosscultural and interorganizational nature, which poses a challenge for research on trust. Indeed, trust is particularly difficult to build in IJVs because partners may differ widely in their cultural background and business operations (Atuahene-Gima and Li, 2002; Child and Faulkner, 1998; Das and Teng, 1998). Practically, IJV is a more popular mode by which multinational companies enter the Chinese market. Approximately 70% of the foreign investment in China is in the form of IJVs (Luo, 2002). Therefore, we test our hypotheses in the context of IJVs instead of wholly owned subsidiaries. We selected IJVs that intended to sell their products in the Chinese market rather than those set up mainly for production and exporting purposes. The former have a stronger commitment to the Chinese market, which makes building the trust of the local managers more critical for them. We obtained a sample frame consisting of 2260 companies in 48 consumer durable and nondurable product categories from the China Marketing and Media Study (CMMS). This list includes all the brands purchased and used in these product categories by respondents surveyed by the CMMS and their corresponding companies. From it, we randomly selected 150 IJVs. Telephone calls were made to identify a local senior manager in each IJV (e.g., general manager, regional manager) as the respondent. The respondent was further screened to ensure that he or she was knowledgeable about the company’s various functional areas and committed to cooperating with the research. Hoskisson et al. (2000) suggest that in an emerging economy, collaboration with local researchers is a key means to obtain reliable and valid information; in addition, a face-to-face interview is desirable because it increases the response rate and generates more valid information. Therefore, we commissioned a national marketing research firm to carry out the survey through personal interviews. All respondents were informed in advance of the confidentiality of their responses, and the academic purpose of the project was explained to them through an official university letter from the researchers. Each respondent was rewarded with a valuable gift and promised a summary report of the survey. These efforts were highly effective. Altogether, 138 complete surveys were obtained, with a high response rate of 92%.

2. Method

2.2. Measures

2.1. Sampling and data collection

All our measures were adapted from established studies, professionally translated with back translation to ensure conceptual equivalence (Hoskisson et al., 2000), and then pretested on a sample of 10 senior managers. On the basis of the pretest responses, we revised several questionnaire items

We test our hypotheses by examining IJVs in China, the world’s largest emerging economy, where rapid growth has created huge opportunities for foreign companies. Multina-

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to enhance their clarity. All the scales were measured with a seven-point Likert scale (1 = strongly disagree; 7 = strongly agree). We reported the measurement items in the Appendix. The study adapts Dyer and Chu’s (2000) scale to measure local senior managers’ trust of their overseas headquarters (Cronbach a = .91, composite reliability [CR] = .91). The measure of localization was adapted from Wong and Law (1999) and Fryxell et al. (2004). It has four items pertaining to the effectiveness of the localization program (a = .82; CR = .83). The measure of communication was adapted from Smith et al. (1994). It consists of four items about the ongoing communication between local senior managers and the overseas headquarters (a = .92, CR = .92). We measured control with four items adapted from Roth and Nigh (1992). The items describe the extent of overseas headquarters’ control over the local management team (a = .87, CR = .87). Because the rational choice perspective emphasizes the possible economic stimulus of trust development (e.g., Coleman, 1990; Gambetta, 1988), we obtained firm profit information from secondary data and included it as a control. We also controlled for firm age because sociologists suggest that trust evolves over time (e.g., Gulati, 1995). Firm age was measured as the number of years since the IJV first set up in China. In addition, we controlled for firm size, equity share, and industry type. Firm size was measured by the logarithm of the number of employees. Equity share held by overseas companies was assessed as a continuous variable, which ranges from 30% to 90% with a mean of 60%. Industry type was coded as a dummy variable (0 = nondurable products; 1 = durable products). 2.2.1. Common method assessment Because we collected information about dependent and independent variables from the same respondent, a common method variance problem may occur. We checked this potential problem through the Harman one-factor test (Podsakoff and Organ, 1986). A factor analysis of the dependent and independent variables resulted in the expected four-factor solution that accounts for 76% of the total variance; and factor 1 accounts for 26% of the total variance. Because a single factor did not emerge and factor 1 did not explain most of the variance, common method bias is unlikely to be a concern for our data.

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2.2.2. Construct validity We refined the measures and assessed their construct validity in several ways. First, we ran exploratory factor analyses for the four focal constructs and achieved the theoretically expected factor solutions. Second, we ran reliability analyses for each construct to verify that all the measures demonstrate satisfactory Cronbach coefficient reliability. Third, we ran confirmatory factor analyses to assess the convergent validity of the measures with latent variable structural equation modeling. The model fit the data satisfactorily (v 2(98) = 171.48, p < .01; goodness-of-fit index [GFI] = .87, confirmatory fit index [CFI] = .95, Incremental fit index [IFI] = .95; root mean square error of approximation [RMSEA] = .07), and all factor loadings were highly significant ( p < .001), indicating the unidimensionality of the measures (Anderson and Gerbing, 1988). Furthermore, the composite reliabilities were all greater than the .70 benchmark (.83 – .92), and the average variance extracted either exceeded or was close to .50. Therefore, these measures demonstrate adequate convergent validity and reliability (Fornell and Larcker, 1981). We assessed discriminant validity of all four latent constructs through chi-square difference tests. All the constructs in pairs (6 tests altogether) were tested if the restricted model (in which the correlation was fixed as one) was significantly worse than the freely estimated model (in which the correlated was estimated freely). All the chisquare differences were highly significant, showing the evidence for discriminant validity (Anderson and Gerbing, 1988). For example, the comparison regarding trust and localization yielded a v 2(1) = 18.99 ( p < .001), suggesting these two constructs are distinct. Taken together, these results show that the measures in this study possess adequate reliability and validity (Anderson and Gerbing, 1988). In Table 1, we present the basic descriptive statistics and the correlations of the measures.

3. Analyses and results Because our model contains interaction effects (H4 and H5), a hierarchical moderated regression is appropriate to test the hypotheses. To mitigate the potential threat of

Table 1 Means, standard deviations, and correlations

1. 2. 3. 4. 5. 6. 7. 8. 9.

Trust Localization Communication Control Firm profit Firm age Firm size Equity share Industry type

Mean

S.D.

5.11 5.20 5.17 4.87 67,069 9.11 6.04 60.04 .41

.94 .86 1.18 1.02 138,224 13.80 1.40 20.85 .49

N = 138. *p < .05 (two-tailed). **p < .01.

1 1.00 .52** .26** .50** .05 .03 .07 .13 .03

2 1.00 .19* .20* .08 .06 .05 .06 .11

3

1.00 .02 .04 .01 .01 .24** .06

4

1.00 .06 .11 .14 .22** .01

5

1.00 .02 .02 .01 .01

6

1.00 .17 .16 .16

7

1.00 .07 .12

8

9

1.00 .07

1.00

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multicollinearity, we mean centered all independent variables that constitute interaction terms and created the interaction terms by multiplying the relevant mean-centered variables (Jaccard et al., 1990). The largest variance inflation factor, a multicollinearity indicator, is 1.3, so multicollinearity is not a concern in our analysis. To assess the explanatory power of each set of variables, we include only the control variables in model 1; add localization, communication, and control in model 2; then include the interaction terms in model 3. Model 3 accounts for 55% of the variance in trust, which is a highly satisfactory and encouraging amount of explanatory power. We summarize the results in Table 2. H1 – H3 pertain to the main effects of the focal strategies on trust building. In Table 2, model 3 shows that the localization program has a positive effect on trust (b = .41, p < .001), in support of H1. Furthermore, communication is positively related to trust in overseas headquarters (b = .21, p = .002), providing support for H2. And in support of H3, there is a strong positive relationship between control and trust (b = .42, p < .001). We also explored whether control has an inverted U-shaped relationship with trust by adding a quadratic term of control in the model. The results show that the quadratic term is not significant (b = .09, p = .239). In H4 and H5, we argue that more effective communication will strengthen the effect of localization on trust, whereas a higher degree of control will dampen its impact. The results show there is a positive and significant interaction between localization and communication (b = .18, p = .005) and a negative and significant interaction between localization and control (b = .17, p = .008). Therefore, H4 and H5 are fully supported. Table 2 Standardized coefficient estimates: hierarchical moderated regressions Variables

Control Variables Firm profit Firm age Firm size Equity share Industry type

Trust Model 1

Model 2

Model 3

.054 .017 .090 .142 .057

.066 .027 .112 .019 .015

.051 .006 .102 .001 .031

.391*** .179** .432***

.412*** .210** .422***

.481 .452*** 14.970 p < .001 8,129

.181** .171** .023 .545 .064*** 13.700 p < .001 11,126

Main Effects H1: localization H2: communication H3: control Interactions H4: localization  communication H5: localization  control Communication  control R2 DR 2 Model F Significance Df **p < .01. ***p < .001.

.029 .785 p = .563 5,132

3.1. The effects of controls The results also indicate that profit has no impact on trust (b = .05, p = .405), so economic benefit is not a significant contributor to local senior managers’ trust in their overseas headquarters. Firm age also is not significantly related to trust (b = .01, p = .920). Thus, the logic proposed by the social perspective—‘‘trust develops over time’’—does not seem to apply in this research context. It may be that, in a highly unfamiliar and uncertain environment, a longer history leads to both trust and distrust (Child and Mollering, 2003). In addition, firm size, equity share, and industry type have no significant influence on trust building. The interaction between communication and control is not significantly related to trust.

4. Discussion Building on the model of active trust development, our study scrutinizes the efficacy of localization, communication, and control strategies for enhancing trust both individually and in combination. Our findings contribute to the literature in several ways. First, our study adds to extant research on trust by demonstrating that trustees (i.e., overseas headquarters) can actively and strategically build the trust of their trustors (i.e., local senior managers). Previous research has suggested factors such as trustors’ personality (Hardin, 1993), cognitive capability (Gambetta, 1988), affects (McAllister, 1995), and exchange history (Gulati, 1995), influence the formation of trust. Taking a different perspective, our study highlights the important role of trustees in trust building. Our findings indicate that overseas headquarters can actively implement a localization program to enhance their local senior managers’ trust. Effective communication between overseas headquarters and local senior managers also fosters the trust of local managers. Moreover, overseas headquarters may utilize a proper control mechanism to increase trust. In an uncertain and complex environment such as China, a power-based coordination mechanism (i.e., control) seems helpful for establishing familiarity and developing a shared knowledge base that gives rise to trust (Das and Teng, 1998). Second, in addition to demonstrating how certain strategies work individually, we provide a refined understanding of strategy combinations in trust building. While firms often use multiple strategies collectively in practice, the trust literature remains silence on the simultaneous use of trust-building strategies for trust development. Our study fills this research gap by examining how various combinations of these strategies affect trust building. We find that a communication strategy reinforces the effect of localization on trust building. Because a successful localization program requires the understanding, cooperation, and support of

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local senior managers, a communication strategy enhances the program’s effect by aligning the goals of local managers and overseas headquarters and encouraging cooperative behavior and collaborative work. Moreover, our findings show that the positive effect of localization on trust decays when the overseas headquarters exerts a high degree of control, perhaps because extensive control undercuts the decision-making authority and task independence endorsed by localization. Third, contrary to the predictions of both the rational choice model and the social embeddedness perspective, we find that neither profit nor IJV age has a significant impact on trust. One explanation for this finding may lie in the lack of an institutional foundation for trust in emerging economies. Without a shared institutional foundation, neither calculative trust based on economic benefit nor relational trust based on exchange history is likely to occur (Rousseau et al., 1998). This again reinforces the importance of active trust building in uncertain environments such as emerging markets. Our findings also provide significant managerial implications. Foreign investors have long faced the challenge of building trust and deterring opportunistic behavior among its local staff. Our findings suggest that economic benefit may not lead to trust of local senior managers, nor will trust automatically develop as the time of firm operation increases. Instead, foreign investors must start or strengthen their active trust development initiatives to build the trust of local senior managers. For example, overseas headquarters should communicate more interactively and effectively with local managers, implement an effective localization program, or exert tight control over the IJV’s operations. Our findings also encourage foreign investors to couple localization with effective communication to further foster trust. However, foreign investors must be aware of the negative effect of combining a localization program with extensive control. They should carefully justify and evaluate the degree of control and localization they use to build local senior managers’ trust. Our study also has several limitations that suggest directions for further research. First, whereas our model examines three active trust development strategies, additional research could expand our model by including other strategies such as vertical integration. Second, because our focus is on active trust building, we only control for variables from the rational choice perspective (i.e., profit) and sociological model (i.e., firm age). Further research can develop a more fully specified model to include economic factors and social embeddedness variables explicitly and then compare the explanatory power of each set of factors. Third, our study does not control for the country of origin of the overseas headquarters. Future research is encouraged to consider this factor so as to comparatively analyze the possible differences among different types of overseas headquarters (e.g., headquarters in Asia versus in the West).

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Acknowledgement The authors thank the two anonymous reviewers and Hans Mu¨hlbacher (associate editor, JBR) for their very helpful comments. This study was supported by a research grant from the Chinese Management Centre, the University of Hong Kong.

Appendix: measurement items Trust 1. The overseas headquarters is always honest and truthful. 2. I am sure that I can fully trust the overseas headquarters. 3. I believe that the overseas headquarters has high integrity. 4. I can expect the overseas headquarters to treat us in a consistent and predictable manner. Localization 1. Our localization program is effective. 2. We are satisfied with the outcome of our localization program. 3. Our localization program is on schedule. 4. Local staff feels free to voice their ideas. Communication 1. It is very difficult to talk to the overseas headquarters. (reverse coded) 2. We do not like informal meetings with the overseas headquarters. (reverse coded) 3. Communication is a big problem between local senior managers and the overseas headquarters. (reverse coded) 4. We cannot communicate effectively with the overseas headquarters. (reverse coded) Control 1. The overseas headquarters has high 2. The overseas headquarters has high and procedures in our work unit. 3. The overseas headquarters has high work. 4. The overseas headquarters has high to do.

control of how we do the work. control over the policies control over the quality of our control in choosing what projects

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