Download - Joint Ventures 2
The Characteristics of Joint Ventures in Developed and
Developing Countries – Paul W Beamish, Columbia Journal of
World Business, 1985, pp13-19
Harrigan’s “dynamic model of joint venture activity” (1984) suggests in
part that the external environment influences both the initial
configuration and the stability of a joint venture. He demonstrates that
developed and developing nations represent different external
environments; the LDCs are considered a more complex and difficult
environment in which to manage joint ventures than developed
nations. Also, he shows that JVs in LDCs are characterised by higher
instability rate and greater managerial dissatisfaction.
Venture Creation Rationale
In a sample of 34 JVs in developed nations, Killing (1983) divided the
reasons for creating a venture into 3 categories: a) government
suasion and legislation; b) partner’s needs for other partner’s skills; c)
partner’s needs for the other partner’s attributes or assets. For Killing
(1983), 64% of JV were created because each partner needed the
other’s skills. Only 38% for Beamish (1984) were created for such
reason for LDCs. The primary skill required by the MNE partner of the
local firm was its knowledge of the local economy, politics, and culture.
19% for Killing were created because one partner needed the other’s
attribute or assets while it was only 5% for Beamish. 17% were created
for Killing because of government suasion or legislation while it was
57% for Beamish. Janger (1980) found same result when he postulated
that nearly half of the companies in his sample in LDCs did so because
of government’s requirements. Same results were found for Gullander
(1976) and Tomlinson (1970) for India and Pakistan i.e. because of
government’s requirements. The government’s reasons include
legislation, to MNEs seeking an advantage in attracting government’s
contracts to import restrictions whereby MNEs would lose its access to
the local market if it did not establish a local manufacturing plant.
Stability
A JV instability rate of 45-50% was observed in LDCs by both Reynolds
(1979) and Beamish (1984). This is higher than the 30% instability rate
found for JV in DCs by Killing (1983) and Franko (1971).
Performance
Beamish (1984) MNE managers assessed 61& of their JVs as
unsatisfactory performers as compared to the 36% for the DCs.
Frequency of Government Partners
Few of the studies of JVs in DCs made any significant involvement of
government partners. However, where the scale of investment was
high, or the business lay in an industrial sector important to the local
economy, the use of government partners was higher Stuckey’s (1983)
while for LDCs it is significantly higher (Beamish, 1984). Yet, foreign
private firms that had a local private partner were satisfied with
performance much more than with other types of partners (although
still lower than in DCs). These performance observations support the
view that for MNEs to be successful, they require partners with
knowledge of the local economy, politics and customs.
Ownership
The use of equal ownership was advocated by Killing (1983) in
developed countries’ ventures. In the LDC samples of both Beamish
(1984) and Reynolds (1979), in approximately 70% of cases, the
foreign firm was in a minority equity position. This contrasts sharply
with DCs ventures where 50% had 50-50 ownership (this also
confirmed by Berg and Friedman, 1978 for US chemical JVs).
In Beamish (1984) LDCs sample, when the MNE owned less than 50%
of the equity, there was a greater likelihood of satisfactory
performance. Also they performed better than where MNEs were the
largest shareholders. They used minority shareholding because of
existing regulations; local tax advantages; because of high level of
corruption, better to keep a low profile; also where minority could
report in financial statements as merely investment.
Ownership-control relationship
While there is no necessary correlation, in practice a correlation has
often existed (Killing, 1983 for DCs). For developing nations, local JVs
partners are rarely passive shareholders (Stopford and Wells, 1972;
Schaan, 1983). But for Beamish (1984), no correlation was found.
Control-performance relationship
Killing (1983) found that dominant-parent ventures perform better
given they are managed more like wholly-owned subsidiaries whereby
all decisions are made by the dominant parent. But Janger (1980) does
not identify either dominant or shared ventures as being more
successful than the other. Schaan (1983) on the other hand concluded
that parent companies were able to turn JVs around by creating a fit
between their criteria of JV success, the activities and decisions they
controlled, and the mechanisms they used to exercise control.
Surprisingly, Tomlinson (1970) found that JVs with a more relaxed
attitude towards control outperformed their competitors. He suggests
that the sharing of responsibility with local associates will lead to a
greater contribution from them and in turn a greater return on
investment. Hence the literature tends to indicate a weakening of the
link between dominant management control and good performance as
the emphasis shifted from DCs to LDCs.
Beamish 19XX –Check
JVs, not fully-owned subsidiaries, are the dominant form of business
organisation for MNEs in LDCs (Vaupel and Curhan, 1973), and are
frequently used by Fortune 500 companies in the developed nations
(Harrigan, 1985). The limited literature on JVs suggests that
performance problems are more acute in developing rather than
developed nations (Janger, 1980; and Franko, 1976).
The purpose of the paper is to address the question of how the
performance of JVs in developing nations can be improved.
Performance difficulties are costly for the MNE in time and capital. In
addition, there are social costs to the host country when JVs
experience difficulties or fail (Casson, 1979).
By creating viable joint ventures in LDCs, international development
can be speeded up. However, given the declining share of direct
investment flows from the industrialised countries to LDCs (Robbock
and Simmonds, 1983), the costs of joint venture failure in LDCs are
magnified.
The distinction used for developed/less developed countries is: 1978
per capita GNP over/under US 3,000. In this research, JVs are defined
as share-equity undertakings between two or more parties, each of
which at least holds at least 5% of the equity. The most common
partner for MNEs in LDCs is a local private firm. Other partner
combinations are not included in the sample because they are either
not typical or because the partners might not share the same profit
motivation.
Conclusions:
1. Characteristics of JVs in LDCs differ from those developed countries.
These characteristics – assessed in terms of stability, performance,
ownership, reason for creating the venture, frequency of
government partners and autonomy – were observed to differ
following an analysis of, and comparison with, developed country
JVs samples.
2. Decision making control in JVs in developing countries should be
shared with the local partner, or split between the partners. There
was support for the observation that there is a weakening of link
between JV performance and the MNE having dominant
management control, when one considers developing, rather than
developed countries.
3. Both partners need and commitments prove to be good predictors
of both satisfactory and unsatisfactory JV performance. For example
there is a positive association with performance of MNEs using local
management, being willing to use voluntarily the JV structure and
looking for the local partner for knowledge of the local economy,
politics and customs.
4. While it may be possible to operate a JV for a short period with a
dissatisfied partner, refusing to recognise differences is ultimately
costly in terms of the long-term viability of the JV.
5. When the MNE partner has 2 sources of income, additional to that of
the local partner, poor performance resulted. When the sources of
income were close for both partners, performance was more
satisfactory. This is generally consistent with Contractor’s (1985:44)
point that in some cases “the optimum for the local partner is to try
to disallow a royalty or component supply agreement altogether
and negotiate only on an equity sharing basis”.
Characteristics of Joint Ventures
The external environment influences both the initial configuration and
the stability of a joint venture (Harrigan, 1984). The external
environment includes things such as industry structure, competitive
behaviour, technology and government policies. (already done check
first article).
Equity Joint Venture and the Theory of the MNE
Limited consideration has been given to the rationale for equity JVs in
the theory of the MNE. While recent theoretical contributions utilising
the internalisation approach has significantly advanced our
understanding of MNEs (Buckley and Casson, 1976; Casson, 1979,
1982; Rugman, 1979), the theory offers only partial explanations of the
ownership preferences of MNEs for other than wholly owned
subsidiaries (Davidson and McFetridge, 1985; Teece, 1983; Thorelli,
1986; Horstmann and Markusen, 1986; Wells, 1973).
Although the elegance and comprehensiveness of transactions costs
reasoning has provided the internalisation approach with a powerful
logic (Rugman, 1981, 1985), it is still deficient in some respect as a
general theory of the MNE given it focuses primarily on one mode of
hierarchy i.e. the wholly owned subsidiaries. Yet, there a number of
other modes which firms can and do adopt to deal with imperfections
in international markets including licensing, management contracts,
sub-contracting, joint ventures etc. Moreover, firms often employ
different modes simultaneously in addressing the needs of a particular
foreign market (Contractor, 1985; Davidson and McFetridge, 1985).
Hence, the internalisation theory should also encapsulate an economic
rationale for the other modes (Hennart, 1985) and specify the
conditions under which each would provide efficiency gains over WOSs
and the market.
To justify the use of JVs within the internalisation framework, 2
necessary conditions must be present: the firm possesses a rent-
yielding asset which would allow it to be competitive in a foreign
market; and JV agreements are superior to other means for
appropriating rents from the sale of this asset in the foreign market
(Teece, 1983). A detailed explanation for the possession of a
sustainable competitive advantage regardless of the means employed
for exploiting it in international markets has already been provided by
Dunning and Rugman (1985). Likewise Stuckey (1983) using the
transaction costs paradigm has considered the conditions within which
JVs provide a superior means of exploiting those assets for firms
pursuing international vertical integration. But, research in the context
of horizontal integration is lacking.
Following Teece (1983), it is argued that the attractiveness of JVs is a
function of both the revenue-enhancing and cost-reducing
opportunities they provide the MNE. However, according to the
internalisation theory, firms would have a strong incentive always to
avoid JV agreements since these are regarded as inferior to WOSs in
allowing the firm to maximise the returns available on its ownership
specific advantages (Caves, 1982; Rugman, 1983; Killing, 1983;
Poynter, 1985; Harrigan, 1985).
However, JVs which conform to certain preconditions and structural
arrangements can actually provide a better solution to the problems of
opportunism, small numbers dilemma and uncertainty in the face of
bounded rationality than WOSs. Also, rents can exceed those available
through WOSs due to the potential synergistic effects of combining the
MNEs assets with those of the local partner. In situations where a joint
venture is established in a spirit of mutual trust and commitment to its
long-term commercial success, opportunistic behaviour is unlikely to
emerge (Buckley and Casson, 1987). Furthermore, if these positive
attitudes are reinforced with supporting inter-organisational linkages
such as mechanisms for the division of profits, joint decision making
process and reward and control systems, the incentives to engage in
self-seeking pre-emptive behaviour could be minimised (Williamson,
1983).
A small numbers situation, particularly when combined with
opportunism, would normally result in serious transactional difficulties
for the firm (1975). But in the absence of local partner opportunism,
and also by establishing those inter-organisational linkages mentioned
before, it is possible to manage many of the types of difficulties
associated with exchange between bilateral monopolists regarding
individual of joint maximisation of profits (Contractor, 1985). There will
be much less incentive to secure gains by strategic posturing and the
interests of the JV can be promoted. Thus under certain conditions, the
small number dilemma can be effectively dealt with in JVs.
The problem of uncertainty can also be handled efficiently within some
JVs. In the absence of opportunism and small number disabilities, there
are strong incentives for the parties to pool their respective resources.
By doing so, it is possible for the MNE to economise on the information
requirements of FDI (Caves, 1982; Beamish, 1984; Rugman, 1985). The
MNE can provide firm specific know-how regarding technology,
management and capital markets while the local partner can provide
location-specific knowledge regarding host country markets,
infrastructure and political trends. By pooling and sharing information
through the mechanism of a joint venture, the MNE is able to reduce
uncertainty at a lower long-term average cost than through pure
hierarchical or market approaches. The low costs associated with
opportunism, small numbers, uncertainty and information
impactedness in JVs under the conditions specified above would render
this mode of transacting the most efficient means of serving a foreign
market.
But, JVs do have limitations. First, they can suffer from the same goal
distortions as hierarchies. For e.g. conflict of interests between MNE
objectives and JV objectives. However, several approaches to ensuring
that profitability gains are not subordinated to other considerations or
that the JV mode is not uncritically preserved can be taken. Contractor
(1985) has noted that many overseas ventures are being formed as a
mix of direct investment, licensing and trade. He suggests that a JV
partner may be compensated by a package involving some return on
equity investments, royalties, technical service, and management fees,
and/or margins on components or finished goods traded with the JV.
Both Schaan (1983) and Beamish (1984) found evidence of such
approaches.
The risk of leakage of proprietary knowledge also serves to limit the
efficiency gains available through JV arrangements. Leakage can occur
as follows: First, a local employee may decide to resign and use the
knowledge acquired in the JV to establish a competing firm. Second,
The local partner may decide to dissolve the JV as a basis to continue
to serve the local/foreign market through his own organisation.
Leakage is a problem in JVs and its costs do limit the efficiency gains
JVs offer markets and hierarchies (Parry, 1985; Rugman, 1985).
Irrespective of the damages caused by leakage, what is often
overlooked by management in the overall economic evaluation of JVs is
that though the start up costs of a WOS may be lower, the long-term
average costs may be much higher due to the very significant costs
associated with independent efforts to overcome a lack of knowledge
about the local economy, politics and culture.
Caves (1982) provides 2 reasons that cause MNEs to seek out JVs. The
first is the MNEs lack of capacity or competence needed to make the
investment succeed. The second lies in the MNEs need for specific
resources possessed by local JV partner. These needs include
knowledge about local marketing or other environmental conditions
(Stopford and Wells, 1972). Caves adds that JVs seem to be prevalent
as MNEs proceed towards more unfamiliar host nations, citing Saham’s
(1980) finding that JVs are uncommon in culturally familiar LDC
settings.
Unlike Killing (1983) and Kolde (1974), Janger (1980) found in his study
of JVs in DCs and LDCs that one control structure could not be
identified as more successful than the others. Tomlinson (1970)
concluded that MNEs should not insist on dominant control over the
major managerial decisions in JVs in LDCs. He felt that the sharing of
responsibility with local associates would lead to a greater contribution
from them and in turn to a greater return on investment.
Also, Artisien and Buckley, (1985) found that where the MNE’s motive
for preferring JV mode was to achieve greater participation in decision
making, the mean success rating for the JV was very successful. In
both LDCs and socialist market economies (Cory, 1982), MNEs from
DCs may well be confronted with higher adaptation and information
requirements than they are accustomed, thus reinforcing the
appropriateness of JVs.
Wells (1983) – 90% of the manufacturing subsidiaries established by
third world MNEs were JVs. These are considered similar to the MNEs
from the developed countries in Beamish (1984) study in that
presumably they could benefit equally well from local market
knowledge their partners could provide. The benefits of what Wells
calls partial internalisation would seem to be shorter for third world
MNEs than for MNEs from developed countries in Beamish study
(1984).
Also, Stuckey (1983) feels that JV firms can be more efficient because
it allows some of the economically important relationships between
otherwise separate partners to be internalised by one organisation.
Also same for Cory (1982).
International Joint Ventures in Developing Countries – IFC
Discussion Paper No. 29 – R. Miller, Jack Glen; F. Jaspersen; Y.
Karmokolias
Developing nations have been growing faster than the industrialised
world and companies have not been oblivious to such trends. One way
firms are entering these markets while minimising financial risks is via
the establishment of JVs with local firms.
Joint Ventures have been defined as “a common project between
legally and commercially independent companies in which the parties
jointly bear the responsibility for management and financial risk” (Rolf
Weder, 1991).
But there has been problems witnessed with the survey namely that
partners in a JV often are similar to partners in a marriage, and in both
cases they are unwilling to disclose their problems to outsiders. This
gives rise to what is known as the halo effect that may affect the data
leading us to believe that the relationship appear more positive than it
really is.
One need to bear in mind that JVs are considered as second best
alternatives. But, the reality of global competition today is that few
companies possess all of the competitive advantages that will enable
them to compete successfully. But, for a variety of reasons, doing
business in LDCs is considered riskier. Also, firms from LDCs are now
more open to international competition and hence firms have to evolve
to become more competitive. For this reason, many company
management now attempt to complement their firms’ strengths
through alliances with other companies.
Reasons for JVs by industrial country companies.
1. Local investment regulations e.g. India. Also government’s
restrictions.
2. Cost and risk sharing – JVs offer mode by which firms can limit their
financial exposure while at the same time gaining experience in a
new market.
3. Lack of country familiarity – for example lack of knowledge about
local product market and distribution channel familiarity, knowledge
of labour conditions, likely problems in managing the local
environment; knowledge of the legal system and government, and
familiarity with local customs and conventions.
4. Lack of relevant contacts within the government and elsewhere – to
reduce the level of bureaucracy and time wasting which may be
critical for a firm’s success.
5. Existing facilities – local companies often have existing production
and distribution facilities which can also be of use to the JV. For
example, Ford in India has used the local partner’s existing facilities
to set up operations.
6. More effective technology use: Combining with a local partner can
provide the MNC with an opportunity to earn additional returns from
its R&D operations over and above what might have been
anticipated from alternative methods of exploiting the technology
such as licensing and export sales.
Reasons for JV by developing country companies
1. Financing
2. Access to technology
3. Access to management know-how
4. Access to export markets
Potential problems that may arise with JV agreements:
1. Valuation problems – how to value the financial and other assets
that each partner may bring into the JV. Also, how to value the
technology to be supplied.
2. Transparency – Getting accurate data upon which to base
valuations and other decisions. For example for a family business
the accounting standards may be different from internationally
acceptable rules.
3. Conflict resolution – need specify how disputes are to be settled.
4. Division of management responsibility and degree of management
independence.
5. Changes in ownership shares.
6. Dividend policy and other financial matter.
Problems that arise in JV relationships
1. Problems related to multinationality - there may be differing basic
objectives of the 2 types of firms. MNCs hope to operate through
the JV in a way that will be optimal over their entire global network,
not just within the local market, the usual interest of their JV
partner. The MNC looks upon the JV as one piece of a complex
global web, and it is not likely to allow that single piece to dictate its
own policies where other pieces or, indeed, the web itself might be
compromised. The rule in such situations is for the MNC to put strict
limitations on the rights of the JV to export.
2. Tax issues – MNC wish to maximise its global tax burden. But there
may be problem due to transfer pricing especially if import
components from parent company.
3. Dividend and investment policies – the problem is that the MNC may
have global inv. Programs that involve the transfer of funds from
one region to another; it might prefer dividends to reinvestment in
the JV.
4. Differences in partner size.
5. Ownership and Control problems – for example product line
disputes; where to source raw materials; technology utilisation.
6. Cultural problems – partners may come from a complete different
background; MNCs partners were often characterised as being
arrogant and narrow-minded; problem of embedded corruption; also
procurements may be directed towards a “friendly” firm.
7. Problems related to the dynamic changes in the relationship:
Experience in a JV results in learning and learning can modify how
one views the contributions of one’s partner. For e.g. with time, the
MNC may be more familiar with the local environment and hence
could be the basis for more equity by the MNC; also if there is once-
and-for-all transfer of technology, then local partner may be
reluctant to continue paying royalty fees.
Hence, mutual trust and respect among the partners is important to
such relationships, but so too is attention to maintaining compatible
corporate goals and to assuring that the JV business continues to
depend importantly on contributions from all partners.
Joint International Business Ventures in Developing Countries –
Case Studies and Analysis of Recent Trends – W. Friedmann &
J. Beguin – Columbia University Press, 1971
The host country will strive for the following:
1. The JV must be integrated in the national economic development
plan. This means that it will generally be assigned a certain priority
in the national development plan. This is normally done by making
the allocation of FE, the importation of foreign materials, the
repatriation of capital, profits, salaries etc, dependent upon the
value assigned to the enterprise in the national development plan.
2. Since LDCs usually lack investment capital, and particularly FE, the
capital contribution brought by the investor in the form of cash,
assets etc will be very important.
3. Training of local skills – gradual replacement of foreign by local
staff.
4. Increase the local sourcing factor.
5. Development of local infrastructures by foreign capital.
The foreign investor will seek:
1. A return on investment that will justify the investment decision from
a commercial point of view.
2. Some legal guarantee of the security of his investment.
3. Obtaining certain privileges with regard to taxation, repatriation,
earnings, capital etc.
The reasons for the frequency and importance of the joint venture
capital may be as follows: (See W.Friedmann and G Kalmanoff, Joint
International Business Ventures, New York, Columbia University Press,
1961).
1. Sharing of financial risk as the foreign partner may be short of
capital.
2. Availability of the best local entrepreneurial and managerial talent
is linked with local participation.
3. Because of legal local requirements.
4. Also, for developing nations JV is a symbol of equality.
Joint venture is an important symbol of the changing relationship
between the developed and less developed countries, but it cannot be
regarded as a panacea. Confidence between the partners will
overcome the most difficult obstacles; lack of confidence will destroy
the most perfect devices. As a major negative factor there is the issue
of disparity of outlook between the foreign and local partners. In JVs
between developed nations, there is a certain community not only of
tradition and of scientific, technical and legal standards, but there has
also been more experience with more responsible investment practices
and legal supervision. In LDCs, this stage has not yet been reached in
the business environment. Power and wealth are often concentrated in
relatively few hands and they are not matched by a corresponding
sense of responsibility. Tax considerations may provide an additional
incentive to reinvest in a developing foreign enterprise. Inflationary
situation may produce the reverse situation.
Like other forms of cooperation they are in themselves neither good
nor bad. Their value depends entirely on the degree to which they
meet each partner’s requirement. Only successful and mutually
satisfactory JV serve the cause of world economic development. The
government and the administration in the host country should be
sympathetic, understand the requirements of modern enterprises and
be reasonably equipped to meet these. If a government agency is a
local partner it should be fairly free from day to day politics.
The answer to the question as to whether a joint venture was likely to
be a permanent or a transient phenomenon in the evolution of
relations between the developed countries of the west and the
developing world is as follows: from the point of view of LDC’s a joint
venture serves three essential purposes:
1. It stimulates the engagement of responsible local capital in
productive enterprises;
2. It helps to develop a nucleus of experienced managerial personnel
in the public and in the private sectors, in proportion to the
participation of public authorities and private capital in joint
ventures;
3. It helps to advance the training of native labour and technicians.
As the less developed countries advance in these respects, their need
for joint ventures is likely to decline. Some of our most experienced
collaborators from the less developed countries have pointed out that
it is advisable for foreign investors to begin their enterprises in the
form of joint ventures from the outset rather than the later on as a
belated concession or as a result of pressure. They believe that local
enterprises will eventually exploit a growing proportion of industrial
production without the participation of foreigners, unless the foreigners
are associated with the enterprises from the start.
Enterprise and Competitiveness – A Systems View of
International Business – Mark Casson, Clarendon Press, Oxford.
Introduction
The conventional economic theory of international business explains
well the stylized facts relating to the growth of horizontally integrated
multinationals in high-technology industries during the 1950’s and
1960’s (Buckley and Casson, 1976; dunning, 1981; Hymer, 1976;
Kindleberger, 1969). It is less successful, however, in explaining some
more recent developments (Borner, 1986)
These include:
1. the emergence of new international division of labour, based on
offshore processing in newly industrialised countries (NICs)
according to which a production process is split up into constituent
activities dispersed over developed countries and NIC’s;
2. the rapid growth of multinational operations in the service sector
during the 1970’s - especially banking, professional business
services, retailing and tourist-related industries; and
3. the growing prominence of joint ventures and other collaborative
arrangements involving enterprises in both the public and private
sectors of global industries; and
4. the growing importance of Japanese foreign direct investment (FDI)
in the world economy.
The systems view of production makes it natural to think of joint
ventures as a compromise contractual arrangement. Three main
conditions must be satisfied in order for a joint venture to be preferred
to an alternative arrangement (Buckley and Casson, 1988). First, there
must be some reason for integrating the operation of the facility with
that of other facilities owned by two partner firms. In other words,
internationalization economies must be present, for otherwise there is
no reason why, on operational grounds, each partner should not deal
with the facility at arm’s length. Secondly, there must be a reason why
the two firms prefer to share a single facility rather than operate a
separate smaller facility. This implies that there must be an economy
of scale or scope, such that the cost of operating the single large
facility is less than the sum of the costs of operating two smaller
facilities generating a similar output. Thirdly, there must be a reason
why the two partners do not simply merge their entire operations,
creating a single ownership unit which encompasses the partners’
operations and the jointly owned facility itself. Given the costs arising
from the ambiguity of shared control, the merger option is, on the face
of it, very attractive. Obstacles to merger arise, however, from
managerial diseconomies – due to the difficulty of monitoring and
motivating managerial employees – and from political constraints
stemming from competition policy (fear of high levels of industrial
concentration) of fear of foreign control (when the merging firms are
based in different countries)
Joint ventures, therefore, are most likely to occur in situations where
there are significant internationalization economies involving two or
more existing firms, the facility concerned exhibits economies of scale
or scope, and the potential partner firms are already sufficiently large
for merger to be difficult because of either managerial diseconomies or
political constraints.
The pooling of corporate expertise in new product development
frequently satisfies these conditions, particularly where the product
concerned is a versatile component which can be used in different
ways for different firms. Each partner can feed back experience
gained in the use of the component to help improve the design, while
spreading the fixed costs of development by avoiding wasteful
duplication of research.
Another potential role for joint ventures is in the ownership and
operation of network infrastructure. When there are just a few major
users, each of whom is heavily dependent upon the network, and the
infrastructure exhibits significant economies of scale (as is usually the
case), joint venture operation may be an attractive alternative to
ownership of the network by an independent monopolistic common
carrier. In established modes of transport and communication, publicly
owned or regulated monopolistic common carriers are often very well
established on a national basis. International traffic is organised
through a conference formed by national carriers, with individual
cartels being used to organise traffic over particular segments of the
network, or over particular routes. In more novel modes, however,
such as optical fibre communications, an alternative arrangement
based upon joint ventures between major private uses has evolved.
The preceding analysis suggests that the joint venture arrangement is
a viable alternative in some cases where, at present, nationalised or
regulated common carriers supply a small number of major users.
Thus one of the consequences of deregulation in transport and
communications may be the proliferation of international joint venture
arrangements where national monopolies previously existed.
Because of the ambiguity of control inherent in the joint venture, social
mechanisms play a key role in successful joint venture operation.
Social mechanisms are most effective, it has been argued, in growing
industries, and it is certainly true that it is in growing industries that
joint ventures tend to be most conspicuous. It is possible, indeed, to
regard joint ventures as a mechanism for building trust between
partners. When two firms are in conflict with each other on some
fronts, and collaborating on others, a progressive development of joint
venture operations can help to strengthen the collaborative forces
between them, and weaken the competitive ones.
Joint ventures are sometimes dismissed by their critics as inherently
unstable, and therefore transient, arrangements. It is certainly true
that many joint ventures have a relatively short life, but it cannot be
inferred from this that short-lived joint ventures are failures. Many
joint ventures are terminated when one partner buys out the other and
maintains it as a going concern. It is by no means the case that the
termination of a joint venture implies the closure of a facility.
One of the features of joint venture arrangements is their flexibility – a
flexibility that stems partly from the reliance on social mechanisms of
coordination, and partly from the fact that it is relatively easy for one
party to sell out to the other at a future date. It is quite plausible to
argue that the recent turbulence in the world economy, and the
associated uncertainty about how the division of labour is likely to
evolve, has encouraged the use of flexible arrangements such as joint
ventures, and equally plausible to argue that should conditions
stabilise and the future become more predictable, joint ventures will
lose favour and existing arrangements be terminated. But it is just as
plausible to argue that had joint ventures not been used to provide the
necessary flexibility during recent periods of great uncertainty, the
adjustment problems encountered within the world production system
would have been much more acute than they have actually been.
Cultural and Economic Interactions – Joint Ventures
Joint ventures have always been an important aspect of business
organisation. The partnership, which is common in the professions, is
an example of a joint venture between individuals. Inter-firm joint
ventures have played an important role in the expansion of MNE’s into
new markets – as when a sales affiliate is established with an
indegenous distribution company as a partner. Recently joint ventures
have become a popular form of alliance between established MNE’s
and the high profile of joint ventures means that JV’s have attracted
much more attention (Contractor and Lorange, 1988; Harrigan, 1985;
Hladik, 1985; Killing, 1983)
As a result of this trend, JV’s are playing an important role in the
restructuring of international economy. In come cases they are simply
transitional arrangements, associated with the gradual spinning of an
existing plant to a new owner. The joint venture, in other words, is a
form of staggered disvestment or acquisition. This approach may be
useful in avoiding loss of face for the disvesting firm, and in minimizing
the risk of unfavourable political reaction when the acquiring firm is a
foreign one. It also allows the disvesting firm to tutor the acquiring
firm in managerial and technical skills during the transition period.
Given that such JV’s are specifically transitional, the fact that they last
only for a limited time does not necessarily mean that they have failed
in their purpose (Kogut, 1988)
The internationalization approach to joint ventures
The analysis focuses on a 50:50 JV involving two private firms.
Although arrangements involving state-owned firms and government
agencies are very important in practice (particularly in developing
countries), they raise issues which lie beyond the scope of this chapter.
To the extent, however, that the state sector is primarily profit-
motivated, the analysis below will still apply.
It is assumed that each partner in the JV already owns other plants.
It is also assumed that the JV is pre-planned, and that the equity stakes
are not readily tradable in divisible units. This means, in particular,
that the joint ownership of the venture cannot be explained by a
‘mutual fund’ effect – in other words, it is not the chance outcome of
independent portfolio diversification decisions undertaken by the two
firms.
Working under these assumptions, theory must address three key
issues.
1. Why does each partner wish to own part of the JV rather than simply
trade with it on an arm's length basis? The answer is that there
must be some net benefit for internalizing a market in one or more
intermediate goods and services flowing between the JV and the
parties’ other operations. A symetrically motivated JV is defined as
one in which each firm has the same motive for internalizing. This
is the simplest form of JV to study, and is the basis for the detailed
discussion presented later.
2. Why does each firm own half of the JV rather than all of another
plant? The force of this question rests on an implicit judgement that
joint ownership poses managerial problems of accountability that
outright ownership avoids. To the extent that this is true, there
must be some compensating advantage in not splitting up the
jointly owned plant into two (or possible more) separate plants. In
other words, there must be an element of economic indivisibility in
the plant. The way this indivisibility manifests itself will depend
upon how the JV is linked into the firms’ other operations.
(a) If the JV generates a homogeneous output which is shared
between the partners, or uses a homogeneous input which is
sourced jointly by them, then the indivisibility is essentially an
economy of scale.
(b) If the JV generates two distinct outputs, one of which is used by
one partner and the other by the other, then the indivisibility is
essentially an economy of scope.
(c) If the JV combines two different inputs, each of which is
contributed by just one of the parties, then the indivisibility
manifests itself simply as a technical substitution and non-
decreasing returns to scale).
3. Given the above, why do the partners not merge rather than
creating a JV?
It is clear that a JV operation is to be explained in terms of a
combination of 3 factors, namely internalisation economies,
indivisibilities, and obstacles to merger.
Furthermore, JV agreements may arise because of the following:
1. Insuring against defective quality in components: This relates to
forward integration involving 2 distinct flows of materials.
2. Adapting a product to an overseas market: Involves combination of
2 distinct but complementary types of know-how in the operation of
an indivisible facility. Usually there is complementarity between
technological know-how and the other is knowledge of an overseas
market possessed by an indigenous firm.
3. Management training and the transfer of technology: In some cases
a JV may be used as a vehicle for training. Usually, training is
administered by personnel from industrialised nations’ partners.
It can be argued that the political risk of expropriation, the blocking of
profit repatriation and so on are lower for JVs than for WOSs. Also, tax
minimising TP is more difficult to administer in the case of JV than
WOSs.
So far as the general concept of co-operation is concerned, the
international dimension is much less important than the inter-cultural
dimension. In purely conventional analysis of transaction costs, the
focus is on the legal enforcement of contracts, and so the role of the
nation state is paramount in respect of both its legislation and its
judicial procedures. The mechanism of co-operation however is trust
rather than the legal sanction, and trust depends much more on the
unifying influence of the social group than on the coercive power of the
state. Trust will normally be much stronger between members of the
same extended family, ethnic group, or religious group, even though it
transcends national boundaries, than between members of different
groups within the same country. Hence, cultural attitudes are certainly
likely to dominate in respect of the disposition to co-operate with other
firms.
It is clear that the JV operations involving firms with different cultural
backgrounds are of particular long-term significance. Once established,
they provide a mechanism for cultural exchange, particularly attitudes
to co-operation. The success of this mechanism will depend upon how
receptive each firm is to ideas emanating from an alien culture.
To sum up: JVs are first and foremost, devices for mitigating the worst
consequences of mistrust. In the language of internalisation theory,
they represent a compromise contractual arrangement which
minimises transaction costs under certain environmental constraints.
But also, JVs provide a suitable context in which the parties can
demonstrate mutual forbearance and thereby build up trust. This may
open up possibilities for co-ordination which could not otherwise be
entertained.
An important role for JVs from the limited perspective of internalisation
economics, is to minimise the impact of quality uncertainty on
collaborative research and training. From the more open-ended
perspective of long-term co-operation, however, JVs designed to cope
with quality uncertainty are also well adapted to help partners to
reciprocate, and also learn the values which inspire the other partner
to unreserved commitment to a venture.
Why Should Firms Cooperate? The Strategy & Economics Basis
for Cooperative Ventures. F.J. Contractor & P.Lorange
Traditionally, cooperative arrangements were often seen as second-
best to the strategic option of going it alone in the larger firms.
Licensing, JV etc. have been viewed as options reluctantly undertaken,
often under external mandates such as government investment laws
or to cross protectionist entry barriers in developing and regulated
economies. What makes the recent spate of cooperative associations
different is that they are typically being formed between firms of
industrialised nations where there are few external regulatory
pressures mandating the link-up. Instead of the traditional pattern of a
large firm trying to access a market by associating itself with a local
partner, many of the recent partnerships involve joint activities in
many stages of the value-added chain such as production, sourcing,
and R&D. These associations often involve firms of comparable rather
than unequal size, both may be international in scope, and each may
make similar rather than complementary contributions. Further, the
territorial scope of some of these new cooperative ventures is global
rather than restricted to a single country market as in the traditional
pattern of JV and contractual agreements.
Traditionally, MNEs have been seen as monolithic entities, controlling
or owning its inputs and outputs, and expanding alone into foreign
markets, based on its O advantages (Caves, 1971). It could be seen as
a transitional chain of control, internalised within the firm (Buckley and
Casson, 1976). In this view the corporation reserves for itself the gains
from global vertical and/or horizontal integration.
Nowadays, in many situations, the international firm is better seen as a
coalition of interlocked, quasi-arms-length relationships. Its strategic
degrees of freedom are at once increased by the globalisation of
markets (Levitt, 1983) and decrease by the need to negotiate
cooperative arrangements with other firms and governments. In linking
up with another firm, one or both partners may enjoy options
otherwise unavailable to them, such as better access to markets,
pooling and swapping of technologies, enjoying larger economies of
scale and benefiting from economies of scope. As a corollary, each
partner is less free to make its own optimising decisions on issues such
as product development, TP, territorial scope, and retention of
earnings and dividends payout.
Seen in isolation, a cooperative venture may only be a simple start-up,
technical training arrangement, or standard patent license. But, if the
effect of this cooperative move is to create a long-term customer for a
part or active ingredient, the strategic impact goes beyond the
arrangement itself. On the other hand, there could be negative
strategic impacts external to the venture itself, for example the worry
of creating a future competitor (Reich, 1984; Abegglen, 1982). But how
significant in cooperative arrangements is this problem of creating a
new competitor will depend on many factors such as the duration of
the agreement, the ability of each partner to go it alone on the
expiration of the arrangement, and their resolve to independently keep
up with technical and/or market related changes in the industry. Also,
if an industry is territorially fragmented or multi-domestic, an improved
technology can be easily spread by a partner that is already global in
scope (Reich, 1984; Hamel, Doz, and Prahalad, 1986).
Rationale for Cooperation
JV formed to crate value added. Done via either a vertical or horizontal
arrangement. If vertical, then useful to draw on the value chain
approach suggested by Porter (1985, 1986). The combined efforts of
all partners must add up to a value chain that can produce a more
competitive end result. It is important that partners have
complementary strengths, that the strategies of the partners are
compatible and not in conflict. If horizontal, then done to limit excess
capacity, risk reduction and to save costs.
1. Risk reduction: Spread the risk of a large project over more than
one firm; enabling diversification of product portfolio; enabling
faster entry and payback; cost subadditivity (cost less than go
alone) – E.G. Herriott (1986) – regional electric company makes
lower investment by JV; also the experience of all the partners, their
mutual sharing or abdication of markets in favour of JV make for
faster entry with a better design and quicker payback. The risk
sharing function more important in research intensive industries
where successive generation of technology tends to cost much
more to develop while at the same time life cycles are shrinking
(Friedman, Berg and Duncan, 1979). Also, decrease the political risk
by linking with a local partner. Also, may be due to government
regulations.
2. Economies of scale and product rationalisation: Production
rationalization means that certain components or subassemblies are
no longer made in two locations with unequal costs. Production of
this item is transferred to the lower-cost location which enjoys the
highest comparative advantage, thus lowering sourcing cost. But,
there is an added advantage – Volume in the more advantageous
location is now higher, further reduction in average unit cost is
possible due to economies of larger scale.
In many situations, too, particularly in more mature businesses,
there may be excess capacity and need for industrial restructuring.
A joint venture approach may be a practical vehicle for achieving
this. Thus, production can be rationalised and output levels
reduced within the joint venture context. High exit barriers can
thereby be overcome.
Potential synergistic effects of joint ventures can possibly also be
inferred from the findings of McConnell and Nantell (1985), who
show that the value of the shares of over two hundred firms listed
on the New York and American stock exchanges was increased for
those companies that had undertaken jopint ventures.
3. Exchanges of ComplementaryTechnologies and Patents: Joint
Ventures, production partnerships and licensing agreements may
be formed in order to pool the complementary technologies of the
partners. In general, it is important to consider joint ventures as
vehicles to bring together complementary skills and talents which
cover different aspects of state-of-the-art know-how needed in high
technology industries. Such creations of electric atmospheres can
bring out significant innovations not likely to be achieved in any one
parent organisation’s monoculture context. There are also pressures
on a company that has invested heavily in developing a new
technology breakthrough. But, on its own it may not have sufficient
production or global marketing resources to secure a rapid, global
dissemination of the new technology, making it hard to achieve an
acceptable payback for its investment. A JV approach can be an
important vehicle in achieving such dissemination and realistically
securing the necessary payback. This may be especially true for
smaller firms lacking the internal financial and managerial resources
to make their own investments or expand rapidly.
Hence, direct investment in fully owned subsidiaries is reserved for
the most interesting combinations, while many of the rest are
handled by cooperative ventures. Stopford and Wells (1972) confirm
in their study that the propensity to form JVs is higher when the
entry entails product diversification. Berg, Duncan and Friedman
(1982) indicate that the large average firm size and rapid growth in
an industry correlate positively with JV formation.
4. For Co-opting or blocking competition and Overcoming Government-
mandated investment and/or trade barriers please check page 14 of
article.
5. Facilitating Initial International Expansion: For medium or small-
sized companies lacking international experience, initial overseas
expansion is often likely to be a joint venture. This may be
especially true when the firm is from a socialist or developing
country (Lall, 1981). In a cross-sectional study, Dunning and
Cantwell (1983) show that the lower the GDP per capita of the host
nation originating a MNE, the more likely it is to use JV in its initial
international expansion. Also, it takes time to build up a global
organisation and a significant international competitive presence
and JV may help in this respect.
6. Vertical Quasi Integration: Whereby the inputs of the partner are
complementary rather than similar. In such a case the ventures can
be described as a mode of interfirm cooperation lying between the
extremes of complete vertical integration of raw materials from raw
materials to consumer, to the opposite case where stages of
production and distribution are owned by separate companies which
contract with each other in conventional market mechanisms
(Thorelli, 1986).
A firm may therefore integrate vertically because it may more easily
permit longer-run strategic decisions. There is a large literature on
vertical integration (Richardson, 1972; Buckley and Casson, 1976).
But, briefly stated its advantages are:
a. avoidance of interfirm contracting, transaction and negotiating
costs (Williamson, 1975);
b. reduction in cost or achieving economies of scale from combining
common administrative, production, transport, or information
processing activities in 2 or more stages of production or
distribution;
c. internalising technological or administrative abilities and secrets
within a single firm
d. gaining a better understanding of strategy within the industry as
a whole;
e. the ability to implement technological changes more quickly and
over more stages of the value chain.
But there drawbacks to integration as well.
a. Investment capital may be too high for just one company to bear
and JV may be used to simply spreading the investment and risks
involved.
b. The vertically integrated firm tends to increase its fixed costs
thereby potentially increasing its vulnerability to cyclical
fluctuations (Moxon and Geringer, 1984 on Boeing).
c. Forward integration to internalise more elements of marketing
channels requires market access, links with major buyers, and
brand recognition which can be a critical impediment to
international expansion.
d. Lastly, Porter (1980), indicates some other strategic disadvantages
of full integration such as reduced flexibility to environmental and
technological change, dulled incentives for an individual operating
unit to remain competitive if internal transfer prices do not reflect
their external values, and being deprived of the marketing or
technical insights available from outsiders. A middle position
between the 2 extremes of full integration and purely contractual
relationships is often optimal for many companies. JVs,
coproduction, management service agreements and so on provide a
means whereby each partner can contribute its distinctive
competencies. The relationship is neither purely contractual nor
entirely integrative. It can be described as a mode of quasi
integration, as Blois (1972) puts it.
Potential strategic advantages under the distribution-type JV category
include rapid access to an existing marketing establishment, links with
key buyers, knowledge of the local market and culture and benefits
from a recognisable brand name – in total a better market access.
Costs and Benefits of JVs:
1. Incremental benefits from cooperative JVs:
a. Higher revenues from cooperation: project revenues can be
improved are the other partner’s market knowledge, technology,
market access, ties to important buyers and governments, faster
entry and thus more favourable cash flows.
b. Lower costs of cooperative ventures: given larger economies of
scale and rationalisation gains; government incentives available to
JVs and licensing; lower capital investment and overheads due to
utilising slack capacity in the partner firms; cheaper raw
materials/components and more productive methods acquired
through the partner; also might gain cost advantages from
productivity gains and other efficiency improvements learned from
the partner.
2. Detrimental aspects of cooperative ventures:
a. Lower revenues: given JV does not allow firm to expand into certain
lines of business in the future; partners reap the benefits of future
business expansion that is not proportional to its future
contribution; lower price is set at the behest of partner; partner’s
desire to export decreases sales made by other affiliates in
international markets; partner becomes more formidable competitor
in the future.
b. Higher costs: costs of transferring to partner technology and
expertise; increase coordination and governance costs; pressures
from partner to buy from designated sources or sell through its
distribution channel; increase in headquarters administrative, legal
and other overheads; opportunity costs of executives and/or
technicians assigned to CV; global optimisation of MNC partner may
not be possible for: sourcing, financial flows, tax, TP, rationalisation
of production.
3. Risk reduction effects of cooperative ventures: lower capital
investment at stake – partial investment, excess capacity utilisation,
economies of scale, economies of rationalisation and quasi
integration; faster entry and/or certification; use JV as a guinea pig;
for large risky projects – limit risk per venture’ diversify risk over
several firms; lower political risk; lower asset exposure for medium
and small-sized firms.
There are also softer issues that need to be considered before reaching
a decision on whether to form a JV. This may include the anticipated
ease of working with the other partner; possible language difficulty,
cultural differences; style incompatibilities and differences in values
and norms; the anticipated political climate within the context of the
partner’s organisation; and the presence of a sufficiently strong mentor
who will push the cooperative venture. But the fact remains that the
strategic rationale prevailing when a JV was formed may shift over
time. Moreover, the traditional impetus for JVs remains in many
nations. Economic nationalism, protectionism, transport costs, differing
local cultures and standards, as well as the presence of entrenched
domestic firms encourage a linkup with a local company as a means of
serving the particular needs of a geographic market and/or for getting
political permission to produce and tap natural resources.
Cooperative Strategies in developing Countries: The New
Forms of Investment – Charles P. Oman.
The changing international division of risks and responsibilities reflects
a tendency for some MNEs to modify their views on the advantages
and disadvantages of NFI (New Forms of Inv.) over TFDI (Traditional
Forms of Inv.). Some firms are finding they can earn attractive returns
from certain tangible or intangible assets that they can supply without
having necessarily having to own or finance projects. Also, NFI often
means reduced exposure to commercial and political risks that
accompany TFDI. There is also evidence that newcomer MNE and
market share followers frequently use NFI to compete with the more
established multinational firms. They may offer host nations shared
ownership or greater access to technology in return for preferred
access to local markets. In other cases these newcomers can use NFI
more defensively in a context of globalised oligopolistic rivalry in which
their managerial and especially financial resources are stretched thin
because of increased competitive pressures to take investment
positions in numerous markets. By sharing technology, control, and
profits with local partners, they can benefit from the latter’s knowledge
of local markets, access to local finance and willingness to share or
assume important risks.
Finally, as technology diffuse and products mature and become
increasingly price competitive, the firms may initiate the use of NFI as
part of a strategy of divestment.
Impact of NFI on the Textiles industries – It is in the apparel industry,
more than in any other segment of the textile complex that NFI have
been of crucial importance. Companies of industrialised nations and
from NICs delocalising to other developing nations. The main
motivations have been labour costs reduction in the context of slow
demand growth and intense price competition. Continued expansion
will also depend on protectionist trends in the OECD region and the
distribution of the MFA quotas among developing nations. It should
also be noted that the MFA quotas along with the high costs of new
production technology and other barriers to international marketing
create major obstacles to developing nations aspiring to join the ranks
of leading textile and wearing apparel exporters (exception of China).
The quota system has had a major influence on the spread of
production to second-tier producing nations, a movement in which the
NFI has played a central role.
Implications of NFI
The continuing proliferation of NFI may entail the latter being used as a
vehicle by many small and medium sized firms to internationalise their
operations. For the host nation, the most important benefit is
undoubtedly the possibility for increased local control over the process
of capital formation and for a larger share of returns from investment.
But for a host nation the crucial question is how to take advantage of
NFI and whether it might do better with TDFI. The evidence suggests
that the answer generally depends less on the country’s foreign
investment policies as such than on the coherence and effectiveness of
its overall industrial and macroeconomic policies. Much also depends
on the relative BP of local elite vis-à-vis their international
counterparts. This bargaining strength in turn depends on such factors
as the size and dynamism of the local market, and the level of
development of local technological, managerial and entrepreneurial
capacity – and hence also on the ability of local elite to take advantage
of rivalry among foreign firms.
Successes and Failures of JVs in Developing Countries: Lessons
from Experience – William A. Dymsza
Key factors that lead to success in JVs:
1. Achievement of Major Goals: The successful JV fosters the
achievement of major goals by each party to the JVs.
2. Complementary Contributions by Partners: A successful JV provides
for complementary contribution of resources by the major parties
involved – contributions that are valued by the principals. The
contribution of the MNE will depend upon the industry in which it is
involved, its product or product lines, its business orientation and
many other factors. In many manufacturing operations, the major
contribution of the TNC comprises manufacturing technology,
product know-how, patents, business expertise, technical training,
and management development. The national partner may
contribute some combination of capital, management, knowledge of
the country environment and the market, and contacts with the
government, financial institutions, local suppliers and labour unions.
3. Synergies of combining the Contributions of the Partners: A more
successful JV creates synergies through the partners pooling their
resources, capabilities, and strengths. These synergies lead to the
establishment of a manufacturing operation in which the total
results are greater than the sum of the contributions of the
partners. As a result of combining the modern production process,
the product know-how, technical training, management
development and management systems of a transnational company
with the national partner’s local capital, management, existing
plant, marketing expertise, and knowledge of the country
environment, the JV results in a more efficient and productive
enterprise than the participants could achieve on their own. The
synergies occur through the partners working closely together,
reinforcing each other’s strength, cross-pollinising with ideas
concerning management of the enterprise, responding to
competition, and developing the potential of the business in the
country environment.
4. Entry for smaller and medium-sized TNCs – JV provide suitable entry
into a manufacturing operation in a developing country for a smaller
and medium-sized international firm with limited capital and some
management with international experience but no great breath in
such management. It also limits the risk exposure for such a firm.
The national partner in such a JV provides a combination of local
financing, an existing plant and facilities, most of the management,
its marketing expertise and relationships with the government,
financial institutions and other groups. The manufacturing
technology, the product know-how, technical training and business
expertise contributed by the TNC lead to a more efficient
manufacturing and marketing operation, introduce new products, or
improve existing products.
5. Comprehensive Joint Venture Agreement – Check Article
6. Joint management responsibilities – a JV performs better if the TNC
and the local partner assume major managerial responsibilities and
share in key decisions. Based upon its greater managerial
experience and competence, the TNC commonly assumes greater
managerial responsibilities during the initial phases of the JV, but
joint management is fostered by using the particular competencies
of the national partner, its involvement in major decisions over
time, and training and development of local managers to assume
top and middle management positions. Involvement of the national
partner in more and more managerial decisions develops its
capabilities in joint management.
7. TP and joint ventures – Problems can exist with respect to purchase
of intermediates, components and other products from a TNC and
the issue of TP. The national partner may want, in cases where they
source raw materials from the TNC, assurance that the prices
charged by the TNC are arms’ length, competitive and fair.
8. Reduction of Ownership by a TNC in a JV – Over time, as the TNC’s
contributions become less significant to the operations of the
manufacturing JV, it may have to reduce its ownership as a result of
pressures of its national partner, and the government and turn
major managerial responsibilities over to its partner. Vernon (1977)
has described the obsolescing bargain under which the BP of the
TNC declines and that of the partner increases, as the partner gains
considerable experience and expertise in production, finance,
marketing, and other managerial functions and does not need the
resources of the TNC as much.
Key Factors in Failures of JVs: TNCs managers prefer to present
information about the problems and weaknesses of the JV forms in
general terms rather than grant specific details on projects that fail.
1. Significant differences in major goals of parties: One may want to
plough the profits in the company to expand the business while the
other may want to maximise short term return and hence seek
maximum dividend payout.
2. TNCs Global Integration and local partner’s national orientation:
TNCs maximise their profits on a global basis rather than maximise
the return in a particular country. Also, they may not wish to grant
high priority to businesses in resource allocation, management and
technological effort if the operation only represents a small
percentage of their total operations.
3. Perception of equal benefits and costs: What counts is not only the
actual contribution made by each party and the benefits obtained
by each one, but more importantly what the partners perceive over
the life of the operation. Such perceptions of the benefits accruing
to each partner may also change over the life of the JV.
4. JV agreements and failures: When the JV does not specify clearly the
goals of each party, the resources contributed by the partners, their
responsibilities and obligations, their rights, the character of the
business, their share of profits and their mode of distribution, ways
of resolving disputes, etc, disputes may arise.
5. Conflicts over decision making, managerial process and style: The
strife between a TNC and a local partner to control major policies
and decisions constitutes a major reason for the failure of JV. For e.g
TNC may be dictated by decisions from the parent ffice. Also, major
differences with respect to management processes, style of
management, and corporate culture between the TNC and national
partner can lead to serious conflicts which may contribute to the
failure of the JV. The TNC may strive to impose their processes of
strategic and operational planning, an information and control
system, budgeting and accounting on the JV affiliate. On the other
hand, the national partner, which is often a family run business in
developing nations, may have a more authoritarian management,
with no delegation of responsibilities to subordinates and very little
formal planning and control.
6. Differences between the partners concerning marketing: Check
Article.
7. Transfer Pricing Conflicts: Problems of pricing when sourcing
products especially on grounds that it assures required quality
standards and meet delivery requirements; on the other hand
national partners may want to explore alternative sources to obtain
the lowest costs materials.
8. Decline in resource contribution by the TNC: The national partner
may have significantly developed the capabilities to take charge of
manufacturing, marketing, finance and other key aspects of the
venture and may find that it has far less need for the expertise of
the TNC expertise. Hence he may wish to renegotiate their benefits
and ownership rights.
9. Other factors: Given host country regulations including performance
requirements and operational restrictions; increased political
instability and risk; high rates of inflation; frequent and sharp
currency devaluations; and exchange control on remittances on
dividends and royalties.
Competition Policy and JVs – OECD
Numerous JVs are found in the area of manufacturing and production.
They are set up for the following reasons:
1. Common Production
2. Penetration of a new geographical market: By linking up with an
enterprise which is already active in the underlying market. Such
ventures may be generally based on financial, fiscal, psychological
and legal considerations; the foreign company needing the help of
the indigenous firm which has the necessary local knowledge,
goodwill and experience.
3. Manufacturing new products or providing new services.
Motives for JV:
1. To make use of complementary technology and research activities.
Usually involves firms from different industries and segments of the
same industry to acquire knowledge they do not possess. May serve
as an important vehicle for transfer of knowledge.
2. Lack of capital to undertake activity on sole basis.
3. To reduce the level of risk.
4. JV may increase technical efficiency. In industries where economies
of scale are substantial, a vertical JV may produce substantial
distributional and transactional savings.
5. To overcome entry barriers to product markets, especially in highly
concentrated markets and those protected by trade and investment
barriers against foreign competition.
6. Political and legal considerations.
Advantages of JVs:
1. Risk Spreading – Ferguson found a positive correlation between the
riskiness of an industry and the use of JV as the preferred form of
entry.
2. Possibility of sharing initial cost of starting operations especially in
high capital intensive industries.
3. To reduce transaction costs especially in manufacturing sector.
4. Pooling R&D costs may constitute a mechanism for firms to solve
the problem of free-riding and may reduce the social costs of
excessive duplication of research efforts.
5. For exporting JVs, may enable firms unwilling or unable to face the
costs and extra risks of exporting alone to enter into new export
markets with consequent benefitial effects of a country’s export
performance.
Disadvantages of JVs: Check article on pages 24-25
Joint International Business Ventures – W.G.Friedmann and
G.Kalmanoffe, Columbia University Press, New York and
London
In the widest sense, the JV comprises any form of association which
implies collaboration for more than a transitory period and it excludes
pure trading period.
Attitudes and Motivations
Decisions on JVs in LDCs involve acceptance or rejection of a close
quasi-fraternal partnership with foreigners who are of different cultural
and often of different racial backgrounds. In such matters, unconscious
attitudes are understandably present, for example, attitudes towards
familial patterns, racial and cultural differences, and hierarchical and
impersonal relationships versus human relationships based on equality
and face-to face dealings. Indications of rationalisation and other
symptoms of unconscious motivation have not infrequently appeared
in respondents’ discussions, especially in their objections to JVs.
Non Specific Motives: General economic or business advantages of
given JV which are not necessarily connected with their being a JV.
Specific Motives: Refer to the advantages of a JV as such. There is
also the matter of motives underlying the preference for a particular
form of JV or degree of participation.
Non Specific Motives:
1. Local legislation e.g. in the Philippines; also investor companies will
often explain their participation in joint ventures by reference to
broad business identical to those which would apply to solo
ventures e.g. market costs; control of supply of raw materials; tax
advantages.
2. Profitability reasons.
3. Also the benefits of integration.
4. Opportunity or challenge offered by a particular situation. Quite
frequently, the challenge is a threat to continuation of an existing
profitable situation. E.g. imposition of import tariff by host nation
may result into the exporting firm setting up a JV and servicing
within the local economy itself.
5. Positive opportunity: for example a source of raw materials in rising
world demand.
Specific Motives:
1. Lack of finance to go alone.
2. For developed nations: JVs permit local capital to participate more
fully in the benefits of economic development, and that it transmits
technical and business know-how more rapidly and effectively than
either purely local; and hence it lessens the danger of foreign
domination of industry. But the JV may use local funds which could
have been used elsewhere. Also if business venture is too risky.
3. For capital exporting nations: The trend is towards increased
acceptability of joint ventures. The motives for JV in LDCs may be
analysed in various ways and the advantages usually mentioned
are: the achievement of capital savings and the reduction of
business risks; the obtaining of management skills and the
maintenance of employee morale; the facilitating of sales; the
improvement of government relations; the achievement of good
public relations.
a. The savings of capital usually more relevant for developed nations.
Usually not relevant for LDCs because the proposed JV is commonly
a brand new production operation; most of the equipment usually
imported and paid for by the foreign partner; local group very often
unable to finance a sizeable proportion of the JV; also the initial inv.
In LDCs is not such a critical factor since there are other more
important hazards and difficulties.
b. Closely connected with capital savings is the reduction in business
risk. By sinking less K into a venture and diversifying investment
between industries and countries, the investing company obviously
gains an element of protection. Also, the entrepreneurial skills and
experience of local partners permit easier adaptation to the
potential dangers of a new business environment with which the
investor company may be relatively unfamiliar. Also, given local
partner, the company may be less subject to the danger of adverse
action by the local government.
c. In cases where management objectives play a part in motivating a
JV, the aim is not to avoid management responsibilities entirely so
much as to supplement the investor company’s managerial
resources with locally available resources. The main contribution
that the local management may bring is its qualitative
consideration. Local management can contribute a knowledge of
local conditions and an ability to deal with labour, government, and
suppliers with no foreign management could match. There is an
important managerial advantage of JV of a relatively intangible
type: the favourable effect on the morale of the local employees of
inviting local capital participation. Also, national pride may provide
substantial economic effects (where local participation is
permitted).
d. Also easier to sell its product on the local market if a JV rather than
FOS.
e. Also hope of obtaining more favourable treatment form the
government. Also, the success of a JV may be affected by the
positive actions which the government may take. Protective tariffs
to protect the new industry; tax burdens/exemptions; authorised
transfer of dividends or repatriation of K; Government attitudes may
be very important.
f. Local partners may influence government actions by private
negotiations with government officials and politicians. The local
partners are more experienced in dealing with local administrative
procedures because they “know the ropes”; have well-established
connections; and have the feel of the situation and also because
such activities on their part are more readily accepted by the
government and local opinion.
g. Exchange controls have also stimulated the formation of JVs. Also
where exchange controls and import restrictions.
h. Also, lack of technical know-how or administrative resources to start
up a project by government or local partner though has the financial
capabilities. They may invite a foreign partner to bring in the
missing ingredient.
i. The creation of a JV may sometimes be motivated by the desire to
aid in the process of transferring technical and managerial
knowledge and skills to LDCs as a contribution to their economic
development. This has been a legitimate and important motive of
various development banks.
Problems: JV reduces capital requirements but at the same time
reduces profits. Also, provides potential communication problems of
co-operating with local managerial resources. Also, sometimes local
partner gains a return incommensurate with its contribution. Also the
choice of a local partner may be limited; lack of local capital may also
be a problem; also political instability present in LDCs. There may be a
real and inevitable conflict of interest between the partners or there
may be differences in management philosophy. Different tax laws and
foreign exchange considerations affecting the 2 partners may be a
source of conflict. Also problem of dividend distribution and declaration
of earnings figure – parent co v/s JV. Staffing and employment policies
and in particular the problems of nepotism are further causes for
controversy. Also, promised government influence may be a source of
conflict. If government change, then local partner influence may
decrease and its expected contribution to the JV may decrease.
Interesting Aspects
JVs are not an invention of the postwar period. They existed before,
although predominantly between industrially developed nations. But as
a significant phenomenon of international business relations, the JV is
overwhelmingly a postwar phenomenon, one of many attempts to
bridge the gap between the vast material and technological superiority
of the industrially developed nations and the urgent needs and
aspirations of the less developed nations. At the other extreme, there
is the wholly foreign-owned subsidiary. Critics of the JV have rightly
pointed out that WOSs which make the maximum use of local
personnel on all levels, which avoid discrepancies in the remuneration
and standard of living between foreign and local personnel, and which
are guided by experience and understanding of the country and its
people can be a far more successful equipment in partnership than a JV
which is merely a financial device. Also, to many of the governments
and the people of LDCs, partnership in the full sense that is a JV is a
symbol of equality. Such symbols are important regardless of the
immediate business aspects because they help to reduce deeply
ingrained suspicions of foreign economic domination.
Quite often the question of joint venturing will be decided by the
nature of previous relationship between the parties concerned and the
degree of intimacy to be achieved in continuing collaboration.
In essence, the JV is an important symbol of the changing relationship
between the developed and the LDCs, but it cannot be regarded as a
panacea. It is a device to be adopted, rejected, or modified after a
sober consideration of the many legal, psychological and technical
factors prevailing in a given situation. Confidence between the
partners will overcome the most difficult obstacles; lack of confidence
will destroy the most perfect devices.
More important even than the technicalities of legal, financial and
technical arrangements is the question of how much the JV can
contribute to the vital battle for the progress of the LDCs, a battle that
is fought simultaneously on the political, economic and personal level.
At its lowest, the JV is a device of financial arrangement or company
law, a minor variation of equity investment. At its highest, it can be an
important experiment for the sharing not only of legal and financial,
but also of human responsibilities. It expresses well the idea of
partnership, and it is only on the basis of partnership that the
economic progress of the less developed countries can be achieved,
and that it will be possible to impart the experience and resources of
the more developed nations to nations that want to bridge the gap
without sacrificing national pride and human dignity.
JOINT VENTURES – E.Herzfeld, Second Edition, Jordans, 1989.
Defn: JVs: Planning and Action, pp11-15 by Young and Bradford: “ An
enterprise, corporation or partnership formed by 2 or more companies,
individuals or organisations at least one of which is an operating entity
which wishes to broaden its activities for the purpose of conducting a
new profit motivated business of permanent duration. In general the
ownership is shared by the partners with more or less equal
distribution and without absolute dominance by one party”.
Purpose of JV:
1. Horizontal Integration
2. Vertical Integration
3. Conglomerate JV – Operate in a field unrelated to the existing
activities of the participants.
Advantages and Disadvantages of JV
Berg and Friedman (1978) quote the view that most JVs are born out of
sets of unique circumstances and also draw attention to the fact they
represent an organisational form for achieving economic objectives
which neither parent could normally attain acting alone.
Advantages:
1. Limitation of investment: attractive especially if investment made in
country with existing or potential exchange control problems
affecting possible repatriation.
2. Limitation of risk: especially the financial risk to the foreign investor.
3. Overcoming nationalistic prejudice
4. Merging skills and strengths.
5. For above check article pages 22-24
Disadvantages:
1. Decision making – management style
2. After-effect of failure – effect on parents’ image
3. For further information check article.
The Strategy of MNE – Ownership Policies
Advantages of JVs:
1. Technical resources: The JV may present the opportunity for local
firms to acquire needed managerial, technological or productive
resources at a substantial saving in time and expense. For the
foreign partner, the benefit will be in finding a partner with the
knowledge of the local market. Often the local partner can offer a
trained sales organisation or labour force or productive facilities to
complement the special know-how or resources or both of the
foreign investor. But, unless the partners are of comparable size
and strength, such marriages of convenience are often shortlived or
at least full of strife.
2. Financial Considerations: Lack of finance from foreign investor.
3. Political considerations: Main reason for seeking local shareholdings.
A policy of local ownership was desirable and essential to maintain
satisfactory public relations in the host country though performance
is more important than public relations.
Disadvantages:
1. Conflicts of interest: The growing tendency towards unification of
markets and the rationalisation and integration of production and
other functions on a regional or even wider basis means the
concentration of manufacture in certain plants and the assignment
of export markets on mainly economic criteria. Under such
conditions, the interdependence of the various subsidiaries of the
group makes any attempt to measure their individual profitability a
difficult if not an arbitrary exercise. Often too, for tax or other
reasons, a company’s foreign business may best be structured so
that more of the ultimate profits are taken in one subsidiary than in
another. But problems might arise if have local partner. The parent
company might use TP to bring down profit and minimise group tax
payments while the local partner may demand higher dividends and
fees. Also conflicts of interest may arise especially concerning
reinvestment of earnings. A parent company is often willing to wait
considerably longer for its return on investment than its local
partner especially if it is claiming royalties or fees. The parent
company may want to reinvest the profits while the local partner
may want to distribute the bulk of it. Also the parent company may
want to delay the dividend payments.
2. Disclosure of information: Many of the practices used by the MNEs
to avoid or defer taxes, to protect themselves against exchange
losses, or to achieve other corporate objectives are neither feasible
nor appropriate where there are local shareholders in the
subsidiary. This is especially so for quoted companies which need
submit published accounts.
3. Unwillingness to share earnings: especially so in the technological
advanced industries where the parent company enjoys a monopoly
or near-monopoly position. And in such cases, the local partner
hardly makes any contribution and companies find it difficult to see
any justification at all for sharing the equity.
4. Too much time wasted in settling petty disputes among partners.
5. Also differences in the approach to business between head office
and local management.
But there are costs in a policy of local participation. Less income from
tax from withholding taxes lost on dividends paid to the minority
holdings and from lower profits if there is TP used. It could also have an
impact on BOP if the proceeds of the sale to create a minority holding
were repatriated.
Third World JVs: Indian Experience in eds. Multinationals from
Developing Countries – 1981 By R.G.Agrawal, edited by Krishna
Kumar and Maxwell G Mc Leod.
In some cases, the MNEs acquired a bad image for it failed to relate
itself well to the problems of host nations. In other cases, it
transgressed certain limits making it socially and even economically
detrimental to the interests of the host nations. It is against this
backdrop that one has to view the emergence of joint production and
marketing enterprises of the third world.
Motivations:
1. sharing of experience and expertise in fields where adequate
capabilities have been developed in the home country;
2. setting up enterprises of a comparatively medium/small size in
industries where the MNE did not evince interest;
3. safeguarding of markets to which goods have been exported and
using the venture for promoting exports;
4. expectation of a reasonable return on investment coupled with
technical know-how fees and royalties;
5. participation as a means to secure larger orders for machinery and
components;
6. an assured supply of raw materials;
7. diversification of business risks among two or more countries.
For the host nation:
1. obtaining investment without use of own foreign exchange
2. acquiring technology best suited to its needs
3. setting up of IS and XO industries
4. participation in management
5. stronger bargaining position vis-à-vis TNCs.
Other factors that govern the decision to invest abroad include the
dynamic desire to make a name abroad, use of the JV country as a
production base for the supply of components to the investing nation,
indirect fringe benefits such as easy foreign travel on behalf of the JV,
creation of an outpost through the JV for commercial intelligence, using
it as an instrument of trade development on a two way basis,
demonstration of a dynamic spirit of enterprise in carrying out a job in
a foreign nation, and absorbing new ideas through such operation in a
competitive environment.
One of the major impulses of the investing nation in venturing abroad
can be explained by the growth theory of trade. If restraints on
expansion of a firm are placed at home, growth can be achieved by
diversifying risk across the borders through transfer of the appropriate
technology suited to the needs of the host nation. Also the
acceptability of JV has been increasing among developed nations since
they are easier to control the TNCs.
For information of JV on a regional integration scope please see article
pages 119-122.
Use of Minority and 50-50 JVs by US MNEs during the 1970’s:
the interaction of host country policies and corporate
strategies – Franko, L.G, JIBS, 1989 vol.20:n1.
Beamish and Banks (1987) and Buckley and Casson (1988) discuss the
conditions under which JVs as a concept may be compatible with the
internalisation paradigm. The internalisation view of the MNE does
however posit that MNEs will minimise transactions costs by using
internal and presumably wholly owned structures as opposed to arms-
length, market intermediaries to serve foreign markets. Thus according
to the internalisation theory in its present formulation, firms would
have a strong economic incentive to always avoid JVs since these are
regarded as being inferior to WOS in allowing the firm to maximise the
returns available the returns available on its ownership specific
advantages (Beamish and Banks, 1987). But why is there a trend
towards JVs?
Beamish and Banks (1987) provide 2 possible modifications to the
internalisation paradigm which would allow for the willing acceptance
of JVs by MNEs: mutual trust and commitment, and hedging against
uncertainty. Buckley and Casson (1988) note a third: governmental
barriers to complete merger (or takeovers) or JV partners.
Reasons for increasing use of JVs in LDCs:
1. LDC Policy Shifts: Shifting of host policies towards an insistence on
increasing amounts of local ownership. Check Salehizadeh, 1983;
Robinson, 1976; Black, Blank and Hanson, 1978).
2. Country Ownership Policies and Economic Performance: It has been
frequently noted in the literature that the JV form and a high degree
of product exchange and trade with home country or other parts of
the MNE system are different bedfellows, if not indeed
fundamentally incompatible (Fagre and Wells, 1982; Gomes-
Casseras, 1985; Franko, 1971; Stopford and Wells, 1972). The Asian
NICs appeared willing to adapt themselves to this MNE
characteristic, thus clearly placing first priority on export-success as
opposed to local ownership though in some cases they have allowed
100% ownership in EPZs while encouraging or requiring reduced
equity in ventures aimed at the local market.
3. JV Stability: A considerable body of evidence pointing to the fragility
of the JV forms exists (Franko, 1971; Reynolds, 1979; Killing, 1973;
Beamish, 1984; Beamish, 1985). Moreover, studies by Reynolds and
Beamish suggest that both JV instability rates and suppressed JV
instability in the form of acute MNE management dissatisfaction
with JV performance may be higher in LDCs than in advanced
nations.
The trend found in this article accords with expectations derived from
the relative technological and marketing bargaining power school of
thought on JV formation generally associated with the writings of Prof.
Wells (Stopford and Wells, 1971; Fagre and Wells, 1982). High levels
and trends towards JVs are found in lower technology sectors.
4. The MNE Company Strategy Dimension (Check article page 7)
The shift towards use of JVs was mainly in nations whose
industrialisation policies were largely oriented towards IS mode of
development. But MNEs tend to retain 100% ownership or majority
ownership when they had notable propriety technological or marketing
strengths.
Although host government policies can be held largely responsible for
triggering the move toward increased use of MJVs, company strategies
and behaviour both allowed these policies to succeed in obtaining
MNEs assent to minority positions, and conditioned the kinds of MNEs
that accepted limited or reduced ownership. Smaller, latecomer MNEs
anxious to catch up with or match or marginally go ahead of dominant
firms would logically sell their services to host governments and locals
by offering a better deal in the form of local majority or equal
ownership. One risk for the country or local partner was that the
outsider firm may not be as technologically dynamic or experienced
and hence not as competitive in terms of world cost levels, product
specifications or quality as one of the majors or segment specialists
who might insist on WOS. Another risk for the economy was that
majority local ownership might be obtained largely at the price of
offering permanent protection for an IS venture. But such outsider
presence might be rewarding. It may help develop local competencies.
But, the economic result of any MNE activity, be it judged in terms of
cost-efficiency, quality of output, FE earned, technology transferred, or
whatever will be the joint product of MNE conduct; host country
objectives, rules and conduct; and host entrepreneurial conduct and
motivation. The legal form of the activity may facilitate or inhibit
particular outcomes, but it alone does not determine them.
Environmental Risks and JV Sharing Arrangements, Shan.W,
JIBS, 1991, v22:n4
There are unfamiliar territories in which the rules of the game are likely
to be dissimilar from those of market economies. The challenge to a
foreign investor is how to adapt investment strategies to those
economies in order to succeed under the peculiar conditions of diverse
political and economic systems.
Much of modern theory of FDI has been developed against the
framework of transaction costs economics (Caves, 1982). A MNE can
compete successfully in a foreign market because of its possession of
monopolistic or unique advantages (Hymer, 1976; Kindleberger, 1969).
These ownership advantages (Dunning, 1977) must be sufficiently
great to offset the disadvantages of being a non-resident firm.
Full ownership need not be the only organisational alternative to
simple market exchanges. There is a spectrum of intermediate modes
of organisations that are designed to govern inter-firm relationships
including for example JVs. As an alternative to full integration or simple
market exchange, the JV facilitates inter-firm learning and transfer of
intangible assets (Kogut, 1988) while mitigating incentives for
opportunism by creating interdependence between the transacting
parties (Buckley and Casson, 1988; Stuckey, 1983; Hennart, 1988).
Moreover if the benefits derived from a JV minus the transactions costs
specific to the formation and operation of an international JV, are
greater than the sum of these benefits from exploiting firm specific
advantages separately, a JV creates synergies and enhances economic
rents to the partners (Beamish and Banks, 1987; Shan, 1990; Teece,
1983). These synergies can be the result of risk reduction, economies
of scale and scope, product rationalisation, convergence of
technologies and better local acceptance (Harrigan, 1985; Contractor
and Lorange, 1988). Therefore under the right conditions, JV can be a
first best choice. As a corollary, the synergistic effects are larger the
greater the complementarity between foreign and indigenous firms.
Hence, the greater the complementarity, the higher the probability
that the foreign firm will enter the market through a cooperative
arrangement with a local firm, ceteris paribus. Therefore, in a country
in which the cultural, political and economic systems differ greatly
from its own, a foreign firm is more likely to cooperate with an
indigenous firm which may have developed unique country and firm
specific skills and advantages that are very costly, if not impossible to
duplicate by a foreign firm (Davidson and McFetridge, 1985).
In less developed nations, in which requirements for adaptation and
information are greater, the appropriateness of an MNE forming JVs is
reinforced (Beamish and Banks, 1978). The transaction costs
implications of the degree of integration or the extent of ownership of
productive assets, are complicated under conditions of uncertainty.
When uncertainty is high, a larger degree of ownership potentially
entails greater switching costs should undesirable events occur. The
ownership of productive assets may deprive the owner of the flexibility
of low cost exit from the market. Therefore firms should shun
ownership under such conditions (Williamson, 1979). There are
however different types of risks and uncertainties according to the
extent to which they can be controlled and managed by the firm
through the organisational strategies. Uncertainties and risks
embodied in the contextual environment are usually beyond the
control of the firm (Root, 1988). Transactional risks such as the
exposure of dedicated assets to the potential opportunism of
transacting parties, may be reduced or eliminated through
internalisation of markets or integration (Williamson, 1975, 1985;
Monteverde and Teece, 1982). In contrast, uncertainties of the
contextual environment might not be eliminated through expansion of
the boundaries of the firm. Therefore transactional and contextual
uncertainties may have opposite effects. The former may lead to
increased integration while the latter may cause firm to shy away from
ownership. The risks due to the opportunistic behaviour of the
transactional parties are more substantial for those ventures with a
higher degree of dependence on these relationships.
A JV can be viewed as a hedging vehicle against both transactional and
contextual risks imposed by the political system, in addition to other
types of benefits it might bring to the foreign firm. But the JV does not
necessarily align the interests of the local partner to those of the
foreign firm. The goals of the JV partners might well be incongruous
due to the divergent interests of their stakeholders, private
shareholders and the host government (Boisot and Child, 1988). While
the foreign firm may find it desirable to minimise the labour costs, the
state owned enterprise may want to maximise the benefits accruing to
its employees (Milking a JV). The challenge of the foreign firm is how to
synchronise the interests of the local partner to that of the JV and to
proactively control contextual risks through offreing appropriate
incentives to its partners in the JV. Empirical evidence suggests that
the williongness of American firms to commit equity in entering in a
foreign market is inversely related to perceived uncertainties of doing
business in that country (Stopford and Wells, 1976; Davidson and
McFetridge 1985; Gatignon and Anderson, 1988; Kobrin, 1988).
Needless to say, the perception and the ability to manage risks are
likely to differ across firms. Indeed the JV literature is rife with
empirical studies that examine firm-level variables as determinants of
JV formations and other types of entry strategies. Moreover, the degree
of the vulnerability of a foreign venture to host government
intervention is a decreasing function of its position within, and the
degree of inter-dependence of, the multinational network (Poynter,
1982). Therefore, the higher the degree of dependence of the venture
on local relationships, the more the venture is prone to political and
other contextual risks. It should be noted however that intended
strategy may very well be modified over time as a firm adapts its
strategy either to the changing market conditions or to its perception
of the environment (Mintzberg and Waters, 1985). Neither is it unusual
for JVs in LDCs to be renegotiated as market conditions and bargaining
powers shift (Wells, 1977).
It is theorised that committing the local partner to a larger share of the
JV under conditions of political, bureaucratic and legal uncertainties in
a CPE aligns its interest to that of the JV and reduces the incentives for
it to pursue divergent goals to the detriment of the JV. To the extent
that it is possible, the foreign investor may proactively manage its
contextual relationship (Williamson, 1979). To the extent that this is
possible, the foreign firm may proactively manage its contextual
relationships in such market.
The sharing decision of a JV is undoubtedly a strategic decision.
Clearly, ownership does not only affect the share of profits or losses
from a JV, it is an essential part of an incentive system for both
partners of the venture. The incentive extends beyond the local
partner to the contextual relationships in as much as transactional
parties are linked to the bureaucratic hierarchy. An MNE can therefore
proactively manage the contextual environment through its sharing
agreement in a JV. The optimal share must be calculated taking into
consideration the peculiarities of the relationship between
transactional and contextual environments of the foreign country as
well as the risk bearing capabilities of the foreign partner. However, to
the extent that equity share increases the power of a partner, there is
a trade off between the share controlled by the foreign firm and the
degree of control over the operation of the venture. Therefore, while
the foreign firm may be tempted to induce its local partner to commit a
larger share of the equity, it must also negotiate the terms of the
agreement to allow itself to maintain or share control over decisions
related to key issues such as TP, technology protection, and the
expansion of operations and crucial functions of the venture (Schaan,
1988). Finally the MNE must constantly reevaluate its policies towards
the JV as the environment changes over time. (For information on tests
and results check article).
UK JV Activity in the Czech Republic: Motives and Uses – E.
Davies, B. Kenny, R. Trick – European Business Review, Vol. 96
No. 6, 1996, MCB University Press
JVs and collaborative agreements between firms have become a
distinct feature of international business. In the 60’s and 70’s the
collaborative structures were perceived to be second-best options and
were restricted to cases where host governments required the use of
local partners. In examining the changing environment of IB and the
increasing use of collaborative arrangements by Western nations,
Buckley (1991), listed certain developments in the international arena
that have challenged MNEs and in turn posed new questions for the
development of IB theory. They include:
1. an increase in both competition and collaboration between firms;
2. political changes including deregulation, political, economic and
financial integration, and changes in trade policies.
3. The increasing resource put into research and development which
play a major role in international competition.
4. Changes in social patterns including an increasing interest in
environment, green issues and equality of opportunity.
5. A restructuring of the world economy and of its constituent parts at
national, regional, firm, and intra-firm levels;
6. Relations between advanced nations and less developed nations.
For Survey and results check article
The Changing Characteristics of JVs
1960s-1970s 1980s-1990s
transitional: Testing the water frequently non
transitional or
entry strategy complementary to other
strategies
second best to other modalities as first best entry strategy
free standing as part of a polycentric integrated with a
geocentric or global
or multi-domestic strategy of MNEs strategy of MNEs
undertaken by mainly small or medium increasingly undertaken by
larger
sized firms or smaller MNEs especially MNEs from leading K
intensive firms
from smaller home nations
market seeking or resource seeking strategic asset seeking
inv.
Investment
Especially favoured by developing both DCs and LDCs
Nations
Especially prevalent in mature spread throughout sectors
including
Sectors or in those producing technology and information
intensive
Standard goods sectors in which economies of scale
Are prevalent
Designed primarily to reduce intended mainly to acquire
complementary
Risks of 100% commitment assets and capture
economies of synergy.
Formation and Performance of Multi-Partner JVs: A Sino-
Foreign Illustration – D.Griffith, M.Hu, H.Chen, International
Marketing Review, vol15, no.3, MCB University Press.
Many MNCs have gained access to markets via the formation of
international JVs. JVs are formed to achieve synergy through combining
complementary partners (Kogut, 1988). International JVs are formed to
improve a firm’s competitive positioning with the global marketplace.
To accomplish this objective, parent firms attempt to create synergies
through combining resources, capabilities and strengths (Dymsza,
1988). Local partners, particularly from LDCs benefit from the
technological know-how, management skills and capital brought in by
their foreign partners (Kim, 1996; Shao and Herbig, 1995). MNCs
depend on local partners’ knowledge and networks in the host country
to reduce risks and increase revenue. International JVs allow partners
to share information, resources and risks, hence creating synergistic
effects. JVs have also created problems for partners because of
different goals, values and cultures.
Researchers have adopted a formation orientation to better
understand criteria leading to successful IJVs. Researchers indicate
that size (Kogut and Singh, 1988; Pan, 1996), control (Anderson and
Gatignon, 1986; Beamish, 1984; Blodgett, 1991; Dymsza, 1988;
Geringer and Hebert, 1989; Geringer and Woodcock, 1989; Gomes-
Casseres, 1989; Hladik, 1988; Pan, 1996; Schaan, 1988; Wei, 1993;
Williams and Lilley, 1993), socio-cultural (Agarwal, 1994; Hu and Chen,
1996; Kogut and Singh, 1988; Pan, 1996; Wei, 1993), industrial
characteristics (Blodgett, 1991), and location (Dunning, 1979, 1980,
1988, 1990, 1995) are important factors contributing to the
establishment and ongoing administration of a cooperative and/or
contractual organisation. If these factors are critical to the formation of
IJVs, they may also increase our understanding of why IJVs differ in
numbers of partners. Under an outcome orientation, performance has
been widely investigated (Beamish, 1987, 1993; Cavusgil and Zou,
1994; Chow and Fung, 1997; Davidson, 1987; Geringer and Hebert,
1988; Hennart, 1988; Hu and Chen, 1996; Killing, 1983; Osland, 1994;
Osland and Cavusgil, 1996; Reynolds, 1984; Schaan and Beamish,
1988; Shenkar and Zeira, 1992; Woodcock et al., 1994). If IJVs differ in
terms of the number of partners during formation, performance may
also vary.
The sensitive nature of competitive capabilities shared within the IJV
inherently creates a need for control (Williams and Lilley, 1993).
Control has been used to better understand inter-organisational
cooperative behaviour (Anderson and Gatignon, 1986; Blodgett, 1991;
Dymsza, 1988; Woodcock et al., 1994). Control within an IJV can be
defined as the process through which the aprent companies ensure
that the management of the JV conforms to their interests, thus
protection their proprietary assets (Geringer and Hebert, 19989;
Hladik, 1988; Schaan, 1988).
Socio-cultural distance significantly influences inter-cultural business
operation (Agarwal, 1994; Chan, 1996; Hofstede, 1980; Kogut and
Singh, 1988). Kogut and Singh (1988) as well as Agarwal, (1994) and
Chan (1996) indicate that socio-cultural significantly influences the
entry mode choice of an organisation. Kogut and Singh (1988) found
that the greater the socio-cultural distance of the investing firm and
the country of entry, the more likely the firm was to utilise a JV over a
wholly-owned entry method.
During the formation process, partners with a low socio-cultural
distance gap are more likely to share values, beliefs and knowledge
and create a more cohesive organisation. Wei (1993) found when
analysing Chinese foreign JVs that those partners having the smallest
socio-cultural distance gap dominated the number of JVs during the
period of 1979-1986. (For analysis and results check article).
Potential Problems that might take place in JVs
1. Meeting the Expectations of 2 parents: A challenge facing JV
managers is not only that the parent companies may have different
set of expectations, but, more importantly, that those expectations
are seldom clearly communicated and that they change over time.
Managing a JV involves a subtle balancing act between the parent’s
priorities, the JV strategic and operating priorities, and the personal
objectives, beliefs, and values of the managers representing the
various stakeholders in the JV. Finally, the observed differences in
expectations regarding good management practice have been
explained by Reynolds (1979) on the basis of the parent’s attitudes
towards the role of management in 5 areas: a. the source and the
scope of the manager’s authority; b. status; c. personality versus
position; d. responsibility for decision making; e. responsibility for
future events.
2. Insuring the Economic Viability of the JV: In the country where the JV
was located, the MNE partners were not strictly dependent on local
earnings in determining the overall return. However, venture profits
were often the only source of revenue for local partners, and, as
Reynolds (1979) notes, the JV was much more often the major
industrial interest of the local partner.
3. Drawing from Partners’ contribution: A mutual long-term need
between JV partners is another significant variable associated with
the success of JVs. In Beamish’s study (1984), partner needs were
characterised into 5 groups with 3 items in each group. These 5
groups encompassed: a. needs for items readily capitalised; b.
human resource needs; c. market access needs; d.
government/political needs; e. knowledge needs.
4. Managing in an environment constrained by the parent’s control
practices: Parent companies have been found to exercise control
through both positive and negative mechanisms. A parent uses
positive control when it is in a position to influence activities or
decisions in a way consistent with its expectations and interests. It
uses negative control when it is in a position to prevent decisions or
activities it does not agree with from being implemented.
Even if not coerced into a JV, companies may use them to achieve
what appear to be important benefits, including:
a. faster and easier access to the local market and the distribution
system;
b. improved knowledge of the local economy, politics and culture;
c. improved access to local human resources, including managers and
labour;
d. a sharing of risk;
e. preferential treatment. This could include the repatriation of
dividends, the registering of investment to increase the capital base
on which dividends may be computed, and the securing of
government contracts and work permits for expatriates.
Too often, entering into a JV is a result of organisational and individual
pressures rather than for good strategic or economic reasons.
Euphemistically, regarding a venture as a sharing of risk, may only be
delaying the day that it is recognised as a bad deal. Strategic and
economic benefits are crucial first considerations. However, they are
analogous to the proverbial tip of the iceberg. Implementation and
operating difficulties lie hidden below the surface.
In order to cope with the political and interpersonal constraints of their
job, JV managers must show great sensitivity to the parent companies’
differences in culture, management style and expectations. Being
under the scrutiny of 2 or more parents they have to reconcile their
achievement of their personal and career objectives with the parent’s
objectives and with the unique strategic and operating imperatives of
running a company in a LDC.
There is a tendency in MNEs to insist on providing management
personnel to the JV. But, they have to recognise that the skills and
knowledge required to manage a JV successfully in a LDC are very
different from those developed in managing WOSs and/or in developed
nations.
Hence, a major challenge facing JV managers is that they have to be
good diplomats, able to operate constantly within two or more frames
of reference and set of values, and to manage the idiosyncrasies of
their parent with success.
Effective Leadership in JVs in Vietnam: a cross-cultural
perspective – T.Quang and W.Swierczek and D.Thi Kim Chi,
Journal of Organisational Change, vol11, no.4, 1998.
In 1998, nearly 800 foreign businessmen identified the current FDI
problems (a substantial decrease in FDI in recent years) which have
not changed in 5 years:
1. inadequate implementation of the legal framework;
2. red tape and bureaucracy
3. unfair treatment in costing projects
4. import/export tariffs
5. corruption
As the Saigon Times (1998) put it: “ there have been too many high
profile failures or withdrawal cases between JV partners, too many
problems associated with the lack of transparency in the law which
allows for too many different and changing interpretation by
bureaucrats which in turn create unforeseen delays and costs for
investors”.
In such a culturally complex business environment, expatriate
managers are not only judged with respect to their technical and
international business knowledge and experience, but also on their
personal characteristics and leadership skills. Insufficient knowledge
and limited understanding of each partner’s culture often create open
and long lasting conflicts between international managers and local
counterparts and employees. In the worst cases, this leads to the
failure of the business partnership (Quang, 1997).
Cooperative ventures are increasing in IB because of the well-known
imperatives to be simultaneously global and local. The role of culture in
the success and failure of JVs is still not well researched despite the
seminal efforts of Lane and Beamish (1990) who recognised that:
“many Western corporations seek co-operative ventures as quick fix to
global competitiveness without understanding the relationship being
established and the behavioural and cultural issues involved”
Failure stem from the influence of culture on behaviour and
management systems which create unresolved conflicts. Compatibility
between partners is the most important factor in the endurance of a
global alliance. Differences between national cultures, if not
understood, can lead to poor communication, mutual distrust and the
end of the venture (Lane and Beamish, 1990).
Since trust is a major dimension of effective partnership, those cultures
which emphasise trust would minimise the impact of cultural distance.
In high trust ventures, organisational controls are often based on
shared values such as duty or obligations to others (Shane, 1992).
Cultural distance is most clearly shown in terms of communication.
This causes problems, particularly when the partners do not share a
common work language. The local values, beliefs, norms for getting
the jobs done are generally constrained by the international partner’s
approach to managing the JV (Walters et al., 1994).
JV management characteristics:
1. JVs will be more successful where there is a high degree of
compatibility in the leadership styles of the partners.
2. JVs will be more successful where there is a great emphasis on
closing the cultural distance and on developing a multi-cultural
foundation for management;
3. JVs with a leadership style which emphasise trust, communication
and mutual objectives will be more successful;
4. JVs in which the partners emphasise a relationship style based on
teamwork and collaboration will be more successful;
5. The greater the complementarity of leadership styles of the
partners in the JV the greater the likelihood of success in the JV;
6. The greater the emphasis of multicultural leadership characteristics
and skills in the JV such as flexibility, empathy, understanding
problem solving, communication and relationship building the
greater the likelihood of success of the JV.
For analysis and results check article.
Conclusion: The example of successful JVs emphasise building
relationships, creating a mutual understanding and shared values. In
organisational change they are more adaptive, focused more on
teamwork and they provide a stronger role for local managers. From
the perspective of organisational learning, successful JVs promote the
management development of Vietnamese managers and reduce the
involvement of expatriates. These JVs enhance their strategic
capability by having long term commitment and a vision for the JV
which will be implemented by Vietnamese managers with effective
leadership skills.
THE CHARACTERISTICS AND PERFORMANCE OF KOREAN JOINT
VENTURES IN LDCs – Lee and Beamish – Journal of international
Business Studies – Third Quarter 1995.
A joint venture is the investment form used by nearly half of all
multinationals from developed countries to enter developing countries
(Austin, 1990; Kobrin, 1988). Much of the research work on JVs has
been from a DC perspective (Sohn, 1994; Woodcock et al., 1994;
Negandi et al., 1987). It has shown that certain characteristics of joint
ventures differ when located in DCs and LDCs. Specifically, JVs from
DCs into LDCs are characterized by: a. a higher instability rate and
greater managerial dissatisfaction than those in DCs; b. equal
ownership being more frequent DCs and minority ownership most
common in LDCs JVs; c. strong relationship between ownership and
control in DCs but not LDCs based JVs; and d. an inconclusive
relationship between JVs performance and management control in DCs
JVS and shared control showing some more satisfactory performance in
LDCs JVs (Beamish, 1995; Reynolds, 1979; Killing, 1983; Franko, 1979;
Tomlinson, 1970).
This study suggests that the characteristics of Korean Joint Ventures in
LDCs are as follows. First, the need for the local partner’s knowledge is
a more important reason for creating a venture than government
regulation on ownership. Second, Korean JVs are more stable than
developed country JVs. Third, the stability of the Korean JVs is related
to the type of local partner. Fourth, the most common ownership level
of Korean partners is a minority one. Fifth, overall satisfaction with the
performance of Korean Joint Ventures is higher than that of developed
country JVs in LDCs.
HOW MNCs CHOOSE ENTRY MODES AND FORM ALLIANCES: THE
CHINA EXPERIENCE – Tse, Pan and Au – JIBS Fourth Quarter,
1997.
Entry mode has been the cornerstone of a firm’s market entry
strategy. To investing firms, different entry modes represent varying
levels of control, commitment and risk. These factors are of particular
significance to firms entering new or unstable markets (Dunning, 1988;
Shenkar, 1990). In China, Joint ventures are popular because there are
government regulations (Davidson, 1987; Eiteman, 1990). It is the
oldest form of business in China (Beamish, 1993) and has a proven
success record (Pearson, 1991; Shenkar, 1990).
Faced with rapid technological advances, changing market structures
and increasing global competition, firms are motivated to form
alliances with other firms to reduce investment risks, share technology,
improve efficiency, enhance global mobility and strengthen global
competitiveness (Auster, 1987; Harrigan, 1988). The reasons for a
foreign firm to enter a JV also include risk sharing, resource pooling,
asset protecting and the ability to react quickly to market changes
(Pan and Tse, 1996).
WHAT DIFFRENCES IN THE CULTURAL BACKGROUNDS OF
PARTNERS ARE DETRIMENTAL FOR INTERNATIONAL JVs –
Barkema and Vermeulen – JIBS, Fourth Quarter, 1997.
Entering a foreign country through an IJV has several advantages. The
IJV allows the firm to share the costs and risks of foreign entry and to
use the local partner’s knowledge about the local institutional
framework’ local consumer tastes, and business practices (Agarwal
and Ramaswami, 1992; Erramilli, 1991; Erramilli and Rao, 1993;
Gatignon and Anderson, 1988; Gomes-Casseres, 1989, 1990; Kogut
and Singh, 1988). However, IJVs also entail unique risks owing to the
potential problems of cooperating with a partner from a different
national culture (Brown et al., 1989; Harrigan, 1988). The cultural
differences may create ambiguities in the relationship, which may lead
to conflicts and even dissolution of the venture (Barkema et al., 1996;
Shenkar et al., 1992; Woodcock et al., 1991).
THE ENVIRONMENT FOR FDI AND THE CHARACTERISTICS OF JVs
IN CHINA – Chen, Development Policy Review, Vol. 11, 1993
The investment environment of a country includes both physical
factors, its geography and resources (hardware) and man-made factors
such as infrastructure, political stability, the structure and
development of the economy, the rate of inflation, the culture etc
(software). Obviously both the hardware and the software are
important determinants of FDI which is governed by a complex set of
economic, political and social factors (Frank, 1980; Hood and Young,
1979; Hughes and Seng, 1969; and Vernon, 1975)
Several studies have shown that joint ventures are more efficient than
wholly-owned subsidiaries under certain circumstances and they are
also an important means for developing countries to obtain foreign
capital and technology and make a contribution to their development
process (Beamish, 1988; Dunning, 1981; Stuckey, 1983; Vaupel et al.,
1973). MOFERT’s (1986) study showed that the popularity of JVs in
China was mainly due to the fact that foreign partners expected their
local counterparts to help them overcome specific obstacles to
operating in China. For e.g. an unfamiliar environment; different
political and economic structure; cultural and languages differences,
current business practices different management systems and
knowledge of government procedures in both local and central
government. Furthermore, the pooling of resources reduced
uncertainty and duplication of effort.
The popularity of Hong Kong as a source of investment was mainly
because of its adjacent location, cultural affinity and the Chinese
Connection.
INTERNATIONAL JVs IN DEVELOPING COUNTRIES – MILLER ET
AL., 1993, FINANCE AND DEVELOPMENT
JVs between local firms in LDCs and foreign companies have become
popular means for both management to satisfy their objectives. They
offer at least in principle, an opportunity for each partner to benefit
significantly from the comparative advantages of the other. Local
partners bring knowledge of the domestic market; familiarity with
government bureaucracies and regulations; understanding of local
labour markets and possibly existing manufacturing facilities. Foreign
partners can offer advanced process and product technologies,
management know-how and access to export markets. For either side,
the possibility of joining with another company in the new venture
lowers capital requirements relative to going it alone.
FOR PROBLEMS RELATING TO JVS CHECK ARTICLE.
CHARACTERISTICS OF JOINT VENTURES
There are a large number of potential partner needs and these can be
classified in various ways.
1. Items readily capitalized: To Roulac (1980), capital was one of
the 2 reasons for which partners are needed (the other was
expertise). Also the second reason was to ensure supply of raw
materials. Third, technology and equipment.
2. Human resource needs
3. Market access needs: better access to local markets (Stopford
and Wells, 1972).
4. Government political needs – need to meet government
requirements (Killing, 1978).
5. Knowledge needs (Newbould et al., 1978) – general knowledge of
the local economy, politics and customs.
Equity JVs and the Theory of the MNE – Beamish and Banks,
JIBS, Summer 1987
MNEs often prefer JVs over fully owned subsidiaries regardless of
whether they are required by a host country as a condition of entry
(Beamish, 1984). Nevertheless, fairly limited consideration has been
given to the rationale for equity JVS in the theory of the MNE. The
theory of internalization only offers partial explanations of the
ownership preferences of MNEs for other than wholly owned
subsidiaries (Davidson and McFetridge, 1985; Teece, 1985; Thorelli,
1986; Horstmann and Markussen, 1986; Wells, 1973).
In order to justify the use of international JVs within the internalization
framework, 2 necessary conditions must be present: the firm
possesses a rent-yielding asset which would allow it to be competitive
in the foreign market; and JV arrangements are superior to other
means for appropriating rents from the sale of this assets in the foreign
markets (Teece, 1985).
Hence, following Teece (1983), the attractiveness of JVs is a function of
both the revenue-enhancing and cost-reducing opportunities they
provide the MNE. However, JVS are viewed as inferior to fully-owned
subsidiaries (Caves, 1982; Rugman, 1983; Killing, 1983; Poynter, 1985;
Harrigan, 1985). The value of the foreign local partners’ assets would
apparently be insufficient in any conceivable situation to offset the
strategic risks and transaction costs faced by the MNE in exploiting its
ownership-specific assets.
One of the most significant transactional contingencies faced by MNEs
considering a joint venture would apparently arise due to the problem
of opportunism. But in situations where a JV is established in a spirit of
mutual trust and commitment to its long-term commercial success,
opportunistic behaviour is unlikely to emerge. Furthermore, if these
positive attitudes are reinforced with supporting inter-organisational
linkages such as mechanisms for divisions of profits, joint decision
making processes and reward and control systems, the incentives to
engage in self-seeking preemptive behaviour could be minimized
(Williamson, 1983).
A small number situation, particularly when combined with
opportunism would normally result in serious transactional difficulties
for the firm (Williamson, 1975). But in the absence of opportunism, this
might not arise.
The problem of uncertainty can be handled efficiently within some
international JVs. In the absence of opportunism and small numbers
disabilities, there are strong incentives for the parties to pool their
resources. By doing so, it is possible for the MNE to economise on the
information requirements of FDI (Caves, 1982; Beamism, 1984;
Rugman, 1985). The MNE can provide firm-specific knowledge
regarding technology, management and capital markets while the local
partner can provide location specific knowledge regarding host country
markets, infrastructure and political trends. By pooling and sharing
information through a JV mechanism, the MNE is able to reduce
uncertainty at a lower long-term average cost than through pure
hierarchical or market approaches.
INTERNATIONAL JOINT VENTURE INSTABILITY: A CRITIQUE OF
PREVIOUS RESEARCH, A RECONCEPTUALISATION AND
DIRECTIONS FOR FUTURE RESEARCH. – A. YAN AND M. ZENG,
JIBS, 30, 2, 1999, PP 397-414.
Factors contributing to instability:
1. Inter-partner conflict in co-management: Killing, 1983; kogut,
1989. Harrigan (1988) found that differences between the
partners in founding goals, strategic resources and corporate
cultures were responsible for shorter JV duration.
2. Cross-cultural differences: See Turner, 1987; Jones and Shill,
1993. The findings of several recent studies demonstrate that
the relationship between partner cultural differences and IJV
stability may be more complex than previous research has
suggested. Barkema et al. (1997) found that inter-partner
differences in uncertainty avoidance and long term orientation
have a significant negative impact on IJV survival while
differences in power distance, individualism and masculinity did
not affect IJV survival.
3. Control/ownership structures: Killing (1993) found that a
dominant management structure can minimize co-ordination
costs and hence outperform shared-control JVs. However, too
much power may prove detrimental to the minority. Therefore a
balanced ownership structure is more likely to produce mutual
accommodations (Harrigan, 1988). Bleeke et al. (1991) found
that alliances with an even split ownership had a higher success
rate than dominant JVs. Beamish (1984) found improvement in
performance when control shared with local partner.
Performance suffered however when the foreign partner
exercised dominant control (Yan, 1993; Hebert, 1994; Yan,
1997).
4. External environments: It has been widely documented that
unanticipated major changes in local political environments
affect international business operations and contribute to IJV
instability (Vernon, 1977; Blodgett, 1992; Brewer, 1992;
Boddewyn and Brewer, 1994).
THE IMPACT OF ORDER AND MODE OF MARKET ENTRY ON
PROFITABILITY AND MARKET SHARE – PAN ET AL., 1999; JIBS,
30, 1, PP81-104.
There are 2 streams of explanation for the impact of entry mode on
profitability. One is the cost argument (Contractor, 1990; Hennart,
1991; Kim et al., 1992; Madhok, 1997; Woodcock et al., 1994).
Contractor and Lorange (1988) provide a framework to analyse the
various costs and benefits in choosing the appropriate mode of entry.
It is suggested that the costs of setting up and running a WOS may be
lower than those of an equity JV (Woodcock et al., 1994). This is
because firms often simply duplicate what they have done successfully
in other overseas markets. Thus they incur minimal new resource-
based costs. Equity JVs, however, entail costs related to searching for
appropriate local partners and integrating the assets pooled together
by the venture partners (Madhok, 1997). In addition, some resources
are consumed in coordinating the interests, goals and management
between the partners. The main premise is that the total combined
costs are often higher for JVs than WOS, holding other things constant
(caves et al., 1986). As such WOS can be more profitable than JVs (Li
and Guisinger, 1991).
The second explanation stems from the need for managerial control.
WOSave few reservations about extending their competitive and
proprietary assets abroad (Davidson et al., 1984). Most importantly,
WOS avoid the conflicts of interest and objectives that occur in the
case of partnerships with local firms (Tse et al., 1997). As a result it is
often believed that the preferred mode of entry is by WOS (Woodcock
et al., 1994). However, this is subject to local knowledge not being
required. Otherwise they may perform sub-optimally compared to
other modes (Vanhonacker, 1997).
THE ENTRY MODE CHOICE OF MNEs: AN EVOLUTIONARY
APPROACH – M. MUTINELLI ET AL., 1998, RESEARCH POLICY,
27, 491-506.
A number of empirical studies have analysed the factors which
influence the choice of mode of entry. Those approaches mainly reflect
and explain the choice of MNEs within the conceptual framework of
transaction costs and market imperfections (Anderson and Gatignon,
1986). Therefore, firms resort to governance structures which reduce
risks and the hassle costs of going abroad.
JVs and strategic alliances may be regarded as organizational forms
that under specific circumstances allow the firm to economise on the
costs associated with the use of both arm’s length trade based on
market mechanisms and the administrative mechanisms typical of
hierarchies.
Entry in foreign markets and the unrelated uncertainty are also crucial
for international neophytes which lack experience in managing foreign
operations. This may lead to WOS taking inappropriate decisions on
matters such as the choice between producing certain inputs locally or
importing them, the location of plants in the foreign country,
production levels, adaptation of products and services to local market
requirements, management of relation with workforce, suppliers,
customers, banks, local authorities (Mariotti and Piscitello, 1995).
These risks might not be present for IJVs since the foreign partner can
exploit the positive externalities deriving from having a local partner.
Once the experience of FDI has been gained, the firms set in motion a
cumulative evolutionary learning process in going abroad. The
perception of uncertainty decreases and the firm acquires increasing
capabilities and knowledge about how to manage foreign operations
and to correctly assess the risks and the expected economic returns of
FDI.
Johanson and Vahlne (1977) explain the phenomenon of incremental
internationalization, i.e. a step-by-step increase of a firm’s involvement
in a foreign market. More generally, the capability of a firm to capture
the gains from an internationally integrated structure depends
positively upon its degree of multinationality (Cantwell et al., 1993)
and the cumulative and incremental learning experience which
determines the set of opportunities for growth. As a result, the
propensity to gain full ownership for WOS tends to increase while
experience in dealing with international operations is accumulated
(Davidson, 1982; Anderson and Gatignon, 1986; Gatignon and
Anderson, 1988; Kogut and Singh, 1988a; Zejan, 1990; Vahlne, 1977).
The empirical evidence confirms that earlier operations in the target
country by the parent company increases the probability of choosing a
WOS (Kogut and Singh, 1988b; Hennart, 1991b; Larimo, 1994).
In this context it is also worth mentioning the role of differences in
geographical spread of FDI. Ceteris Paribus, high physical and
psychical or sociocultural distance (Hofstede, 1980) between the
parent’s home country and the target country engenders high
information needs because of the uncertainty perceived by executives
and the problems in transferring values, management techniques and
operating methods from the home to the host country (Buckley and
Casson, 1979; Davidson, 1982; Hedlund et al., 1983; Ronen et al.,
1985; Anderson and Gatignon, 1986; Gatignon and Anderson, 1988;
Kogut and Singh, 1988a; Gomes-Casseres, 1989; Agarwal and
Ramaswami, 1992; Larimo, 1994).
JVs are particularly important in the internationalization strategy of
small-sized firms because of their different attitudes towards risks with
respect to large firms and also because of their lack of complementary
assets and their financial and commercial and managerial constraints
which leave them with few means of reducing risks. Likewise, very
large, widely diversified and highly internationalized MNEs show a
propensity towards collaborative ventures. The availability of a great
variety of specialized, non-reproducible assets which are
complementary to the ones possessed by other firms, the bureaucratic
inefficiencies, and the ability of these MNEs to deter opportunism
credibly by threatening retaliation in response to defection by the
other party explain their inclination to JVS and agreements.
Joint ventures are also the favoured internationalization device for less
experienced firms which prefer to co-operate with local partners
representing a precious accumulation point for information on the local
economy and environment.