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.