joint ventures
Content
1 Introduction (1)
2 Joint ventures prevailing reasons (1)
2.1 External reasons (1)
2.2 Internal reasons (2)
2.3 Competitive and strategic goals (2)
3 Joint ventures disbanded reasons (3)
3.1 Internal reasons (4)
3.2 External reasons (5)
4 Conclusion (5)
Bibliography (7)
Why are companies attracted to entering into joint ventures? Why do many joint ventures fall short of expectations and consequently are disbanded?
1 Introduction
With the increasing of global business, foreign direct investment (FDI) has become important for any growing business to obtain unique opportunities to reach higher market share in the world market or enter new market to structure their business arrangement (Gutterman, 2002; Hill, 2009). One of the most popular forms of FDI is joint ventures which is a contractual business undertaking between two or more legally distinct parties (Cary & Lawlor, 1988).
As a common vehicle, individual or companies choose to enter joint ventures in order to create strategic cooperation with partners that mutually complement capabilities and resources, substantially increase competitive advantages, effectively exploit distribution channels, rapidly develop new technologies, adequately finance each other or share information, markets and profits, minimize risk to build trust among firms and yield economies of scale (OECD, 2008; Hewitt, 2005; Campbell & Netzer, 2009). Joint ventures, which can be business units or collaborations, exist in all regions of the world and in all types of industries (David, 2005; Schaffer, et al., 2008).
Despite the surge popularity and superiority of joint ventures, inevitable tensions will arise in operation between the partners due to its inherently unstable organizational forms and complex relationship (Park & Russo, 1996; Nieminen, 1996). Conflicts increase among partners of different objective and market, owner ship arrangement, benefits and cost (Harrigan, 1988a). All of these conflicts lead to poor performance, failure and dissolution (Peng & Shenkar, 2002). The external reasons, such as increased political instability and risk, high rate of inflation, frequent and sharp currency devaluations severe economic decline, can also lead to joint ventures fall short of expectations and consequently are disbanded (Contractor & Lorange, 2002).
2 Joint ventures prevailing reasons
There are many reasons why businesses attracted to enter into joint ventures, such as expand businesses at low costs, enter key markets or develop new products and establish an international presence (Shepherd, 2006). Even for a successful business have enough innovative ideas to induce a strong growth, a joint venture may also bring it other benefits like increasing resources, promoting capacity for production, enhancing technical expertise, accessing to well networked marketing and distribution channels or entering into established markets, especially overseas. Organizations are interested in joint ventures for three aspects reasons: external reasons, internal reasons, competitive and strategic goals (Campbell & Netzer, 2009).
2.1 External reasons
Regional trade barriers
Global business has stimulated and accelerated international flows of capital and goods. In order to restrict the development, agreements between countries have been formed of discriminatory tariffs against goods or services coming from nonparticipating countries. The economic zones with customs discrimination has appeared all over the world. The primary example is the European Union (EU) which formulates different tariffs for members and non-members. Tariffs barriers make exporter at a serious disadvantage in these economic blocs (Hill, 2009). The only effective way for an enterprise is joint ventures with local companies. For example, many firms from the United States and Europe have set up joint ventures outside their own countries to produce the goods locally rather than exports (Wolf, 2000).
Government policy
In many countries, government restricts other forms’ FDI that means joint ventures is the only feasible method to entry into its market (Hill, 2009). For example, in 1979, China formally opened its door to FDI by promulgating “Law of the People’s Republic of China on Joint Ventures Using Chinese and Foreign Investment”. To date, in some countries, joint ventures are still the only FDI in some sensitive commercial areas, such as banking or telecommunications. It is due to the foreign government fears its general commerce has been dominated by non-nationals (Coughlin & Segev, 1999; Wolf, 2000). Research indicates joint ventures with local partners help reduce adverse interference from nationalization and government. Because local partners may easily influence host government policy and oppose nationalization or government interference (Hill, 2009).
2.2 Internal reasons
Natural and human resources
Some companies lack of raw materials, so they need to joint ventures with other companies which possess these materials (Campbell & Netzer, 2009). An airline company need a catering company to provide the quality and price of food service. The car manufacturers need steel suppliers to ensure the steel with high quality and reasonable price. Oil and mining companies are well-know examples. There are many oil companies in West African coast. They are obliged to transact their business in joint ventures with the host country to reach these resources (Wolf, 2000). The present epoch encounter with talented people from different parts of the world. In order to utilize the local expertise, such as Indian software developers, Mexican electronics engineers, Portuguese mold designers etc, foreign companies must cooperate with local firms by joint ventures (Edvinsson, 1996).
Costs and risks reduction
An outsider comes into another business often confront high investment costs and development risks (Hill, 2009; Luo, 1997; Kogut, 1991). There are many factors to be considered, such as obtaining credit, foreign investment rules, civil and commercial law, exchange-rate fluctuations, taxation etc. Joint ventures with local partners is a prudent approach to becoming integrated into the local business and allow firms to avoid mistake costs and share high risks of developing new products or processes (Wolf, 2000). Boeing desired to share the estimated $8 billion investment required to develop its commercial jetliner 787 by joint ventures with a number of Japanese companies (Hill & Jones, 2009).
Financial resources
For the smaller organization with insufficient finance, the joint venture can prove an effective approach of acquiring the necessary financial resources to enter a new market. Some project is a large undertaking and needs tremendous financial support to satisfy its operating requirement. In general, the requirement of capital is far beyond the scope of capability that one company can afford. The joint ventures pool the resources of two or more partners to adapt the requirement of the project (Miramontes & Rice, 2005).
Attain technology and business know-how
Some companies find that the joint ventures is the most feasible way to attain essential technology, business know-how, and trademarks. For example, South Korean firms joint ventures with an American pharmaceutical multinational company in South Korea. The Korean partner gained the manufacturing of dosage drugs in modern plant through the subsidiary, develop its production and marketing capabilities, and make a good return on its investment (Contractor & Lorange, 2002).
2.3 Competitive and strategic goals
Influencing structural evolution of the industry
It can make sense to joint ventures that will help the enterprise establish the industry standards and gain the benefit from it (Teece, 1996). For example, Palm Computer, the leading maker of personal digital assistants (PDAs), joint ventures with Sony which agree to use Palm’s operating system in Sony products. The joint ventures motivate to establish Palm’s operating system as the industry standard for PDAs in order to oppose competitor Windows-based operating system from Microsoft which monopolises the whole market (Hill & Jones, 2009).
Complement and create stronger competitive units
It is quite common that joint ventures between some companies in order to complement each other drawbacks and enhance them competitive (Koh & V enkatraman, 1991). Such as some partners may be responsible for manufacturing technology, product know-how, patent, technical training and management development. Others contribute some combinational capital, knowledge of the environment, distribution of the products and contact with government, financial institutions, and local suppliers (Contractor & Lorange, 2002; Shepherd, 2006). Joint ventures not only make the total competence larger than the sum of its parts, but also reduce the expenditure of doing the business (Wolf, 2000). Burger King and Hungry Jacks formed a joint venture in Australia in order to join forces against market leader McDonald’s. All Burger King’s stores in Australia were renamed Hungry Jacks, but Burger King retained ownership under the unusual agreement. With this agreement, Australia becomes Burger Kings fourth largest country market (David, 2005).
Enter into Foreign market
Joint ventures may be more successful and facilitate than other forms FDI when trying to enter or expand into a developing country with a considerable size of market, growing market potential, and opportunity for a satisfactory rate of return in the longer term (Hewitt, 2005; Contractor & Lorange, 2002). For example, many companies consider China is a tremendous potential market. If they want to successfully enter it, they need cooperate with local partners who are familiar with local business environment and have good network. Therefore, Warner Brothers collaborated with two Chinese partners by joint ventures to produce and distribute films in China in 2004. As a foreign film company, Warner found that it was difficult to produce films on its own for Chinese market because of a complex approval process for every film and outsourcing distribution to a local company. Due to the participation of Chinese enterprises, they make the joint-venture films go through a streamlined approval process and take charge of any films’ distribution. Moreover, they get the chance to produce films for Chinese TV that foreign companies are not allowed to do (Hill & Jones, 2009).
Synergies
Joint ventures create synergies through the partners pooling their resources, capabilities, and strengths (Contractor & Lorange, 2002). These synergies lead to skills and assets of the partners together to complete a project which could not be easily finished on its own. In 2003, for example, Microsoft brought its software engineering skills and Toshiba brought its skill in developing microprocessors to established a joint venture in order to develop embedded microprocessors (essentially tiny computers) that can perform various entertainment functions in an automobile (e.g., run a back-seat DVD player or a wireless Internet connection). The processor will run a version based on Microsoft’s Windows CE operating system (Hill & Jones, 2009).
3 Joint ventures disbanded reasons
Despite the significant advantages and popularity, joint ventures are complex, expensive, difficult to execute well and described as inherently unstable organization forms. Its dissolution rate is reported to be about 50 percent (Harrigan, 1988b; Kogut, 1988). The major reasons for joint ventures failure need to be analyzed from internal and external perspectives.
3.1 Internal reasons
Lack of common strategic objective and marketing
A number of joint ventures fail because partners have different objective and marketing. Multinational companies focus on integrating their business in global context, select their own marketing systems based upon product differentiation, promote and advertise due to their products requirement, emphasize trademarks and brand names, intend to maximize their profit or reach their target rate of return on investments (ROI) in the global market, not just only maximize their business in a particular country, so this country may not be given high priority by foreign company in resource distribution, management, financial and technological support (Triantis, 1999). However, local partners may strive to emphasize the operations within the country, adopt different marketing programs and procedures, and contribute major resources and management effort to the joint venture subsidiary. They expect the multinational company has comparable commitment in order to reach a successful business. They may also have different perspective on pricing practices, marketing segmentation, introduction of new products and marketing expenditures. As a result, serious conflicts can be triggered when local firms find that the international company does not grant comparable commitment to the joint ventures and does not contribute enough resources and effort. These conflicts can become deeper in marketing management and result in stalemate in decision making. Ultimately, the joint venture may fail (Contractor & Lorange, 2002). For example, an Italian transnational corporation cooperated with a family firm by joints ventures in Turkey. The local firm was mainly responsible for assembling agricultural machinery. While Italian organization took charge of integrating production, finance, and management based on the whole European market, simultaneously importing and interchanging components with its European and African subsidiaries. In order to increase components production to obtain more profit, the Turkish partner and government enforced the Italian company to increase its investment in Turkey, the Italian firm resisted increasing its investment. During the next five years, contradiction intensified, the Italian transnational company withdrew investment by selling its interests to a German company at a lower price.
Ownership arrangement
A foreign company may not recognize the decline of its bargaining power in a joint venture arrangement due to the value of its technological, product, managerial and other contributions for the business has experienced a decline. Meanwhile, the local partner gains the knowledge and skills of manufacturing technique, increases financial resources and enhances other aspect abilities through the joint ventures. Therefore, its competence has been improved significantly. The local partner may find that it has less need the expertise and support from the foreign partner. Despite the fact that the local company depends on the foreign company far less than before, the foreign partner still insists on major ownership and managerial responsibilities. As a result, the joint venture breaks up due to both of them want to gain absolute control (Contractor & Lorange, 2002; Reitman, 1994). In some other cases, the opposite situation exists between a foreign firm and a local firm. Foreign partner increases its knowledge about local market environment over time and depends less on the expertise of a local partner. The bargaining power of the foreign partner increases and ultimately leads to conflicts of control the venture’s strategy and targets (Hill, 2009).
Perception of unequal benefits and costs
Some joint ventures fail because foreign company or the national partner perceives itself not obtain enough benefits from the joint venture in return for its contribution of resources (Beamish & Killing, 1997). In some cases, the multinational company considers that it does not obtain a sufficient return for its contribution of manufacturing and product technology, management, financial support, technical training, trademarks and business expertise. On the other hand, the national partner is responsible for providing factories and facilities,
management, local capital, products distribution, and communications with the government that has exceeded its share of ownership, the responsibilities in the venture, and the profits it gains. When one or both partners do not satisfy the ratio between benefits and costs from the venture, serious conflicts emerge among the partners and ultimately terminate the venture (Contractor & Lorange, 2002).
Giving controlled technology to competitors
Joint ventures make the company give control of its new technology and know-how to its partners at a low-cost way (Hill, 2009). For example, a few years ago, many joint ventures formed between American and Japanese firms. Japanese companies provided high paying, high valued-added jobs in Japan as part of their business strategy to obtain the skills of project engineering and production process that were the competitive advantages which many United state firms were based on. Due to joint ventures, United States technology and new inventions made Japanese success in the machine tool and semiconductor industries. While they also got American sales and distribution network for the products by joint ventures. Although such deals may generate short-term profit, in the long run United States firms lost competitive advantage in the global market. When Japanese companies no longer needed this cooperation, so joint ventures were dissolved (Hill & Jones, 2009).
Poor relationships
In many joint ventures, the important relationship is brushed aside by partners and ultimately leads to failure. Poor relationships are caused not only by external influences and interference, but also by internal inconsistency on implementing projects. Different culture backgrounds, poor comprehensive communications, lack of clear strategies and objectives, and lack of continuous common target and interest prevent relationship developing and cause existed relationship deteriorating. This leads to distrust each other and makes implementation more difficult. Therefore, the joint venture has been dissolved (Triantis, 1999; Stone & Stone, 2000). Transfer-pricing conflicts
Major conflicts can emerge between partners in joint ventures about purchasing of materials, intermediates, and components. Some multinational companies strive to purchase intermediate goods or components for affiliate immediately and ensure required quality standards and meet requirement of delivery. Competitive alternative sources are not available at that time. By contrast, national partners want to find alternative sources in order to gain the lowest-cost materials. They may believe that the multinational company charges extra costs and aim to obtain additional income from selling the materials to the subsidiary. If the multinational company continues to sell intermediates to the affiliate, when the partner finds other suppliers who provide competitive or lower price, serious conflicts increase between the foreign and local firms, which can disband the relationships (Contractor & Lorange, 2002; Rugman & Eden, 1985).
3.2 External reasons
Increased political instability and risk, high rate of inflation, frequent and sharp currency devaluations, severe economic declines, competitors come up with better technology, one of the parties is taken over by a competitor these external factors also led to disruptions or failures of joint ventures (Contractor & Lorange, 2002).
4 Conclusion
There are many reasons that enterprises are interested in joint ventures, such as expand businesses at low costs, enter key markets or develop new products and establish an international presence (Shepherd, 2006). However, different objective and market, owner ship arrangement, benefits and cost among partners combine with external influences, such as increased political
instability and risk, high rate of inflation, frequent and sharp currency devaluations severe economic decline, can lead to high failure rate of joint ventures (Contractor & Lorange, 2002; Chowdhury, 1992; Hill & Hellriegel, 1994). Therefore, joint venture is a chance as well as a challenge for companies.
Any size of enterprises can use joint venture to reach their aims and objectives (David, 2005; Schaffer, et al., 2008). Lunching and running a world class joint venture is complex and demand task (Bamford, et al., 2004). In order to operate business successfully and enter into global market, the joint ventures partners need to build and maintain a strategic alignment, create a effective joint governance system, manage the economic interdependencies between the parent firm and the joint venture, establish a good management team, set rigorous risk management and performance tracking methodology, decide on all potential issues prior to operational launch (Barkema, et al., 1997). It is necessary for all executives involved to understand the unique demand of joint ventures and invest in early plan. If done right, joint venture promises a better ROI than a merger or acquisition (DePamphilis, 2009).
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