Entering into international joint ventures
Introduction
International joint ventures act as one of the many ways that a firm uses to expand their operations and reach in international markets. With home markets becoming more competitive, firms often struggle to seek opportunities for growth using a corporative strategy in order to achieve their objectives. International joint ventures represent a strategy that enables firm to form alliances with other firms instead of competing with them.
A cooperative strategy emphasizes on the benefits that are to be achieved and how the cooperation can be managed to realize them, and can be advantageous for firms that may lack specific competences or resource necessary to operate in a foreign market (Child et al 2005, 2). A cooperative strategy can help an organization to secure such resources or competences by collaborating with others that have such complementary skills (Child et al 2005, 2). Companies strategize on interning into Joint Venture Agreements so as to create or produce new products or services, enter into foreign markets or achieve both. The international joint venture has been preferred eve with increased elimination of restrictions on foreign ownership, so that they make up a significant part of foreign investment or entry. Joint venture makes it possible for organizations to have an access to each others’ complementary capabilities and resources so as to obtain economies of scale. In their efforts to develop new products, the firms are able to achieve speed and reliability which help in minimizing costs as compared to the firms going it alone or through acquisition. A firm with an intention to expand into foreign markets understands that they need partners who will help in navigation of the unfamiliar business policies, practices and in some cases to improve its credibility in the eyes of the local customer (Tjemkes, Vos, & Burgers, 2013s, 3). In foreign markets that are highly uncertain, International Joint Venture have been reported to perform better than other strategies such as contracting , licensing even wholly owned subsidiaries due benefits provided by a local partner.
An investment of own capital by a partner acts as a sign of commitment, which improves the possibility of success. The commitment improves collaboration among parent companies which is necessary more so when they are competitors in the market. The cooperation also provides specialized capabilities and resources that cannot easily be duplicated (Kale &Singh, 2009, 46). For instance, the firm that wants to expand in a foreign country may have production technology and facilities that another firm in the country lacks to create competitive products and distribute them. The joint venture between the two firms gives the local partner access to such resources without bearing the cost of buying or leasing them, while the parent company can participate in the production of product without having to incur costs (Kale &Singh, 2009, 46). In this case, the two firms gain benefits from the joint venture and none is bearing the burden alone. Unlike other strategies, international joint venture can be temporary, so that the involved firms can dissolve at any given moment in future if they feel that they have succeeded (Tjemkes, Vos, & Burgers, 2013s, 4). If a firm is small, and has not developed a patent or technology, it may choose to venture with large companies whose superior technology has manufacturing and distribution capabilities. In this case, each company achieves the capability to potentially increase or access the overall intended market. The firm will have the chance to learn from each other about the entire business operations including manufacturing technologies, processes and more importantly the market. It is not always feasible for the expanding firm to build a competitive edge from scratch since the major resources may be under the control of local competitors and this may prove costly. In addition, strategies such as acquisitions are mostly costly and a complete transfer of competitive resources or assets is not guaranteed, which makes International Joint Ventures preferable to a foreign firm (Jiang Li, & Gao, 2008). The strategy is also attractive to local companies that are keen to extend their existing capabilities and hence, cover a broad product line while not having to invest in production facilities.
Some factors specific to a country are also a main reason for companies to enter into International Joint venture. For instance, Russia as an important market due to large population has attractive resources, comprising of highly educated and inexpensive labor force and natural resources, and a company may prefer to cooperate with local companies if various factors such as political, economic and cultural systems are different from the local market or country. In a developing country like China, many Chinese are bound into business or social web by personal a relationship, which largely influences their social behavior and even business practices (Child & Yan, 1999).These people may use such relationships to enhance the promotion of products by way of sales-forces marketing strategy, even though this cannot sustain success of the venture and cannot be substituted for essential organizational fundamentals. In addition, an International Joint Venture may be aimed at mitigating trade barriers, with a case in example being the joint venture between Japanese firms and US firms. These ventures were aimed at mitigating any future trade barriers, where the Japanese invested in local firms like the Hitachi and National Semiconductors. Some countries like India and China may impose strict rules that only allow foreign investments on the basis of International Joint Venture. For firm to access the local markets, they may participation that is based on local equity. Some initiatives such as those the Chinese government engaged in 1980s and 90s encouraged the formation of International Joint Venture so as to conserve foreign exchange, improve local efficiency and even create more jobs (LUO & CHEN, 1995, 599).
A company may choose to enter into International Joint Venture so as to minimize its operations cost and hence, improve its competitiveness. During the early 1980s, a lot of US managers reasoned that the joint ventures between US and Japan were sensible in terms of business (REICH and MANKIN, 1986, 78). At the time, US firms were facing foreign competition that seemed quite unbeatable and so they perceived it more profitable to hand over the complex manufacturing to partners from Japan. For instance, Bendix, a firm dealing with machine tools, could produces a turning machine for about $ 85,000 locally, but the cost for the same tool in Japan would be just $ 65,000 if produced by Murata another machine toll firm located in Japan. This could be possible if the firm could enter into a joint venture agreement (REICH and MANKIN, 1986, 79). The development of a new product or provision of a new service and the penetration of new markets may prove very expensive if a firm decides to always venture on its own. The sharing of risks and costs can be achieved through International Joint Ventures in market environments that are characterized by uncertain demand, high costs or technology and product life cycles that are quite short. Partners market value is also positively and substantially impacted by International Joint Ventures and some firms may embark on International Joint ventures to exploit such benefits. The potential economies of scale in such a case are likely to be seen in financial markets. Organizations that form joint ventures in complementary categories that are identical and related have been seen to report more returns, and at times abnormal returns than those using other foreign market entry strategies.
Despite the highlighted and expected benefits achieved through International Joint Ventures, it is important to note that success is not always guaranteed. Cooperative strategy adopted by a firm must take into consideration, its feasibility in future and find ways in which to eliminate or minimize risks and losses (Child et al 2005, 3). A cooperative strategy such as International Joint Venture should not be viewed as a substitute for competitive strategy, but should provide an option whose purpose is to make it possible for an organization to compete more effectively. This is more relevant where cooperation and competition is high, and which results to abiding tension between partners (Child et al 2005, 3). In this case, the partners will have to quickly learn from each other, otherwise one partner may defect. For instance, the strategic alliance formed between Renault and Nissan that involved mutual stockholding led to reduction of opportunism and defection risks.
It is necessary to look into various reasons why some companies that have entered into International Joint Venue have failed and that way, the best way to succeed through the strategy can be explored. Cultural differences play a major role in determining the success of International Joint Ventures. The differences may be noticed among management and employees especially when dealing with risks and uncertainties emerging from the market and or brought about by the partnership between the firms. Differences appear in uncertainty avoidance which can be hectic to manage in case firms inter into international cooperation, since people’s perception of threats and opportunities in the market environment and their reaction to them vary (Barkema & Vermeulen 1997, 848). In some countries risk avoidance may be higher than others, and employees with high avoidance attitude tend to depend on a laid down system, but those with low avoidance may feel uncomfortable if hierarchical and rigid rules adopted (Barkema & Vermeulen 1997, 848). The issue of integration may also be affected directly by individualism and power distance and this can have an impact on relationship with workers. This may be seen in the chosen forms of control and reward systems. In order to achieve minimal intercultural collision, the issue of managing human resources can be given to the local partner. For instance, US firms that have been successful in IJV were not imparting cultural values that involve individualism and power distance to their partners in Netherlands (Barkema & Vermeulen 1997, 849). This shows that it is possible to avoid tensions between partners relating to variations of these factors. In addition, if partners are obtained from both the masculine and feminine cultures, may have great benefits to International Joint Ventures. The complement desired for success of the strategy can be achieved when individualism attitude seen in the aggressive partner is oriented towards the other partner (Child et al 2005).
A major factor that leads to failure of International Joint Venture is instability caused by organizational and strategic changes brought about by the ventures parents. The disruptions brought about by these changes make it hard to align the structures of these firms which affect the operations and business activities they engage in (Tjemkes, Vos, & Burgers, 2013s, 3). This calls for a mechanism for building alliance capabilities at the firm level and this involves the structural aspects. The strategy for joint venture should involve implementation of organization principles that are highly orderly and may include the creation of a separate entity or rather structure through which the entire alliance will be coordinated and managed. The involved firm can put in place an organizational unit and a team whose roles involves managing the new alliance and thereby, build the alliance capability of the organization. For instance, the successful adoption of this mechanism has seen in firms such as Philips Electronics and Eli Lilly (Kale &Singh, 2009, 52). The dedication of an alliance function is beneficial to the companies in various ways; the alliance management best practices and lessons obtained from the experiences both current and prior to the joint venture are captured , and the knowledge obtained can be leveraged in the entire organization when required; the managers of the functions acts as storehouse for the knowledge about alliance management , since they are repeatedly involved in different alliances engaged by the firm; the alliance organizational unit improves the awareness and visibility of the joint ventures and resulting alliance among various external stakeholders including customers , investors and the government and their support is enlisted in the process; this unit provides legitimacy and even support for the alliance and internal resources of the company for alliances are secured (Kale &Singh, 2009, 52). In addition, the alliance unit provides a mechanism for monitoring how the joint venture is performing so as to locate the possible trouble areas before grow to an issue. In such a case, the alliance function can come up with the necessary action on time to solve any arising conflict (Kale &Singh, 2009, 52).
Moreover, amid the various challenges facing the members of the established alliance, it is important to develop learning processes through which the aforementioned alliance capability is built. The learning process should be based on the knowledge-based view of the company, where skills will be improved so that various tasks can be managed through the accumulation and application of related knowledge. In international market environment that is full of uncertainties, knowledge is very necessary as an ingredient in the built alliance capability (Kale &Singh, 2009, 52). The knowledge held by aforesaid alliance function managers can be exploited to teach other managers on the best practices for the venture. This can also involve an internationalization process, where learning how best outcomes can be achieved is emphasized. The process can also be termed as an alliance apprenticeship, where new individuals in management are guided by experienced managers and obtain the necessary knowledge from them. This can also work by sending managers to training programs geared towards alliance, which may be conducted by outside consultants or internally. This alliance function, knowledge on organizational processes and alliance experience can go along to ensure positive outcomes for the joint venture (Kale &Singh, 2009, 53). Prior experience assists in the development of alliance skills especially if the experience is recent given that knowledge from experience tends to depreciate quickly. Through alliance function, skills necessary for the joint venture are developed more effectively especially in large organizations. The full benefits of the function will be achieved if the management strategically decides its location in the organizational set-up, its best head, the composition of the team to work in it and how its role evolves with time (Kale &Singh, 2009, 53). The success of the international joint venture will be achieved if the three aspects are addressed adequately within the firm.
In addition, the control and governance in the management of joint venture is an important aspect that will determine its success. The issue of governance is mostly of essence when making decisions and negotiating on terms of the joint venture. The decisions that managers make at this point are very critical since it is normally difficult for important governance decisions to be made after the implementation of the venture (Beamish & Lupton, 2009). The partners must lay down the various issues that should be considered such as equity ownership level and how management decisions will be divided. The governance decision also involves setting of performance goals. When one party believes short-term performance to be crucial and the other one considers the importance of solid future base, such a collision is likely to lead to failure of the venture. In such a scenario, management must utilize their negotiating skills and persuade the others that there is no preferential treatment offered to either party (Beamish & Lupton, 2009). At the decision making level, there should be little slowness and confusion so as to prevent placing the joint venture at a competitive disadvantage.
In conclusion, International Joint Venture is a necessary strategy for firms looking into foreign markets regardless of the past failure of such an approach. Success in the strategy will be achieved effective decisions are made on people’s culture, management and governance principles and structures of the joint venture.
References
Barkema, Harry, and Vermeulen, Freek. 1997. “What Differences in the Cultural Backgrounds of Partners are Detrimental for International Joint Ventures?” Journal of International Business Studies Vol. 28, No. 4, p. 845 – 864
Beamish, P. W. and Lupton, N. C. 2009. Managing Joint Ventures. Academy of Management Perspectives, Vol. 23, No. 2, p. 75 – 94.
Child, J. and Yan, Y. 1999. “Investment and Control in International Joint Ventures: The Case of China” Journal of World Business. Vol. 34. No. 1, p.3 – 15.
Child, J., Faulkner, D. and Tallman, S. 2005. Cooperative Strategy: Managing Alliances, Networks and Joint Ventures (2nd Ed.) Oxford University Press
Jiang, X, Li, Y. and Gao, S. 2008. The stability of strategic alliances: Characteristics, Factors and Stages. Journal of International Management Vol. 14, p. 173–189.
Kale, P. and Singh, H. 2009. Managing Strategic Alliances: What Do We Know Now, and Where Do We Go From Here? Academy of Management Perspectives, Vol. 23, No. 3, p. 45 – 62.
LUO, Y. and CHEN, M., 1995. Financial performance comparison between international joint ventures and wholly foreign-owned enterprises in China. International Executive, 37(6), pp. 599.
REICH, R.B. and MANKIN, E.D., 1986. Joint ventures with Japan give away our future. Harvard business review, 64(2), pp. 78-86
Tjemkes, B., Vos, P. and Burgers, K. 2013. Strategic Alliance Management Routledge. 2-5
