International Joint Ventures

Theory and Practice

Aimin Yan, Yadong Luo

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781315501314
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

The first book-length treatment of theories, practical lessons, and the full set of critical issues that affect international joint ventures. It addresses culture, human resources, learning, legal, management, and research and development, and presents a full set of decisions and detailed guidelines for IJV formation and management. It also thoroughly analyzes 30 case studies.

Part I

Defining International Joint Ventures

1

Conceptualization and Formation Motives

In this chapter, we first define international joint ventures and explain why managing such ventures can be particularly challenging. Second, we identify several key areas of research that have emerged in the literature: motives for joint venture formation, partner/structural selection, governance and control, and venture stability and performance. Then we continue to discuss the first area of research by presenting the major practical and theoretical reasons for forming international joint ventures. Finally, we describe the structure of this book in terms of the fundamental questions to be addressed in each chapter.

International Joint Ventures Defined

In this book, we focus on equity joint ventures, as differentiated from nonequity, cooperative alliances in which the partners do not share ownership of capital resources. Equity joint ventures are legally and economically separate organizational entities created by two or more parent organizations that collectively invest financial as well as other resources to pursue certain objectives (Anderson 1990; Pfeffer and Nowak 1976). Among the different forms of interorganizational relations, joint ventures are unique and arguably the most complex type of arrangement. Interfirm contractual relationships such as licensing or franchising do not involve shared equity or joint capital investment by the participating firms, whereas corporate mergers and acquisitions result in a complete combination between two firms without creating a new organization existing in parallel to the merging firms. In comparison to the contractual forms of interfirm cooperation, joint ventures represent a longer-term collaborative strategy.

International joint ventures are broadly defined as joint ventures that involve firms from different countries cooperating across national and cultural boundaries. On some occasions, joint ventures formed by partners from the same country but located in a country other than their parents’ are also considered as international joint ventures (Geringer and Hebert 1989). Although an overwhelming majority of international joint ventures involve only two parent firms, one from a foreign country and the other from the local country, some ventures may consist of multiple participants. For example, many early joint ventures in China were three-way partnerships including a local partner, a multinational partner, and a partner from Hong Kong. In other cases, a joint venture may include partners with more complex nationality or cultural backgrounds. For example, Xerox Shenzhen is a joint venture formed between Xerox China Ltd., Xerox’s wholly owned holding company in China, and Fuji Xerox, which itself is a U.S.-Japanese joint venture in Japan. This Chinese joint venture without a Chinese partner was created to take advantage of the preferential government policies toward enterprises with an international joint venture status.

Complexities in International Joint Ventures

As legally and economically independent organizations, joint ventures operate like stand-alone firms and have to engage in all the different types of “regular” business activity and external relationships that any independent firm has to undertake. However, more complex than the single organization, joint ventures involve multiple “internal” interorganizational relationships: the relationship between the partner firms, the venture management’s relationship with the foreign parent and with the local parent, and the relationship between the venture’s managers nominated by different partners. Each of these relationships can be extremely difficult to manage. First, the most important and arguably the most problematic relationship is that between the joint venture partners. Above all, international joint ventures represent an intercultural and interorganizational linkage between two separate parent companies that join forces with different strategic interests and objectives. Importantly, “These parents, unlike the shareholders of a widely held public corporation, are visible and powerful and can and will disagree on just about anything” (Killing 1983, 8). Cross-cultural differences, diverging strategic expectations, and incongruent organizational strategies, structures, and operational processes between the partner firms have been frequently cited as sources of interpartner conflict, which in turn lead to the venture’s instability and performance problems. As Davidson (1982, 46) argues, “Even more important than formal arbitration procedures, perhaps, is the nature of the relationship with the partner. A positive relationship that extends beyond legal contractual commitments is the principal goal of any joint venture agreement.”

Similarly, it is quite a challenging task for the joint venture management to effectively create and maintain a healthy relationship with each of the parent firms. For example, when an unbalanced linkage with one parent (e.g., internal transfer pricing) is poorly managed, it can create serious dissatisfaction in the venture’s other parents. In one of the U.S.-Chinese joint ventures that we studied, the American firm bought back some of the venture’s products and, after minor modification, sold them in South Africa. From this deal, while the U.S. parent made a sizable profit, the joint venture lost money because the internal transfer price was set too low to cover the costs. This created a serious problem for the Chinese partner, who complained that the U.S. firm was making “dirty money” at the partnership’s expense.

Finally, empirical evidence suggests that the working relationship between the two groups of managers at the joint venture, each nominated by and thus representing a different parent, is also very critical to the venture’s operation, creating significant implications for interpartner trust as well as the venture’s performance, as illustrated by Killing (1983, 9):

The board of directors of one company in my study, consisting of American and British managers, continually disagreed vehemently about the amount of data required before a decision could be made. The British could not understand why the Americans wanted “all those numbers.” The Americans, on the other hand, believed the British were totally “flying blind.” This problem was serious, as it meant that either the Americans had to agree to proceed with what they considered to be insufficient information, or the British had to incur a delay and spend extra money collecting information which they did not feel was necessary. From this beginning the problem became even worse.…

In addition to the complex inter- and intra-organizational relationships that a joint venture has to manage, the external institutional environments in which the venture operates are also quite complex and hard to deal with. On the one hand, like a single, stand-alone organization, an international joint venture has to interact with the different components of the institutional environment in a local country. On the other hand, as a “child” organization, the venture is heavily influenced by the institutional environments of both of its parents. For example, from a legal point of view, the forms of incorporation, the structure of ownership arrangement, taxation regimes, and the governance mechanisms of joint ventures can be significantly different between the countries where the parent firms are found. Most international joint ventures, particularly ventures between partners from developed and developing countries, have to be furnished with two different accounting systems, one for the international firm and the other for the local tax authorities, because of the significant differences between the two accounting systems. In addition, the cultural environments are different. A joint venture has to hire local employees, including both managers and workers. In many cases, taking advantage of the cheap local labor is a major objective of companies from developed economies in forming joint ventures in developing countries. As a result, cultural and intercultural issues become a challenging task for joint ventures. Employer-employee relationships, as well as their mutual expectations, differ considerably in different cultural contexts. For example, Motorola in China found that it had to be engaged in building apartment buildings for employee families, a business that the company had never done before elsewhere in the world. At times, the social norms and expectations in different countries are so strong that ignorance can create serious management problems. For example, it is a widely shared, and many times taken for granted, practice in Taiwan, Hong Kong, and China that the employees receive a sizable bonus, frequently referred to as “the thirteenth month’s salary,” right before the traditional Chinese New Year. In one of our research fields (an Australian-Chinese joint venture hotel), the management’s refusal to grant such a bonus prompted employee strikes during the holiday season.

The Key Areas of Research

As discussed above, the quite unique features of international joint ventures have made this organizational form both interesting and challenging. Since joint venturing is a process that involves multiple facets and dynamics, previous research has identified several key areas of study. In an effort to synthesize the vast and growing literature, Parkhe (1993) identified four major areas of research on international joint ventures: the motives for venture formation, partner selection, governance and control, and joint venture performance and stability. He further argued that although some of these areas have received enormous research attention, others continue to be understudied or virtually ignored. Relatively speaking, according to Parkhe, the various motives for creating international joint ventures have been extensively, if not systematically, explored. In contrast, research in other areas deserves more significant attention. In particular, the “choice of organizational structure, alliance structure design, and dynamic evolution of the cooperative relationship” represent the “three major areas await(ing) deeper theoretical insights” (p. 233).

Following Parkhe’s suggestion, this book focuses on these understudied subjects. However, in order to provide the reader with a more complete picture, in the rest of this chapter, we summarize the previous work on the motives for forming international joint ventures from both the practitioner and scholarly literatures.

Practical Reasons for Joint Venture Formation

Why do firms choose joint ventures to conduct international business? The practitioner literature suggests the following reasons. First, joint ventures result from government insistence. Although the push for multinational firms to make direct foreign investment may come from forces associated with products (e.g., product offerings and value chains) and markets, many international joint ventures result from the pull by the local government. Governments, particularly in developing countries, exercise pressure on multinational companies to use the form of equity joint ventures rather than wholly owned subsidiaries. To the foreign firm, an alliance with a local organization, business or governmental, may be required in order to enter these countries. For example, the overwhelming majority of foreign investment projects in China during the first decade of the Open Door policy were framed as equity joint ventures, while the increase of wholly owned foreign subsidiaries is a quite recent phenomenon. It is important to note that oftentimes, institutional pressures for joint ventures, or for a particular type of joint venture, are imposed not in the form of formal laws or government regulations but in the form of strong social, cultural, or industrial norms. For example, the rise of the significant number of 50–50 shared equity joint ventures in China made the Western researchers and practitioners alike speculate that it was the Chinese law that required the equal split of equity ownership. In fact, the Chinese joint venture law in both the original 1979 version and the amended 1990 version states that the foreign partner’s equity holdings should be “at least 25 percent” while no ceilings were stipulated. Therefore, joint ventures with majority foreign ownership have been legally allowed since the very outset of the policy. This type of venture, however, had been quite scarce until very recently. In fact, it was the prevailing political and cultural norm for interpartner “equality” promoted by the Chinese government and society that created the isomorphic, equally shared ownership structure in the overwhelming majority of Chinese joint ventures.

Second, gaining access to overseas markets has been a classic reason for firms to form joint ventures. This is true for both the multinational and the local partner firm. On the one hand, one advantage of a joint venture is that a foreign firm can piggyback on a local partner to gain access to the local market. On the other hand, in many cases, it is also the aim of the local partner to gain access to the international market. Without fully understanding the consumer behavior, distribution network, and marketing strategies and practices that are effective in a specific country, a foreign wholly owned subsidiary has many ways to fail. Japan is an obvious example. Its distinctive marketing and distribution practices encourage foreign companies to set up partnerships with Japanese companies as the most practical means of selling into the market.

Risk sharing is a third frequently observed motive for forming international joint ventures. First, if an investment project is financially too large or too risky for single firms to handle alone, they may join forces to share the financial risk. This is the case with oil exploration and commercial aircraft manufacturing where large, risky projects call for interfirm collaboration. Second, if the business environment in a host country is highly uncertain or unfriendly to foreign firms, a joint venture with a local firm may allow a multinational company to share political risks and to defuse xenophobic local reactions, a strategic action to amend the “liability of foreignness.”

Fourth, formation of international joint ventures allows a firm to tap outside resources to build competitive strength at significantly reduced costs—with capital investment much lower than if the firm either developed it alone or achieved it through acquisition. For example, access to new products developed by a joint venture partner allows a firm to concentrate on its most competitive products while adding multiple related product applications. Access to a partner’s technology enables a firm to enjoy the fruits of research and development while avoiding the rapidly escalating R&D costs. In addition to cost considerations, joint venturing is an effective, if not the most effective, avenue for companies in developing countries to learn about new business processes and to catch up with the substantial technological advantages possessed by their counterparts in developed economies.

Finally, joint ventures may be formed between partner firms in pooling resources to pursue a common interest or a symbiotic cooperative advantage. By sharing financial resources that otherwise are not available to each individual partner, two smaller companies in an industry can form a joint venture to achieve economies of scale similar to those that are enjoyed by their larger competitors. Alternatively, joint venture partners can cooperate to take advantage of pooled nonfinancial resources. It has been a classic rationale that a joint use of complementary resources, competencies, and skills possessed by different organizations can create synergistic effects, which none of the companies is able to achieve if acting alone.

Theoretical Explanations of Formation Motives

Previous scholarly work has offered a variety of theoretical perspectives on the formation incentives of international joint ventures, ranging from economic theories to organization theories and game theory. Below we focus on several most prominent perspectives, namely, transaction costs, organizational interdependence, and strategic behavior.

Transaction Costs

Williamson (1991) argues that there are three types of contract laws in business transactions, each accompanying a different mode of governance: (1) the classical contract law for markets, (2) the forbearance contract law for hierarchies, and (3) the neoclassical contract law for hybrid governance. The principal criterion for choosing among these alternative governance structures, according to Williamson, is minimization of transaction costs. Transaction costs are negotiating, writing, monitoring, and enforcement costs that have to be borne to allow an exchange between two parties to take place. The sources of these costs are the transaction difficulties that may be present in the exchange process (Williamson 1975). Jones and Hill (1988, 160) summarize six main factors producing transaction difficulties in interfirm transactions: (1) Bounded rationality: The rationality of human behavior is limited by the actor’s ability to process information. (2) Opportunism: Human beings are prone to behave opportunistically, or to seek self-interest with guile. (3) Uncertainty and complexity: The real world is characterized by considerable uncertainty and complexity. (4) Small numbers: In the real world small numbers of trading rela...