International joint venture: a company that is owned by two or more firms of different nationality.
- formed from a greenfield basis or result of merging existing divisions of established companies
- Purpose: pooling resources and coordinating efforts to achieve better results that neither could obtain alone.
→ move from being a way to enter foreign markets to being a substantial part of corporate strategy
- Strategic alliances vary in their level of interaction
Equity Joint Venture: alliance form requiring the greatest level of interaction, cooperation and investment.
→ popularity of alliances has continued despite their reputation for being difficult to manage – failures do exist.
→ But: there is far greater alliance experience and insight to draw from today.
Association of Strategic Alliance Professionals (ASAP): provides support and forum for sharing alliance best practices to help companies improve their alliance management capabilities.
Why Companies create International Joint Ventures
→ Four basic purposes with different concerns and different partners to look for:
1. Strengthening the Existing business
→ existing market, existing products
- Achieving economies of scale:
- Regarding raw material and component supply, R&D, marketing, distribution
- Very small entrepreneurial firms rather participate in a network than in an equity joint venture: reduces costs, increases potential of foreign market entry. Network has loose structure and often quite easy to entry as limited investment is needed (often self-financing through fees)
Raw Material and Component Supply:
- obtaining raw materials or jointly manufacture components to reduce costs
→ Jointly production and changing is slow: every partner needs to agree
→ Transfer pricing: Issue when joint ventures supply their parents.
- low transfer price: whichever parent buys most products obtains most benefit
- higher transfer price: economic benefits will flow according to the parent’s proportions to their share holdings in the venture
Research and Development
- Saving time and money by collaborating scientists and coming up with results that alone would have been impossible.
- Critical: how far collaboration should extend: partners are competitors! Joint effort should focus on “precompetitive” basic research and not on product development work
- Coordinating efforts and sharing costs ( each company does research on different way for a common objective; results are shared in meetings and partners are fully informed on new insights )
- Set up a jointly owned company ( Provided with own staff, budget and physical location)
Marketing and Distribution
→ collaboration often stops at joint marketing: Antitrust, Intrinsic desire to maintain separate brand identities and increae own market share
→ butsome also want economies in marketing and distribution: hoping for wider market coverage at a lower cost. (similar to cooperative marketing agreements but without managerial complications of joint venture)
Trade-Off: loss of direct control over sales, slower decision making, possible loss of direct contact to customer.
- combining “too small” operations (often doing poorly) with those of a competitor
- allows a graceful exit from a business in which it is no longer interested.
- Acquire needed technology and know-how in the Core Business:
Traditionally: acquire new technology by license agreements or developing them in-house (takes too long)
Power of joint venture: solving the same problems; opportunity to learn new techniques
- Reducing Financial Risk of Projects
àsome projects are too big or too risky to tackle alone à share risk
- examples: oil companies, aircraft industry
- Drawback: you train potential competitors, but this is better than risking that competitors hook up with other competitors against you
→ Keep your friends close, but your competitors even closer.
→ Eliminating potential competitors
2. Taking Products to Foreign Markets
→ Existing products, new markets
→ Believing that domestic products will be successful in foreign markets. Choose:
- produce at home and export à unlikely to lead to market penetration
- license technology to local firms à no adequate financial return
- establish wholly owned subsidiaries à too slow
- form joint ventures with local partners à most attractive compromise
- reducing risk associated with new market entry – look for partners with a good feel for the local market
- objective: hold major investments until market uncertainty is reduced
Following Customers to Foreign Markets
- many Japanese auto suppliers have followed Toyota, Honda etc as they set up plants in the USA.
- Some joint ventures are established to satisfy legal requirements in order to permit a firm in to follow its customers abroad.
Investing in “Markets of the Future”
- taking an early position in what they see as emerging markets; potential source of low-cost raw materials and labor
- Problem: unfamiliarity with local culture
- Solution, often imposed by local government: creation of joint ventures with local partners that can deal with local bureaucracy
3. Bringing Foreign Products to Local Markets
→ New Products, existing markets
- For local company, joint venture is an attractive way to bring foreign products to its existing market
- Better utilization of existing plants or distribution channels
- Protection against threatening new technologies
- New growth
- Financial rewards for local partner is different from foreign partner:
- Foreign partner captures total profit of shipping products in hard currency.
- Foreign partners receive a technology fee
- Foreign partners pay a withholding tax on dividends remitted to them from the venture
→ Result: local partners are often far more concerned with bottom line earnings; foreign partner often happier to keep the venture as simply a marketing or assembly operation. But benefits can come back to a parent from a powerful joint venture.
4. Using Joint Ventures for Diversification
→ New products, new markets
- most acquisitions of unrelated business do not succeed.
- Joint venture: choose partner who will help you learn the business you are unfamiliar with
- Go beyond knowledge transfer to include transformation and harvesting
Requirements for International Joint Venture Success
→ Checklist a manager should consider then establishing an international joint venture
Testing the Strategic Logic
→ As joint ventures require a great deal of management attention, managers must satisfy themselves that there is not a simpler way than an equity alliance to get what they need.
→ also need to consider the time period in which they need help à not to get stuck with joint venture when help not needed anymore
Is the added potential payoff high enough to each partner to compensate for the increased coordination/communication costs?
→ Determine whether congruent measures of performance exist:
- Need to make explicit all the primary performance objectives of partners
- Implicit measures are a source of misunderstanding
- Ensure that explicit versus implicit measures of each partner are consistent.
- → Inter-partner and Intra-partner issue (internal managers should act from common platform too)