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

Potential problems:

→ 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

Two ways:

  1. 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 )
  2. 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.

Divisional Mergers

  • 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)