The Failure Rate For International Joint Ventures (IJVs)
Is Frequently Reported As Being Very High. Why Do Companies Enter Into IJVs And Why May This Statement Be Misleading? Give Examples throughout. International Joint Ventures became common in the late 20th century when companies wanted to venture beyond their native shores in order to extend their area of influence, capture attractive markets and increase profits. Initially only large business ventured out but soon it became a trend that all companies, big, medium or small, found attractive.
Most countries have joint ventures functioning out of their soil. The reason for this can be seen in the globalisation of the markets, easy and speedy communication and the use of rapidly changing technologies. (International Joint ventures: Theory and Practice by Aimin Yan and Yadong Luo) There has been a paradigm shift in the way businesses have been conducted right across the world. Despite the notion that IJVs are unsuccessful, this essay goes to prove why this idea can be deceptive. Economical and Legal Distinction What is an International Joint Venture?
It has been defined as “a common project between legally and commercially independent companies in which the parties jointly bear both the responsibility for management and financial risk” (Weder 1991). Economically and legally distinct businesses are created by parent companies that pool financial and other resources together to pursuing common objectives. (Anderson 1990; Pfeffer and Nowak 1976) According to Yan and Luo, firms operating in different countries work together across national borders. (Yan and Luo, 2001) In a joint venture, economic activity is the result of collaboration between two entities.
Here, the two existing parties enter into a contract or a partnership. Why do companies form joint ventures? As firms expand, they are constantly on the lookout for new markets, products and services. It is not necessary for the parent firms to own 50% of the equity in a JV. In fact, in order to control the amount of investor influence, many countries consider an investment that is less than 20% a good decision (Managing Joint Ventures by Paul W. Beamish and Nathaniel C. Lupton. ) Throughout history, countries have laid estrictions on businesses, for example a compulsory involvement of a local partner to facilitate foreign entry. Such discretionary practices are rarely seen today. However, IJVs continue to successfully make up the bulk of foreign entry and investment. Some Advantages In a JV, firms can use each other’s strengths in order to introduce new services and develop new products rapidly which would not have been possible had they been alone. Efficiency is maximized as there is little duplication of resources. To a large extent, the presence of a local firm can increase acceptability for an alliance between two businesses.
The local firm can ease the passage through unchartered waters for the foreign firm. Other ways to access resources of another firm are through contracting, licensing and other strategic alliances that do not involve sharing of equity. In volatile foreign markets, it is the IJVs that outperform subsidiaries that are wholly owned. This is because of the safety net that the local partners provides. Success rates are higher as commitment is inherent in a joint venture. This commitment leads to better cooperation between parent companies especially when it comes to defeating competitors.
Expansion is the main motive behind joint ventures. The main concern with regards to this partnership is the financial strengths of the participating firms. However, when a strategic alliance is contracted, there is flow of not only capital, but assets, technology and human resources between the companies as well. This is expected to double benefits and halve the risks. Investing in any business carries its own risks but investing in joint ventures provides a larger cushion from risks and often has more growth opportunities.
Another advantage of IJVs is the short incubation period where product development, enhancement, market penetration and expansion all take less time. Both entities profit from the venture as they are able to reap higher profits with lower costs of investment. Many joint ventures are able to infuse life into failing companies as they receive more capital and human resources. (a company failing and a bigger company that bought it) The Local Edge Because of local prejudices, businesses that operate out of country are not well able to predict whether they will perform positively or negatively in new markets.
When a strategic alliance is formed with an established local industry, this gap of knowledge about local conditions and contacts will be filled. Many companies overlook certain problem areas and choose a local partner which may smooth some of the cultural differences for the overseas company. In many countries the bureaucracy will function as a power centre and companies hoping to get a toe hold may find battling the unhelpful bureaucracy an uphill task. In such a situation having a partner which that knows the way around will smooth the passage for the foreign partner.
When an entity plans to enter foreign shores and forge a partnership with a local company, there is much to be gained. The local company stands to benefit from the technology that the visitor brings with it. Building a good reputation is time consuming. When a strategic alliance is struck with a company that has a dominant presence and good recognition value, the less known institutions benefit from the direct association. Some Success Stories KFC proved itself successful when it joined with active local companies in China that were in the food and retail market.
The local companies benefited from international exposure and in return KFC gained access to prime locations for restaurants at competitive prices, distribution facilities, labour and good suppliers for raw materials. They were able to use the logistics network of the local partner at no cost. Another example of a successful joint venture is the tie up between Honda Japan and Hero Cycles of India to produce motorbikes. Hero Honda is one of the most successful motorcycle companies in the world that benefitted from Hero’s market penetration, knowledge of local conditions, sales network and
Honda’s technical excellence. The coming together of Sony Japan and the Swedish telecom giant, Ericsson, to manufacture and market mobile phones helped to make it one of the companies most successful in the mobile phone market. The Downside Similar to other ventures, JVs have some disadvantages as well. Having to share profit with a partner is the biggest drawback. Getting only half the returns after working equally hard can be demotivating. Another issue is, dealing with multiple centres of power within the joint venture leading to confusion of roles and responsibilities.
The overall supervision of the alliance could suffer, reducing productivity, spiking operational costs and shrinking profits. Most firms that enter into IJVs conduct lengthy negotiations to iron out these differences. Laws differ in every country, which in turn can be problematic for multinational companies. Legal disputes are commonplace and it is essential to have a bank of lawyers to look after these issues. These disadvantages can often lead to failure of IJVs. Groupon’s tie with Tencent in China is a good example of all that can go wrong in a joint venture. Groupon assumed it would strike gold prematurely.
It did not utilise Tencent’s extensive work force, instead it hired expats with no knowledge of local market conditions to manage everyday operations. The Sudden Death Scenario IJVs are faulted for having a die-by-date and the failure rate can be very high. While many strategic international alliances do wind up, not all of them can be known as failed. Many of them plan to last for a particular duration of time and when that period is over and set objectives are met, they are terminated (Inkpen and Beamish, 1997). Although it may seem misleading, these closers do not actually imply instability.
There have been instances of several ventures resulting in lawsuits that bleed companies but not all joint ventures come to such a tragic end. Why Do Things Go Wrong? Choosing partners unwisely is the main reason for the high failure rate of joint ventures. Having the right fit can translate into benefits mentioned previously. Not understanding each other’s motives and miscommunication is one reasons behind failure. Some firms have what is called an extractive approach in which they seek to acquire the partner’s assets, knowledge, skills and resources while giving nothing in exchange.
Such partnerships are bound to end in trouble. A great degree of openness and communication is needed in successful joint ventures. Wide disparities in culture that can be national or corporate are often seen behind failed ventures. (damlier and crystler) The dominant partner may not show enough respect to the cultural considerations of the minor partner. Joint ventures between partners who have no prior experience often run into rough weather. To reduce chances of failure, it is best that firms dealing with similar products come together to form a new company.
A benefit that accrues from international joint ventures that has not been studied fully is that of organizational learning. Businesses that come together for operational purposes bring with them new skills, knowledge and strategies. The knowledge that partners bring functions as the impetus for the participating firms to learn from and along with the other firms in the joint venture. More and more research is being conducted on this benefit that strategic alliances bring to participating firms. Firms can learn about managing alliances and this knowledge will help them in managing future alliances better (Andrew C.
Inkpen and Eric W. K. Tsang). Learning about alliances helps firms to focus on the differences between firms and formulate solutions that can tackle these differences. Firms that encouraged this kind of learning in the past have produced managers who were capable of understanding and adapting to the dynamics of strategic alliances. Understanding more about the alliance partner helps to learn the skill sets that the alliance partner brings. This is especially pertinent in situations where the alliances partners come together to enter an entirely new business area which is unfamiliar territory for all partners.
This kind of learning that results will be specific to a business situation but will support future alliance management. Called reciprocal learning by Lubatkin, Florin and Lane (2001), learning with the partner (Andrew C. Inkpen and Eric W. K. Tsang) happens when the partners foray into a new business environment. Here all partners learn side by side rather than learn from each other. The learning outcome is independent of each other’s capabilities as the partners function in their particular area of expertise.
The Importance of Collaborative Activities Collaborative activities form the core of an alliance
While being part of a strategic alliance, firms have access to knowledge and skills that would otherwise be beyond reach. The knowledge they gain may be industry specific and one which cannot be incorporated into their original operations. Firms contribute their skills to an alliance thus helping it to grow. If an alliance is to be viable and grow it is imperative that the partners contribute their skills and knowledge and learn from all the partners.
Very often, the learning that comes out of an alliance can help the parent firms in their original operations that are completely different from the activities of the alliance. Some of the skills and knowledge might have found origin in the alliance, not having existed before. One of the outcomes of an alliance is learning through an alliance partner but this is possible only if the alliance partner wills it. In fact there may be situations where the alliance partner blocks access to knowledge under its control. Only when companies work in close collaboration will learning occur.
Many companies prefer the option of an alliance over an acquisition when their aim is to expand their knowledge base. Are Cultural Differences a Game Changer? Several companies, when they want to enter a foreign country to do business, prefer to take the route of IJV rather than a wholly owned subsidiary as risks are more there. Cultural differences can play an important part in creating rifts within an IJV leading to its dissolution. All cultural differences cannot be treated alike. Some are more difficult to overlook than others.
Many studies have been conducted on the cultural differences that lead to disruption of strategic alliances. Hofstede’s research mention four dimensions namely, uncertainty avoidance, power distance, masculinity and individualism (Kogut and Singh, 1988). Research now centres on the fifth dimension called long-term orientation. Uncertainty avoidance refers to the way people react to confusing situations and ambiguity. Nations that are characterised by high levels of uncertainty avoidance take refuge by building a formal and rigid hierarchy.
They feel comfortable only when such a system is in place. The opposite is true of countries that have low levels of uncertainty avoidance. Here people prefer open and flexible arrangements where there is scope for bringing in quick changes. In situations where alliance partners come from areas that display wide uncertainty avoidance variations, conflicts and disputes can be expected. This will have a direct impact on the survival of the joint venture. Issues with personnel relations and internal integrations are the outcome of power distance and individualism according to Hofstede (1980).
But these are both areas where a cautious approach can smooth differences. In most IJVs, management of personnel is the prerogative of the local partner, with only the upper echelons coming from the overseas company. Cultures are often defined as being feminine or masculine. A combination of both ensures a harmonious balance that does not give rise to conflict. Harry G. Barkema and Freek Vermeulen in the Journal of International Business Studies express the view that the survival of an IJV depends more on uncertainty avoidance than the other cultural dimensions.
The aspect of culture that can really make a difference to the well being of an alliance is the long term perspective of people. Some people are future oriented whereas some others focus on the present and are not too concerned about the future. They want fast results and such communities are individualistic in their makeup. The future oriented people are thrifty and collectivistic. This divergence in orientation has the potential for conflict as one partner may be willing to make investments for the future and wait for results whereas the dynamic partner may demand quick results.
The Role of Risk In International Alliances Risk is commonplace in international business alliances and risk has to be viewed as inextricably connected to trust and control. Those who wish to reduce and manage risk must understand the relationship between the three namely, risk, control and trust. These three basic concepts can be further broken into its key dimensions. Risk is made up of performance risk and relational risk. Trust can be divided into competence trust and goodwill trust (T. K. Das, Bing-Sheng Teng). Control can be studied as social control, output control and behaviour control.
Risk, risk management and risk perception are an important part of management. Alliances run the risk of failure a lot more than a single firm. If one were to compare strategic alliances and single firms, the one difference that stands out are the problems that dog cooperation and understanding among partners. Single firms are able to concentrate on market transactions. Alliances run the risk of having partners reneging on full cooperation leading to poor productivity. Risk in strategic alliances can be reduced through practices like social control, behavioural control and goodwill trust.
In order to increase goodwill trust, mutual interest should be developed alongside building individual and team trust and amicable resolution of disputes by all partners. To boost a sense of reliability, mutual interests should be developed so that conflict of interests can be minimized. Mutual interests are important in all types of alliances. When there is team level and individual level trust, it translates into trust at the company level. Whenever individuals remain disinterested in the company’s fortunes, it is likely that the company will fail.
If trust is to be built between the firms in an alliance, it is important to start at the level of individuals and teams. It is in joint ventures that individual and team interpersonal trust needs to be most developed as personnel from different firms work in close cooperation to achieve common objectives. Alliances have found through experience that joint dispute resolution is critical to the health and longevity of the alliance. Participating firms may have their differences but joint dispute resolution gives a chance to appreciate differences and value them.