Why Companies Enter into International Joint Ventures - Assignment Example

?Contents Contents International Joint Venture 2 Introduction 2 Types of Joint Ventures 2 Why Companies Enter Into International Joint Ventures 3 Partner Selection Process 4 The Process of Joint Venture Formation 5 Control in International Joint Ventures 5 International Joint Ventures Agreements 7 Why International Joint Ventures Fail 7 Advantages and disadvantages of International Joint Ventures 9 How the Success of International Joint Ventures Can be Increased 9 Conclusion 11 Works Cited 12 International Joint Venture Introduction A Joint Venture is a strategic alliance between two or more individuals, companies or other entities that are legally and commercially independent and agree to pursue a specific objective in which they share revenues, expenses, assets, and management roles. International Joint Ventures (IJVs) involve individuals, companies, or firms from different countries forming a partnership. Globalisation has resulted in the need for collaboration of companies of different countries hence the emergence of multinational companies. The partnership could be short term or temporary such that it ceases to exist after meeting its goal such as in case of projects. Some of IJV partnerships are long-term and last for longer periods. During the formation of joint ventures, the firms or companies combine their assets, which could be in material form or intangible such skills as well as technological knowledge. Joint ventures help in licensing, franchising as well as in export of company products. This paper focuses on why companies choose to enter into an international joint venture, reasons why international joint ventures fail and things that can be done to increase the success rate of International Joint Ventures. Types of Joint Ventures Joint ventures take different forms depending on objectives of the partnering companies. Some companies may decide to co-operate through signing of contract. This is for example viable if a small company wants to form collaboration with another larger company to enhance sale and distribution of certain products. A good example is the Joint venture between Tata motors and Fiat, which has been discussed under the reasons for formation of joint ventures. The joint venture helped Fiat market its diesel engines. Another type of venture entails coming up with a new joint company where each partner has a specific number of shares to enable division of expenses and profits. This option works best when the business venture involved is a long term or short-term contract. Another partnership option is complete merging of the firms involved in the partnership. When deciding the type of joint venture to get into, it is crucial for the partners to understand the responsibilities of each party as well as the risk involved in the venture. It is also important to seek legal advice in making the decision of the appropriate venture. A legal agreement should also be signed between the partners to specify on sharing of income or assets in case of failure of the venture (Gutterman, 2002, p.32-35; Yan and Luo, 2001, p.181-183). Why Companies Enter Into International Joint Ventures Companies enter into partnership for various reasons. The major reason for companies entering into International Joint ventures is for economic reasons explained by a number of theories, which include transaction cost economics, resource-based theory, transaction-value theory, real options theory, and increased returns theory (Gutterman, 2002, p.168-173; Yan and Luo, 2001, p.233-236). Transaction cost economics is a theory formulated by Williamson, which assumes that formation of IJCs helps in outsourcing since accessibility of resources such as revenue and services, becomes easier. The firms are able to exchange technological ideas and new business ideas while the market range is also expanded. An example is the Tata Motors and Fiat joint venture, which was formed to manufacture cars from both Tata and Fiat at a reduced cost. In this joint venture, Tata motors buys diesel engines from Fiat. On the other hand, Fiat helps in the distribution of Tata cars in the entire Europe. Formation of international Joint ventures makes it possible for the collaborating companies to overcome legal barriers (Yan and Luo, 2001, p.9-12). Resource - based theory focuses on the need for integration of companies to form multi-national companies or international joint ventures to improve the market as well as exploitation of resources. The theory stresses on the need for companies to diversify their operations through formation of Multi-national companies to enhance resource acquisition and utilization (Reinert, 2011, p.30-35; Aberle, 2010, p.10-12). The theory claims that companies can improve on their income through diversifying their operations, which can be made possible by exchange of competence between companies. Mahindra and Renault joint venture is a good example of a joint venture formed to enhance competence since the two companies hoped to learn from each other and help Renault expand its market. This joint venture manufactures Renault Logan cars in India. Mahindra will gain by learning skill on how to improve the quality of their cars hence improve their market. The theory argues that most governments have enacted policies that limit operations of multinational companies thus formation of international joint venture help companies to transport their products worldwide. Global competition created by IJV encourages resource accumulation as well as apposite utilization of available resources (Yan and Luo, 2001, p.11; Aberle, 2010, p.1-4). Transaction value theory argues that companies form IJV as an attempt to minimize the transaction cost. Real options theory claims that the competitive environs created by international joint returns offers an opportunity for firms to expand their market as well as other operations .Increased returns theory argues that companies form IJV with the aim of maximising on utilization of the available resources such as capital, technology, as well as workforce. A good example is the joint venture between Tata and AIG. The venture’s aim was to aid AIG, which is a car insurance company acquire technical knowledge. Partner Selection Process Companies coming into partnership must demonstrate commitment, compatibility of goal, their individual resources should complement each other and they should have the capability to manage and fund the joint venture (Gutterman, 2002, p.29-32; Yan and Luo, 2001, p.18-23). A good example of such a venture was the partnership between Sony Corporation, which is a Japanese electronics company with Ericsson, a telecommunication company from Sweden to form Sony Ericson. The venture helped the two companies’ pool their resources with Sony providing expertise in electronics while Ericson provided know how on communication aspects to come up with enhanced technology hence more qualitative products. The venture also widened the market range (Share and Keep, 2012, Web). The Process of Joint Venture Formation The process of joint venture formation involves agreement between the partners on the need for the partnership. During this step, the stakeholders should be named and the goals of the partnership set (Yan and Luo, 2001, p.12-15; Aberle, 2010, p.6-10). The next step is the analytical stage where the partners agree on the risks involved, the contribution of each partner in terms of capital, technological expertise, as well as workforce. The ways to share expenses and assets should be established. Additionally, the partners should come up with the joint venture agreement, which should state the type of partnership and elaborate on other managerial aspects (Gutterman, 2002, p.15-20). Control in International Joint Ventures Control is the extent to which the different entities in a joint venture influence each other’s activities, as well as behaviors. Formation of IJV requires that the parties involved come up with a management style that favors both parties. The management pattern should involve sharing of power as well as discussions between the parties to enhance decision-making. International Joint Ventures are characterized by increased complexity due to existing differences in culture as well as managerial strategies, which can result in conflicts (Yan and Luo, 2001, p.97-101). Opportunism can also result adding up to the complexity. It is thus important that IJVs have a strategy to monitor and coordinate their activities to ensure that conflicts, which might arise, are solved without compromising the performance of the joint venture (Gutterman, 2002, p.62-67). There are different types of control, which include dominant control, shared control, divided control, rotational control, as well as sovereign type of control. In dominant control, one of the partners does the joint venture management. This is common in cases where a small company collaborates with a large company such that there is inequity in the number of shares each partner has. The partner with the higher number of shares takes up the managerial role (Aberle, 2010, p.14-16). In shared control, the two parties divide the managerial roles equally such that each of the parties exhibit equivalent level of influence over the other. Companies share the management roles. A good example of shared control type of management is in BHPBilliton the largest mining company in the world. BHPBilliton is joint venture of Australian BHP a British company called Billiton. Australian BHP is the major shareholder. The two companies collaborated in 2002, which enabled uniting of both resource as well as skills from both companies to enable the mining. However, the two companies are listed as independent bodies but they operate under one management with the headquarters at Melbourne in Australia but there is a main office in London. The two companies also have equal rights. The two companies also function as one unit and carry out metal mining in 25 countries. The company operates under ten Customer Sector Groups (CSGs) (O'brien, 2010, Web). In split control, the partners divide the management roles such that each party has a specific managerial role that is different from the other. In rotational control, each of the partners plays the role of management for a specified period after which the other partner takes over. The period of time each of the partners is supposed to manage the IJV is specified in the agreement. In sovereign or independent control, none of the partner is engaged in the management. The partners find a third party to run the joint venture. International Joint Ventures Agreements When setting up an International Joint Venture, it is important that the parties involved set up the goals and objectives right from the start. The agreement should also include bylaws as well as a ventures agreement, which elaborates on issues such as financial control, distribution of the expenses as well as incomes. The agreement should state the terms of transfer of ownership as well as confidentiality of the venture’s information. The agreement should provide the conditions of the partnership as well as the regulations to be used in running the business venture (Gutterman, 2002, p.122-125). Another important aspect that should be included in the partnership agreement is the contribution of each of the parties, the expected achievements , the means to measure success, ways of sharing profits and the roles that each partner should play in management of the venture. The agreement should provide for terms and conditions that could lead to termination of the partnership or disposal of a partner in joint ventures involving more than two firms. Other factors that must be address in the IJV agreement include, the election or appointment of the board of directors, and Chief Executive Officer, the process of decision making as well as share holding (Yan and Luo, 2001, p.66-71). Why International Joint Ventures Fail Most JVCs are unsuccessful and thus short lived due to factors such as managerial conflicts organizational differences as well as culture disparity between the different countries. Formation of IJVs is quite a risky and complex venture in which difficulties arise and result in failure of most IJVs. Reasons leading to collapse of most IJVs include unclear objectives, which could be due to incompatibility in goals of the collaborating companies. Another reason is inequity in assets, expertise and capital investments between the collaborating companies. Difference in cultures between the partnering companies or the management modes is another factor that causes conflicts in joint ventures (Yan and Luo, 2001, p.142-147).The joint venture between Corning and Vitro failed due to cultural difference. Vitro was a Mexican company that deals with drink ware while Corning Inc. deals with glassware. The venture was unsuccessful due to the differences in the decision-making strategies that each company preferred. Corning CEO publicly addressed problems facing the venture while Vitro executive objected this approach. Tension eventually arose and the joint venture failed. This arises because most companies do not consider the cultural aspects when selecting the company to collaborate with and some companies end up being incompatible. Another major factor is poor management as well as leadership strategies especially at the preliminary stages of partnership. An example is the Pepsi and BAE S.A joint venture in Brazil, which collapsed due to management wrangles since they had not decided on the leadership style from the start. The collapse of the venture resulted in great losses for Pepsi. Most joint venture partners opt to share the leadership and management roles thus when disagreements arise even in other areas of the venture, it becomes hard to resolve them amicably (Wolf, 2000, p. 120-125). Some IJVs fail to succeed due to legal problems, financial crisis, as well as lack of transparency. A good example is that of Citigroup, a joint venture involving Brazilian Telecommunications industry. Daniel Dantas who was the general manager of Brasil Telcom, one of the business ventures of Citigroup siphoned about $300 of the joint ventures capital for his own benefit. When the Citigroup executive realised this, they decided to fire Dantas but realised it was going to cost the partnership great losses since Dantas had developed a complex pyramid with other firms. (Kellogg School of Management, 2009, Web). It is thus important for companies to understand the management of companies they wish to collaborate with to avoid such occurrences. Another factor that contributes to failure of IJVs is lack of planning. Most companies get into joint ventures without a clear plan thus end up facing logistical problems, which may eventually lead to disintegration of the ventures. Some IJVs fail due to other factors such as host government interruptions, overrated market, and poor infrastructure (Wolf, 2000, p.215-220; Aberle, 2010, p.8-10). Advantages and disadvantages of International Joint Ventures Formation of IJVs is advantageous since it enables companies’ access more resources such as more workforce, enlarge their market, acquire technological knowhow from their partner, and learn new managerial and technical skills (Wolf, 2000, p.315; Acevedo, 2012, Web; Gutterman, 2002, p.112). Formation of IJVs also has its disadvantages, which include possible occurrence of conflicts between the partners, which hampers the success of the business operations. Another problem is that the process of developing trust with the partner takes time, losses may occur in case the terms of the partnership are not clearly set and one partner turns out to be dishonest. How the Success of International Joint Ventures Can be Increased Success of International Joint Venture principally depends on compatibility in goals as well as objectives between the partnering companies. In most instances, International Joint Ventures are faced with the challenges such as cultural differences since the merging companies are from different countries. However, the chances of the success of international joint ventures can be increased though several ways as discussed below. Reducing the chances of failure of IJVs thus entails limiting the risks involved in the venture. This can be made possible by companies carrying out sufficient research to ensure that they collaborate with companies that have similar agendas. Novartis & Procter formed a joint venture with Gamble to enable them market the drug Enablex. The venture was well planned and the expectations on each partner were establish right from the start, which contributed to great success such that Enablex gained worldwide market. The success of this venture is also due to the compatibility of the goals set by the two companies (Acevedo, 2012, Web). After deciding the company to collaborate with, the managements of the companies involved in the venture should enhance proper communication from the start to ensure that all the stakeholders understand the plans involved in the venture. Another factor that the partners in IJV should consider is the leadership. The partners should decide on how to control the daily operations of the business venture. Deciding on the style of leadership prevents occurrence of wrangles later (Yan and Luo, 2001, p.241-245). Another way of increasing the success of IJVs is establishing the financial as well as the work force each of the two partners will be expected to provide right from the start. The companies should also decide on the governance style and ways to resolve any forms of conflict that may arise. If the Citigroup joint venture had agreed on how to deal with conflicts right from the start, the wrangles would have been settled amicably without the risk of great losses. A number of IJVs fail due to disagreements related to lack of transparency especially on money matters. IJVs should thus encourage evaluation of financial records by carrying out frequent audits (Acevedo, 2012, Web; Wolf, 2000, p. 200-205). Another way of increasing success of IJVs is by ensuring that each of the companies guard its sensitive documents to avoid intellectual theft since some companies may enter into a joint venture with the aim of copying or stealing technological ideologies. Some joint ventures collapse due to financial constraints, which mostly arise if one of the partners fails to meet their financial input (Acevedo, 2012, Web). It is therefore important that companies be acquainted with the financial records as well as management of the company to form collaboration. The two partnering companies should also discourage connection of the joint venture computers with those computers bearing previous company’s data. This prevents occurrence of security breaches. Other factors that lead to failure of IJVs include lack of commitment from the partners, disagreements on policies and managerial differences. These factors should thus be looked at from the start. The success of the Coca Cola Company and NESTEA joint venture is attributed to the clearly set regulatory as well as licence agreement for the Nestle brand. The two companies agreed on the transition process, which is to happen by the end of 2012. For successful joint ventures, the policies should be set with legal assistance to prevent compromise (Acevedo, 2012, Web; Reinert, 2011, p.17-20). Conclusion International Joint Venture is a form of partnership between two or more companies or firms from different countries. The partners get into an agreement to participate in a project or business partnership for a short period or for a long period. Formation of International Joint Ventures provides companies with an opportunity to access greater resource as well as expand their markets. Collaborating companies also get an opportunity to learn from each other by exchanging their technological knowhow. It is crucial for partners entering into International Joint ventures to have compatible goals, be committed to their objectives and have a memorandum of understanding, which is equivalent to a venture agreement. Formation on international joint ventures allows companies to use external resources to reduce the cost of production. 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Viewed 12 June 2012 . Wolf, R 2000, Effective International Joint Venture Management: Practical Legal Insights for Successful Organization and Implementation. M.E. Sharpe, New York. Yan, A. and Yadong L 2001, International Joint Ventures: Theory and Practice. M. E. Sharpe, New York. Read More