Why do some international joint ventures succeed whereas others fail - Essay Example

?Why do some international joint ventures succeed whereas others fail? International joint ventures together with the different cross-border strategic alliances are essential elements in international strategy for multinational corporations. International joint ventures are not necessarily established as permanent arrangements and besides by the virtue of having many owners, the ventures are characterized by the problem of multiple agencies. Hence owners can disagree on the international venture’s goals making the performance of the venture more difficult to define and measure than performance of conventional organizations. Therefore, dissolution of international joint ventures (IJVs) signals not only the failure of the joint venture but also a realization of agreed goals by involved partners. Various scholars draw upon various contextual and internal factors organised in various theoretical perspectives to explain instability and failure of international joint ventures. First, the study considers benefits of conceptualising IJVs as cooperative or expedient collaboration and secondly draws on the distinctions to examine differences between instability and failure theories through structural and processual lenses. International joint ventures as cooperation experience instability from factors that erode trust, commitment, forbearance and other similar partnership qualities. For instance, a venture that lacks complimentary with the partner is bound to be unstable; moreover, the same applies to ventures associated with significant partner differences regarding values, identities, goals, interests and practices (Salk and Shenkar, 2001). The perspective of selecting the wrong partner reduces the possibility of developing trust, which compromises cooperation making the venture vulnerable to instability. Another view conceptualises IJV as transitional organization, whose initial structure and internal dynamism create inevitable tendency to instability, which results in dissolution (Peng and Shenkar, 2002). The approach presumes that partners engage in IJVs with expedient motives seeing the partnership as a short-term instrument for serving their competitive self-interests by exploiting other partners’ weaknesses or gaining at the expense of other partners. Within this view, one variant stresses structural factors to explain imminent instability of IJVs and the other theorises instability and failure as products of internal political processes. Early influential approaches emphasise the need for parent partner to establish appropriate governance structures because when expedience prevails, IJV pose great risks to the parents like the loss of technical or strategic capabilities to opportunistic behaviour (Noe, Rebello, and Shrikhande, 2002). Most scholars are persuaded that that dominant equity control by one parent likely leads to venture success since benefits are associated with the unitary control framework (Hauswald and Hege, 2003). Similar to equity shares, which have gained dominant management control associated with the success of IJV, equal division of management control is associated with inter-parental disputes, instability and failure. Hence, structures suggest IJV’s destiny avails itself in control structures established in the original bargain. However, another complementary perspective argues that venture instability is a process dev eloped by parents in the lifetime of the IJV. As competition for competence, the IJV process involves multiple ‘micro bargains’ between parents as each seek to acquire the strength to exploit weaknesses of the other, the processual approach accentuate the significance of bargaining power as each manoeuvre within the IJV structure to augment its control and attain its ends (Hamel, 1991; Inkpen and Beamish, 1997). Acquisition of knowhow appears to the central aspect in joint ventures, besides joint ventures seem to be temporary in nature since there is no competition where optimal contracts are used. Moreover, duration of joint ventures relies on the discrepancies on partners’ cost, moral hazard, partner’s ease of knowhow acquisition and the identity of the buying partner relates to the duration of venture (Morellec, and Zhdanov, 2005; Bhattacharyya and Lafontaine, 1995). For instance, the aircraft engine joint venture between BMW and Roll-Royce lasted 10 years before its dissolution in 1999 through buyout of BMW by Roll-Royce. Even though, it is possible the venture ended because of the failure to cooperate on the part of the two partners, such an explanation is unlikely considering that BMW was paid in Rolls-Royce shares, which made BMW one of the large shareholders of Rolls-Royce. A likely explanation is that Rolls-Royce, which stopped the production of small aircraft engines and wanted to re-enter the business again, thought it could gain from BMW’s knowhow of small engines. Once Rolls-Royce gained sufficient small engine knowhow from their partner (BMW), the desire for the joint venture vanished. BMW was eager to engage in the venture since it was an extra means for the corporation to gain profit from its knowhow in small engines (Habib and Mella-Barral, 2007 p.193-194). Given the expedient strategic values associated with parents, winning the race to learn likely provokes an obsolescing bargain since the initial agreed control structure change shape as relationship between parents erodes which slips the IJV toward instability and eventually dissolution (Ramamurti, 2001; Elfenbein and Lerner, 2003). Although structural tendencies toward instability remain part of power background, poor performance and ultimate collapse is a result of escalation of partners’ political behaviours (Pothukuchi et al, 2002; Yan and Gray, 1994). IJVs exist in complex and cross-cultural business environments shaped by institutional, economic and cultural features of the parents’ home communities. The argument recognises that post-socialist transition environment varies significantly from developed western environment in important respects from other LDCs (Least Developed Countries). All LDC environments are characterised by high levels of institutional complexity, fragility and ambiguity and are conducive for economic opportunism. Such institutional uncertainties compound the already increased risks associated with operating in unstable economic environment and in a cultural context where business values, knowledge, practices and motives vary substantially (Johnson and Houston, 2000; Tsai, 2001). Institutional and economic conditions of post-socialist context have significant implications for inter-parental control and outcomes of IJVs. The Deutschmotor–Autodil Joint Venture (DAJV) Before 1990, Autodil was one of the largest companies in Hornice employing around5,500 people before the fall of communist community in 1989. The enterprise was highly successful under the command economy, by supplying engine part to automotive industry in Czechoslovakia and across the soviet empire. However, at the start of transition the company’s markets collapsed as motor manufacturers failed or declined hence by 1990 the company appeared set to close. This led the company to join a joint venture with Deutschmotor, a company that had more than ninety years’ experience in investing abroad, proposed joint venture around the production of the new engine part designed by Autodil. Although, Czech managers regarded the venture as the second best, the lure of being associated with a prestigious manufacturer, securing jobs for employees and generating extra profit to invest in the outdate plant was too big to turn down. This presented a chance for the company to brand new capital investment and join economic network of successful German car industry (Soulsby and Clark 2011, pp.302-302). DeutschMotor’s power in the post-socialist context allowed it determine the control structure in venture insisting on equity share to minimise its financial commitment but maximised its ability to appoint the entire board and control strategy process (Clark and Geppert, 2006; Collis and Montgomery, 1998). Autodil contributed mainly land and building and handed the original design for its work with German Engine Manufacturer; moreover, Autodil was to supply components for assembly and a small number of Autodil-selected employees to initiate what was agreed as a limited operation. Within a year from the start of operations, people began to see things going very wrong since DeutschMotor’s philosophy changed since there was an uncoordinated transfer of people. When the venture required someone, they never said anything but the person just left hence the company engaged in poaching and besides the company posted no profits. It soon became clear that DAJV’s general director had the intentions of expanding the ventures production and increase the number of employees. The process would involve taking staff not just from Autodil but also from different engineering companies in the region. Autodil directors were furious but they had no power to change strategic decision to exploit the venture in order to allow the parent company invest in its production capabilities. After realizing that the company was supporting a venture designed to operate at a loss, Autodil pulled out of DAJV (Soulsby and Clark, 2011). Cultural, institutional and economic contexts of IJVs are vital in exploring relationships between partners from Western developed and transforming post-socialist countries. Two features in post-socialist context are the intense uncertainties and ambiguities associated with transition economy, which influence risks faced by partners hence influencing strategic approaches adopted and established in operating in IJVs. Moreover, the relative weakness of post-socialist states create conditions necessary for enhancing relative power of foreign multinational companies in negotiating IJV contracts. Thus, contextual parameters predispose formal nature of the IJV structure where internal processes unfold. Experience of DAJV supports the significance of the two contextual features with DeutschMotor’s choice of the IJV as a strategy that reflects attempts of minimising risks associated with high levels of institutional ambiguity and business uncertainty common in early post-socialism (Soulsby and Clark, 2011; Reuer, Zollo and Singh, 2002). IJVs are deeply political with instability and failure being the conscious and or unwitting consequences of meaningful actions pursued by agents to using power and influence to achieve their ends and achieve their values (Child and Rodrigues, 2004). The one reason why many ventures end is that they are meant to because they are designed with fine goals or tasks in mind, and anticipation of dissolution thereafter. Nevertheless, the study focuses on ventures without durations; thus, the end of the joint venture is associated with unfavourable or unexpected experiences. Organizational qualities of parent companies affect frequency with which corporation joint ventures fail. Continued feasibility of joint ventures in cross-industry settings are enhanced by the existence of concurrent ties among partners, which facilitates reciprocity (Kogut, 1989). However, changes in industry concentration and increase in growth rate both measures of volatility negatively influence joint ventures. Act of renegotiation prior agreement is associated with unequal ownership shares, past negotiations and policies of the host country with regard to the negotiations (Moskalev and Swensen, 2007). The rationale of joint ventures is positioned in a transaction-cost economics paradigm explained as form of governance, which shares attributes of the market and internal organizations trying to avoid the hazards of each (Allen and Phillips, 2000; Sampson, 2004). Joint venture failure from the perspective of transaction-cost rationale is an intermediate for of governance sharing properties in both markets and hierarchies. Hence, joint ventures are subject to analogous, hybrid forms of transaction hazards associated with the needs of governance continuum (Makino and Neupert, 2000). The dangers sway links connecting the parties domineering separate business entities. Joint ventures are intended to meet objectives of individual firms and communal undertaking, hence valuable when shared outcomes surpass opportunity costs incurred by members and their distribution is fair. However, when the system of balanced and equitable contributions, benefits and safeguards gets jeopardised, it consequently affects the joint venture. Incentives to cheat when they emerge may subsequently sway partners to act opportunistically to achieve their competitive objectives and not the communal goals of the venture. Joint ventures have high rate of failure when partners are direct competitors; for instance, consider the not-unlikely scenario where partners engage in a joint venture where the partners are competitors seeking to maximise their home market share. In such a case, parental goals entirely conflict and the venture prove to be dysfunctional resulting in the failure of the joint venture (Yan and Gray, 2001). Moreover, a different angle on cooperation between competitors emerges if the undertaking is considered to have cartel-like properties. Thus, cartel agreements between competitors to act in a unified, manner induce instability because by nature they contain potential economic incentives to be opportunistic after reaching an agreement. Analogous incentives rise when competitors form joint ventures; for instance, sharing of marketing information and prices for products of the parent and joint venture in market offers the parent product an incentive to undercut prices of the joint venture. Therefore, joint venture compared to inter-firm collusive agreement provides great alignment for the parent’s interest hence stimulating opportunism resulting in failure of joint venture. Another essential feature for the collapse of IJVs regards the character of partner assistance in the functioning of the venture. The vital variable is pattern of interdependence between partners with one form showing lack of integration in contributions but lies on sequential path like when one partner designs a product like in the case of Autodil and the other partner (DetschMotors) manufactures for distribution in a sequential joint venture. Another form of interdependence involves the partner’s contributions representing pooling of their talents, like the BMW and Rolls-Royce venture, to manufacture a new good. The market in which the fresh entity operates is related in many ways to the parent’s market as one partner uses the venture to expand down the product stream (Rolls-Royce), while the other (BMW) uses the venture to expand upward hence blending their expertise in the venture. In Rolls-Royce and BMW venture, Rolls-Royce used the arrangement to diversify into new area of activity together with BMW its partner in an integrative joint venture. In sequential joint ventures one partner’s gains come at the direct expense of other partner considering the case of upstream firm (DeutschMotors) in DAJV and the downstream firm (Autodil) separated by the gap of manufacturing stage, which was bridged by the sequential venture. In the setting, the contractual terms provide for some eventualities, but the agreement was subject to opportunistic interpretation since the markets were thin. This problem is also prevalent in integrative ventures like the BMW and Rolls-Royce venture because one of the manufacturing partners is the contributor of essential inputs. Hence, in both integrative and sequential joint ventures neither does the interests of partners dovetail, since parents are virtually guaranteed to clash occasionally as representatives attempt to maintain operating and reporting consistencies between the venture’s operations and their practices, which may differ hugely. Decision making often offers one parent great opportunity, which gradually exposes and appropriates the other firm’s key assets, which offers a serious threat to integrative joint ventures (Geringer, 1991). The chance of leaking important knowhow especially regarding manufacturing processes to the partner can be utilised to undermine the other’s competitive advantage like the case of BMW in its venture with Rolls-Royce. Given the bounded reasoning it is impractical to contractually specify all possible contingencies involved in managing a cooperative entity. Indeed, formal contracts often include minimal obligations; hence, the problem of joint venture is the rivalry in that it can stimulate opportunistic behaviour when proper course of action is ambiguous. The complexity of management can limit advantages of internal organization, as it is difficulty-managing one’s stake in joint venture since it reduces an organization’s governance and advantages (Das and Teng, 2000; Doz and Hamel, 1998). The sheer complexity of managing joint venture is a significant impediment to the success of joint ventures, which is even aggravated by presence of many partners who affect coordination costs and managerial complexity. Thus, when the number of dyadic relations between partners increases in number, so does dysfunctional pairing which undermines the joint venture. In conclusion, the article shows that IJV theory of instability and failure benefits from exploring the relations between contextual, processual and structural factors with credible explanations depending on marshalling of factors to comprehend the internal dynamics of international Joint Venture as an organizational form. Analysis of case materials offers empirical support that theoretically links three concepts; power, context and strategic orientation derived from international business literature on business conceptually and theoretically developed in search of explanations for IJV instability and failure. For instance, diminished state and other institutional conditions in post-socialist transition are conducive for strong relationship, placing multi-national corporations in powerful position to shape joint venture. Besides, reasons for IJV instability and subsequent dissolution varies according to how managers in multi-national corporations define IJV in short-term expedient or long-term cooperative ways as well as the way local managers respond in terms of acceptance or opposition. In DAJV case, a combination of strategic orientation and asymmetries associated with the joint venture was a recipe for instability and failure. References Allen, J., and G. M. 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Antecedents and Effects of Parent Control in International Joint Ventures. Journal of Management Studies, 38(3): 394–416. Read More