International Joint Venture - Essay Example

International Joint Venture Introduction A joint venture (JV) is formed when two businesses combine or enter into a strategic alliance or partnership to form an independent business enterprise in order to carry out a business activity together or to achieve a certain goal. The two businesses share their finances, income and expenses. A JV formed between a local and a foreign company, organization or individual is called an international joint venture. The company shares resources and builds business relationships with that in the host country so as to carry out cross-border economic activities. International JVs most often involve only two parent companies but may include multiple participants as well. Robin Elliot, a business joint venture broker, states that the key to making “huge cash profits with no money down and no risk” is to collaborate with other companies in productive business joint venture agreements (2009). JVs often provide very good opportunities to gain foreign trade income. These have arisen as a strategic business substitute in the highly competitive milieu of today’s world. As companies share their expertise and financial resources, the burden reduces and the risks are mutually shared and handled. The clientele increases which brings increased revenue. However, the performance of the JV depends mainly on the relationship between the partners and the intensity of disagreements and trust between them. Kemp (2008) states that the activities of the JV are subjective to the norms of exchange and thus the companies should give special consideration to dependence and the norms of exchange with the partner so as to improve the JV’s performance. Norms of exchange are actually the expectations, about performance of the JV or about the behavior of a partner, which are at least partly shared by a group of decision-makers (Heide & John, cited in Kemp 2008). Moreover, the intensity of interdependence or mutual dependence between the partners is a very important consideration because if there is little interdependence, then the chances for the survival of the JV become scarce. On the other hand, good relationship between partners of the JV leads to high economic performance with diminished level of conflict which reduces the management time along with other advantages. A international JV can be long-term or short term depending upon the goals to be achieved. These JVs are established for purposes like engineering, mining, production, distribution, and so on. 2. International Joint Venture Model Contracts “At long last, specialists have agreed upon two model contracts for international joint ventures”, says Schneider, Vulliety and Olsburg (2002). Previously, companies would develop and follow their own JV contracts because there was no international JV model contract that would cater with all the needs of the companies in a JV and bring together lawyers from varied backgrounds following miscellaneous legal cultures and practices. This situation led to the formation of international JV model contracts which have provided the international business community with two models of JV agreements, viewed and authenticated by international trade law specialists. These models are described below. 2.1. Incorporated Joint Venture Contract In an incorporated JV contract, a new independent company is created or more than one JV companies are created in a certain country with the aim of achieving one specific goal. The JV agreement is signed along with the consideration given to the legal issues concerning the incorporation of the new company (Schneider, Vulliety & Olsburg 2002). 2.2. Contractual Joint Venture Contract In case of a contractual JV contract, no new independent company is formed. The companies in the JV cooperate with each other and support each other’s business through financial resources, expertise, technology, risk management, etcetera. “A legal entity is not created, but a collaborative group exists” (Schneider, Vulliety & Olsburg 2002). The contractual joint venture agreement has to be signed by the companies involved which is the only legal issue involved in this case. 3. Complications in International Joint Ventures International JVs have to undergo all economic and business activities just like other independent organizations. But unlike single firms, JVs have to look for inter-organizational relationships between partner companies along with the relationship of the JV with the both the parents. The relationship between the JV’s managers and employees nominated by local and foreign partners also needs to be given serious consideration (Yan and Luo 2001: 4). Managing these inter- and intra-organizational relationships is what makes an international JV complex as compared to standalone firms or common JVs within a same country. According to Yan and Luo (2001), an international JV is “an intercultural and interorganizational linkage” between the local and foreign parent firms which may belong to dissimilar interests and objectives and thus can disagree upon anything or everything out of cross-cultural differences or differences in the organizational structures. This complicates the partners’ relationship which can eventually lead to conflicts and instability of the JV along with reduced performance. Moreover, complexities may also arise due to the ineffective relationship maintained by the management of the JV with any or both of the parent companies, and also due to unhealthy relationship between the local and foreign managers. An international JV also has to struggle to survive in an external institutional environment where it has to deal with factors influencing from within the local country while being influenced by the institutional environment of the foreign country (Yan and Luo 2001: 6). 4. Partner Selection in an International Joint Venture A good local partner helps in improving the JVs competitiveness in the host country’s market while enhancing the access to marketing channels and reducing the political disadvantages. A good foreign partner can help the JV to gain benefits from highly developed technologies, international marketing and hi-fi expertise. Thus, wise partner selection provides an accurate combination of strategic resources which are crucial for an international JV. Good partners must have similar levels of commitment towards the JV which is essential for the establishment of trust between the two firms. Yan and Luo (2001: 21) argue that the JV sponsors have to consider four basic factors for partner selection which include the partners’ cultural, strategic, organizational and financial traits. 5. Goal Compatibility between Partner Firms For an international joint venture to thrive without the arousal of conflict, it is very important to have compatibility between the partner firms regarding the objectives and goals of the JV. If the objectives differ, then the partners will not be able to adopt cooperative strategies. On the other hand, if both the local and the foreign partners are moving in the same direction, this makes the JV flourish and progress without uncertainties arising from inter-partner conflict 6. Conclusion Putting it all together, international joint venturing between domestic and foreign companies in developed countries is becoming a popular means of attaining cross-cultural objectives. Each partner benefits from the advantages of the other by sharing the resources. Joint venturing helps increase revenue and profitability by sharing the risks, finances, expertise and technology. Wise partner selection and consideration towards inter- and intra-organizational relationships is very important for international joint ventures to flourish in today’s competitive business market. References Elliot, B 2009, ‘Business joint venture’, Buzzle.com, viewed 20 December 2009, Kemp, R 2008, Cooperation and Conflict in International Joint Venture Relationship, viewed 20 December 2009, Schneider, M, Vulliety, JP, & Olsburg, C 2002, ‘International joint ventures’, International Trade Forum, viewed 20 December 2009, Yan, A & Luo, Y 2001, ‘Complexities in international joint ventures’, International Joint Ventures: Theory and Practice, M. E. Sharpe, New York. Read More