Joint Venture Issues and Challenges - Literature review Example

Joint Venture Issues and Challenges Contents Introduction 3 Objective of the Essay 3 Literature Review 3 Personal Opinion 8 Conclusion 8 Recommendation 8 Reference List 9 Introduction Joint Venture is an amalgamation of more than two parties with the purpose of developing their business for an explicit goal and expanding their market. This goal can be a fresh project or other trading activity. Under European Law, ‘Joint Venture’ is defined as an ambiguous legal perception with its better description mentioned under the company law and is a contractual type trading practise. It is just like a business venture with a key difference, i.e., a joint venture is based on a single bargain or transaction (Wolf, 2000). Companies choose to enter into a joint venture with the target of maximizing their gain by minimising the risks involved. Joint Ventures can be a defined as definite business units or an association between various business groups. A combination of technology and manufacturing body can be called a joint venture in the sense that one provides the idea and the other provides the medium (Trost, 2013). In Joint Venture (JV), basically a parent firm may hold a stake of nearly 5% but in many nations’, investments less than 20% is not noted by the local regulators and those investors cannot create much influence (Caloghirou, 2013). Joint Venture aids firms to have access on each others’ resources so that they can achieve economies of scale and produce goods quickly. Though this could have been done by the firms alone or through acquisition, but this is a more reliable method. Generally, a local partner helps a foreign partner in understanding the market and different business policies and regulations so that it gets a better picture of the needs and choices of the native consumers. Objective of the Essay The purpose behind the essay is to analyse the issues and challenges of Joint Venture type business models and how the organisations utilise such business arrangements to achieve advantages. The aim of the study is to develop an in-depth knowledge regarding the adverse effects of joint venture. The paper also includes examining real life examples based on the area of study. Accordingly, suitable conclusions and recommendations have been discussed upon. Literature Review In the 21st century, the cost of production is rising every day. As a result, it becomes tough for a single entity to expand its business activities all by itself. So at this junction, JV plays an important role since the participating companies share the expenses of the production equally. Hence, they equally share the risks and gain (Killing, 2013). There are some important features of the JVs such as formation of JV includes more than two individuals. The task involves on a distinct project. No particular firm name is allowed as equal importance is given to the firms. It is basically temporary in nature and the agreement dies once the project gets completed. In this, risks and gains are shared in a specific ratio. Hoeck (2008) states during the regime of the venture, the other participating firms can carry on with their respective businesses unless any agreement has been made regarding this. JVs are also formed with the collaboration of the leading partners with the local public. In such cases, public shareholding is considerable but the originating partners cling to their identity. It has been observed that 50-70% of JVs are unsuccessful (Beamish and Lupton, 2009). For structuring a business relationship, setting a long term goal is the fundamental and foremost criterion which is supposed to be followed by the companies. First issue that grows out of a JV is due to lack of an intact agreement. According to Smith and Parr (2004) before setting up an agreement, both the parties should come together to discuss their regions of priorities. However, this point is ignored by the companies and an improper agreement is set up at the end. The aim, arrangements, requirements of the JV should be cleared and discussed well with the partner companies. This partner companies are technically known as the Co-Venturer. So it is very important to select the ideal partners for a long run success. Hambrick et al. (2001) stated the process of selection of ideal partners is a demanding job. It contains a number of steps like screening & providing ranks to the prospective partners, investigating the authorization of other partners, feasibility of properties allotted to the JV, purpose behind the JV, discussing the financial contributions, process of controlling the functions of the management, structuring the Exit plan. However, in many cases, these measures are not followed correctly. At times, sick firms end up joining hands with another sick firm when the investigation procedure lacks accuracy. According to Henmart and Zeng (2005) during the planning process, less importance is given on the exit strategy. Firms are supposed to focus on the terms and conditions and all the possibilities related to the end of a JV. Since, companies forget this strategy; they sometimes end up incurring more loss. Issues can arise but companies often forget to appoint a board with members from both the participating companies. This board mainly solve such issues. Lust for assets can severely damage the JV. Entrepreneur can make mistakes if they have more hunger for capital. Like a small company which provides technological facilities to a large company, may give more authority to the board of members and in return can ask for more capital grants. However, small company can lose authority over critical decisions. Since JVs have the advantage of quick profit making, most of the firms take this benefit very seriously. As a result, there is an unbalanced distribution of gain (Wolf, 2000). JVs also fail to gain success when the owners cannot adjust to the new system where they have to jointly take decisions. They want control over the JV and forget that it is a joint project where views of both the owners are important. Sometimes, large companies ignore the decisions of the small companies and try to gain control over the JV (Terpstra, Foley and Sarathy, 2012). Reuer, Klinjn and Lioukas (2013) highlighted that it becomes time and effort consuming process to find suitable partners for a long term trade. Partnership is built on the basis of trust. So a trustworthy partner is hard to find. It becomes a challenging job to create a good business relationship. Trust is the main criteria for a good partnership. Envy can be build up between partners leading to mistrust which ultimately leads to failure of JV. Often the firms face the problem of miscommunication which leads to misunderstandings. Imperfect information exists in such cases making it worse for the partnership. Operation of good communication system is to be created not only with the managers but also with the employees (Banjo and Krishna, 2013). However, this is often forgotten while making agreements. Sometimes, insecurities crop up between co-ventures when JV is formed between one small and large company. Small companies feel that they may be getting thrown out of the scenario. This adversely affects the business. It has been seen that the targets and objectives of the venture are not cleared to the co-venturers and at times, such objectives are also set up which are unrealistic (Reuer, Klinjn and Lioukas, 2013). Sometimes, individual partners get more concerned with their own benefits that they end up forgetting what is best for the other joining companies. This results in the failure of the partnership. Another disadvantage cited out is the uneven division in the distribution of assets, investments and proficiencies. This causes conflict between the firms which ultimately leads to a poor business (Roussakis and Moysidis, 2012). There is a strict profit ratio which is to be followed. However, this ratio gets hampered. This problem is one of the most important and frequent problem that needs huge attention. Since, JVs also takes place in different countries with different persons, so, sometimes, cultural as well as managerial differences crop up among the firms. As a result, lack of cooperation is a huge detriment. Especially in case of International JVs, it is seen that there are differences in ideologies and culture. Smith and Parr (2004) believe that there is lack of compatibility and integration in the relationship. The firms find it difficult to blend together with each other. So if they do not gel well, it is impossible for them to continue the venture. According to the viewpoint of Henmart and Zeng (2005), for a successful relationship, leadership quality is of utmost importance. In the initial stages, firms are not willing to take responsibilities and there develops a lack of support for each other. As a result, the business collapses. In JVs, contracts are signed which are mainly done to lessen the clash between companies. On the other hand, JVs restrict the outside possibilities of participating firms while the project is still in progress. This acts as a hindrance to the company’s main business operations. Sometimes, long term goals set by the companies get diverged after a while. Owners start creating their own views and opinions. In case of a business loss, blame games are also paid. Blames are put on each other creating an unhealthy environment. Though the advantages included equal distribution of profit but in reality, sometimes, work and resources are not evenly distributed. Yan and Gray (2001) think that the main idea behind JV is that one company utilises the resources which the other company has in excess and vice- versa equally. However, if the pressure is more on the shoulder of any one company, then this creates the discrepancies in the bulk of time, money and capital spent on the JV. Although this does not necessarily imply that the share of gain of the oppressed partners has also increased. This results in disputes among the firms and causes slowdown in the success rate (Chung and Beamish, 2012). Besides sharing of gain, companies also share risks when they enter into JVs. Since both the firms are responsible equally for the progress of a business and takes steps accordingly, hence they are equally responsible for its failure. Hence, they are bound to carry the risks involved in JVs (Beamish, 2013). With the purpose of making extra profits, companies ignore the rules and end up making loss instead. Therefore, this needs to be checked; otherwise JV’s will cease to exist. It has been observed that the companies end up using more resources than anticipated. Firms which fail to accurately plan the amount of resources to be spent may face trouble in the future (Tidd, Bessant and Pavitt, 2001). Also, examinations revealed that too much governance badly affects business. It may so happen that one firm imposes too many laws over other firms. This creates rivalry among the partners. During the making of an agreement, management issues are vaguely discussed leading to misunderstandings. Like, financial management, risk management, control issues, tax and accounting issues are not clearly specified. The worst part which makes this JV a risky venture is that if the JV fails then the participating companies have to pay if the obligations are not covered (Wolf, 2000). Tidd, Bessant and Pavitt (2001) points out to the fact that in case of International JVs, local government body plays a crucial role. Government policies are often unsupportive of foreign investors thereby, making it tough for the foreign partners to independently set up their business projects. Policies like paying tax, licensing, etc. makes it difficult for a JV to take place. Even political issues hamper the JVs (Saccon and Dima, 2015). Bamford, Casseres and Robinson (2003) put the blame on the markets which do not support JVs. Some markets are scattered over a vast areas, there’s high level of deviation of consumers’ education and income level which gives birth to variations in taste and preferences. This creates problem on the proper functioning of s JV. The challenges for the JV can be in the form of unfavourable market conditions like the markets can be highly price sensitive, the procedures of procurement, delivery and sales are difficult to take place in the market, there exists a liability of labour disputes, the market has poor infrastructure, administrative and tax policies are complicated. This type of challenge was faced by Wal-mart and Bharati Enterprises. This venture failed when they decided to part ways in 2013 and decided concentrate on retail projects individually. The blame was put on the Indian Government for poor Foreign Direct Investment (FDI) policies which made it difficult for Wal-Mart to continue its venture in India (Lee, et al., 2013). Zentes and Morshchett (2013) believe that one of the important aspects of a successful JV is proper and continuous flow of cash. Cash generates value. Large cash stock doesn’t create any impact on accounting policies. Hence, lack of cash creates problem in paying dividends, repaying of debt, stops investment in new projects and opportunities. Poor marketing strategy can also lead to the failure of JVs. Kinetic Honda Motors Ltd., a JV between Honda Motor Company, Japan and Kinetic Engineering Limited, India, couldn’t grasp the consumers’ confidence mainly due to poor marketing strategies that involved brand promotion. The product failed to analyse its market share. Marketing procedures were not properly discussed by both the firms. Hence, inadequate expertise planning can disrupt the accomplishment of a JV Henmart and Zeng (2005). Re-negotiating the old contract challenges can be addressed. However, Companies do not always give this facility and so, cannot prevent JVs from falling down. Personal Opinion After a vivid discussion on JVs, it has been understood that such a business model acts as a highly risky venture to the companies. Since it has pros and cons so it requires careful administration based on careful strategic evaluation. Despite all the risks involved, some firms go into JVs which has proved to be effective and companies have gained a lot. However, most JV projects are terminated due to lack of efficiency and existence of numerous risks. Steps that are highlighted for the success of JVs are not followed correctly. Agreements which are made carry flaws. Issues like, trust issues, cultural disputes, are sometimes are not mentioned in the arrangements. Not only time is wasted but also money and resources. Conclusion JVs are quite common in the business sector. It holds risks as well but if investigated seriously and rules are being followed properly, then it can help firms to achieve success. Among the various JVs available, Product and Marketing JVs and International JVs are common. These kinds of JVs help firms to capture huge market sectors. However, before entering into the International JV, it is advisable to evaluate the possibilities that local government provide to the Foreign Investor. Proper selection of co-venturers is an essential step failing of which the JV has the high chance of getting failed in the future. Recommendation JVs are first seen as the driving force of profit making. JVs are undertaken mainly when the firms lack in some resources and want the help of other firms and likewise, the Co-venturers face the same problem. It also helps in gaining economies of scale and technological advancement. Another reason is for increase access into new markets to cover a large section of consumers. Since JVs can also create problems for the firms therefore, disadvantages should be noted carefully so that the errors can be removed beforehand. Selection of good partners and classification of business strategies are some of the important steps that should be taken carefully, failure of which the whole agenda breaks down. Reference List Bamford, J.D., Casseres, B.G. and Robinson, M.S.2003. Mastering Alliance Strategy. [PDF] Jossey Bass. Available at: [Accessed on 12 May 2015] Banjo, S. and Jai Krishna, R., 2013. Walmart Pulls Back in India [online] Available at: [Accessed on 12 May, 2015]. Beamish, P., 2013. Multinational Joint Ventures in Developing Countries (RLE International Business). NewYork: Routledge. Beamish, Y.P. and Lupton, N.C., 2009. Managing Joint Ventures, [PDF] Available at: [Accessed on 11 May 2015] Caloghirou. Y., 2003. Research Joint Ventures. Journal of Economics Surveys, 17(4), pp. 541-570. Chung, C. and Beamish, P.W., 2012. Multi Party International Joint Ventures: Multiple Post Formation Change Processes. Journal of World Business, 47(4), pp. 648-663. Hambrick, D.C., Li, J., Xin, K. and Tsui,S.A., 2001.Compostional Gaps and Downward Spirals in International Joint Venture Management Groups. Strategic Management Journal, 22(11), pp. 1033-1053. Hennart, J.F. and Zeng, M., 2005. Structural Determinants of Joint Venture Performance. European Management Review, 2(2), pp. 105-115. Hoeck, M., 2008. Cooperation and Technological Endowment in International Joint Ventures. Germany: Kolner Wissenschaftsverlag. Killing, J.P., 2013. Strategies for Joint Venture Success. New York: Routledge. Lee, K., Jarvis, J., Kundra, S., Mihoubi, B. and Grueneberg, S., 2012. Alternatives To Master Franchising: Area Development Agreements, Area Representatives and Joint Ventures. Alternatives to Master Franchising, 10(4), p. 3. Reuer, J.J., Klijn, E. and Lioukas, C.S., 2013. Board Involvement in International Joint Ventures. Strategic Management journal, 35(11), pp. 1626-1644. Roussakis, E.N. and Moysidis, A., 2012.Foreign Direct Investment Options: Bertos Manufacturing Corporation. World Review of Entrepreneurship, Management and Sustainable Development, 8(1), p. 92. Saccon, C. and Dima,S.M., 2015.Financial Reporting For Joint Ventures and Capital Markets Reactions. International Journal of Economics and Business Research, 9(2), p. 158. Smith, J.V. and Parr, R.L., 2004. Intellectual Property :Licensing and Joint Venture Profit Strategies. New Jersey, USA: John Wiley & Sons. Terpstra, V., Foley, J. and Sarathy, R., 2012. International Marketing. Naperville: Naper Press. Tidd, J., Bessant, J. and Pavitt, K., 2001. Managing Innovation. Chicago: Wiley. Trost, T., 2013.Joint Ventures: The Benefits And Perils-Why Some Are Successful And Others Fail. Norderstedt Germany: GRIN Verlag. Wolf, R. C., 2000. Effective International Joint Venture Management. United States: ME Sharpe. Yan, A. and Gray, B., 2001, Antecedents and Effects of Parent Control in International Joint Ventures. Journal of Management Studies, 38(3), pp. 393-416. Zentes, J. and Morshchett, D., 2013. Strategic Management: A European Approach. Gabler: Springer Verlag. Read More