International Joint Venture Arrangements - Essay Example

Introduction International Joint ventures between companies of developing countries and international organizations offer significant benefits as both domestic as well as international firms tend to benefit from comparative advantage of each other. International joint ventures are often made in various manufacturing, mining as well as service concerns and sometimes even also involve significant technological transfer between host and international firm. Forming joint ventures is considered as one of the most important aspects of gaining entry into new markets. Joint ventures are often formed between two entities to achieve certain economic objective and after achievement of such objectives they are often liquidated. Joint ventures are common in different industries and are formed for different purposes as all the parties to the Joint venture contribute one way or another for the purpose of achieving the objective. Joint ventures are therefore important in the sense that their formation allows companies to utilize each other’s strengths in achieving the desired strategic objectives. There are various benefits that organizations can derive from join ventures including sharing of technology and R&D facilities, developing new markets and sharing of risks spread over different markets as well as the expansion into new markets. However, despite the fact that international joint ventures offer such benefits but their failure ratio is significantly larger because most major international joint ventures failed to perform. This paper will discuss different reasons as to why international joint ventures are formed and potential benefits they provide to respective organizations by citing example from different business sectors where International joint ventures have actually been formed. What is a Joint Venture? “In general, a joint venture (“JV”) is an association of two or more entities (whether corporate, government, individual or otherwise) combining property and expertise to carry out a single business enterprise and having a joint proprietary interest, a joint right to control and a sharing of profits and losses. “(Vaughan, 2009). The above definition indicates that a joint venture can be formed between different entities regardless of their legal status by taking benefit from each other’s expertise and property to perform a single business objective. However, all the entities in the joint venture also settle for gaining joint right to control the venture as well as share profits and losses arising out of taking that business activity. It is important to note that formation of joint ventures always require equity participation from all the parties and it is because of this reason that Joint ventures are often considered as the most complex legal of forming alliances with different partners. From legal and economic perspectives, international joint ventures are considered as separate entities engaged into separate activities and undertake all activities as a standalone and independent firm. What is however; critical to understand that joint ventures are plagued with multiple interorganizational relationships which often become more difficult to manage and organize? The relationship between the joint venture partners are considered as the most significant and delicate to manage thus many international joint ventures fail because of the inability of the managers to understand the relationships between two entities. Furthermore, international joint venture is often considered as a marriage of different organizational and national cultures as two different entities belonging to two potentially different cultures agree to work together for a single strategic objective. The management of this cultural diversity therefore requires excellent managerial acumen as one of the major causes for failure of joint ventures is the inability of the managers to understand the cultural differences fully. It is also important to note that Joint ventures are always formed for temporary purposes and are often closed down after the successful achievement of the objectives. However, some joint ventures can be formed for the longer periods also and often convert into an entirely new entity by merging both the partners to joint ventures to form a new entity. Formation of joint venture however, does not necessarily mean that each partner to the agreement shall cease to exist in its own legal name but a new entity is formed where each partner tend to maintain its own legal status too. In pure legal terms, joint ventures therefore are temporary or short term partnerships in which partners carry out a particular activity for the purpose of mutual profit. Whey Joint ventures are formed? Internationalization theory does not seem to support the formation of joint ventures and advocate the cause of forming wholly owned subsidiaries in international market. However, despite such theoretical underpinning, it is advocated that the large MNEs will be more beneficial in forming the joint ventures as compared to other options available. (Al-Khalifa & Peterson, 2004). If one attempt to study the formation of joint ventures within the context of internationalization, it becomes obvious that the internationalization, in its true spirit, advocate for the possession of some property in foreign markets through which it can derive some benefit and most appropriate form of achieving that objective is the formation of joint ventures. One of the reasons as to why joint ventures are formed is based on the cost advantage that foreign companies tend to achieve by forming joint ventures. Traditionally, joint ventures reduced the costs and increased the overall profitability for the international firms and as such remained a more preferred method of entering into new markets. Countries also tend to prefer formation of joint ventures because it is one of the most important sources of attracting foreign direct investment into the country and as such provides an opportunity to ensure technological transfer from developed countries to developing countries.(Chadee, 2002). International joint ventures therefore carry a significantly more importance for developing countries specially in attracting and maintaining consistent stream of foreign direct investment and allow local industry to boost and develop as support industry for providing essential ancillary products and services to such large joint ventures .It is however, also critical to note that joint ventures fail too and high expectations held for the success of such joint ventures. There are multitudes of factors that include cultural differences, complexities of forming legal contracts, lack of understanding the local culture as well as subsequent government restrictions may very well restrict the overall benefits expected from Joint ventures. Following section will discuss as to why the international joint ventures are formed Reasons for forming International Joint ventures There are various means through which organizations can make entry into new markets. This urge to gain market space into new markets can be accomplished either through licensing, exporting, franchising, opening fully owned subsidiaries or forming joint ventures with domestic companies. Formation of joint ventures also provides significant benefits to both domestic as well as international companies. The most obvious benefits or reasons that companies formulate international joint ventures are: Entry in new markets International organizations become international by entering into new markets and they do so through various means. Entering into new markets is often done in order to expand the markets for the firm as well as gain strategic advantages over the competitors besides reducing the risks by spreading it over different markets. Forming international joint ventures is one of the most effective methods of entering into new markets by joining hands together with other domestic entities. By sharing the equity and other qualitative aspects of the business, international organizations often attempt to build long term relationships with the local firms and continue to show their existence in new markets. Establishing long term relationships allow international firms to further develop their capabilities to access and tap the local knowledge to gain deeper penetration into the local market. It is important to note that entering into new markets is as equally important from the point of view of the local firm as it is for the international firm as both attempt to understand the strategies and tactics behind understanding the potentially new and more lucrative market. Apart from this, local firms also need to understand the delicate consumer behavior of the international customers as well as the distribution and marketing networks working in international markets. Thus entry into new markets is a concepts which is equally important for the domestic as well as international firms and as such both the firms benefits from this mutual agreement.(Yan & Lou, 2001) Access to Local Knowledge Access to local knowledge is one of the most important aspects of forming the international joint ventures. Focus on managing knowledge within the firm and to achieve more creativity and innovation, firms often tend to engage themselves into taking strategic measures which allow them to successfully manage the knowledge. The emergence of globalization as well as frequent internationalization of businesses signified the importance of knowledge management within the firms thus accessing and tapping various sources of knowledge became one of the most critical aspects of managing businesses internationally. International joint ventures therefore allow leveraging of local knowledge with the help of the technological transfer as well as other resources. It is critical to note that international firms often seek to utilize local knowledge in order to tap the potential of the new market. Various research studies conducted on the retail industry in Europe indicate that there were substantial utilization of local knowledge and knowledge transfer through the formation of joint ventures and strategic alliances. These studies indicate that though there are no universal patterns of the knowledge transfer or local knowledge utilization however, there seems to be strong evidence of the fact that with the help of forming joint ventures, international firms were able to utilize the local knowledge.(Robinson & Bailey,1998). Apart from this, it is also critical to note that international businesses and managers often have to face different cultures and subcultures and as such have to adjust in such environment. Adjusting in such environment however requires time and greater degree of understanding the local culture and knowledge. In order to avoid any problems, international organizations often tend to enter into new market by banking on the local knowledge so that they can get wider level of acceptability within the market. Data from American multinational firms also indicate that the partial ownership through joint ventures is the most suitable means of establishing extensive contacts within local market and this can only be achieved through the extensive utilization of local knowledge. It is also believed that those joint ventures are going to succeed more which are engaged in procuring larger fraction of their inputs from the local market therefore in order to succeed in the new market, it is critical that the firm must develop the ability to tap the local knowledge and utilize it to its best advantage. Sharing Risk International competitive landscape has become so volatile that firms simply cannot afford to be complacent and concentrate themselves on just one or few markets. Concentration in one market exposes firms to a larger degree of systematic risk which is often beyond the control of the firm and firms have to take the hit. In order to avoid such situations and minimize the risk associated with doing business, international firms often tend to enter into new markets to not only tap their potential but also spread their risk over many markets. Forming international joint ventures therefore is one of the most critical methods through which firms can diversify their risk and minimize the chances of failure at larger scale. Joint ventures formed in China are the prime example of how the Companies like Apple, Western Digital, HP and Dell are spreading their risks over different markets. China, in this case, not only provides an ideal environment for setting up manufacturing facilities through joint ventures but also offers opportunities to such companies to tap the enormous potential of the largest market in the world because China has the largest population in the world and that population is making really fast transition from one social class to another due to rapid economic growth.(Lihong & Goffin, 2001).Similarly, formation of joint ventures in Russia in oil and energy sector was one of the attempts to share the risk across non-traditional markets to gain further strategic advantages and reduce the risk of focusing on just few markets.( Katsioloudes,2007). Pooling of resources International joint ventures are also formed in a bid to pool the combined resources of the firms in order to achieve a common objective. The pooling of resources allows firms to utilize the strengths of each other and create synergies in such a creative way that they become more efficient in achieving that particular objective. For example, firms may pool the financial resources of each other which may not be available to any of the partners in his single capacity therefore pooling of financial resources allow both the firms to expand into new markets by incurring capital expenditures which can significantly provide better returns in future. Further, relatively smaller companies can also form international joint ventures in order to achieve economies of scale and as such reduce the overall average cost for themselves. Achieving economies of scale more rapidly provides firms an opportunity to negotiate with the competition in more stable manner and develop the ability to withstand the competitive pressures more confidently as compared to their individual capacity in which they may not be able to achieve the relative degree of competitiveness due to lack of resources. The joint use of nonfinancial resources or complementary resources is also one of the important aspects of forming the international joint ventures as achieving competencies and synergies becomes lot easier if nonfinancial resources are pooled together to achieve the different strategic objectives which either firm may not be able to achieve in their single capacity.(Wong & Maher, 2002). Conclusion Forming a joint venture is one of the most important mean of gaining an entry into the new market. International joint ventures are often considered as more complex than the local joint ventures because of the different unique factors faced by the entities formed as a result of such joint ventures. The associated complexities of the international joint ventures make them more complex and difficult to manage and as such managers of international firms often should develop the capability to understand and tolerate the different cultural differences that may prevail between the cultures of two organizations. International joint ventures are formed in order to gain entry into new markets, share risk across different markets, pool different resources of the firms as well as get an access to local knowledge to tap the large potential of such strategic markets. Gaining entry into new markets is probably the single most important reasons as to why the international firms formulate international joint ventures. It is also due to the fact that international organizations face uniquely different dynamics and as such must always look for new opportunities and markets to continue to derive the value for their shareholders. In a bid to maintain such strategic objectives, it becomes therefore necessary for international firms to enter into international joint ventures and combine the resources of two different entities to achieve a common strategic objective of mutual interest for both the parties. References 1. Al-Khalifa, A & Peterson, S (2004) On the relationship between initial motivation, and satisfaction and performance in joint ventures. European Journal of Marketing. 38 (1/2) 150-174 2. Chadee, D (2002) Foreign ownership structure of service equity joint ventures in China. International Journal of Service Industry Management. 13 (2) 181-201 3. Katsioloudes,, M (2007) International joint ventures in Russia: a recipe for success. Management Research News. 30 (2) 133-152 4. Lihong, Z & Goffin, K (2001) Managing the transition” – supplier management in international joint ventures in China. International Journal of Physical Distribution & Logistics Management. 31 (2) 74-95 5. Robinson, C & Bailey, J (1998) Skills and competence transfers in European retail alliances: a comparison between alliances and joint ventures. European Business Review. 98 (6) 300-310 6. Vaughan, J (2009) FAQ: What is a Joint Venture? The University of Iowa, Available: http://www.uiowa.edu/ifdebook/faq/faq_docs/Venture.shtml Last accessed 17th August, 2009 7. Wong, Y & Maher, T (2002) The hesitant transfer of strategic management knowledge to international joint ventures in China: greater willingness seems likely in the future. Management Research News. 25 (1) 10-23 8. Yan, A & Luo, Y (2001) nternational joint ventures: theory and practice . New York: M.E. Sharpe. p8-9. Read More