Despite the reported high failure rate of international joint
ventures, they are still frequently used by companies to expand
their international presence. What
hat can a company do to decrease
the likelihood of failure (from its own perspective)?
An early IJV: The arranged
rranged marriage between Louis XIV of France and Maria Theresa of Spain
Monday, 15 March, 2010
Student Number: 0955773
2500 word limit (+10%): 2750 word count
This work is submitted as part of the requirements of the MSc in
Marketing and Strategy. The work contained in this assignment is my
own, individual and original work and has not been used in whole or
in part for any other assessment in this or any other degree. I have
read and understand the University rules on Plagiarism.
Contents
Introduction.........................................................3
Definition of Failure.............................................4
Partner Motives, Till Death Do Us Part or No
Strings Attached?.................................................5
Culture................................................................6
Previous Experience Necessary.............................7
Compatible Organisations & Related Products......8
Market Power & Size............................................9
Organisational Skills & Capabilities....................10
Conclusion.........................................................11
References.........................................................12
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Introduction
This essay will consider the myriad of definitions that have been used regarding failure,
considering in depth what can help decrease the likelihood of failure when international
expansion is the aim. The key factor identified was incorrect choice of partner selection and
the problems that can arise from this. This essay seeks to provide a comprehensive analysis of
the vital aspects which should be considered to assist with the partner selection process; these
are culture, experience and organisational factors.
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Definition of Failure
There is a confusing collection of repeated failure statistics for International Joint Ventures
(IJVs), reasons for such variance can be explained by the fact we rarely see a clear definition
of failure in this context. The Oxford English dictionary (2008) defines failure, ‘a lack of
success’, which is ambiguous when we know that IJVs can fail in a variety of ways and
success is just as difficult to define. Some studies consider failure simply as its dissolution,
including Park, S., Ungson, G. (1997), although there are significant problems which can
contribute or be considered failure in their own right. Unforeseen transfers of technology can
occur between partners, as seen Ahern, R. (1993), when an alliance failed because the foreign
partner covertly stole technology, manufactured and sold the product at a reduced price in
direct competition with the alliance partner.
As the essay title states, IJVs are used by companies to expand their international presence,
the assumption is IJVs allow partner companies access to key capabilities and skills that
would be very difficult or impossible to obtain on their own, demonstrating the importance of
partner fit.
When trying to expand into emerging markets, Multinational corporations
(MNCs) face the challenges of weak market structure, poorly specified property rights and
uncertainty, while the right partner can help MNCs boost market expansion, obtain insightful
information, mitigate operational risks, and provide country-specific knowledge.
IJVs can be compared to a marriage, but it would seem naive to state that just because the
marriage ended, it has failed. The experience gained through marriage could help avoid the
same mistakes in the future, while the marriage may have successfully brought up children or
help with career advancement. Failure is specific to the partners’ aims before entering
marriage. One must consider these aims and objectives, considering to what extent these
objectives were met and what additional benefits and disadvantages resulted. Regardless of
any successes, if the firm could have reasonably found a more suitable partner this will be
considered to a fundamental failure, while assuming due diligence and care was not taken in
the selection process. This argument will be used to demonstrate the high importance that has
been placed on the partner selection process.The next section looks at the effects of different
partner motives for the IJV.
‘The success of international joint ventures investing in emerging economies, most notably
China, largely depends on the selection of local partners’ Luo, Y. (1998, p1)
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Partner Motives - Till Death Do Us Part or No Strings Attached?
The most vital aspect of partner selection involves making sure partners recognise and
understand each other’s motives to avoid potential goal incompatibility.
Venturing is what firms usually seek, having a genuine reason to create new business. The
concept of transaction cost economics would usually apply, as this perspective is based on the
costs of business being reduced, such as logistics, accounting and payments as a result of the
IJV. Resource based theory explains that a firm hopes that the IJV will allow access to
something new, such as technologies or skills. Transaction value theory is a mixture of the
transaction cost and resource based view. Zander, U., Kogut, B. (1995) explored the lowest
transaction cost alternative, enabling the company to improve its strategic position.
Depending on its motives, the relationship type varies and a short term perspective is likely
when the firm takes an extractive approach, which can be a devious process to suck the other
partner dry, gaining access to a partner’s resources, assets and competencies. If the partner
wanted to develop process technology knowledge, success in this strategy would depend on
the partner’s abilities and willingness to share information. Long term extraction needs to
consider if the partner will carry on developing technologies as halting development could
make the alliance redundant.
Opportunist is a firm usually looking for short term goals or a legally required sleeping
partner. Real options theory gives the option to buy-out partners, which can be a lower risk
entry strategy to the market. Increased returns theory is based on the principle of gaining the
first mover advantage, such as the B-Zero alliance between PSA Peugeot Citroën and Toyota
to develop a city car, allowing quicker production time with shared resources and costs.
Lasserre, P., Schutte, H (1995) identified a difficulty to understanding partner motives, that
firms will say what the partners’ want to hear, especially when their motives are covertly
extractive or opportunistic. Although partner goals do not have to match and different
motives can work together, Lasserre, P., Schutte, H (2006) acknowledged the potential issues
that local and foreign partners with different motives could face. It’s recommended that
thorough research is conducted to allow companies a clear understanding of each other’s
goals, a good place to start would be the consideration of the firm’s culture, which will be
looked at next.
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Culture
The likelihood is that IJVs will be more difficult to co-ordinate when both national and
corporate cultures greatly differ, it’s considered vital to understand the cultures of potential
partners. Park, B., Whitelock, J., Giroud, A. (2009) stated that successful knowledge
exchange between participants is highly dependent on organisational cultural similarity,
which facilitates knowledge acquisition in IJVs. Parents possessing compatible cultures will
be less likely to have misunderstandings, resulting in better collaboration. Summarised in
Ojha, N. (2008) the takeover of Chrysler by Daimler, which was labelled as a merger, blamed
the failure on cultural clashes. A danger to international joint ventures is that a partner can try
to impose its own cultural values without considering the cultures of its partners. Due
diligence should be conducted to understand potential areas of conflict and identify ways in
which differences could be understood and integrated.
Park, S., Ungson, G. (1997) found that cross-border joint ventures with partners from
culturally distant countries usually lasted longer and were less likely to end, suggesting a
misplaced importance given to cultural fit, backed up by Bleeke, J., Ernst, D (1993)2 findings
that difficulties caused by differences in culture can be overcome early in the IJV. Park, S.,
Ungson, G. (1997) acknowledged that stability of cross-border JVs is dependent on the
ability to ‘understand, access, and adopt innovative practices that can mitigate the
compounding effects of cultural differences.’
The Air France-KLM study by Gesar, A. (2006), demonstrated that partners with different
cultures can work together successfully. To mitigate cultural differences, a merger strategy of
mutual respect was implemented through intercultural training programmes. This
demonstrates that cultural differences can be successfully amalgamated, while placing a high
importance on partner selection, joining those who will make an effort to understand the
others culture. Adler, N.J (1980) coined ‘Cultural Synergy’, demonstrating the importance of
the benefits gained, through convergence of the operation and direction of partners.
Measures to identify characteristics of potential partners culture include the comparison of
high and low context cultures Hall, E. T (1976), and the five dimensions of culture Hofstede,
G (1980). McSweeney, B. (2002) found these culture dimensions limited, advising against
focusing on the uniformity and generalising used in the Hofstede, G (1980) approach. He
suggests in-depth variations in attitudes, actions and opinions should be studied to provide
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rich depth of cultures. The suggestions by McSweeney, B. (2002) are easier said than done,
leading to the next factor of experience, which could be the clearest way to identify the other
partner’s culture and provide other useful insights.
Previous Experience Necessary
Experience is defined by Merriam-Webster. (2010) as ‘practical knowledge, skill, or practice
derived from direct observation of or participation in events or in a particular activity’. It’s
reasonable to accept that if partners can implement any of this knowledge or skill from a
previous encounter, then increased likelihood of success will ensue. Park, S., Ungson, G.
(1997) identified the significance of prior relationships, suggesting experiences between
partners promotes longevity in IJVs.
Past or current relationships between the partners can be very influential; insights can be
gained such as identification of strengths and weaknesses, greater understanding of skills and
routines, in-depth knowledge such as the firms’ strategy, structure and operations. As the
duration of interaction between the partners’ increases, so does the likelihood of making the
right partner selection choice.
When prior experience with the potential partner firm isn’t available, other static factors
could be surreptitiously assessed. International business experience could be very important
when forming with a MNC, prior success can demonstrate the ability to accept and work with
other cultures, having a wider international perspective. If a firm is experienced in a chosen
location, it is expected they will understand the local culture and business practices.
Finding partners with joint venture or power sharing relationship experience can be very
useful, due to steep learning curve of joint ventures, even those formed internally. It is
expected that skills can be gained that are transferable to the future IJV. Considering the
performance of the company in these prior relationships could reveal implicit characteristics
of the firm, such as relations with government, the firms level of trustworthiness, reputation
and its financial abilities. Luo, Y. (1998), an esteemed academic in this field, identified the
strategic and organisational traits of local partners that were strongly linked to IJV
performance, finding that compatible organisations with related products attributed to
success. Market size & power, organisational skills & capabilities were identified as
important for profitability and stability including local market expansion and export growth.
These characteristics will be considered respectively.
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Compatible Organisations & Related Products
An IJV can be formed to allow partner companies to gain key capabilities and skills that
would be very difficult or impossible to obtain on their own. The success of IJVs to meet
these objectives will largely depend upon partners’ absorptive capabilities.
Park, B., Whitelock, J., Giroud, A. (2009) identified that compatible organisational
characteristics make it easier for IJVs to obtain knowledge. Inter-partner fit generates synergy
benefits for the IJV, created through complementary partner needs. Operational success is
strongly linked to partners having absorptive capabilities, including its abilities to process,
introduce and integrate knowledge and skills to the existing knowledge structure.
Luo, Y. (2002) identified from 134 IJVs in China, that higher product relatedness between
partners was directly linked to improved IJV performance. Reasons given were relevant
inter-partner learning and resource sharing opportunities, such as existing distribution
channels and production facilities. When firms form JVs from related product categories it
can help establishing long term relationships with suppliers, distributors, customers and
government agencies. The ideal partner should have a core business related to the dominant
business of the other parent firm, while sharing common or compatible goals. When these
criteria are met, IJV performance will be significantly elevated, greatly reducing the risks of
‘failure’ because of their interaction effects.
Product relatedness suggests that the firm has knowledge of the relevant local market, which
can be an important contribution in helping the success of the joint venture, such as the
Tesco-Lotus joint venture, according to Stamp, G. (2006). Tesco were able to adapt their
western style offering to the Thai market, based on the Lotus supermarkets local market
knowledge. The KFC IJV in China demonstrated the benefits of joining with firms from
related industries such as retail and food. It allowed KFC access to prime restaurant locations
at discounted prices, to existing logistics and distribution facilities, local suppliers and labour.
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Market Power & Size
Market power & size are seen as important factors to assess the IJV’s local market
performance. Market power can represent its industrial and business background, market
position, and suggest the power of its marketing and distribution networks. Strong market
power can enhance the IJVs commitment to local market expansion, leading to greater
bargaining power with the government while helping reduce political risk and uncertainty.
Culpan, R (1993) considered alliances between two multibillion dollar multinationals and the
considerable market power yielded through doing so. It was interesting to recognise that such
an alliance be sufficient to block competitors’ entry into the market, suggesting that power
takes precedence above other factors in some situations.
Scherer, FM., Ross, D (1990) identified the positive relationship between IJV performance
and firm size, stating that a greater organisation size will raise the likelihood of being able to
overcome entry barriers, having the capabilities to reduce risk and ease uncertainty.
However, organisational size can become a hindrance, as seen in the Kleinwort Benson joint
venture with Tata reported by Durman, P. (1994). The Tata Company was considered a
lethargic giant, very inefficient and decision making was very slow due to its pyramid
structure.
The organization size needs to be considered relative to the other partners, if one partner is
much bigger than the other, then the big firm may not place the same degree of strategic
attention and commitment than the smaller firm. Park, B., Whitelock, J., Giroud, A. (2009)
researched knowledge exchange between local and foreign parents and the results indicated
only a marginal influence of IJV size on mutual interests.
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Organisational Skills & Capabilities
Zander, U., Kogut, B. (1995) demonstrated the vital importance of organisational skills and
capabilities. The structure, co-ordination and communication within a firm are dependent on
organisational capabilities.
Luo, Y. (1998) identified the people factors which can enhance or hinder IJV progress, such
as cultural barriers and a reliance on local or expatriate managers. The features related to the
workforce such as staffing and training should be considered essential to the development of
the IJVs future. Organisational abilities to overcome cultural barriers are important as people
from different cultures collaborate in IJVs, often working together with little preparation.
The Firm must consider specific capabilities and organisational skills that strongly support
their motives for the IJV. The IFC study In Condon, D (2010) identified what companies
were looking to gain through ventures. The results revealed that knowledge of local politics
was rated of highest importance by the MNCs, suggesting the importance of local firms for
assistance to understand the local market. This understanding would be expected to concern
regulations and government relationships.
Therefore when considering a partner who has positive relationships with local government,
trade unions and other pressure groups, especially within particular markets such as China,
this could be a very important trait. The concept of Guanxi is the importance of private
networks within business. The successful strategy of KFCs entry into China involved
working with government or pseudo government organisations, which helped the progress of
approvals and applications, especially important in countries with high levels of bureaucracy.
Importance of Guanxi was studied by Fan, Y. (2002), it identified that Guanxi can be very
useful when dealing with China, considered quite vital, but Guanxi alone doesn’t ensure
business success. There is even potential for Guanxi to become worthless or become a
liability, if one party was to lose power or become implicated in corruption. It is often
suggested that Guanxi could be transferred into the IJV, but as Fan, Y. (2002) demonstrated,
the majority of Guanxi relationships are not exclusive and can be copied and that when the
relationship between organisations becomes formal and contractual it is no longer Guanxi.
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Conclusion
The firm must also consider dynamic level traits which are difficult to pre-empt. Partners
with clear compatible goals, could find these quickly transformed if senior management
changed, such as a new CEO. Al-Khalifa, A., Peterson, S. (1999) identified that if a parent
company was taken over, then goals could change. If one partner is no longer committed to
the task or if the capabilities which initially were a key driver of the IJV cease to exist, then
the IJV should no longer remain.
Issues like this are very difficult to recognise during the initial planning stages of an IJV,
proper planning is one way to mitigate the risks but in some cases it’s unavoidable. For a
company to avoid ‘failure’, regardless of the outcomes, a satisfactory agreement could be put
in place with a memorandum of understanding to provide a comprehensive plan if failure
should occur.
This essay considered the definitions that have been used regarding failure, looking in depth
at the key criteria for successful partner selection which would help to decrease the likelihood
of failure when international expansion is the aim.
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