despite the reported high failure rate of international ... · uncertainty, while the right partner...

Despite the reported high failure rate of international joint

ventures, they are still frequently used by companies to expand

their international presence.

the likelihood of failure (from its own perspective)?

An early IJV: The arranged marriage between Louis XIV of France and Maria Theresa of Spain

2500 word limit (+10%): 2750

This work is submitted as part of the requirements of the MSc in

Marketing and Strategy. The work contained in this assignment

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.



their international presence. What can a company do to decrease


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


Marketing and Strategy. The work contained in this assignment






hat can a company do to decrease


rranged marriage between Louis XIV of France and Maria Theresa of Spain


Marketing and Strategy. The work contained in this assignment is my




0955773 International Joint Ventures

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


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.


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)


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.


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


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.


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.


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.


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.


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.


References

Adler, N.J (1980). Synergy: The Management of Cross-Cultural Organizations. San Diego:

University Associates.

Ahern, R. (1993). Implications of strategic alliances for small R&D-intensive firms.

Environment and Planning A. 25 (10), p1511 – 1526.

Al-Khalifa, A., Peterson, S. (1999). The partner selection process in international joint

ventures. European Journal of Marketing. 33 (11/12), p1064 - 1081.

Bleeke, J., Ernst, D (1993). Collaborating to compete, using strategic alliances and

acquisitions in the global marketplace. New York: Wiley.

Compact Oxford English Dictionary. (2008). Ask Oxford: Failure. Available:

http://www.askoxford.com/concise_oed/failure?view=uk. Last accessed 10/03/2010.

Condon, D (2010). Seen in Global Business Strategy Lecture Slides, Warwick University

Culpan, R (1993). Multinational strategic alliances. New York: International Business Press.

Durman, P. (1994). Kleinwort sets sales sights on Indian market: Tata Group backs new

investment trust that hopes to raise100m pounds. Available:

http://www.independent.co.uk/news/business/kleinwort-sets-sales-sights-on-indian-market-

tata-group-backs-new-investment-trust-that-hopes-to-raise-pounds-100m-1398067.html. Last

accessed 03/03/2010.

Fan, Y. (2002). Questioning Guanxi: Definition, Classification and Implications.

International Business Review. 11 (5), 543-561.

Gesar, A . (2006). Company Watch: Air France KLM. Available:

http://www.thefreelibrary.com/company+watch+-+Air+France+KLM.-a0155055325 . Last

accessed 10/03/2010.


Hall, E. T (1976). Beyond culture. New York: Doubleday.

Hofstede, G (1980). Culture's consequences: International differences in work-related values.

London: Sage.

Lasserre, P., Schutte, H (1995). Strategies for Asia Pacific. London: MacMillan.

Lasserre, P., Schutte, H (2006). Strategies for Asia Pacific: Meeting new challenges. 3rd ed.

London: MacMillan

Luo, Y. (1998). Joint venture success in China: How should we select a good partner?.

Journal of World Business. 33 (2), p145-166.

Luo, Y. (2002). Product Diversification in International Joint Ventures: Performance

Implications in an Emerging Market. Strategic Management Journal. 23 (1), pp1-20.

McSweeney, B. (2002). Hofstede's model of national cultural differences and their

consequences: A triumph of faith - a failure of analysis. Human Relations. 55 (1), p89-118.

Merriam-Webster. (2010) Dictionary Definition: Experience. Available:

http://www.merriam-webster.com/dictionary/experience. Last accessed 02/03/2010.

Ojha, N. (2008). Merger Failure. Available: http://jurisonline.in/2008/11/failure-mergers/.

Last accessed 10/03/2010.

Park, B., Whitelock, J., Giroud, A. (2009). Acquisition of marketing knowledge in small and

medium-sized IJVs: The role of compatibility between parents. Management Decision. 47

(8), p1340 - 1356.

Park, S., Ungson, G. (1997). The Effect of National Culture, Organizational

Complementarity, and Economic Motivation on Joint Venture Dissolution. The Academy of

Management Journal. 40 (2), pp.279-307.


Scherer, FM., Ross, D (1990). Industrial market structure and market performance. Boston:

Houghton Mifflin.

Stamp, G. (2006). Foreign growth key to Tesco goals. Available:

http://news.bbc.co.uk/1/hi/business/4781458.stm. Last accessed 10/03/2010.

Tolstoy, L. (1828-1910). What counts in making a happy marriage. Available:

http://thinkexist.com/quotation/what_counts_in_making_a_happy_marriage_is_not_so/14481

4.html. Last accessed 10/03/2010.

Zander, U., Kogut, B. (1995). Knowledge and the Speed of the Transfer and Imitation of

Organizational Capabilities: An Empirical Test. Organization Science. 6 (1), p76-92 .

despite the reported high failure rate of international ... · uncertainty, while the right partner...

Documents