When is an International Joint Venture the appropriate mode of entry?

An International Joint Venture takes place when a partnership is formed by two businesses which are situated in two or more countries. Joint ventures are basically entered into with the foreign partners by those companies which want to explore the international trade without taking the entire responsibility of cross- border business transactions (Yan and Luo, 2016). The risk associated with an outright acquisition of a business by the international investors is minimized to a great extent by way of entering into a joint venture. There are a number of reasons which leads to the formation of joint ventures as it is a common international structure where two businesses agree for contributing resources and sharing legal ownership for the purpose of pursuing the business opportunities together (Mantecon, Song, and Luo, 2016). Various rewards and benefits of a full merger or acquisition is provided by the international joint ventures only with the sharing of the risk. This report focuses on cases when an international joint ventures regarded as an appropriate mode of entry and along with the issues in managing the International joint ventures.

Modes of entry into the international businesses can be defined as the channels which are employed by an organization for the purpose of gaining entry into a new internal market. There are a number of modes of entering into an international market such as licensing, exporting, strategic alliances, international distributors, international agents, etc. (Eriksson, Johanson, Majkgård and Sharma, 2015)

Joint Ventures are generally equity- based which means that set up of a new company takes place with the parties that own a proportion of the new business.  There are a number of reasons behind the selection of international joint venture as the mode of entry in the new international market. This mode is appropriate to be used when a business needs access to technology, management skills or core competencies. The perfect example of this is the joint venture that took place between Honda and Rover from 1980 to 1994. Joint venture was selected as the mode of entry by Honda and Rover for the purpose of stimulating the production management capabilities and product design.  Also, this mode makes it easy to gain entry into the foreign market. For example, any business which plans to enter into Chinese market can make the use of this mode for sourcing the local Chinese partners. This mode further provides access to manufacturing, distribution channels and R&D which becomes the reasons behind entering into joint ventures by the businesses.  Another example of joint venture is between BMW and Toyota. These two companies entered into a joint venture for the purpose of co- operating on research into vehicle electrification, hydrogen fuel cells and ultra- lightweight materials (Chen, Chen and Zhou, 2014).

The key issues which are considered by a joint venture are control, ownership, pricing, length of agreement, local firm resources and capabilities and government intentions. The formation of a joint venture provide a number of benefits to the firm with respect to distribution channel and political connections access which is dependent on a great extent on the relationships (De Villa, Rajwani, and Lawton, 2015).   

Issues in managing International Joint Ventures

International Joint Venture can be regarded as an appropriate mode of entry in the following cases-

Economies of Scale- Economies of scale can be regarded as the most important factor behind gaining of competitive advantage by businesses. Economies of scale allow the business to keep the costs low by increasing the production levels. For the industries where the fixed costs are high, the establishment of joint venture with a larger company can result in the economies of scale which is required to competing on a global level. Also, this mode can be effective for the purpose of pooling of resources and achievement of critical mass by two companies (Khan, Lew and Sinkovics, 2015).     

Risk Sharing- When a business wants to enter in an international market but does not want to bear the entire risk of the project then this mode can be appropriate. These are particular found in the case of highly capital intensive industries along with the industries where the costs associated with the product development are extremely high and have the capability of leading towards the failure of any product (Klijn, Reuer, Buckley and Glaister, 2014).

Market access- International Joint Venture can be regarded as an appropriate mode of entry for the companies and businesses which are suffering from the lack of basic understanding regarding the customers and the infrastructure and relationships needed for the distribution of the products to the customers. This is due to the fact that a joint venture can provide the right partner to such companies which can offer instant access to receptive customer bases and efficient, established and effective distribution channels (Merchant, 2014). For example, in the year 2007, Walmart entered into an equal joint venture with Bharti Enterprise of India as Bharti Walmart Private Limited for the purpose of gaining access to the Indian market with the intention of doing wholesale business. Under this joint venture, Walmart provided technology, logistics, supply chain and management support to the retail stores (Kwicinski, 2016).

Funding Constraints- Joint Venture is a suitable option for the business suffering from the funding constraints. High up- front developmental costs are involved in the international joint venture which can put the companies planning to enter into international market into trouble. The engagement with correct joint venture partner can assist such businesses in providing the required creditability and financing (Pak, Ra and Lee, 2015).

Geographical Constraints- Entering into a foreign market can be a difficult job for a company due to lack of experience in such market and the presence of number of barriers to foreign controlled and foreign owned companies. The internal joint venture is an appropriate mode in such conditions as it allows grabbing the business opportunities available in the foreign market by establishing a partnership with the local company. For example, Honda, a Japanese Company, entered into a joint venture with Her Cycles, an Indian Company, known as Hero Honda. The basic motive behind such joint venture and collaboration between these two companies was to introduce a fuel efficient and low cost motorcycle into the Indian market. Honda provided its technological know- how while Hero Cycles utilized its manufacturing and logistics capacity for the purpose of meeting their joint venture goal (Saha and Chattopadhyay, 2015).   

Does culture still matter in international business?

Acquisition Barriers- Acquisition of business is a commonly adopted mode of entry into international market by a large number of businesses. However, the acquisition of businesses is not easy due to certain size, cost or legal barriers along with geographical concentrations which, in turn, makes international joint venture an attractive option. For such businesses, joint venture is appropriate because it is less costly and less risky as compared to complete acquisitions. The needed flexibility is allowed by the joint venture arrangement to the purchaser to cut its losses in cases where the investment appears to be less fruitful than anticipated (Mata and Portugal, 2015).        

The management of international joint ventures is a very difficult process due to the involvement of a number of conflicts. In other words, there can be a number of issues faced in the management of international joint ventures. The first issue faced while managing the international joint venture is due to the non- clarity of objectives of the contract among the joint venture partners. This affects the contribution of the partners in resources, their rights, responsibilities, obligations, profit sharing, nature of job, profit distribution and conflict solving and can even result in disagreements and joint venture collapse. Culture, system and relations development for reducing the risk of a problem appearance in management is also a major challenge for the managerial team of joint venture. Problems may be faced on the board level, for example if two partners in a joint venture having equal stake have opposite stands, which may even result in the slowing down of the decision making process (Isidor, Schwens, Hornung and Kabst, 2015).

The three major issues faced in the effectively managing the international joint ventures are lack of trust between the partners, lack of control and insecurity associated with the possibility of leaving the joint venture.  Firstly, the companies that enter into the international joint venture suffer from the major issue of lack of trust. When problems and tensions occur in the venture, a lot of time and money is spent in trying to resolve them (Khalid and Ali, 2017). When the cases leads to its extreme stage, then such disagreements are often end up with the arbitrage and lawyers. Secondly, the management of the international joint venture becomes difficult when the complete control over decision making is replaced with divided control. This leads to a problem in the management in cases where assets contributed towards the joint venture are still very important for the parent organization. Thirdly, issues are also faced with respect to defining the termination regulation and its structuring. The executives require the formulation of certain exit mechanisms for the situations when some changes in the existing circumstances take place (Park and Harris, 2014).

International joint venture take place between the companies or businesses of two different countries which means problems can arise as a result of the cultural gap. One of the significant problems faced in the effective management of the international joint venture is that the shareholders of the two companies have diverse expectations regarding the overall timelines and specific milestones during the development of their strategy. For example, many of the western companies believe in working on a three to five year plan, while the companies operating in the developing countries of the world plan on yearly basis due to the uncertainty of the local economy. These differences in the timelines also have a great impact on the decision making process in terms of skill development and investments which requires a long pay- back (del Mar Benavides- Espinosa and Ribeiro- Soriano, 2014).

Relationship between strategy and structure in international business

The culture clash is caused by the partner who portrays a diverse ethical benchmark, for example, a cultural clash was discovered by Walmart in its joint venture with Bharti when allegations of corruption and local bribery was imposed on it. Issues are also faced by the partner who does not have an intent of collaborating and views the entire joint venture relationship as a source for extracting value. For example, Danone faced issues with its Chinese partner Wahaha which was found engaged in the manufacturing and sale of identical joint venture products outside the joint venture (Kwicinski, 2016).

Majority of the issues faced in the management of joint ventures are due to the conflicts between the parties which lead to worse business practices and in the end collapsing the joint entity. The major sources of conflict in the joint ventures are cultural differences between the partners, diverse objectives of the companies, company needs and aspiration for autonomy and control (Westman and Thorgren, 2016).

Also, there is a difference in the human resource politics experienced by international joint ventures as compared to other organizations. In various joint ventures, the functional and general executives are named from the parent companies. However, in most of the cases, two general directors are chosen from each of the company who ensure that the interest of their companies is met. This is done due to the reason that there is lack of trust between the partners which can further result in inefficiency and dissatisfaction in the company. There is a positive correlation between the trust and efficiency in a joint venture (Liu, Vredenburg and Steel, 2014).

A joint venture partnership provides manifold advantages which represent a fusion between the partners of assets, capital and access to markets and technology (Liu and Maula, 2016). However, all these points are required to be clearly understood by the partners otherwise it results in conflicts among them in the process of decision making. This is due to the fact that it clearly gets reflected in the actual obligations of the both the shareholders in the achievement of targets. These are usually the cases when the partners fail to deliver the promises made by them on initial basis. Another issue occurs when a joint venture is not up to the economic expectations which, in turn, lead to the hiding of margins by the partners in their home units through the transfer price (Westman and Thorgren, 2016).   

The only way of dealing with the probable problems faced by the joint venture company is to avoid them. These managerial problems can be avoided with the help of structural measures:

The joint venture company should form an agreement from the beginning of the venture that only one of the partners will have managerial control and clear voting power. Also, there should be an agreement that leadership or control will be exercised by a specific partner over the specific area or decisions and management responsibilities. Furthermore, such management structures and procedures can be created which allows majority of the decisions to be made at the executive level without the requirement of any kind of approval or instructions from the board. Moreover, restriction can also be imposed on the number of questions that require instructions to be received from the stakeholders (Reuer, Klijn and Lioukas, 2014).               

Conclusion

Conclusion:

Therefore, it can be concluded that an International Joint Venture takes place when a partnership is formed by two businesses which are situated in two or more countries. This report focused on cases when international joint venture is regarded as an appropriate mode of entry and along with the issues in managing the IJVs.  International joint venture is an appropriate mode of market entry when an enterprise looks for economies of scale, risk sharing, market access and aims to overcome the acquisition barriers, geographical constraints and funding constraints. The management of international joint ventures is a very difficult process due to the involvement of a number of conflicts. The three major issues faced in the effectively managing the international joint ventures are lack of trust between the partners, lack of control and insecurity associated with the possibility of leaving the joint venture. Also, the major sources of conflict in the joint ventures are cultural differences between the partners, diverse objectives of the companies, company needs and aspiration for autonomy and control.  At the end, this report also provided the structural measures which can be adopted by the joint venture companies for the purpose of avoiding these issues.

References:

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