Internatioal Joint Ventures

International Joint Ventures

Jaime Escamilla
April 22, 1999
Jescamilla@ajcfood.com
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Internatioal Joint Ventures
International Joint Ventures
The objective of this paper is to highlight some of the important issues that must be considered prior to forming an
international joint venture. Why is this topic important? The folloing !uote summari"es the main reason#
"Cross-border M&As, JVs and alliances seem to share at least two characteristics with marriage trends of
the post World War II "Bab Boomers" generation! "he ha#e grown e$plosi#el d%ring the &'()s and
thro%gh the &'')s b%t - less fort%natel - the fail abo%t half the time*"
&
With this in mind$ it is very li%ely that sooner or later you ill be involved in an international joint venture$ either in
the process of forming one$ dissolving one or or%ing for one. The more you %no about international joint
ventures$ the better prepared you ill be to understand and contribute to the solution for the challenges they present.
&ost companies begin their e'pansion to overseas mar%ets by e'porting their products or services. ('porting
products has minimal ris% involved$ especially if the proper steps are folloed. )oever$ in some instances
e'porting is difficult or e'pensive and companies use other methods to penetrate international mar%ets. *orming an
international joint venture ith a foreign firm in the target mar%et is$ in some cases$ the only avenue to accomplish
the goal. +n international joint venture is usually a progression in the investment level that companies are illing to
commit prior to fully investing in a foreign subsidiary. What is the main difference beteen opening a subsidiary
and forming a joint venture? +ccording to +ndre In%pen$ a joint venture occurs hen ,to or more legally distinct
firms -the parents. pool a portion of their resources ithin a jointly oned legal organi"ation,
/
,The distribution of
e!uity among the parent companies can ta%e different forms$ ranging from 01201 IJVs beteen to companies$ to
reduced minority or dominant majority sta%es.,
3
In contrast$ only one company ons a subsidiary. (ven though
companies perceive IJV as less ris%y than opening their on subsidiaries$ forming inade!uate joint ventures can be
ris%y and e'pensive. If managers are not careful in their analysis and are not aare of the potential pitfalls of
international joint ventures then they can face some serious trouble.
4o far e have learned that culture plays a major role in business culture. )ence$ culture ill ultimately have a
major impact in the international joint venture. 5iero &orosini$ one of the leading researchers in international joint
ventures$ e'plains the role culture plays in international joint ventures as follos#
1
&orosini$ 5iero.1667. &anaging 8ultural 9ifferences$ 5ergamon :reat ;ritain.
/
In%pen$ +ndre. 1660. The management of international joint ventures$ <outledge =ondon and >e ?or%.
3
&orosini$ 5iero.1667. &anaging 8ultural 9ifferences$ 5ergamon :reat ;ritain.
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Internatioal Joint Ventures
"+mpirical e#idence s%ggests that technical iss%es are less li,el to lead to conflicting sit%ations compared
to relationship problems d%ring the implementation of international JVs and alliances* "hro%gho%t this
phase, too m%ch emphasis is %s%all placed on setting strategic ob-ecti#es at the cost of ignoring personal
interaction aspects in#ol#ing people from different national c%lt%res* "his has been cited as the most
critical factor leading to %nresol#ed conflicts and o%tright fail%re of an international JV or alliance*"
.

8ompanies some times enter into joint ventures ith objectives other than to gain rapid access into the mar%et.
4ome companies ant to learn from other companies or li%e to combine resources in order to ma%e a stronger
company. ,The need to combine strategic resource contributions and foster functional co@operation and co@
ordination beteen the partners to create mutual advantages is at the heart of both IJVs and global alliances.,
0
+s
you read this paper$ you ill learn that most of the failures in joint ventures occurs due to the misunderstanding in
the goals and the definition of the goals. *innie Williams states that ,half of all partnerships donAt or%. Those that
are successful share three characteristics ith successful marriages#
"he act%al and percei#ed potential benefits m%st be large for both parties*
"he partners m%st share a common set of #al%es
"he ,e people m%st be committed to s%ccess*"
/
It seems that the most important aspect hen spea%ing of international joint ventures$ is that partners must share a
common set of values. This is very unli%ely to happen. The main reasons cultures are different is because they have
different sets of values. *or instance$ some companies define success in terms of return on investment$ others use
mar%et share$ yet others define it in terms of customer satisfaction. These differences are critical and must be
discussed early in the planning stage in order to lay a solid foundation for the partnership. It is important to %eep in
mind that even companies from the same cultural and business bac%ground have different plans to achieve their
goals. Therefore$ henever e mi' companies ith different cultural bac%grounds$ the comple'ity level increases.
5eople from different cultures perceive business in different ays.
The rest of this paper provides e'amples of international joint ventures in different countries and e'amines some of
the general observations related to such ventures and countries.
China
B
&orosini$ 5iero.1667. &anaging 8ultural 9ifferences$ 5ergamon :reat ;ritain.
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&orosini$ 5iero.1667. &anaging 8ultural 9ifferences$ 5ergamon :reat ;ritain
C
*innie$ William 8. 1667. 4trategic partnering# Three case studies. 4trategy and leadership$ /C -B.# 17@//.
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Internatioal Joint Ventures
,*oreign investment in 1660 as DE437 billion -8hina 4tatistical 5ress 166C.. International Joint ventures -IJVs.
beteen overseas companies and domestic state@oned enterprises -4F(s. have been the dominant mode of entry.
)oever$ many JV investments have been less than successful.,
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8hina ,is no the orldAs most active joint
venture mar%et.,
7
These facts are not surprising as ,8hina is home to /0 percent of the orldAs population and
many estern firms vie the country as a prime target mar%et.,
6
)oever$ as e ill discuss$ not everyone
venturing in 8hina has been successful. *or instance$ a group of *rench investors dissolved their joint venture in
8hina after 1/ years of investment. The agreement as primarily beteen 5eugeot and :uang"hou +utomotive
&anufacturing -:+&.. It too% four years of negotiations beteen *rench and 8hinese investors to form the joint
venture :uang"hou 5eugeot +utomobile 8orporation -:5+8. in 1670. *olloing are some of the major problems
that 5eugeot mentioned as %ey elements to the failure of their venture in 8hina#
The labor force from the 8hinese partner had inade!uate s%ills$ hich resulted in more time and money spent in
training.
=ac% of suppliers in the :uang"hou area that could provide !uality parts. +s a conse!uence many of the parts
had to be imported hich raised the cost of the vehicles as compared to the competition.
:uang"hou officials ould not allo the plant to purchase parts from suppliers from other regions in 8hina.
8ompetitors ho ere located in other 8hinese regions had access to !uality 8hinese parts and ere able to
build vehicles at loer prices.
There is another side to this story$ analysts believe that#
5eugeot chose the :uang"hou area because the central government had little influence over the local
government and there ould be more management freedom. )oever$ this bac%fired on 5eugeot as the
distance from ;eijing acted as a barrier to access suppliers from other regions.
5eugeot did not act fast enough to form a joint venture ith a supplier in the :uang"hou region. Their
competitors had formed such partnerships ith their suppliers.
5eugeot repatriated most of its profits and made fe changes to their vehicles. Their competitors instead$
reinvested most of the profits in the venture and to improve the vehicles.
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I thin% there are several lessons to be learned from this e'ample. Fne is that it ta%es a long time to agree on the
terms of the agreement. 4econd is that even though both partners had agreed on the goals$ une'pected deficiencies
-labor and parts. put the company at a disadvantage ith its competitors. It is ama"ing that after four years of
negotiations$ nobody chec%ed if the s%ill sets ere compatible and if the local suppliers could provide !uality parts.
G
F 8onnor$ >ealH I 8halos$ 5eter. 1666. The challenge for successful joint venture management in 8hina# =essons
from a failed joint venture &ultinational ;usiness <evie$ G -1.# 01@C1.
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4i$ 4teven I ;ruton$ :ary. 1666. Jnoledge transfer in international joint ventures in transitional economies# The
8hina e'perience. +cademy of &anagement ('ecutive$ 13 -1.# 73@61.
6
4i$ 4teven I ;ruton$ :ary. 1666. Jnoledge transfer in international joint ventures in transitional economies# The
8hina e'perience. +cademy of &anagement ('ecutive$ 13 -1.# 73@61.
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)arit$ (ric. 166G. :uang"hou 5eugeot# 5ortrait of a commercial divorce. 8hina ;usiness <evie$ /B-C.# 11@11.
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Internatioal Joint Ventures
Third is that even hen companies believe that they are ma%ing the correct strategic move they could be doing the
opposite due to lac% of %noledge of the local culture. In this case$ 5eugeot as under the impression that distance
from ;eijing ould be positive and in fact it turned out negative. *inally$ companies that ant to use joint ventures
as means to have a !uic% entry into the mar%et can get hurt. In this case$ 5eugeot as not committed to re@investing
capital in the joint venture$ hich at the end made them completely uncompetitive in the mar%et.
?ou might be ondering ho as the competitor to 5eugeot that as being so successful in 8hina. That competitor
as also a joint venture. This time it as beteen a :erman company$ Vol%sagen +:$ and a 8hinese partner in
the 4hanghai area. +s mentioned before$ 4hanghai Vol%sagen as !uic% to form partnerships ith suppliers to
increase the content of 8hinese parts in their vehicles and reduce the number of imported parts. +nother important
aspect is the fact that 4hanghai Vol%sagen as reinvesting their profits in order to improve their vehicles. 4uch
improvements plus their commitment to the 8hinese economy$ alloed 4hanghai Vol%sagen to earn a better
reputation among customers.
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+nother major corporation that has been successful in forming joint ventures in 8hina is Enited 5arcel 4ervice.
,E54 has been aggressively e'panding its operations there. Fn Jan. /1 1666$ the company announced an agreement
ith 8hinese airline 4inotrans to e'pand E54@branded operations to 17 additional cities in 8hina$ bringing the total
to /1. The to carriers signed a memorandum of understanding that includes ne investments to develop dedicated
operations and more joint training and management efforts. In 166B$ E54 opened representative offices in 4hanghai$
:uang"hou and ;eijing$ and by 166C established a joint venture ith 4inotrans in ;eijing. (fforts to establish joint
ventures in 4hanghai and :uang"hou ere temporarily put on hold ith a change in government leadership.,
1/
These e'amples provide us ith some useful information regarding joint ventures in 8hina. )oever$ there are
some other facts that you must %no#
=as governing international joint ventures in 8hina are different than the las for 8hinese firms.
=as may also be different depending on hether the 8hinese partner is a state business$ village or tonship
enterprise.
8hinaAs legal system consists of guidelines for businesses and individual judges have enough leeay to
determine hat is right and hat is rong.
5rovincial regions can prohibit the sale of goods not produced on its on region. -this as the case ith
5eugeot suppliers..
The need for government support is greater hen the output of the joint venture is sold ithin 8hina
The local partner is critical hen the output must be sold to the government instead of the general public.
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)arit$ (ric. 166G. :uang"hou 5eugeot# 5ortrait of a commercial divorce. 8hina ;usiness <evie$ /B-C.# 11@11
1/
Traffic World 1666 E54As big sta%e in 8hina tal%s. *eb 7# 3G.
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4i$ 4teven I ;ruton$ :ary. 1666. Jnoledge transfer in international joint ventures in transitional economies# The
8hina e'perience. +cademy of &anagement ('ecutive$ 13 -1.# 73@61.
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Internatioal Joint Ventures

+ survey of 1/0 randomly chosen 4ino@Western joint ventures$ each ith a minimum of 01 employees$ and each in
business for over one year$ ere surveyed in 4hanghai. They surveyed mangers from both parent companies in
order to compare results and the results ere as follos#
The goal emphasis of the to groups as substantially different.
8hinese managers focused on things that they had not yet mastered such as technology$ management s%ills$ and
capital understanding.
Western managers focused on their on things to be mastered such as understanding the local mar%et$
government policy and the political system.
1B

Japan
The situation in Japan is mi'ed. While some researchers point that there are some major problems in forming
international joint ventures$ large multinationals have formed very successful joint ventures and the announcements
of more and more joint ventures being formed continues.
Fn one hand is the vie that international joint ventures beteen Japanese and >orth +merican firms in the
automotive industry have encountered many problems. &ost of the problems are related to cultural differences and
management styles. ,+lthough it is overly simplistic to describe Japanese management as long@term oriented and
+merican management as short@term oriented$ the Japanese partner firms in this study appeared to focus on
customer satisfaction and product !uality rather than profit based performance. Japanese firms seemed less
constrained by issues of share price and impatient board of directors than their +merican counterparts.,
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Fn the other hand is the trend of ne joint ventures being formed or e'isting ones being e'panded$ ,:oodyear Tire
I <ubber 8o. and 4umitomo <ubber Industries announced the formation of four joint venture operating companies.
The units ill be based in >orth +merica$ (urope$ and Japan. To E.4.@based service joint ventures ill also be
formed$ one for global purchasing and one for sharing tire technology.,
1C
This agreement beteen :oodyear and
4umitomo reflects some e'perience in forming joint ventures as they have clearly defined the goals of the different
joint ventures. This joint venture seems to be headed in the right direction$ it ill be interesting to follo up in a
fe years to see if they actually become successful.
1B
4i$ 4teven I ;ruton$ :ary. 1666. Jnoledge transfer in international joint ventures in transitional economies# The
8hina e'perience. +cademy of &anagement ('ecutive$ 13 -1.# 73@61.
10
In%pen$ +ndre. 1660. The management of international joint ventures$ <outledge =ondon and >e ?or%.
1C
*leet oner. 1666. :oodyear$ 4umitomo deal. &arch# 1C.
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Internatioal Joint Ventures
,9ainippon In% and 8hemicals -9I8. and (astman Joda% say they ill combine portions of their Japanese graphic
arts businesses in +pril to ma%e a Japanese unit for their e'isting JV$ Joda% 5olychrome :raphics ->oral%$ 8T..
The combination ill increase the JVs sales from D1.0 billion last year to D/ billion in 1666$ Joda% says.,
1G
Joda%
seems to be having success in their joint ventures ith Japanese companies as they are e'panding their current joint
venture.
9upont and Teijin announced that they ill form a 01@01 joint venture to manufacture polyester films. The joint
venture is e'pected to generate sales of D1.B billion and represent /0K of the mar%et. ,;oth companies say the
venture ill allo for the free flo of technology and ill combine 9u5ontAs strengths in the E.4.$ (urope$ and
8hina ith TeijinAs strengths in Japan and 4outheast +sia.,
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Fnce again$ it seems that companies that invest time and effort analy"ing and understanding the challenges of joint
ventures get on the right trac% from the start. 8ompanies that just ant to do business as usual -the case in the
automotive industry. ill have a hard time ma%ing the joint venture successful.
SPAIN
4pain has seen less activity in terms of joint ventures than Japan and 8hina. It seems that 4pain is not perceived as
,ris%y, country and most companies might be illing to spring into fully oned subsidiaries in 4pain. +lso$ the
barrier to enter the mar%et might not be as high as in the case of the Japanese mar%et. )oever$ in some industries$
such as the financial services industry$ there is a need for joint ventures to penetrate the mar%et. 4panish people
loo% for names of familiar companies to invest their money. +ccording to a =ondon fund manager interested in the
4panish mar%et$ ,The easiest ay to brea% into the mar%et is through joint ventures ith local ban%s but there are
not many suitable partners. We have loo%ed around a fe ban%s but e havenAt been able to come up ith a deal e
li%e the loo% of.,
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There is one company that has formed a joint venture ith a *ibanc in ;arcelona$ =a"ard Enit
Trust &anagers. +lthough$ the majority of the investment firms have decided to just open their on branches in
4pain. *idelityAs managing director for central (urope believes that ,4pain has a big population$ around B1 million
so in terms of sheer si"e it is very attractive. ItAs one of the mar%ets e have to be in. *idelity opened its office in
&adrid this year and has put a sales team in place. We are aiming at creating our on distribution channel rather
than any other form of strategic alliance or joint venture,
/1
It ill be interesting to observe hich of the to firms
becomes more successful given the different approaches to penetrate the 4panish mar%et.

1G
&oore$ 4amuel J. 1666. Joda% and 9I8 develop another JV. 8hemical Wee%$ 1C1 -7.# //.
17
Westerlvelt$ <obert. 1666. 9upont and Teijin ta%e a joint role in films. 8hemical Wee%$ 1C1 -C.# 16.
16
&arshall$ Julian. 1667 2 1666. <etail 5ioneers ill gain in 4pain. 117# 0C.
/1
&arshall$ Julian. 1667 2 1666. <etail 5ioneers ill gain in 4pain. 117# 0C.
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Internatioal Joint Ventures
+nother recent joint venture in 4pain is 4panair. *ormed beteen 4candinavian +irlines -B6K. and Viajes &arsan
-01K.. 9ue to the recent deregulation of the (uropean airline industry$ the to companies ere able to establish the
airline as a joint venture. 4panair is flying direct from &adrid to Washington 9.8. and it is increasing the number
of intra@(urope flights. 4panair is no trying to form alliances ith Enited +irlines to gain mar%et recognition in
the Enited 4tates. 4panair has a different approach to mar%eting$ they consider themselves an ,airline ith humor,$
in fact$ they gave aay /CC round trip tic%ets to the first /CC people to arrive at the airport earing some type of
costume resembling some aspect of the 4panish culture.
/1
+lthough$ it seems that this airline has had a great start$ it
ill be interesting to find out ho they do in the future$ as the 4panish culture seems to be playing a mayor role in
the ay the airline is run. I thin% that if 4candinavian +irlines is fully aare of the differences in management style
beteen them and their 4panish partners$ this joint venture should successful.
Russia
5rior to 167G$ <ussia had major restrictions in the formation of joint ventures. Fnly (astern ;loc% countries ere
alloed to form joint ventures ith <ussian partners. )oever$ after 167G the opportunity for joint ventures ith
<ussian companies opened up and the result as a flood of joint ventures along ith problems$ ris%s$ frustrations$
opportunities and reards.
//
The folloing !uote summari"es the joint venture situation in <ussia#
"Altho%gh more than &),))) international -oint #ent%res ha#e been registered in 0%ssia since &'(1, onl abo%t one-
fifth of those ha#e act%all beg%n operations* 2istoricall, man 0%ssian-foreign -oint #ent%res fail in the first ear
of operation, with an a#erage s%r#i#al rate of abo%t 3*4 ears*"
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<ichard <eece has identified some myths about <ussians$ hich he believes are %ey elements in the failure trac% of
international joint ventures in <ussia. *olloing is a summary of these myths and his observations regarding the
myths and suggestions to consider hen forming a joint venture in <ussia.
1. <ussian or%ers are alcoholics and have an inferior or% ethic. +lcoholic consumption might be higher$ there
is no certainty in this remar%$ hoever$ <ussian or%ers are used to longer vacations in the summer time and
this can create the impression that <ussians are la"y. )is suggestion is to learn more about the <ussian habits
and styles prior to committing to a joint venture and have unrealistic e'pectations.
/. <ussians are ignorant$ incompetent managers. It is important to remember that <ussians are learning about the
mar%et economy. *or many years they have not been e'posed to open mar%ets$ so they are less familiar ith
issues such as pricing$ receivables$ cost analysis$ financing$ cash flo$ and mar%eting. It is important to
/1
:uttman$ <obert J. 1667. 4panair# The s%yAs the limit. (urope$ 371#1C@1G.
//
<eece$ <ichard. 1667. 4uccessful joint ventures in <ussia. World Trade$ 11 -7.# B/@BB.
/3
<eece$ <ichard. 1667. 4uccessful joint ventures in <ussia. World Trade$ 11 -7.# B/@BB.
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Internatioal Joint Ventures
remember that this is one of the major reasons hy <ussians are loo%ing for partnerships ith estern
companies. <ussians are eager to learn more about the estern style economics. The best ay to find out the
%noledge level is trough intervies ith potential partners.
3. <ussian managers lac% business savvy. This myth has some truth in it$ hoever$ the fact that the <ussian
economy is unstable$ has given managers the ability to react !uic%ly to changes and adapt to the conditions of
the ne environment. In fact it is important to understand that not all estern style solutions ill or% in <ussia
and <ussian manager are more familiar ith the details on ho to get things done in <ussia.
<ichard <eece ma%es particular emphasis in communication as a %ey ingredient to a successful joint venture in
<ussia. If potential partners do not learn about each other$ ho can they e'pect the venture to be successful.
General Guidelines to Select a Partner
In general regardless of the countries involved$ William &yers offers the folloing guidelines to select an ade!uate
business partner#
Is your prospective partner a %non entity?
)ave you or%ed ith the group before?
9o the organi"ationAs culture and values match yours?
9oes your prospective partner understand ho associations or%?
Will the organi"ation be fle'ible in crafting or%able deals?
8an your prospective partner clearly define success in the joint venture?
9oes your prospective partner have a reputation for honesty$ and ill the organi"ation define or%ing
agreements in riting?
/B
+nsers to these !uestions ill give you a general idea on hether to proceed ith the venture$ do more in depth
analysis or simply not go through ith the process.
Conclusion
This paper presented e'amples of successful and unsuccessful joint ventures. It also highlighted important
information regarding %ey aspects of joint ventures in different countries. Joint ventures are still popular and
/B
&yers$ William. 1667. 5ic%ing your partners isely. +ssociation &anagement$ 01 -11.# 31.
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Internatioal Joint Ventures
international companies are creating more every day. Therefore$ the %noledge from this paper should assist you to
better understand the challenges associated ith most joint ventures. + topic that as consistent throughout the
literature on joint ventures is the importance of cultural differences$ patience and the comparison of joint ventures to
marriage. Therefore$ if you have been married for a hile$ you might be better prepared for a joint venture than you
thin%.
+nother interesting observation is that joint ventures seem to be preferred hen there are mar%et barriers$ such as
the case ith Japan$ or hen the perceived ris% level is relatively high$ such as <ussia and 8hina. The fact that there
as scarce information on joint ventures beteen companies of developed nations indicates that joint ventures are
not the main avenue of e'pansion for most firms. This does not imply that they do not happen or that are not
recommended$ it simply states that they are far less popular. 8ompanies are more illing to establish their on
subsidiaries or branches since the ris% level is loer.
If you are involved in a joint venture$ use the guidelines presented in this paper. The authors ho recommend them
have been studying international joint ventures for several years and have learned a lot from them.
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