Partner selection for joint-venture

agreements
R G Williams and M M Lilley

choosing a spouse4. It is an individual decision, and the

The selection of partners for joint ventures poses many
problems for potential participants. The paper examines
the influencing factors which should be taken into account
so that the performance of such alliances can be improved.
A model is developed which places the factors in sequence
within the evolution of j’oint-venture projects. An inter-
nationalj’oint venture is considered to illustrate and prove
the model. The case follows the general sequence of events
described by the model, but it is concluded that the model
provides a broadframework rather than a prescriptive set
of activities to be followed in strict sequence.
Keywords: business management, joint ventures,
national cooperation
ideal partner for one marriage may be a mismatch in
another. Possibly as a result of this attitude, little has
been written about joint-venture partner selection.
Geringer5,6 is one of the few people to have studied the
subject at any great length. He sets out several factors
which need to be considered in the selection of suitable
joint-venture partners. This paper takes Geringer’s cri-
teria for partner selection, and places them in chrono-
logical order within the general process of partner
selection; it examines the individual importance of each
factor in selecting suitable partners, as well as the stages
in the selection process at which they should be con-
inter- sidered. The model is then compared with the approach
adopted by a large UK chemical company in its search
for a joint-venture partner to rationalize the production
of PVC.

The growth in international cooperative behaviour be-

MODEL AND ITS INTERPRETATION
tween companies represents a significant change in the
nature of commerce. These changes pose many problems Figure I illustrates the process of selecting a joint-ven-
for joint ventures, whether national or international, and ture partner. The left-hand column shows a flowchart of
management practices for dealing with these are still the phases involved in the selection process, and the
developing’. right-hand column represents influences which come into
The stability of any business organization is influenced play at particular stages.
by a number of factors, for example the health of the Primarily, a company needs to distinguish its future
industry, the degree of competitive rivalry, and the goals and act accordingly. Such aims may involve ex-
efficiency of production, innovation and management2,3. panding to a new market, gaining access to new technol-
Joint ventures are affected by any of these, as well as the ogy, distribution networks and marketing experience, or
cooperative behaviour of the partners. The selection of rationalizing production, exploiting economies of scale,
an appropriate partner, therefore, is paramount in im- or minimizing transaction and production costs. Once
portance if the joint venture is to succeed. the company’s future objectives have been identified, the
Executives may enter into arrangements before being next step is to decide how they can be accomplished. If
fully aware of the consequences, only to find their the need for a joint venture is then identified, the
partner’s management style, innovations, motivations subsequent problem is the selection of a suitable partner.
and commitment are at odds with their own*. It can be Initially, companies need to be concerned with stra-
argued that choosing a business partner is very like tegic compatibility, complementary skills and resources,
relative company size, and financial capability. It should
European Business Management School, University of Wales, thus become apparent which firms cannot provide the
Swansea, Singleton Park, Swansea SA2 8PP, UK necessary attributes to form a successful joint venture.

Vol 11 No 4 November 1993 0263-7863/93/040233-05 0 1993 Butterworth-Heinemann Ltd 233

Partner selection for joi~~t-~e~ltL~~e
agreements

Strategic compatibility improve competitiveness without adversely affecting the

It is essential that partners have the same general
objectives in forming a joint venture; differences in
strategy produce conflicts of interest among partners.
Determining a prospective partner’s motives is often
difficult, but it is an essential task. This analytical process
should involve not only the firm’s current situation and
goals, but also scenarios of likely future strategies. It is
important to remember that, generally, no matter what
the initial agreement on control and ownership may have
been, environmental and strategic changes over time
may alter, which, in turn, may well affect the original
agreement.
Joint ventures tend to work only as long as each
partner believes that it is receiving benefits, or is likely
to benefit in the relatively near future. Owing to differ-
ences in goals, what is good for one firm may be a
disaster for another. A compatible partner, ideally,
therefore, is one with similar values and goals, in both
a short- and long-term sense. This is particularly critical
when the strategy stakes, such as the size of investment,
and the potential effect on corporate image, increase in
scale. If such strategic compatibility does not exist, the
joint venture should not be pursued.
Looking at the case study, the major objective for the
British entering into a joint venture was production
rationalization. The company indeed rejected two firms
as prospective partners at this stage in the selection
process as they did not meet the necessary requirements.
The Italian company selected was considered to be
suitable as they, too, wished to reduce capacity and
Defimtion of
New mark~,finan~e,
- technology, economies
future goals
of scale, costs,
rationalisation etc
c domination of one firm over the other.
ldentificotion of a
need fora joint
venture
i vironment of many large firms, with relatively slow
identification of I Strategic compatibility
prospective - 2 Complementary skills and
partners resources
I characteristic of small firms.
3 Relative company size
4 Financial caoabilitv
I
. sponses. This emphasis on autonomy is particularly
5 Compatibility between
Detailed
- operating policies
negotmtions
6 Compatible management
i teams
7 Trust and commitment
Relimmofy
project ,8 Mutual dependency
imolementation I9 Communrcation barriers
total business.
Complementary skills and resources
Another primary selection criterion to be considered
should be a potential partner’s capability of providing
the skills and resources sought by the other firm, for
example finance, distribution, and marketing. If the
company cannot provide these factors, joint-venture
formation with that particular company should not be
pursued.
To determine such complementarity, the key success
factors for the joint venture should be defined, and then
compared with the prospective partner’s current and
proposed position. Areas where deficiencies exist should
then be considered carefully, and, wherever the necessary
criteria are not met, the company should be rejected.
Returning to the case study, the Italian company met
the necessary requirements as they operated in markets
different from those of the UK firm, and they were a
multisite, multiplant organization, As a result, the com-
pany could rationalize production and provide the
necessary facilities for continued operations.
Relative company size
Joint ventures have the best chance of long-term success
if both partners are comparable in sophistication and
size. Larger companies typically offer greater ‘staying
power’, being able to commit a greater volume of
resources over a longer time horizon. However, joint
ventures between firms of different sizes are often just-
ifiable. A smaller firm may share its innovative technol-
ogy with a larger firm offering finance, marketing,
distribution etc. Significant size differences can, however,
lead to problems. One concern is the possibility of the
A related problem is that partners’ different oper-
ational environments and corporate cultures may appear
to be incompatible. For instance, the bureaucratic en-
decision-making apparatuses, contrasts sharply with the
more entrepreneurial and quick-response orientation
Some problems arising from a difference in size can be
overcome by creating a special operating environment
for the joint venture. For instance, the effects of partner-
size differences can be reduced by giving the joint venture
a free hand in many activities, permitting quicker re-
appropriate for ventures which confront rapidly chang-
ing environments. A willingness to allow such autonomy
might, therefore, be a consideration in the selection of a
partner.
Even if managers strongly desire partners with similar
cultures, that need not restrict joint ventures to firms of
the same size. The relevant measure is often not absolute

/I corporate size, but the relative size of the respective

business units. Managers may, therefore, seek partners
of similar sizes at the business or the division level. Both
partners should, therefore, have similar perceptions of
Figure I. Partner -selection process time as a vital component in the joint venture’s success.

234 International Journal of Project Management


This particular issue was fundamental to the
UK/Italian venture. Both the companies needed to be
able to sustain similar plant closures, as well as provide
the relevant facilities for continued operations. As a
result, the agreement could only expect to be successful
if the companies were of similar relative size.
Financial capability
Finally, for this stage, it is essential to be sure that a
prospective partner can generate suf%ient financial re-
sources to maintain the venture’s efforts. During a joint
venture’s early stages, when large negative cashflows are
common, the presence of a ‘limit’ can jeopardize an
entire project. It is not always possible to identify a
company’s fmancial limitations~ however, its financial
history and overall financial standing may well indicate
potential problem areas. 1t may, nonetheless, be prudent
to include a clause in the joint-venture agreement to
cover such an eventuality,
This particular perspective did not require much at-
tention in the case study as any problems in this area
could always be overcome, since the two companies were
large multinationals with the necessary resources avail-
able to them.
Having considered these first four characteristics with
respect to the proposed joint venture, it should now be
possible to reject certain firms as prospective partners,
Others can be shortlisted, At this stage, it is necessary to
enter into more detailed negotiations to judge a partner’s
suitability. A company should now be interested in
analysing the following: compatibility between operating
policies, compatible management teams, trust and com-
mitment, mutual dependency, and communications bar-
riers.
Compatibility between operating policies
Partners should be clear about the types of policy with
which they will be comfortable working, for example
accounting systems, investment, and vacation policies
Differences in operating approaches often result from
cultural biases, and managers, not conscious of the
existence of these biases, may take it for granted that
there is a ‘right’ way to do things.
The compatibility of partners’ operating policies
should, therefore, be considered before a joint venture is
formed. Differences need to be ironed out at this stage
to avoid severe problems later on.
The UK and Italian companies considered this par-
ticular issue in great detail to reach agreement on the
organization’s structure and operations. The main area
of contention was administration, as the production sites
would not be moved. The two firms decided on a
coordination centre and a separate controlling hofding
company, The sites were chosen to benefit from tax
concessions, as well as for their central geographical
location”
Compatibge management teams
In addition to agreement an operating policies, compat-
ibility between management teams is an essential ingredi-
Vol I 1 No 4 November 1993
R G WILLiAMS AND M M LILLEY
ent in the success of a joint venture. The inability of
management to ‘take to each other’ is frequently cited as
the basis for rejecting a prospective partner or terminat-
ing a joint venture. The essential ingredient is staff with
the skill and intuition to spot problems before they arise,
and with the competence and influence in their own
organization to solve such problems quickly. Managerial
compatibility can thus enhance the partners’ ability to
achieve consensus on critical policy decisions, and to
overcome obstacles. An additional consideration when
selecting a partner is, therefore, the quality and turnover
of the critical personnel within the management team.
Effective management also requires well defined report-
ing and information systems to provide adequate com-
munications channels between the organizations
involved, with the aim of promoting unified planning
and control.
When the case study was considered, it was found that,
as a result of the 50: 50 division, anything other than a
similarly structured management team would have been
inappropriate. There were also few problems in selecting
staff as geographical location often restricted choice.
Trust and commitment
Forming and operating a joint venture over the long
term requires more than cordial relations between man-
agement teams. An executive must determine whether a
potential partner is willing and able to make the relation-
ship work, The partner’s perceived ~stwortbiness and
commitment are pivotal considerations, especially if the
proposed joint venture involves one firm’s core technol-
ogies or other proprietary capabilities which are the
essence of the firm’s competitive advantage. One ap-
proach is to seek majority control, and another is to
structure a legal agreement to address every such contin-
gency. However, these responses are unlikely to promote
compatibility. Each partner, therefore, needs to be com-
fortable in believing that the other will honour the spirit,
and not just the letter, of the agreement. A joint-venture
relationship is delicate at best, and, without fundamental
trust and commitment by each party, there is little hope
for a successful working relationship. Thought should,
therefore, be given to selecting a suitabie negotiator and
support team to build good relationships and win confi-
dence.
The UK and Italian companies undertook discussions
for a considerable length of time to reach a final
agreement. In so doing, trust and commitment were built
up, although the UK company did not consider this
perspective as a separate issue, but rather as a function
of all the other factors that they contemplated through-
out the selection process.
Mutual dependency
Joint ventures are a means of creating strengths, rather
than intensifying weaknesses, by the partners comple-
menting each other. Many managers view dependency
on other organizations as undesirable, and have avoided
such situations when possible. Yet, with proper match-
ing, both partners should perceive a vested interest in the
success of the joint venture.
235
Partner selection for joint -venture agteemenfs
Thus, there should be some identifiable mutual need,
with each partner supplying unique capabilities or re-
sources that are critical to success. When one partner is
strong in areas where the other is weak, and I;ice uersa,
mutual respect is fostered, and conflict can be mitigated.
It is usually better to choose a strong partner, as it is a
mistake to think that a strong association can be created
with a weak partner.
A ‘middle level’ of dependency is the optimal. If the
level of dependency is too small, the joint venture is
unlikely to survive difficult times. However, too much
dependency, such as when small firms enter joint ven-
tures with much larger partners, may prove unstable,
because of the potential consequences of the loss of a
partner. One option to avoid the risks of dependency is
to include a clause in the joint-venture agreement. This
may stipulate that the unilateral decision to terminate
the venture would result in a substantial charge of some
sort.
When the case study was considered, it was found that
this factor was not looked at during the selection
process. This approach probably results from the fact
that the joint venture is a 50: 50 partnership between two
companies of equal size and status. Neither of the
companies, therefore, considered the situation to be
problematic.
Communications barriers
Finally, the ease of communication between the partners
is another potential problem which should be considered
when evaluating a potential partner’s suitability. The
greater the cultural gap between the firms forming a joint
venture, the more difficult it will be to create the
necessary cohesion. Such problems can occur as a result
of differences between national or ethnic cultures, in-
cluding language, as well as differing corporate cultures.
Cultural differences can impede the development of
rapport and understanding between partners.
Managers of different nationalities may have differing
attitudes to such basics as the desirability of material
wealth, the importance of on-the-job perfo~ance~ or
the desirability of change. This may lead to greater
expenditures of time in negotiations, possibly delaying
negotiations or major decisions. However, this factor
should only be considered as a supplementary criterion,
as language and culture tend not to be insu~ountabIe
barriers, particularly for partners from developed na-
tions.
When the UK and Italian companies considered this
problem area, the differences were found to be minor.
The only requirement was a little understanding and
adaptation by all concerned.
Selection
Each of the above nine perspectives need to be taken into
account by any firm before a joint-venture partner is
selected. Certain criteria will be more important to some
companies than others, and they should be judged
accordingly. However, even at this stage in the selection
process, it is not always advisable to enter into a joint
venture immediately. An initial period could be used for
236
firms to cooperate in some activity before formalizing
agreements. Such cooperation may then lead to a part-
nership in the form of a joint venture. This incremental
approach enables managers to keep adding to the com-
plexity of things that they trust a partner to do on the
basis of previous experience. Such an approach keeps the
expectations of a partner lower, and enables managers to
be more analytical in assessing why a particular venture
did not work out.
DISCUSSION AND CONCLUSIONS
As this paper has shown, the case study generally follows
the theoretical process. The nine different perspectives
were considered in the selection process, with one excep-
tion: mutual dependency. However, it is thought that,
rather than implying a deficiency in the model, this is a
peculiar case, because of the nature of this particular
joint venture. All the other factors were considered by
the UK company, and at the stages expected in the
model; there was one exception, in the sequence of
‘communications barriers’, which was perceived early on
in the selection process, and dealt with as and when
problems were identified.
The model does not, therefore, provide a prescription
for selecting partners, but offers a framework for what
and when certain aspects should be considered. By their
nature, projects are unique, and a degree of discretion
should be used in applying any general model to a
particular project. In some cases, some factors will be
more important than in other cases, and these may need
to be considered at different times from those suggested
by the model. Nevertheless, the model does present a
general strategy to be followed.
Many joint ventures have been cancelled, even after
years of negotiations and costly feasibility studies, be-
cause of economic factors, changes in goals and so on.
At any rate, it is better for the money spent on planning
to be wasted, rather than greater losses being risked by
such a venture being proceeded with.
The joint venture studied to test the selection model
has been operational for several years. The detailed
partner-selection process used by the companies in-
volved is considered to have played an important role in
ensuring continued cooperation between the two compa-
nies. It is felt that such analysis overcame many problem
areas early on, leading to smoother and more efficient
operations. However, as with all ongoing partnerships,
the future may reveal a different scenario which could
have been avoided if it had been foreseen and considered
during the selection process.
A changing business environment brought about by
the single European market, the North American free-
trade area and the opening of markets in the former
Communist countries will encourage many companies to
broaden their horizons into new countries and markets.
In such environments, international joint ventures are
likely to be a popular means of extending business
activities while sharing risk and expertise.
Emphasis needs to be placed, by all companies, on
detailed planning and discussion to reduce the risk of
disastrous problems. A great deal of attention needs to
be paid to partner selection for joint ventures by any
International Journal of Project Management
 R G WILLIAMS AND M M LILLEY

company, as mistakes can be avoided. The process is Harrigan, K R ‘Strategic alliances and partner asym-
highly demanding in terms of energy, time, persistence metries’ Manage. Znt. Rev. (1988) (special issue)
and diplomatic ability. However, it is hoped that its Kogut, B ‘A study of the life cycle of joint ventures’
crucial importance is clear, and that those companies Munage. fnt. Rezq. (1988) (special issue)
which make such planning efforts will also reap the Berg, S V and Friedman, P ‘Corporate courtship and
benefits. successful joint ventures’ Calif: Manage. Rev. Vol
XXII (1980)
Geringer, J M ‘Partner selection criteria for devel-
oped country joint ventures’ Bus. Quart. (Summer
1988)
REFERENCES
Geringer, J M ‘Strategic determinants of partner
1 Kiliing, J P Strategies for Joint Venture Success J P selection criteria in international joint ventures’
Killing (1983) J. int. Bus. Stud. Vol 22 No 1 (1991) ~~41-62

Rhys Williams is a lecturer in

management science at the
European Business Manage -
ment School of the University
of Wales, Swansea, UK, where
he teaches project manage-
ment. He graduated in struc-
tural engineering from the
Un~l~ersity of Wales, Cardty>
and gained an MSc in man-
agement science from Imperial
College, London, UK, and a
PhD from the University of
Wales. His experience in-
cludes a number of years in the
co3~truction industry and !ocaf government.
search interest is in mode&g and simulation
project munagement.
Melanie Lilley obtained a ist-
class degree in European man -
agement science from the
European Business Manage -
ment School of the Universit~~
of Wales, Swansea, UK. She
studied business at the Univer -
sity of Strasbourg, France,
and continued her studies at
Swansea, gaining an MPhil on
the analysis of joint ventures in
Western Europe. She is now
based in Paris, France, as a
His main re- marketing consultant with a
applications in particular interest in South
East Asia.

Vol I I No 4 November 1993 237