Joint Venture Partner Selection Criteria

There are multiple reasons why firms form international joint ventures. Local partners can provide firms
with local market and operating knowledge, reputation with local consumers, and can minimize political
risk in the host country; this is especially important when there is a high CAGE distance1 between the
home and host country. In addition, independent of their knowledge of local context, a partner may
bring a valuable capability or technology to the partnership that the firm may learn from. Joint ventures
help reduce the financial investment and risk of entering new markets by sharing the equity
commitment. In some cases, the joint venture mode may not be a strategic choice, but a requirement
determined by host government regulations.

Despite the strong strategic and practical rationale for using joint ventures as a means to enter or
expand in foreign markets, joint ventures have a low rate of success with approximately two thirds of
joint ventures failing. Joint ventures are notoriously difficult to manage due to the complexity of
aligning and integrating corporate goals and cultures from two separate companies. Regardless of the
rationale for forming a joint venture, there are several criteria that are common to those joint ventures
that beat the odds and succeed in meeting both partners’ goals over time. These key criteria in joint
venture partner selection include: complementarity, compatibility, commitment, and trust.

Complementarity

 Are partners’ assets and capabilities complementary (i.e. distinct and added value)? It is vital
that each partner bring capabilities or assets that are distinct and of added value to the
partnership for the joint venture to have ongoing value to the firm. If a firm chooses a partner
with the same capability profile, they are essentially only growing in size, not in competency;
joint ventures predicated on exclusively financial contribution tend to have lower rates of
longevity. An example of complementarity of partners in a joint venture is illustrated by the
recently established Nokia Shanghai Bell, a joint venture between Nokia and China Huaxin Post
& Telecommunication Economy Development Center (“China Huaxin”). In this partnership, in
which Nokia owns 50% plus one share, and China Huaxin owns the remainder, Nokia brings
innovation and efficiency at a global scale, while China Huaxin brings a deep understanding of
the Chinese market and a network of R&D talent across the country.

 Are partners making equal value contributions to the JV? Regardless of what each partner brings
to the joint venture, it is important that the partners view the respective contributions of being
of roughly the same value, or able to reach comparable value over time. This does not
necessarily mean a 50/50 equity split, but rather that there is a perceived value of each other’s
contribution that is comparable. Often one company may contribute a higher portion of equity,
while the other partner is contributing a technology that holds a greater value. For example, in
the long-term joint venture between Kirin Brewery and Amgen pharmaceutical, Kirin initially
contributed substantially more financial capital, while Amgen contributed the research and
technology behind several drugs in their development phase that were expected to increase in
value over time. This successful partnership ultimately resulted in the global commercialization
of the drug Epogen which brought substantial profits to both firms. (34 years after the joint

1
See Pankaj Ghemawat, “Distance Still Matters: The Hard Reality of Global Epansion,” Harvard Business Review,
September 2001, pp. 137-147.

Author: Dr. Susan Bartholomew

 venture began, the very successful JV recently bought out its Japanese partner to become a
wholly-owned subsidiary of Amgen).

The perception of roughly equal contribution is important for ensuring a healthy partnership over
time. If one partner feels like their contributions are of much higher value than what they are
receiving in return, they may feel exploited and stop devoting their highest quality technology or
human resources to the JV. Similarly, if one partner holds too high an equity control over the JV, the
“smaller” partner may feel oppressed and its potential contributions may not be fully realized.
Finally, for longer term JV success, it is vital that partner contributions continue to add value over
time; if one partner learns all they have to learn from the other partner, they are likely to exit the JV.
This situation of asymmetric learning is one of the key reasons for JV failure.

Compatibility

 Are partners’ management style, practices and values compatible? While partners may have
many strategic reasons for wanting to work together, the fact remains that they still must figure
out how to work together. Each parent company brings with it its own organizational culture
and processes, management style and values. Developing the new joint venture company can
often be a tug of war between competing culture and values. Although organizations do not
need to be similar in culture in order to be successful partners, successful JVs are most often
built on a commonality of values in the senior management of the parent companies. For
example, if one partner places a high value on an egalitarian work culture that values
contributions from lower down in the organization, it may have a difficulty integrating its culture
with a partner who has a very authoritarian, top-down style of management. For example, in a
joint venture between a French textile firm and its Thai partner, the partners frequently clashed
over management style. In this JV, the French partner was characterized by a decentralized
structure and management culture where decisions were made on a consultative basis often
with input from production workers. By contrast, the Thai partner was a small family-owned
firm where the CEO made all key decisions and implemented these in a top-down, patriarchal
style. In the Thai firm, production workers were accustomed to never challenging the direction
or decisions made by their superiors. Over time, as the joint venture became operational, the
French managers became frustrated that the Thai workforce would not provide any input when
asked. At the same time, the Thai partner began to lose confidence in their French partner as
they interpreted their more consultative management style as lack of clarity and direction from
the senior management.

 Do strategic goals converge? For partners to be compatible, their strategic goals for the joint
venture must also converge. Typically, most joint venture partners have one or more of the
following strategic goals for entering the JV:
• Market positioning: market positioning rationale can include entering new markets as well
as expanding product or service offerings in existing markets. When entering a new market,
the firm typically enters the joint venture with a local partner to help develop demand for
their product or service in the new market, build reputation, spread a technology, or
develop a dominant standard in the market. For example, when Xerox wanted to enter the
Japanese market, it did so via a joint venture with the Japanese firm Fuji; at the time,

Author: Dr. Susan Bartholomew

 Japanese FDI regulations required local equity participation and Fuji also brought much-
needed local market knowledge to Xerox.
• Learning: one or both firms aim to develop new capabilities through technology transfer,
joint research, or contextual learning. For example, in the Fuji-Xerox JV, Fuji was motivated
to partner with Xerox as a means of learning xerography and diversifying away from Fuji’s
tradition silver-film based photography. In the joint venture between Kirin Brewery and
Amgen, Kirin Brewery used the joint venture not only as a means of technological learning,
but also the opportunity for their scientists to absorb the norms and cultural routines of
their innovative partner, and bring best practices back to their labs in Japan.
• Product exchange, or supply: the firm enters a joint venture to reduce transaction costs by
establishing a mutual and usually long-term commitment between supplier and buyer firms.
Often supply alliances are conducted between firms without establishing a separate joint
venture company. However joint ventures can also fulfil this role; for example, the Xerox-
Fuji JV eventually became a source of supply of products to the parent company Xerox.
Starbucks entered a joint venture with the Ai Ni Group in China, one of Yunnan province’s
most established coffee operators and agricultural companies, in order for Starbucks to
develop its supply of coffee from Yunnan province and move toward eventually owning
coffee farms and roasting facilities in the area.

The partners in a joint venture or alliance do not need to have the same strategic goal, and often
pursue more than one of these objectives. However, it is imperative that one firm’s efforts to
pursue its strategic goals do not conflict with the other partner’s efforts to pursue their strategic
goals. It is also important that the strategic goals, even as they evolve, remain transparent to
the other partner so that continuous strategic alignment can occur over time.

Commitment:

 Are partners making the necessary investments in time and human resources to support the joint
venture? In addition to underlying complementarity and compatibility, joint ventures, like most
relationships, require strong and ongoing commitment from both partners in order to succeed.
One of the clear signs of commitment is that the partner is investing significant time in learning
about their partner, visiting their HQ and building relationships at the senior management level.
Commitment is also demonstrated by committing senior level human resources to the joint
venture and investing in the necessary cross-cultural training of expatiates for them to succeed
in working in a new cultural environment and/or with a cross-cultural workforce. For example,
Ford has put more than 1500 managers and engineers through cross-cultural training programs
specifically designed to increase their success in working with their joint venture partners in
Japan and S. Korea.

 Are partners’ senior management equally committed to the joint venture? Demonstration from
each partner that their firm’ senior management see the JV as a strategic priority is also an
important element of commitment. Strong relationships at the senior executive level can help
smooth the relationship during the operational challenges that international joint ventures
inevitably face. Regular visits from senior executives of each parent company to the joint
venture operation can help signal that the joint venture is considered a strategic priority. For
example, in the longstanding joint venture between the American firm Corning and its Korean

Author: Dr. Susan Bartholomew

 partner Samsung, Corning’s CEO continues to make regular visits to all of the Korean production
sites run by the joint venture.

Trust:

 Do partners trust each other? The final, and least tangible, component of successful joint
ventures is the degree of trust partners have in each other. Trust is the glue that holds a
partnership together during periods of financial stress, communication breakdowns, and
operational problems. The seeds for commitment and trust between partners are generally
sown in the early stages of partners getting to know each other, before a joint venture
agreement is reached. This is why the courtship and negotiation stage of JV formation are
particularly crucial to future JV success (see Figure 1 of stages of joint ventures). Demonstrating
trust during the courtship and negotiation phase can be done through a variety of ways such as
sharing of confidential information about the firm’s future strategic goals, or technology
developments. Once the JV has been established, trust is often demonstrated by one partner
delegating decision-making to another, or allowing the partner access to a proprietary
technology. For example, in the early days of the partnership between the American firm
Corning and its Korean partner Samsung, Corning demonstrated trust in their partner by
delegating all the day-to-day operations in the Korean factory to their Korean partner.
Similarly, a breakdown in trust is often the precursor to a dissolution of the partnership, which
was the case in the break-up of the General Motors-Daewoo joint venture in Korea. In this
situation, relationships between the partners were already strained when the JV was faced with
rapidly declining market share and each parent reacted with different priorities. The Korean
parent decided that the JV should prioritize growth and should do everything they could to
maximize market share. GM, however, itself in a tenuous financial positon, and with shorter
term responsibility to its shareholders, insisted that the emphasis be on current profitability and
refused to put further equity into the venture. When Daewoo, without telling GM, introduced a
concessionary financing program for the joint venture’s customers, the relationship was
damaged forever, never to recover.

Figure 1: Joint Venture Stages

Courtship

Negotiation

MOU/Contract

Launch

Ongoing Management

Courtship

Author: Dr. Susan Bartholomew

Strategic Review