International Management CHAPTER SEVENTEEN

Forming an International Joint Venture

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Presented By:

•Adeel Shoukat

•Muzammil Shahzad

•Ateeq-ur-Rahman

•Mohammad Asaf

•Hameedullah
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Layout

•Introduction
•Why Invest in an IJV?
•Preparing for Success
- The Four Compatibilities
•Trust and Mistrust
•Sharing Control
•Conclusion
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Why Invest in an International Joint Venture?

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Why Invest in an International Joint Venture?

1. To achieve Strategic Goals

2. Developing Multinational profile.
3. Option for Internationalization
- Franchising
- Joint Venture
- Operating Subsidiary
- By Acquisition
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The IJV

•Definition of IJV
- the headquarters of at least one parent is located outside the country in which the
IJV operates

•Focus of IJV
- Sales & Functions, Marketing, R&D

•IJV Formed Basis

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IJV Profitability

•IJV not Profitable always.

•Failure Reasons

•Reason for Making Investment

- Capture Market
- Risk Sharing
- Attain economies of Scale
- Avoid expensive competition
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IJV Profitability

•IJV offers local partner

- Up-stream and down stream Industries

•IJV offers local Government

- Encourage foreign investment
- Ownership access
- Rules and regulation
Muzammil Shahzad
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How Partners Contribute

• Contribution of Foreign Partner

- International know-how and access to international connections

- International reputation
- Access to international product markets
- Access to international labor markets
- Access to international finance
- Access to international technologies
- Access to other international resources
- International distribution
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Contribution of Foreign Partner

• Contribution of Local Partner

- Access to local connections, including government contacts

- Local reputation
- Knowledge of government regulations
- Knowledge of local culture
- Access to local product services
- Access to local labor markets
- Access to other local resources
- Local distribution
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Reasons For not Investing

- A company may not invest in an IJV due to some reasons

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Finding a partner

•Finding an appropriate partner requires investment

•Example
•Need Research
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Preparing for Success

- The Four Compatibilities
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Preparing for Success:

The Four Compatibilities

1. Compatibility in Interest

2. Compatibility in resources
Ateeq-Ur-Rahman
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Preparing for Success:

The Four Compatibilities
Cont.…

3. Compatibility in size

4. Compatibility in time
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Trust and Mistrust

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Trust and Mistrust

•Able to trust each other

•Development of trust

•Mistrust and Opportunisms

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Change in the Environment and Trust

•Modification in commitment

•Change in environment

•Different values in cultural factors for trust

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Mistrust between the Partners

•Mistrust is expensive

•Difference in Interpretations

•Dominate the relationship

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Mistrust within the IJV

•Mistrust between staff

•Mistrust between headquarter and IJV

•Mistrust arises when:

Mohammad Asif
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Fit between Organizational Culture

- Strategic Alliance between Mitsubishi of Japan and Daimler-

Benz of Germany broke down…

•The companies were unable to overcome differences in their:

- strategies,
- structures and
- organizational cultures.
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Fit between National Culture

- Jolly’s (2002) study of Sino-foreign IJVs found that cultural differences and
language differences constituted the two most significant barriers to knowledge
transfer between the partners. Perceptions of cultural distance can be fatal,
particularly when the partner headquarters use different first languages. On the
other hand, an IJV is more likely to succeed when their cultures fit. CULTURAL
FIT occurs when barriers to knowledge flows are low and communication is
accurate. In such circumstances, trust increases and technologies are transferred
efficiently with a minimum of misunderstanding.
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The IJV Organizational Culture is Inherently Unstable

• Most IJVs are inherently unstable arrangements, for a number of reasons.
- First, both because their parents exist in different, rapidly changing environments.
- Second, the partners need control and the IJV needs independence.
- Third, the partners join together (partly) in order to learn from each and this
learning reduces the level of mutual need between them, thus reducing the need
for cooperation – which may have been one reason for their establishing the IJV in
the first place.
- Fourth, there is an inherent structural weakness; not one but three different
management hierarchies (in the partners, and the IJV) are involved in decision-
making. The overlaps in authority are always likely to cause misunderstandings
and give rise to factionalism.
- Fifth, as partners learn to work with each other, differences in their national and
organizational cultures may become less important.
• These factors mean that the influence of the partner’s cultures is mutable and their fit
is continually changing.
Hameedullah
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Sharing Control
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Sharing Control

- The model of sharing control deal with the practical problems of making the
venture works.
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Fedor and Wether (1996)

• Proposed eight stages
- Development of “Cultural responsive alliance”

1. Identify own culture profile

2. Negotiating teams Compare culture compatibilities/incompatibilities
3. Develop joint business plan
4. Plan degree of operational independence
5. Agreed Formal structure
6. Reflect Structure of dependent/independent
7. Selection of director/key staff
8. Development of these inputs require changes.

- Thus, IJV draws on the strengths of two parents to create a new

culture.
Cont.…
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Sharing Control

• The model recognize

•The model links problems of
• What the model does not do?
- Example
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Building Trust

• Integrative Mechanisms
• Socialize of IJV managers
• Motivate IJV managers
• Staff top management of the IJV
• Develop an IJV board of directors

-Thus, the mechanism provide opportunities for the parties to

communicate and resolve problems.
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Communicating between the parents and the IJV

• Communication need to be managed

• Between the parents;
• Between each parent and the IJV;
• Within the IJV;
• Within the environment.

• Selective communication
• Under communication
• Over communication
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An IJV communications Strategy

• An IJV communications plan defines responsibilities between

• The parents;
• IJV management
• The external environment.

• The IJV Communication Plan

- WHO
- TO WHOM
- WHAT
- HOW
- WHEN
- WHERE
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How the IJV affects the organizational cultures of the partners

- By fostering culture of internationalism

• Advantageous • Disadvantageous
• Benefit from an inflow of • When the outflow of staff and
new ideas and technologies, inflow of replacement to the
and develop new IJV take down internal
knowledge. correlation.
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Cont.…

• Reorganize Structures
- Rethinking roles and relationships between headquarters and investments abroad;
- Flattening hierarchies;
- Breaking down boundaries between units.

• International Commitments
- Decentralize the company
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Conclusion
• Why Invest in an IJV?
- To achieve strategic goals
- Developing Multinational
profile.
- Option for Internationalization

• Four Compatibilities
- Interest
- Resources
- Size
- Time

• Trust
- Is the supreme importance
between Parties for Planning
and Implementing

• Practical problems
- Which Partner provides the
CEO and senior managers?
• Integrative Structure
- Establish communication
plan to build trust between
parents and IJV
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