Concepts of an International Joint Venture (IJV)

A Number of organizations are establishing their operations into new markets in order to sustain and develop their competitive edge [1]. International expansion is a challenging undertaking and in order to complete this undertaking successfully firms resort to different market entry strategies [2] [3] [4] [5] [6]. International Joint Venture is the most common and widely used form of international expansion. Joint ventures are not just the means for accessing resources of a different firm; they are also required or used for acquiring licenses, contracts and other alliances. Joint ventures tend to outperform in the international markets, they tend to outperform on wholly owned subsidiaries this is achieved because of the local partners that these ventures have in the market. [7]

According to Culpan (2002) the process of IJV involves two or more firms from different countries to collaborate in creating an independent business unit by contributing their resources. On an another instance Wallace (2004) defines joint venture as the working together of two or more firms for achieving a specific outcome that would not have been possible by any of the firm working alone. The outcome in most of the cases is to achieve growth and a sustainable competitive advantage, and the joint ventures usually provide the most suitable platform to accomplish this task. By studying both the definitions above we could easily recognize the following three variables:

1. Multiple independent companies
2. A well defined purpose
3. The level of interdependence

Wallace (2004) has mentioned that in a joint venture there are usually two firms involved but in certain cases depending on the nature and the size of the business, there is an involvement of more than two players. Another characteristic which he has described is the independence of the companies which plays an important role in the whole process. According to him when two independent companies come together they have entirely different values, goals, cultures and management structures which could lead to various compatibility issues. Joint ventures are usually formed on the basis of a common objectives or mutual goals of all the parties. This objective should serve the needs of the companies in a proportionate manner otherwise the success of the joint venture will be short-lived. [9] The level of interdependence between the firms is the most important variable that makes the whole process of joint venturing different from other type of alliances. Each company which is involved in the process cannot possibly achieve the goal at its own and has to move alongside other partners to get to the mutual goal [9].

Literature review

Despite being the most popular means of international expansion IJV has its own shortcomings for instance they are difficult to initiate, organize & manage. Majority of joint ventures fall short of their stated goals and objectives and end up with a massive losses and debts [10] [11] [12]. Several factors can be attributed to the failure like the legal system, political system, state of the economy, and organizational forces like partner differences and contract terms contribute to failures, a large proportion of IJV failure can be attributed to inefficient management [13] [4]. Despite their shortcomings and difficulties if managed properly IJVs can deliver desired results [14] [10] [15] [12].

Following are 4 major stages in formation and maintenance of an IJV:

Stage 1- Formation

The decisions made in the formation stage holds a critical value in the whole process. Consensus has it that the very nature of joint ventures contributes to their failure: they are a difficult and complex form of enterprise [16] and many companies initiate IJVs without fully recognizing and addressing the major issues they are likely to confront [17] [13]. Both parties forming an IJV need to determine the reasons for adopting IJV as a part of their strategy. Early planning in joint ventures is important without planning the likelihood of reaping the gains from the IJV is diminished [18] [19]. In the initial stage, the companies should whether or not to take a step towards joint venture in order to gain a specific advantage. If the benefits of joint venture outweigh the costs and risks associated with it, the partner(s) decide to take a step further. On the other hand, in the situations when there is high cost and risk involved, they have to decide against it and have to consider other alternatives. (Culpan, 2002). It appears that cooperative partners may help increase the chances of success and the effectiveness of the learning process itself [2] [20] [6] [21]. As mentioned by Stiles (2001) the high level of failures in the strategic partnership occurs due to the wrong selection of partner firms. Culpan (2002) supports this argument and states that the process of partner selection is very critical for a prospective joint venture. He further elaborates the importance of compatibility during the whole process and suggests that success of a joint venture depends on the compatibility of the partners.

Stage 2 – Development

Where to locate is an important question. Locating in the country of one partner may give a “local knowledge” and control advantage. If, however, this knowledge is shared with the other partner, the advantage can move to the partnership and the IJV itself rather than one partner. When both parents are interested in the IJV and want it to succeed, they appear to get involved in all the key decisions made early on as reflected in the contract negotiation [13]. Under these conditions, the board of directors is likely to be composed equally of representatives of the parents and the IJV (internal and external to these entities).

Stage 3- Implementation

The implementation stage of the IJV process involves vision, mission, values, and strategy [23]. With a high quality top management team in the IJV, the vision, mission, values, strategy and structure are more likely to be crafted to fit the local needs as well as those of the parents. The entire set of the policies and practices needs to be created for the IJV. The factors that these policies and practices need to reflect include the IJV’s: (a) vision, mission, values, culture, structure, strategy; (b) labor market; (c) need for global integration with parent(s) such as for knowledge transfer; and (d) differences between the country cultures of the parents and the IJV [24]. Possibly some policies will be non-negotiable and have to meet parents’ standards, e.g., ethical, safety/environmental whereas other policies, e.g., working hours, compensation and benefits, can be much more locally adaptable.

Stage 4: Advancement (IJV and Beyond)

The advancement stage of the IJV process involves: learning from the partners, transferring knowledge and learning to the parents, and transferring knowledge and learning to other locations. As the IJV becomes established, the partners’ relationships continue to evolve [6]. In the views of [11] [21], learning and adjustment by the partners are the key to IJV longevity and the avoidance of premature dissolution. In both cases the parent organizations are gaining new learning and knowledge that can be used for their internal operations or for their next IJV process [6] [21]

Culture

According to the definition, IJV implies partnerships between independent and different firms. This partnership or collaboration is directly affected by the culture at the national and the organizational level. National culture and other institutions of the country in which IJV is situated play an important role in influencing the organization and the management style of the joint venture [25]. As discussed earlier that the success of joint venture depends upon the compatibility between the partners and this compatibility involves culture as well. Culpan (2002) suggests that each partner in the joint venture brings its own culture and if the cultures are not compatible they will really make the joint venture vulnerable. It is also assumed that culture can influence the timing of entry, the investment preferences and the performance of the venture [26].

Barger (2007) describes that in international joint ventures two organizational cultures are brought together to form a third culture which is usually inspired by the either of the two parent cultures or it forms a unique culture by combining various elements from the parent cultures. Cullen et al. (1991) expresses his view in a rather unique way and states that when cultures cross, a cultural shock occurs which can have a negative impact on the organization and the working environment of the joint venture [27].

There are two types of cultures that directly affect the joint venture, first one is the organizational culture and the second one is the national culture. Lane and Beamish (1990) state that the problem in IJV’s is due to the influence of the national culture on the behavior and management system that leads to conflicts, they further elaborated that IJV partners from different national cultures tend to experience greater difficulty in interaction which could adversely affect the performance [28]. Same is the case with the organizational culture; any difference in it can really cause conflicts and can easily undermine the joint venture progress.

Hofstede (2001) defines culture as “the collective programming of mind that distinguishes the members of one group or category from another”. According to him the human mind uses the patterns of thinking, feeling and acting just like a software program. Unlike computer software, the source of mental program lies within the social environment within which a human being is brought up. Corresponding to the layer of mental programming in a human brain, Hofstede (2005) divides the culture into various levels such as national level, regional level, and gender level and so on.

As discussed earlier, both the national and the organizational cultures play a pivotal role in shaping the joint venture culture. In order to assess the culture incorporated in the joint state that the problem in IJV’s is due to the influence of the national culture on the behavior and management system that leads to conflicts, they further elaborated that IJV partners from different national cultures tend to experience greater difficulty in interaction which could adversely affect the performance [28]. Same is the case with the organizational culture; any difference in it can really cause conflicts and can easily undermine the joint venture progress.

Conclusion:

Joint ventures are useful for many entities, for various reasons, joint ventures help companies to overcome the uncertainty & it facilitates setting up business in the new market. Larger projects, different markets, new locations are have avenues in such ventures. Most critical part of IJV is to verify the feasibility of the project and secondly check compatibility of the company towards prospective partner. Most JV’s fail because the partners do not have much in common. In order to make an IJV successful the most important factor that came up in this paper are the cooperation, coordination and understanding of the partner towards each other. National culture and organizational culture too can make or break a IJV. In order to avoid the national and cultural shock the partners need to understand each others values, strengths weaknesses and most importantly they need to coordinate with each other. Sharing each other resources, expertise will enable the firms to be together for a long time and will make the JV profitable.