International Joint Ventures, International Strategic Alliances

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International Joint Ventures, International
Strategic Alliances
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Traditional Determinants of FDI Location

• Access to natural resources
• Cost reduction
• Market access
• These continue to be important
• Hence investment flows to Big Emerging Markets
  (BEMs)
• And for emerging TNCs

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Alternative Market Entry and Development
Strategies

• ISAs assist in rapid internationalisation
• As do IJVs
• But the high costs in IAMs prohibit extensive
  simultaneous use of this mode of expansion
• However they potentially offer immediate delivery
  of benefits

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IJVs

• The characteristics of IJVs
• Their advantages and disadvantages
• IJV performance
• The management problems involved in planning,
  negotiating and implementing IJVs

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IJVs

• The focus here is upon equity IJVs, rather than
  contractual joint ventures
• Equity IJVs may be defined as
• partnerships by which two or more firms
  create an entity to carry out a productive
  economic activity and take an active role in
  decision-making

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Equity IJVs

• Are different from contractual JVs in three main
  respects There is
• a sharing of ownership (ie a capital commitment
  by two or more partners)
• the establishment of a separate legal entity (ie
  the child)
• Some sharing of management control, as well as
  ownership

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Parent Company A
Parent Company B
Joint Venture Child
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Equity IJVs Traits

• Manufacturing JVs
• JVs in the service sector
• Functional JVs (eg marketing, distribution,
  technology)
• JVs between developed country MNEs
• JVs between developed country MNE and local
  enterprise in emerging economy

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Equity IJVs Traits

• East/West JVs
• Minority, majority, shared ownership JVs
• Shared control vs passive JVs

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Trends in IJVs

• Huge increase in numbers during 1960s/1970s
• Very often due to host government controls
• Restrictive fdi policy demanded that MNEs wishing
  market access had to form an IJV with a local
  partner

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Trends in IJVs

• Since then host country legislation has become
  more liberal
• Yet IJVs remain very popular
• But now often MNEs choose to form IJVs
• They recognise that they need assistance from
  local partner
• The competitive imperative has become the key
  driver rather than the political or legal
  imperative

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Trends in IJVs

• Where are these most common?
• What sectors are they most common?
• Who are active in forming IJVs?
• Why is this the case?

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Advantages of IJVs

• Expansion geographically at lower cost than
  establishing wholly-owned subsidiaries
• Reduced management commitment by decentralising
  some control locally
• Synergistic benefits - each partner has what the
  other lacks
• Lower political risk through partnership with
  well-connected local rival

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Performance of IJVs

• Very often the benefits prove elusive
• There is a high incidence of failure or divorce
• Given that each has what the other needs they
  need to trust each other
• However a lack of trust is common, so each party
  is reluctant to provide the partner with its key
  competence

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Performance of IJVs

• Problems arise over the control of the IJV
• And also with the operating strategies, policies,
  and methods

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Motivation for IJV Formation Internal Uses

• Cost and risk sharing
• Economies of scale benefits
• Intelligence - access to new technologies and
  customers
• Innovative managerial practices

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Motivation for IJV Formation Competitive Uses

• Influence industry structures evolution
• First-mover advantages
• Defensive response to blurring industry
  boundaries and globalisation
• Creation of more effective competitors

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Motivation for IJV Formation Strategic Uses

• Creation and exploitation of synergies
• Technology (or other skills) transfer
• Market diversification

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Stages in Planning, Negotiating and Managing JVs

• Establish JV objectives
• Conduct cost/benefit analysis
• Is this the best entry mode?
• Financial commitment
• Synergy
• Management commitment
• Risk reduction
• Control
• Long-run market penetration
• Other advantages/disadvantages

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Stages in Planning, Negotiating and Managing JVs

• Selecting partner(s)
• Profile of desired partner(s)
• Identify and screen partners to prepare a
  short-list
• Initial contact/discussion
• Choice of partner

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Stages in Planning, Negotiating and Managing JVs

• Develop business plan
• Achieve broad agreement on
• Partners inputs
• Venture outputs
• Management style and decision-making processes
• Performance evaluation system
• RD policy
• Production and procurement policies
• Marketing policies and practices
• Personnel policies

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Stages in Planning, Negotiating and Managing JVs

• Negotiation of IJV agreement
• Final agreement on business plan
• However negotiating styles may vary dramatically
• Direct vs indirect
• Slow pace vs fast pace
• Small number in negotiating team vs large number
  in team etc

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Stages in Planning, Negotiating and Managing JVs

• Contract writing
• Incorporation of agreement in legally binding
  contract allowing for subsequent modifications to
  the agreement
• Performance evaluation
• Establish control system for measuring IJV
  performance

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Major Aspects of an IJV Agreement

• Purpose and character of the IJV
• Major goals/strategy of the foreign partner
• Major goals/strategy of the local partner
• Products/industries/markets/customers served

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Major Aspects of an IJV Agreement Contributions
of each partner

• Capital
• Existing land, plant, warehouse, offices, other
  facilities
• Manufacturing design, processes, technical
  know-how
• Product know-how
• Patents and trademarks
• Managerial, production, marketing, financial,
  organisational and other expertise
• Technical assistance and training
• Management development
• Local relationships with government, financial
  institutions, customers, suppliers etc

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Major Aspects of an IJV Agreement
Responsibilities and Obligations of each partner

• Procurement and installation of machinery and
  equipment
• Construction, modernisation of machinery and
  equipment
• Production operations
• Recruitment training of workers and foreman
• Quality Control
• Relationships with labour unions
• RD
• General, financial, marketing, personnel and
  other management
• Continuous training of personnel

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Major Aspects of an IJV AgreementEquity
Ownership

• Ownership share of each partner
• Equity granted to foreign partner for
  manufacturing and product technology
  intellectual property rights
• Equity granted to local partner for land, plants,
  warehouse, facilities etc

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Major Aspects of an IJV AgreementCapital
Structure

• Equity capital
• Loan capital, national and foreign
• Working capital
• Provisions for raising future loan funds
• Loan guarantees by partners
• Future increase in equity capital
• Transfers of shares of stock, including
  limitations

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Major Aspects of an IJV AgreementManagement

• Appointment/composition/authority of the board of
  directors
• Appointment and authority of executive officers
• Expatriate managers, technicians and staff
• Right of veto of appointment of officers and key
  decisions
• Development of local managers, including time
  schedule
• Organisation
• Strategic operational planning
• Information system
• Control procedures

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Major Aspects of an IJV AgreementOther

• Supplementary agreements
• Managerial policies
• Export markets commitments
• Accounting financial statements
• Settlement of disputes
• Arbitration
• Legal matters

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Equity Joint Ventures

• Political imperative
• Competitive Imperative
• With liberalisation the political imperative has
  become much less important
• But MNCs have simultaneously realised that often
  they underestimated the competitive imperative

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ISAs

• Distinctive traits of ISAs
• Trends in alliance formation
• ISA motivations
• Problems involved in managing ISAs
• PLEASE NOTE ISAs DO NOT INVOLVE FDI

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ISAs

• International strategic alliances involve
  co-operation between two or more corporations,
  belonging to different countries, whereby each
  partner seeks to add to its competencies by
  combining its resources with those of other
  partners (Jain, 1997)

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ISAs

• International coalitions are formal, long-term
  alliances between firms that link aspects of
  their business but fall short of merger (Porter,
  1986)

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Major Differences Between Conventional
Collaboration and ISAs
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Motives for ISAs
Technology
Globalisation
Growth of ISAs
Competitive
Governmental
Regionalisation
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Potential Benefits of ISAs
Technology Development
Economies of Scale
Growth of ISAs
Risk Reduction
Shaping Competition
New Market Opportunities
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ISAs The Costs

• Co-ordination costs erosion of competitive
  position creation of an adverse bargaining
  position (Porter)
• Mutual dependency (Jain)
• Competitive compromise dependency spiral
  distrust and conflict (Hamel, Doz and Prahalad)

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ISAs The Risks

• Imbalance in benefits
• Imbalance in commitment
• Communication problems
• Conflict between partners
• Retaliation from governments
• Costly divorce

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Reduce the risks.

• Make sure needs are complementary
• Make sure there are complementary strengths
• The objectives of each party should be compatible
• Share power
• Make sure the benefits of the ISA are evenly
  distributed

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Four tips..

• Collaboration is competition in a different form
• each partner needs to understand how the others
  objectives will effect their success
• Harmony is not essential
• a slight edge may be required to avoid surrender
  of core skills

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Four tips..

• Companies must defend against competitive
  compromise
• Learning from partners is paramount