International Joint Ventures, International Strategic Alliances

2. International Joint Ventures, International Strategic Alliances By Dr. Michael McDermott

3. Alternative Market Entry and Development Strategies • International Strategic Alliances (ISAs) • As do International Joint Ventures (IJVs) • International Acquisitions and Mergers (IAMs)

4. Alternative Market Entry and Development Strategies • International Strategic Alliances (ISAs) assist in rapid internationalisation • As do International Joint Ventures (IJVs) • International Acquisitions and Mergers (IAMs) • But the high costs in IAMs prohibit extensive simultaneous use of this mode of expansion • However they potentially offer immediate delivery of benefits

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

6. 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”

7. 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

8. Parent Company A Parent Company B Joint Venture Child

9. Equity IJVs: Types • 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

10. Equity IJVs: Traits • East/West JVs • Minority, majority, shared ownership JVs • Shared control vs passive JVs

11. 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

13. 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

14. 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?

15. 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

16. Performance of IJVs 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

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

18. Motivation for IJV Formation: Internal Uses • Cost and risk sharing • Economies of scale benefits • Intelligence - access to new technologies and customers • Innovative managerial practices

19. Motivation for IJV Formation: Competitive Uses • Influence industry structure’s evolution • First-mover advantages • Defensive response to blurring industry boundaries and globalisation • Creation of more effective competitors

20. Motivation for IJV Formation: Strategic Uses • Creation and exploitation of synergies • Technology (or other skills) transfer • Market diversification

21. 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

22. 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

23. Stages in Planning, Negotiating and Managing JVs • Develop business plan • Achieve broad agreement on: • Partner’s inputs • Venture outputs • Management style and decision-making processes • Performance evaluation system • R&D policy • Production and procurement policies • Marketing policies and practices • Personnel policies

24. 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

25. 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

26. 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

27. 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

28. 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 • R&D • General, financial, marketing, personnel and other management • Continuous training of personnel

29. Major Aspects of an IJV Agreement:Equity 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

30. Major Aspects of an IJV Agreement:Capital 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

31. Major Aspects of an IJV Agreement:Management • 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

32. Major Aspects of an IJV Agreement:Other • Supplementary agreements • Managerial policies • Export markets & commitments • Accounting & financial statements • Settlement of disputes • Arbitration • Legal matters

33. Motivations for Equity Joint Ventures • Political imperative – i.e. host government legislation • Competitive Imperative – i.e. Cannot manage without assistance from a local firm • With liberalisation the political imperative has become much less important • But MNCs have simultaneously realised that often they underestimated the competitive imperative

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

35. 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)

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

38. Major Differences Between ‘Conventional’ Collaboration and ISAs

40. Motives for ISAs Globalisation Technology Growth of ISAs Competitive Governmental Regionalisation

41. Potential Benefits of ISAs Economies of Scale Technology Development Growth of ISAs Risk Reduction Shaping Competition New Market Opportunities

42. 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)

43. ISAs: The Risks • Imbalance in benefits • Imbalance in commitment • Communication problems • Conflict between partners • Retaliation from governments • Costly divorce

44. 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

45. Four tips….. • Collaboration is competition in a different form • each partner needs to understand how the other’s objectives will effect their success • Harmony is not essential • a slight edge may be required to avoid surrender of core skills

46. Four tips….. • Companies must defend against competitive compromise • Learning from partners is paramount