Research Topics: Joint Venture

COMMON PROBLEMS IN PARTNERSHIPS / JOINT VENTURE

OBJECTIVES As a person with knowledge of various joint venture cases, the author has always brought up to his superiors the viability of strategy formation regarding successful joint ventures and at times fail to understand the reasons or logic behind certain strategic implementations imposed on it. By delving into this project paper, the author intends to have better insights into how successful joint venture procedures are thought up, formulated and then implemented down into the subsidiaries of the companies involved. The author hopes to have an in-depth understanding as to how the successful joint ventures of companies enable them to compete effectively and profitably in this era of internationalization where competition is extremely intense. In order to reinforce the learning objectives, two key focal issues were focused upon, i.e. innovation and diversity. Innovation was discussed with regard to the joint ventures of companies where it was renowned for its developmental capabilities to constantly innovate. Diversity came under strategic thinking and formation as the joint venturing companies considered the diverse culture, political climate, economic surroundings, social environment, technological settings, government policies and legal systems in their bid to become a leading player in their industry.     INTRODUCTION Companies today have to be efficient, flexible and profitable. Without these factors, it would be very difficult to compete in the global economy. Aside from participating in strategic alliances to fully enhance the resources they need to become competitive, many companies now evolve and expand through partnerships or joint ventures. Consequently, as companies and organizations enter into partnerships and joint ventures, the efficient and effective implementation of the policies and tasks necessary after entering into joint ventures of one or more companies or organizations must be done. Change management focuses on the careful management of the processes involved in the gradual adjustment of the “new” management and its workforce. More often than not, the newly formed partnerships among business entities don’t really have an easy time adjusting to the changes brought about by the joint venture. As a result, these entities engage in activities that are somehow resisting to changes. Therefore, the major activities of the company such as the manufacturing of products, product development, production and distribution become severely hampered. However, change management deals with all operations done within companies and organizations. Activities such as the management of purchases, the control of human resources, logistics and evaluations are often the focus of change management. A great deal of emphasis lies on the efficiency and effectiveness of processes. Therefore, change management includes the analysis and management of internal processes. COMMON PROBLEMS IN PARTNERSHIPS / JOINT VENTURE A. MANAGEMENT / POLITICAL REASONS The aftermath of most partnership and joint venture cases among organizations and companies often leads to the implementation of a somewhat autocratic type of leadership and management. Because of the adjustments that the newly combined workforce would have to endure, it is not surprising that at first the new management would hold so much power and decision-making authority.  The management would have the tendency to seldom consult its employees especially in making crucial decisions. As a precautionary measure, the change management would include having a perfectionist type of management to make sure that the new reporting system would remain consistently efficient. The motivation environment is often characterized through the establishment of a new structured set of rewards and punishments. However, as time goes by the workforce and the new management gets to jive with each other. Along with this is the changing of leadership type from autocratic to a democratic type. This way, the participation of all key stakeholders especially the workers will be more encouraged. If they feel something is right or wrong, or if they want to tell something important to the management, they can now be free do so without any worries. Also, a democratic leadership approach allows the management to have a feedback regarding the policies and regulations being implemented. They will immediately know if there is any tension going on between or among the stakeholders involved. Thus, immediate action can be planned and implemented by the management to keep matters from getting worse. B. CULTURAL REASONS It is normal that when the new management starts to assume its post, it will have to implement stricter rights and privileges for its workers. There is a possibility that the once strong and transparent relationship that existed between the management and workers prior to the partnership or joint venture would be replaced by frustration and hatred. The differences in the culture of the personnel involved could also contribute to this friction. When this happens, the performance of the new workforce will surely be severely affected and their efficiency will decline. This is because of concentrating on their work, they will now be more concerned about the diminished benefits they would be possibly be getting. These worries and anxieties will pave the way for them to inhibit frustration and anger towards their new supervisors and the management as a whole, feeling they are already taken for granted. It is a well known fact that human resources play a crucial role towards differentiation and a potent source of competitiveness for any organization or company. Therefore, any organization must take care and constantly invest in human resource development especially during these periods of adjustment to a new management and environment. However, the determination of the extent to which an organization can invest in terms of human resources development depends on the financial capabilities of the company or organization. The rights and privileges of the workers must be carefully studied under the change management program of the company, because it should jive with the basic policies of an organization’s human resource development strategy. Critical Partnership / Joint Venture Success Conditions ·         Financial Stability Financial stability is crucial especially in the pursuit of partnership and joint venturing activities. In any industry, it is important to remain updated with the latest developments to be able to stay competitive in the market. ·         Product Performance and Price The production of the products and services comes as a result of well-funded research and development activities. The strong performance of products in the market could also be linked to their cost-effectiveness. However, the company has to be aware of the positioning in terms of process so as to maintain satisfactory profits margin and remain competitive in the market. ·         Marketing Strategy and Distribution High brand awareness among the buyers has created the need for aggressive marketing, and access to strong distribution channels is critical for the introduction of new models. Benefits of Joint Ventures / Partnerships Among the competitive advantages enjoyed by both companies upon partnership includes the following: ·         Economies of Scale and Scope in manufacturing and research and development. ·         Unique Quality Technology owing to heavy emphasis on research The commitment to research & development activities has always been one of its top strategies to remain competitive in the market.         ·         Differentiated Products Through the production and marketing of differentiated products originating from their research and development activities, the joint venturing companies are able to create its own firm-specific advantages. The continuous pursuit of research and development processes enables them to produce a steady stream of originally differentiated products which makes it difficult for competitors to find substitutes. Because of this differentiated approach, these companies are able to market their products worldwide, which enable them in turn to maximize the returns on research and development expenditures. CONCLUSION The results of the analysis carried out on the issues / problems mentioned in the partnership / joint venture indicated very significant effects for Shirley Associates Ltd., even amidst the threats of unrest. Therefore, we could conclude that Shirley Associates Ltd. could still be expected to grow faster than average. The review of Shirley Associates’ capabilities and resources brought about by the joint ventures revealed very little inconsistencies regarding their strategies. This is coherent with their traditional inside-out approach. However, the need to reconcile both the inside-out and outside-in approaches becomes imperative now as part of the joint venturing process. The gap analysis among the environment, strategy and capabilities of Shirley Associates Ltd. revealed certain gaps, most of which are biased towards the environment. However, these gaps paved the way towards determining a number of recommended strategic options to secure the company’s competitiveness. Also, the company has to find a balance between adherence to internal forces within the company and to the changing forces of the environment in order to implement such strategic options.   Credit:ivythesis.typepad.com

COMMON PROBLEMS IN PARTNERSHIPS / JOINT VENTURE

OBJECTIVES As a person with knowledge of various joint venture cases, the author has always brought up to his superiors the viabilit...

Strategies in action

Strategies in Action The Dramatic Shift from Equity-Based Partnerships to Non-Equity Based Contractual Forms of Partnerships   Strategic Partnerships/Alliances             Strategic partnership or alliance is a formal agreement between two or more business organizations to pursue a set of private and common interest through the sharing of resources in contexts involving uncertainty over outcomes. Strategic partnerships may be classified in various ways; they may seek exploration or exploitation purposes. They may be cross-border or domestic, be governed as equity ventures or as contractual agreements, involve dyads of partners or multiple partners. They may link firms in different stages of the value chain or seek the benefit of scale by connecting companies in the same stage of the chain. The resources shared may be complementary or they may constitute a pool of similar resources. Depending on its purpose, a strategic partnership may be temporary or enduring ( 2003).              Strategic alliances, according to (2001), are collaborative organizational agreements that use resources and/or governance structures from more than one existing organization. Strategic alliances have three important characteristics. <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal" style="text-align: justify; line-height: 200%">The two or more partnering firms remain independent subsequent to the formation of the alliance.</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Alliances posses the feature of ongoing mutual interdependence, in which one party is vulnerable to the other. Mutual interdependence leads to shares control and management, which contributes to the complexity of alliance management and often creates significant administrative and coordination costs.</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Because the partners remain independent, there is uncertainty as to what one party is counting on the other party to do </li> </ul>   Strategic Objectives of Inter-firm Partnerships             The overall strategic objective of alliance partners is the pooling of resources to create value in a way that each of the parents could not achieve by acting alone. Value creation refers to the process of combining the capabilities and resources of the partners to perform a joint task that has the potential to create monetary or other benefits for the partners. Although the perceived value to each of the parents need not be the same, each alliance partner must gain some benefits for an alliance to be the preferred option (1986 , 2001). Some of the strategic objectives of firms in forming alliances are: <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal" style="text-align: justify; line-height: 200%">To gain economies of scale by pooling economic activities such as raw materials supply, manufacturing, and marketing and distribution.</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">To reduce risk and promote stability. Alliances may be an attractive option for large, risky projects because neither partner bears the full cost of the venture activity.</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Legitimacy (1990, 2001 ). Firms may seek established partners to capitalize on the partner’s reputation. This objective may be prevalent in cases where small firms seek cooperative relationships with larger firms. Legitimacy concerns also may exist when firms try to enter international markets. A local partner may provide the necessary legitimacy for firms that are unfamiliar and uncertain about local conditions.</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">To gain access to another firm’s knowledge or ability to perform an activity where there are asymmetries between firms ( 2001).</li> </ul>   Equity and Non-equity Based Alliances             Strategic alliances can take various forms. They can be classified according to equity involvement in the partnership. Some alliances are equity based while others do not involve any equity input. Equity alliances can take two forms: the first is the most well known form of strategic alliance, joint venture. The second is equity participation by which a company owns certain shares of another company for the purpose of control influence. Non-equity alliances include a variety of contractual agreements consisting of technology agreement, Research and Development (R&D) partnership, marketing agreements, supplier agreements, franchising, licensing, and production sharing ( 2002).         Equity Alliances Shared Equity/Joint Venture             Shared-equity alliances entail the foundation of a new business, commonly referred to as a joint venture ( 1998). Joint ventures are the most common form of strategic alliances, which means that two or more firms create an independent business unit by contributing their share of equities. Joint ventures are considered independent legal entities from their parents.             A classic example of a joint venture is the creation of Caltex by Chevron and Taxaco in the 1930s. Going into the alliance, Chevron was successful in exploration and production in the Middle East and Taxaco had a strong distribution and retail network in Latin America, Europe, Africa, and Asia. Chevron needed retail markets for its Middle East crude; Taxaco needed a supply source for its overseas downstream operations. Caltex was formed as a shared-equity venture to solve the dilemma for both companies ( 1998).   Principal Stages: Features of Joint Ventures 1. Initial Stage             Initially, a firm makes a strategic decision of whether to enter a joint venture with another firm (or firms) for the purposes of achieving economies of scale, reducing risks/costs, accessing markets/resources, developing technology or products, and learning from the partner (partners). If the benefits of a joint venture outweigh its costs and risks, the firm decides to engage in a joint venture ( 2002). 2. Formation Stage             Once the choice is made for a joint venture, the second phase of the process starts. At this point, a number of follow-up decisions need to be made. Such decisions are primarily concerned with whom to choose for a partner and what type of joint venture would be suitable for the purpose defined. With regard to the type of joint venture, the ownership pattern and benefits sought from the partner would be important factors ( 2002). Types of Joint Ventures <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Exploiting Symmetrical Competencies – These kinds of joint ventures are established between firms to exploit the existing similar competencies that each partner possesses. These types of joint ventures are formed to leverage combined resources and competencies of partners that would enhance economies of scale or economies of scope of the venture, which in return would eventually add to competency levels of the partners ( 2002).</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Deploying Asymmetrical Competencies – Firms that have different resources and competencies establish joint ventures that benefit from such diverse capabilities. One partner’s resource and competency superiority compensates for the deficiency of the other partner. In order for these types of joint ventures to work, there must be diverse but complementary competencies provided by each partner. The majority of joint ventures fall into this category (2002).</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Creating New Competencies – This type refers to joint ventures where partners intend to create new competencies that no partner possesses. Because no partner alone is capable of generating capabilities needed, partners cooperate to build competencies that would provide benefits for each joint venture partner ( 2002).</li> </ul> 3. Operations Stage             Partners closely watch operations of joint venture and would like to know how the joint venture is managed and what results are achieved. They are time-by-time directly involved in its management by assigning board directors and other managerial staff. Two of the most important decisions that parents need to make are performance assessment and control ( 2002). 4. Outcome Stage             Based on their overall satisfaction with the joint venture, parent companies decide to either continue to be a partner or to leave the joint venture. Their overall satisfaction could be based on the number factors. Some are related to the poor performance of the joint venture or serious conflict with the other partner ( 2002).                         A joint venture involves the creation of a legally separate company of which the alliance partners are normally founding shareholders. The partners normally provide finance, and other support resources including some personnel, until the venture is able to develop its own. The aim of the joint venture is typically that the new company should ultimately become a self-standing entity with its own aims, employees, and resources quite distinct from its parent shareholders (1998).   Equity Participation             In equity participation, one partner owns a certain percentage of equity stakes in another firm. Sometimes it could be a cross holding, by which the partners hold some percentage of equities of each other. It is believed that an ownership of substantial equity in a company provides insights into and some control over that company’s strategies and operations. Firms that have equity relationships feel closer to each other than companies that do not have such ties ( 2002).             General Motors is one example of a firm that uses equity participation. General Motors has effectively used its equity participation on Isuzu and Suzuki to penetrate the Japanese automobile market by co-production and co-marketing. An example of cross-equity (cross holding) alliances is evident in Mitsubishi Bank. Mitsubishi Bank owns 5 to 10 percent of fifteen companies that constitute the core of the Mitsubishi group. In turn, these companies own shares of Mitsubishi Bank and of several other companies in the group. These ownership positions carry unspoken but real agreements that the companies will have preferred business relationships with one another ( 1998,).   Non-Equity Alliances             Firms can still form alliances without any equity ownership. This type of collaboration is called a non-equity alliance. The major forms include licensing, franchising, management contracts, turn-key operations, subcontracting, buyer coalitions, supplier partnership, R&D partnership, marketing agreements, technology partnership, and joint production. According to  (2004), Non-equity alliances embrace a wide variety of cooperation, with a wide variety of organizational concentration. A non-equity alliance can yield different levels of dependence, associated with different heights of exit barriers or switching costs, and this requires different degrees of governance   Types of Non-equity Alliances Licensing – in a licensing agreement, a firm, the licensor, grants the rights of using its patents and trademarks, technology, or know-how to another company, which is the licensee. In return, the licensee agrees to pay a royalty or other form of payment, usually based on either production volume or sales, as agreed upon by two parties. Franchising – is a special form of licensing in which the franchiser grants the use of a brand name, trademark, business system, and other property rights to a franchisee that agrees, in return, to pay a fee based on the volume of sales. The explosion of franchising throughout the world was brought about by the expansion of major franchising companies such as McDonald’s, Burger King, Kentucky Fried Chicken (KFC), Pepsico, Coca-Cola, Hilton Hotels, and Holiday Inns. Franchising works similarly to licensing except that franchising is considered a more continuous type of relationship between a franchiser and franchisee. In addition, the franchiser exerts more control over the franchisee to assure product or service quality (2002). Joint Marketing – often two firms reach a marketing agreement by which each company helps each other in marketing others’ products or services. Although the nature of marketing collaboration varies from one industry to another, the collaborators aim at promoting each other’s products and services to customers (2002). R&D Partnerships – an increasing number of firms have been collaborating to research and develop new products or technologies. Firms pool their resources by sharing the costs of a huge capital outlay of a project or combine their human and technological resources and capabilities to introduce an innovation ( 2002). Joint Production – is also called co-production or productions sharing, where two or more companies contribute to the manufacturing of a final product. If each participating firm mastered in manufacturing certain parts of the product or at processes through cost minimization or differentiation, they would complement  in coming up with superior final product (2002).             Features of Non-equity based Partnerships             Non-equity based partnerships are contractual agreements between firms. Contractual agreements affect the value chain activity of the firm and provide benefits for the firm’s sustainable competitive advantage (2002).             Perhaps the main feature of non-equity based partnerships is flexibility. Contractual R&D partnerships according to  (2002), enables companies to increase their strategic flexibility through short-term joint R&D projects with a variety of partners. This flexibility in R&D projects with a variety of partners. This flexibility in R&D partnerships ties into the more general demand for flexibility in many industries, where inter-firm competition is affected by increased technological development, innovation races and the constant need to generate new products.             Non-equity alliances cover technology and R&D sharing between two or more companies in combination with joint research or joint development projects. Such undertakings imply the sharing of resources, usually through project-based groups of engineers and scientists from each parent company. The costs for capital investment, such as laboratories, office space, equipment, etc. are shared between the partners. During the joint project, each organization is expected to commit and promote organizational interdependence between partners. Compared to joint ventures, the organizational dependence between companies in an R&D partnership is smaller and the time-horizon of the actual project-based partnerships is almost by definition shorter (1993).   Research and Development (R&D)             R&D is regarded as the most valuable, strategic activity of corporations since it is the source of new competitive advantage. R&D is about the effective and efficient creation and deployment of new technology, products, and processes that may result in substantial financial return and competitive advantage to its producers and which may improve the quality of life of its consumers or society in general ( 2002,).   What are the reasons behind the shift from Equity-based to Non-Equity-based R&D Alliances between Firms?             Joint ventures are considered as one of the older models of inter-firm R&D partnership. Joint ventures have become popular during the past decades. However, recent findings, reveal that joint ventures are gradually losing their popularity compared to other forms of inter-firm partnerships ( 1996; 1999 , 2002, ). Among the reasons why joint ventures are decreasing their appeal are high organizational costs combined with their high failure rate. More specifically, problems with the continuation of joint ventures are related to the risk of sharing propriety knowledge, the appetite for control by one partner and a variety of different strategic objectives (1999; 1985, 1988; 1985;  1999  2002,).             Although there are clearly potential economic and technological benefits that result from firms venturing together, the failure rate of joint ventures is high. In a study conducted by  in 1991, they found out that among 880 joint ventures and cooperative alliances, only 45 percent of the companies were judged successful by all sponsors (1995, ). Some factors that lead to joint venture failure include significantly different goals of parent firms; perceptions of unequal costs and benefits; and conflicts over decision-making, managerial processes, and corporate values ( 1988;1983 , 1995). One of the major causes of dissatisfaction that may eventually lead to joint venture failure is shared ownership. Dual hierarchy potentially may result conflict between parent firms. Conflicts of interest due to divergent objectives and operational asymmetries may adversely affect a firm’s flexibility in decision-making and its ability to coordinate (2006).               Perhaps one of the major causes of the shift from equity-based partnership like joint ventures to non-equity based partnerships like joint development programmes is the emergence and rapid growth of high-tech industries, particularly pharmaceuticals and information technology and other R&D intensive sectors (instruments and medical technology and consumer electronics) (2002). Given below is  analysis of the sectoral differences in terms of contractual R&D partnering: <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal" style="text-align: justify; line-height: 200%">In pharmaceuticals and the information technology industry, one sees an above average preference for contractual partnering throughout the past decade (2002, ).</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">Aerospace and defense industry shows rapid decline in the importance of contractual R&D partnering during the most recent decade (2002, ).</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">In chemicals, electrical engineering industries, food and beverages, and metal products, which are all non-high-tech industries, joint ventures have had a inconsistent importance throughout most of the past decades (2002, ).</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">In instruments and medical technology, a rather R&D intensive sector within medium-tech industries, joint ventures have gradually become less important as contractual R&D partnering has become the dominant mode of partnering (2002, ).</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%">In the automotive industry and consumer electronics, there appears to be two opposite developments: in the automobile industry it seems that contractual partnering is becoming less important, whereas the opposite seems to hold for consumer electronics (2002, ).</li> </ul>               Another cause of the dramatic shift is the demand for flexibility. Companies, especially those that belong to the high-tech and R&D intensive sectors are constantly looking for new technologies and products that will boost their competitive advantage. These companies are looking for partnerships between other companies that are more flexible.   Bibliography   Credit:ivythesis.typepad.com

Strategies in action

Strategies in Action The Dramatic Shift from Equity-Based Partnerships to Non-Equity Based Contractual Forms of Partnerships Strategic ...

Case Analysis on International Joint Ventures

Case Analysis on International Joint Ventures   Introduction and Background               International business professionals use the term “modes of entry” to describe the different methods and approaches available to enter markets and conduct business in other countries.  One mode of entry is the joint venture where two or more organizations join together in a cooperative effort to further their business goals.  The joint venture is one of the most common and effective means of conducting business internationally.              This mode of entry is being portrayed in a case study about the relationship between two firms – the Shirley Associates Ltd. (Australian Company) and Huang Enterprises in the locality of China.  Although there had been progress with the joint venture between the two companies, it is still inevitable that problems and pitfalls will surely occur along the way of the partnership.  It sure did as Shirley Associates Ltd. loses the equity control of major management decision-making as the partnership expands.  This paper assesses the nature of the reasons and factors that caused the problem between Shirley Associates Ltd. and Huang Enterprises and tries to answer the question “What went wrong”?  Taking into the business of International Joint Venture is a risky step since joint ventures is relationship based rather than rules based like what had happen to Shirley Associates Ltd. in its merging experience with the local company Huang Enterprises.  Provisions of the Joint Venture                         The documents and agreements of the joint venture are critical to the success of the venture.  The joint venture agreement forms the basis of the understanding between and among the parties.  It is relied upon to ensure that all parties understand their roles, rights, responsibilities, and remedies in the conduct of the venture.  Organizations enter into joint ventures in good faith but closely scrutinize the joint venture documents if anything goes wrong.             The importance of the documents is to cover, step by step, the critical elements to consider and include in the joint venture agreements.  Time is spent on what should be included in the agreements and why they should be included.  Equity participation, for example, may or may not be as important as operational control.  Technical participation in the venture may or may not be as important as the intellectual property rights that may result from the venture.              A key to developing the joint venture agreements is to determine the goals and objectives in advance and ensure that the interests are reflected in the agreement.    International Joint Ventures               An international joint venture is a distinct enterprise, or multi-organizational agreement, created as an alliance between two or more parent organizations working across country borders in designing-managing the venture. Research on international joint ventures is a hot topic for strategists and scholars.  There could be most important questions sought by these groups.  First is the reason why International Joint Ventures are created.  Second is the question of “what are the key success factors in creating and managing successful International Joint Ventures” and the “why do so many have such short lives of only up to 5 years”.  Lastly, is the concern on how can the decision-action processes in creating and managing International Joint Ventures through time be described accurately, and what important insights can be learned from studying these processes?   A fourth question concerns deductive and inductive development of International Joint Venture theories.  According to (1963), there are some central propositions (Pi) in a behavioral theory of the firm applied to creating and managing International Joint Ventures.  These are the following:  (P1) International Joint Ventures are created and managed in a series of small steps that link finding-searching-thinking-deciding with doing and evaluating opportunities and actions; consequently, to describe and understand International Joint Venture decision processes requires the examination of the streams of thinking and behaviors (through time) of participating firms and persons in International Joint Ventures finding-searching-thinking-deciding-doing-evaluating.  (P2) In most cases, search for partners in creating International Joint Ventures is limited, biased, and messy; firms search and evaluate potential partners sequentially – evaluating and deciding are not delayed until consideration set of several potential partners is found – potential partners are usually accepted or rejected without thorough and comparative evaluations.  Firms that are more thorough and comparative in selecting International Joint Venture partners are likely to be successful in moving from creation the on-going operation of an International Joint Venture. (P3) The principals involved in creating and managing International Joint Ventures initially overestimate the level of agreement of shared vision among their partners in the specific objectives and day-to-day management of the International Joint Venture.  Continual and deep communications, daily face-to-face discussions, are necessary to achieve consensus on implementing actions for achieving the shard vision.  Otherwise, trust is reduced, communication breakdowns occur, and the International Joint Venture is judged to be a failure. (P4) Multi-national enterprises (MNEs) are more likely to use International Joint Ventures in centrally planned or hybrid economies when the local government prefers such cooperation, even if wholly-owned subsidiaries (WOS) are permitted (1994).  National governments often create incentives for MNEs to create International Joint Ventures with domestic partners; centrally-planned government interference is believed to be greater for WOS that International Joint Ventures. (P5) Most created and operating International Joint Ventures that include an MNE and a small domestic partner have life spans of less than five years.  The success and failure of such International Joint Ventures should not be judged by the length of their lives; the ability of the International Joint Venture in achieving multiple performance objectives should be the focus in valuing an ongoing International Joint Venture (1987). (P6) Most International Joint Ventures created by two small-size enterprises never become operational.  Delays become permanent because of shallow product-market knowledge, inability to operationalize a shared vision, and limited financial resources (1991).               In such a particular case, the sole focus of this paper is the international joint venture of Shirley Associates Ltd. with Huang Enterprises in China.  The case study concerns on what went wrong with the partnership.  But before jumping into the question, here are some of the generalizations of the nature of the International Joint Ventures.   Why International Joint Ventures Often Break Down Theoretical Insights               The joint ventures between the two companies in the case study are just so timely and providential.  In real life, designing and implementing an International Joint venture usually takes six months to three years.  Moreover, in some countries, the legal creation of an International Joint Venture generally does not result in implementation, that is, no products-services are created, no customers are served, and no sales are made.  The International Joint Venture never gets off the ground for several reasons; the creation-implementation process breads down.  Often the prime reason for such breakdowns is the poor fit in working out the operating details when attempting to convert the early shared vision between the two principal parties (1996).               In addition, decision process in creating an International Joint Venture is messy, time-consuming, and (in most cases) alternative partners and design configurations are not carefully researched by either of the two principals.  Breakdowns and delays occur in valuing the opportunities and costs associated with creating and running the International Joint Venture; additional breakdowns and delays occur in assessing the operating doability of the International Joint Venture.  These are the very valid reasons why International Joint Ventures is “relationship based” and not “rules based” that exactly what had happened with Shirley Associates Ltd.  This specific nature of the International Joint Venture has been the prerequisite problem since it doesn’t state any legal provisions and protection.               Despite that fact that International Joint Ventures have been studied from numerous perspectives (1986; 1989;  1987), agency theory provides a unique and under-utilized perspective (1989;  1992).  This part of the paper focuses on the control of the venture members and the coordination of their actions for the mutual benefits of all members which is the direct cause of the venture’s break down.  By identifying the International Joint Venture partner performing the role of the agent in an agency relationship, reciprocal agency provides a theoretical framework to anticipate where problems arise and suggests the appropriate actions for resolving those problems (1989).              In a theoretical perspective on conflict and cooperation,  (1987) utilize the 50-50 equity joint venture as an exemplar that symbolizes the cooperative ethos. Cooperation is defined as coordination through mutual forbearance. Mutual forbearance builds trust and, through trust, commitment to the venture. Forbearance occurs where an agent chooses to honor his full contractual obligation. Alternatively, the agent may fail to honor minimal obligations (strong cheating) or may choose to honor only minimal obligations (weak cheating). Mutual forbearance occurs when parties forbear on a reciprocal basis and punish cheating. Activities that enhance each party’s reputation for forbearance serve to build trust. As trust builds, agents’ preferences change so that through commitment to the venture, cooperation becomes an end in itself.  (1987) conceptualization is analogous to Thompson’s reciprocal interdependence (1967). Reciprocal interdependence refers to the situation in which outputs of each system element become the inputs for other system elements. This is precisely what occurs in a joint venture relationship. The distinguishing aspect of reciprocal interdependence is that each entity poses a contingency for the other (1967). With reciprocal interdependence, concerted actions are achieved through coordination.  (1987) takes a more practical approach to the conflict-cooperation problem in joint ventures by identifying four dilemmas that reoccur in joint venture management. Partners must make choices between: exploiting or investing in finance and know-how; molding or letting the operation grow; fighting or producing a team-like cooperative effort; and selecting its own joint venture manager or allowing the manager to develop his own staff.   points out that while some of these issues can be resolved early, the same issues are likely to reoccur at later stages in response to changes in the joint venture and its environment. It is clear that the problem of the control of venture activities is of central importance because the parties are mutually dependent on each other to accomplish activities and achieve goals. The agency nature of the relationship has been implicitly recognized by several scholars.  (1989) note that partners are “often unable to rely solely on their ownership position” to determine behavior and must relinquish control to the IJV.  (1986) recognizes that while partners form a joint venture hoping for mutually beneficial outcomes, control is relinquished grudgingly. Greater specification of the cause and solution to conflict in the joint venture is necessary. A useful framework may be developed by explicitly considering the joint venture as a reciprocal agency relationship. Conclusion             There are actually a lot of things that should be stretched out regarding the case study of Shirley Associates Ltd.  First is the risky nature of the International Joint Venture that provides loose business security and legality.  Secondly, it is also important that there should be third-party stakeholders involved in the design and implementation of International Joint Ventures.  Such third-party stakeholders are banks, government agencies, union officials, suppliers, distributors, and legal officials that play a critical role in the contribution in designing-implementing parts of an International Joint Venture.  Consequently, according to  (1989), Enterprises with little prior experience in setting-up International Joint Ventures almost always underestimate the impact of third party involvement.               Close attention should be paid to attaining co-alignment of interests through non-contractual means such as cooperation and coordination since it is based on relationship between business partners.  Reputation is an essential element to insuring trust between partners.  It is obvious and self-evident that problem identification is the initial step to problem resolution.    Credit:ivythesis.typepad.com

Case Analysis on International Joint Ventures

Case Analysis on International Joint Ventures Introduction and Background International business professionals use the...

Doing Business Overseas

Flight Engines Limited   Introduction               This paper discusses a case of joint venture in the aviation sector.  Specifically, this paper gives further answers to questions from the actions made by the Flight Engines Limited in its connection with Indian firms.  It is inevitable that globalization and international business wouldn’t be included in this paper since the focus of the case is the merging of Foreign Service firm (i.e. FEL) and the local firms (Indian Air Force and Component Repairs Limited).              This paper also provides the nature of doing business overseas as well as the reasons for globalization.  At the end part of the paper, recommendations and answers to the questions of the case of FEL have been available.    Terms and Conditions of Trade for Repair and Overhaul Business                         Commercial aircraft maintenance, repair and overhaul (MRO) services is straightforwardly connected to the size and operation of the commercial aircraft fleet.  The type of maintenance, size of airline, and the type of service provider are the factors that may cause variations to the needs of the MRO of aircraft operators and their options of servicing aircraft.  Most of the time, the main players in this market were independent service providers and the airlines themselves.  The larger the airlines, the more MRO services they in-house taking advantage of economies of scale which smaller carriers lack.              Engine manufacturers for instance, have found that the MRO market is very lucrative, especially as profit margins for original engine sales went down during the 1990s.  In lieu of selling engines, some Original Equipment Manufacturer (OEM) began selling power of flight hours through leasing arrangements.  Maintenance relationships with the OEMs were often preferred by the airlines as leasing of aircraft and engines grew.  As smaller European airlines move into the U.S. market, there was a growing role of OEMs along with the increase in global activity by airlines and MRO market has become much more global.              Nowadays the MRO industry, where Flight Engines Limited belongs, is slowly beginning to recover from the traffic slowdown of late 2001 and was predicted to resume its steady growth over the next few years.  It is thus suggested that consolidation among airlines and further competition from OEMs will create further opportunities for alliances and consolidation.  In order to compete, MRO firms will have to offer a wider array of services with greater geographical coverage.  Such condition is appropriate and suitable to the larger firms and it is expected that the number of providers will decrease over the next years as smaller players leave the market or merge.                As many professional service firms do not compete on price and cost not even primarily maximizing profits, it is enormously crucial for professional service firms to analyze both costs and benefits carefully prior to coming up a decision to go global.  Otherwise, internationalization or globalization may turn out to be a formula for success or it may be even reduce the probability of success in its most extreme sense which is survival.  As a preparation for a plan of globalizing services, professional service firm managers and owners should be able to anticipate undesirable outcomes in order to formulate counter measures before implementing a global strategy.                Flight Engine Limited has a key characteristic as a professional service firm.  The bulk of the earnings is based, on the professionals’ application of their expertise, either in terms of a fixed fee for the service, sometimes on a ‘no cure, no pay’ basis, or in terms of a project contract stipulating payment at an agreed fee for the man-hours required to complete the task.  Yet another major difference lies in the nature of potential opportunism.  For the professional service firm, opportunism is typically linked to diagnosing a larger, more complex problem than necessary, thus increasing the number of man-hours required.  On the other hand, the opportunistic professional service firm may involve more junior personnel than initially agreed, which may lead to both an increase in the number of hours required and possibly also a decrease in the quality of the solution delivered.  Therefore, an ethical requirement for professional service firms is that short term gains need to be given up in situations of conflicts of interest, in order to protect the professional reputation and client trust required for long term survival.     One of the major challenges with the specialized knowledge typically constituting the foundation of professional value creation is the fact that the client generally does not have sufficient knowledge to judge the quality of the service delivered.  In other words, the information asymmetry is substantial ( 1984).  For this reason, high ethical standards enforced by a profession or by the firm itself are required, if a firm is rightly to be called a professional firm.               The terms and conditions for trade in the repair and overhaul business can be accessed through a four-part typology of how international transactions in services as provided by the General Agreement on Trade in Services (GATS). <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Cross-border flows</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> The movement of a consumer to a supplier’s economy</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> The movement of a commercial organization to the consumer’s economy</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> The movement of an individual supplier to the consumer’s economy</li> </ul>   Free trade and investment in services occurs when service providers and consumers are able to interact through whichever mode they decide, free of any regulatory distortions.  Any policy that impedes service producers and consumers interacting through any of these modes of supply is an impediment to international service transactions.   The GATS does not define market access. Article XVI (1) obliges members to grant market access to scheduled industry subsectors, while Article XVI (2):(a)-(f) contains a list of quantitative measures considered to be limitations on market access.  Article XVII (1) defines national treatment as treatment no less favorable than that accorded to like domestic services and service providers subject to the limitations and conditions set out in the country’s schedule of commitments.  An uncomfortable overlap exists between the two commitments, with national treatment being interwoven with market access.  Despite this confusion, it appears that the GATS application of market access was applied to broadly cover barriers to both foreign and domestic suppliers, that is competition policy ( 1996;  1996).   Doing Business Overseas               Flight Engines Limited is considered and belonged to the professional business service firms (PBSFs).  These PBSFs,\ have been accounted as a great part of the growth of globalization.  (1992) define International Joint Venture as “a separate legal organizational body representing the partial and fractional holdings of two or more parent firms, in which the headquarters of at least one is located outside the country of operation of the joint venture.  This entity is subject to the joint control of its parent firms, each of which is economically and legally independent of the other”.   Reasons for Doing Business Overseas             Right from the end of the twentieth century until entering the twenty-first century, globalization has greatly improved the worldwide economies without showing a sign of reduced growth in global sectors.  This astonishing and fairly apparent global and international development can be accounted to a couple of factors.  One factor is the level of education of both buyers and suppliers raising the requirements for firms trying to achieve a knowledge-based competitive advantage substantially.  Another important reason is the trend for outsourcing with the combination of the rapid diffusion of information leading to an increasingly globalize economy.              Most firms find that in this competitive context, given the fact that they also need a critical mass of knowledge workers in any area in order to stay ahead of competitors, specialized knowledge-based services are better outsourced and sought from expert firms.  Firms in all industries outsource activities which are not core to their own competitive edge, and expert service firms typically are able to offer both better quality and lower cost than internalized staff.  In addition, with the rapid development of new knowledge in all areas of society, small internalized staff units face an ever increasing danger of their knowledge being outdated.  Consequently, knowledge intensive service firms are found relating to all types of industries as well as to the public sector.  These knowledge intensive service firms are different enough to challenge the industrial logic presently dominating most discussions of management and value creation, because they are fundamentally knowledge-based as opposed to capital-based. And they are different enough to warrant more research into their characteristics and their management practices, in order to achieve maximum value creation, not only in the knowledge intensive service firms themselves, but also in their client firms.             Despite the fact that several threats and disadvantages can be cited along with the commencement of international business, international firms are not even shaken by such risks.  There is no wonder why globalization has been on the rise since its success depends on international firms providing trade to other countries.  With the above-stated reasons on why international firms globalize their business operations, it is noticeable that these advantages are of greater importance than the perceived risks.  Venturing into Foreign Markets             It has been highly suggested and recommended that careful and pro-active planning should be in front when trying to invest in foreign markets.  This may refer to the choice of entry-mode which particularly affects a firm’s performance in the foreign trade ( 1986).  Firms involving in international or foreign trade may include businesses that are outsourcing their services and operations or commit to an international joint venture in order to gain entry into the foreign market of choice.  The Technology Transfer International business is usually defined as the transfer of factors of production owned by organizations across national borders, or the transfer of parts of that organization across national borders (1989).  Technology transfer, on the other hand, refers to the application of technology to a new use, or to a new user for economic gain (1981).  Technology transfer is generally thought of as being product-embodied, process-embodied, or person-embodied. That is, technology transfer can be said to occur through the specific transfer of products, processes, or people.  Most of the emphasis in the research and practitioner literature has been on the latter two types of technology transfer-process-embodied and person-embodied.  To the careful reader, however, technology transfer, which occurs by process or person transfer, never occurs without some overarching organizational framework.  Thus, if we augment this basic taxonomy of technology transfer by including organization-embodied factors, the processes of international business and those of technology transfer become virtually inseparable. Technology transfer can then be considered to be the core, or the heart of international business.  Flight Engines Limited does have processes of technology transferred to India.  However, when it comes to international business, technology transfer is fundamental to the accomplishment of international business.  Moreover, the success of the international business transaction under consideration frequently depends on the effectiveness of the technology transfer embodied in that transaction (1991). The twin concepts of international business and technology transfer share some additional important overlaps.  Both are crucial to the business community, yet they are extremely complex issues involving economic, political, social, and cultural factors.  When issues of complexity emerge, as is the case with international business and technology transfer, simplifying assumptions and frameworks are usually sought to help explain the complexity.  From a simplified model, implications can then be derived for research or practice.  Very often those implications are derived using mathematical techniques, and later those implications are related to some observed reality.  This represents the inductive approach in science. Broadly interpreted, technology transfer is an integral part of the process of international business.  To be successful in international business, the firm must initially possess some specific comparative advantage, which it then seeks to transfer across national borders.  In navigating this terrain, the firm concerns itself with the overall effectiveness of its products, people, processes, and indeed, its organization.  All of this occurs through technology transfer.  To illustrate just how this process works, we begin by establishing a somewhat “abstract” model of the competitive market as an initial benchmark.  We then introduce some major “imperfections” that, in reality, are all non-economic factors, to determine whether technology transfer is desirable from the corporate point of view. Assessing Potential Impediments to Service Sector             Foreign direct investment (FDI) plays a key role in services trade.  For foreign suppliers of many services, such as communications, financial, retailing and various business and professional services like the Flight Engines Limited, it is important to establish a commercial presence in a market to allow ongoing direct contact with consumers.  Restrictions on FDI can therefore potentially have significant implications for services trade.              The first major problem in the analysis of Foreign Direct Investment barriers is the lack of information on the restrictions imposed in each economy.  With this regard, the Flight Engines Limited has already coped up with this during its previous connection with the Indian agency.              There have been very few mergers and acquisitions in the world airline maintenance industry as a whole.  There was quite a lot of merger and acquisition activity in the United States in the 1980s, but overall, particularly international mergers and acquisitions are almost non-existent.  The reason for this is the prohibitive stand by regulatory authorities world-wide.  Consequently airlines have been forced to use other ways than mergers and acquisitions in their search for more competitiveness.  There is a strong need to consolidate the industry but, largely due to government control, airlines can only go halfway along the consolidation path.  Potential Risks for FEL (termination of the agency)             Quitting a certain joint venture would not be a simple termination.  It would also involve risks.  Such risks would apparently be the claims of the previous partner of the FEL since it is one of the provisions of the agreement between the agency and the FEL.  However, FEL can reduce or lessen the exposure claims through professional and smooth exit of FEL stating its purpose of termination.             Under a joint venture, there are adaptable reasons why termination exists.  It could be the dissolution due to partner’s ownership structure to exploit economies of scope as well as government policy changes ( (1987).  Consequently, duration and survival appear to be unacceptable measures of performance since termination of a joint venture may be the result of success, failure, or simply an adaptation to changes in the environment.  In this case, FEL has the permissible and acceptable reason in terminating the joint venture with the agency.  In other words, FEL may use the “changes in a partner’s environment” or the “changes in partner’s corporate strategies” (1993).  In following this approach to termination, FEL will be able to lessen its exposure to claims.  Generally, joint venture termination is not due to failure but rather an adaptation to changes and the aim for better opportunities.  Knowledge Creation and Transfer in International Service Firms             The globalization and even the viability of service firms at the beginning of the twenty-first century clearly depends on the ability of these firms to produce, transfer, and guard knowledge that they use in providing services to clients.  From the simplest financial services that a bank provides to a foreign client or a foreign affiliate of a domestic client, to the most complex management consulting project that involves extensive interaction between the service provider and the client firm, each of these situations requires the service provider to take specialized knowledge and apply it to a client’s needs, while trying to retain the relevant skills, structures, and other appropriable aspects of that knowledge.  In short, the service firms rely fundamentally on their ability to produce the knowledge that they sell to clients, and equally on their ability to utilize and protect that knowledge from competitors.  Knowledge is the key competitive advantage in the service sector ( 2000).             This may not seem like a particularly striking statement, with all of the emphasis being placed on knowledge management in recent years (1995;  1997). Even so, it is quite remarkable that this one dimension is the key to competitiveness time and again in the services sector. In other sectors such as manufacturing or extractive industries, such issues as natural resource availability and production scale economies often play very large roles in creating competitive advantage, along with knowledge such as patentable products or production processes. In services, knowledge is the critical element, and frequently it cannot be protected by patents, trademarks, or copyrights.             The ways that these firms move knowledge among affiliates are numerous, beginning with the relatively costly transfer of experts to foreign assignments, and perhaps ending with low-cost, frequent streams of electronic mail (e-mail).  Since the key knowledge has been found to be relationships with clients and knowledge of the industry, these things are particularly hard to transfer, except when the client is a multinational with which the service firm deals in another country (or other countries).  Since the service firms generally had more than half of their business with multinational clients, the possibility to utilize knowledge of these clients is very real. In addition the firms often have proprietary methodologies for producing their services.  These methodologies can be transferred along more traditional lines, namely through manuals, training programs, and various telecommunications means.   Recommendations and Trade Proposal (CRL & FEL joint venture) The recommended structure of business agreement between the Component Repairs Limited and Flight Engines Limited can be broken down into major subjects through an outline:                I.      Purpose and character of a joint venture or agreement In this section of agreement is a clear statement stating the major goals or strategy adopted by the foreign partner (i.e. Flight Engines Limited).  Similarly, the major goals or strategy of the local partner should also be made available.  In addition to that is the identification of the products, industries, markets, or customers that will be served.              II.      Contributions of each partner The first and most obvious form of security for both firms is the capital.  Included therewith is the existing land, plant, warehouse, offices, or other facilities.  In merging of two firms, each manufacturing design, processes, and technical know-how should be laid out in order to visualize each party’s capabilities.  The technical assistance of workers and their training should be provided by the FEL to the local partner.  In return, the local partner (CRL) will provide the workforce needed as well as the location and property.  Furthermore, it will be the local partner’s job in promoting strong relationship with the local government, financial institutions, customers, suppliers and the like.  Both parties will have to work for the development and advancement of the management.             III.      Responsibilities and obligations of each partner The FEL shall be in charge of providing the machinery and equipment while the local partner (CRL) will be of assistance in the procurement and installation in the locality.  Moreover, it would also be the post of FEL in constructing and modernizing the machinery and equipment.  Personnel management will then be handled by the local firm since the workforce comes from the locality.           IV.      Equity ownership This section has been very critical to most of the cases of joint venture termination.  Hence, there would be a need for clear and understandable agreement regarding equity ownership.  This would involve granting equity to foreign partner for manufacturing and product technology and industrial property rights.  Correspondingly, granting equity to local partner for land, plants, warehouses, facilities and others.  More importantly is the provision of specification of ownership share of foreign partner and of the local partner.  Upon realizing this agreement, it would be the foreign partner that has the advantage most of the time in the international joint venture.             V.      Capital Structure This section is the provision of the structure of capital.  It would involve the equity capital or what is termed as financing.  This is the money being raised by the firm in exchange for a share of ownership in the company.  In addition to equity capital is the loan capital which is the part of company’s capital structure being raised through loans both national and foreign.  Another important consideration is the working capital that measures how much company assets available in building the business.  In thinking ahead, there should also be discussion on the provisions for raising future loan funds since it will be useful in the advancement of the business and to get the future program started.  Accordingly, there should also be guarantees to loans by both partners.           VI.      Management This section deals with the management of the joint venture.  It would initially involve the appointment, composition, and authority of the board of directors as well as the executive officers of the joint venture.  After the selection and formation of the joint venture entity, strategic and operational planning follows.          VII.      Supplementary agreements This section involves licensing and technology agreements as well as management contracts.  There should also be provisions on technical service agreements between partners.       VIII.      Managerial policies Under this section are the specification and the declaration of dividends.  After the joint venture earn a profit, such earnings can be used as the payment to shareholders (dividend) or reinvesting the profit in the business through expansion and extension or could be also used in debt reduction or repurchasing of share.           IX.      Settlement of disputes Settlement of disputes is handled by the board of directors and the executive committee.  In addition to that, there is also mediation and arbitration should misunderstandings and arguments occur.            X.      Knowledge Transfer Given that knowledge is the key competitive advantage in the producer services sector, firms need to find ways to build their knowledge resources, share that knowledge among affiliates, and protect it against incursions by rivals.  Since the knowledge ordinarily resides in people, other than that which has been codified into some kind of medium such as a document or a computer program, the firm faces the need to find and hire high-quality people, to train them in the business, and to retain them over time. One general strategy that has emerged, in particularly the advertising and consulting industries, is the use of teams of people to provide the services to clients.  By creating and using teams, the firm is able to take the offensive in developing new knowledge from the co-operation among team members, and take the defensive in making sure that team knowledge is not able to be ‘stolen’ by a defecting team member.  Both of these attributes enable the firm to build a stronger competitive advantage. The kind of knowledge that seems to produce key competitive advantages is relationships with clients.  This knowledge includes person-based knowledge of key individuals at the client firm; team-based knowledge of the client firm’s people involved in the overall relationship; and historical ‘knowledge’ embedded in the supplier/client relationship that has built up over time.  The latter two types of knowledge are more appropriable by the firm, since no individual can capture the full relationships.  Firms should aim to build up those kinds of knowledge, since they can provide the most durable competitive advantages. In pragmatic terms this means always looking for ways to ensure that services are provided by multi-person teams. It means building relationships with clients that last for years, and that thus build up the historical trust and willingness to co-operate of long-term relationships.   Conclusion             FEL need not worry about gaining profit out of the joint venture with the new firm since usually most foreign firms have the advantage of bigger share and control over the local partner.  In addition to that, as long as the recommended joint venture agreement will be followed prior to merging, the foreign firm (i.e. FEL) has the majority control of the venture.  This is for the simple reason that most of the investing foreign firms are richer than the local country.  Given that the recommendations stated in this paper will be pursued, there would be nothing much that FEL should worry about as the joint venture will surely goes right and well as planned.                         Credit:ivythesis.typepad.com

Doing Business Overseas

Flight Engines Limited Introduction This paper discusses a case of joint venture in the aviation sector. Specifically...