International joint venture between two or more companies has benefits of more resources and knowledge share as well as reward and risk share. Reasons that companies create joint venture could be initiated by new product development, opportunity to access wider marketing or expanding the company with at least one company headquartered outside country of operation (host country).
The immediate benefits of joint ventures partnerships are access to a wider range of resources with complimentary set of skillsets and expertise, access to extensive market domain and ability to utilise a broader range of technologies.
International joint venture partnership is one of the integral factors to grow and develop economics and the most beneficial approach is by engaging with and utilising local business with strong market connections and existing established business networks.
Government and Politics
One of the most important criteria in choosing an international joint venture partner is the environment where joint venture will operate in, as this can have direct effect on the performance of both parties.
Host country’s political atmosphere and government policies are key factors to consider when verifying the suitability of the environment; any pressure could directly or indirectly restrict the foreign partner’s involvement and activities (Blodgett, 1991).
According to Ozorhon et al. (2007) host government’s unstable policies and regulations, regular changes in laws and restrictions on repatriations and imports, jeopardise the effectiveness of joint venture partnership.
In author’s opinion host country’s political procedures that disable effective IJV partnership needs to be identified prior to any attempt to start a joint venture. An example of a political issue effecting IJV is political mismatch and disagreements between foreign partner’s government and the host partner’s government. This will hugely impact business agreements from taking place even if partner’s skillsets, organizational policies and objectives match and work very well together.
Stable economic situation, government policies and political relationships are crucial to a successful business partnership; the foreign partner needs to find an adequate environment before deciding on finding a matching partner, evaluating economic, political and financial aspects of the environment.
This case study will look at current situation of Iran’s International joint ventures and influence of Western countries political relationship with Iran on business partnership with other countries.
The Current UN and European sanctions on Iran over claims that Iran is building nuclear weapons have affected new joint ventures as well as the ones that have been in place for many years.
One example is Rhum North sea gas field in Scotland owned by BP (50%) and the Iranian Oil Company (50%), the joint venture started since 1970s. New European sanctions have forced BP to suspend this engagement and stop production in Rhum North Sea (BP, 2010).
This demonstrates politics contention between countries, affecting joint ventures and ending related agreements with immediate effect, causing financial loss for both partners.
Other countries that are in agreement with the United Nations regulations and countries with good political and economic relation and dependencies with the USA and the West could also consider limiting and ending their joint ventures with Iranian companies. This is to avoid any breaking the United Nation regulation as well as avoidance to jeopardising their relationship and dependency to western countries.
A stable host government creates a suitable environment for IJV partners; this has long term positive impact on the courtier’s economic and immediate positive effect on the partner companies, allowing the parties to concentrate on the inside organisational progress and improvements.
A partner’s country economic situation can affect the business environment and performance, having stable economic elements provides the foreign partner a constant and secure investment climate (Ozorhon et al. (2007).
In author’s opinion economic climate could affect IJV partnership viability, economic fluctuation, foreign exchange rates and inflation, with direct impact on the partner selection process.
Businesses start joint ventures in other countries considering economic perspectives that fit their needs. The host country’s currency compared to foreign country’s currency, gives an opportunity to investors from foreign countries to benefit from cheap investments (Low cost of capitals) and increased wealth position. Currency appreciation makes higher material and manufacturing cost in foreign country hence foreign partner moves the production to host country to benefit from lower costs and gain more opportunity to compete and be a leader in the related market.
The market power is focused on how businesses can get stronger and develop their market domain through international partnership (Child & Faulkner, 1998).
In author’s opinion, successful companies with high position in the existing local market could take advantages of other countries’ market, enter international sale and extend their marketplace by starting partnership with other successful company in different countries. Also companies with advanced technologies and skillsets could start a joint venture partnership with small companies in other developing country to benefit from the raw market and extend their domain. Dominant market network, using partnership advantageous creates an International joint venture with mutual benefits to partners, increases growth opportunities and market power for both parties.
Business market power is an essential deciding factor in selecting a partner. It is also critical to review the business and economic history of the environment, current climate and future predictions. The regional and national business performance, quality of life and people expenditure on similar product and services help to indicate the partner’s economic environment suitability.
Development and management of international joint ventures in different environments creates their own challenges, above all cultural differences between two partners from different nations adds additional complexity. Other related issues and challenges are language barriers and consequence communication issues, management relationship conflicts, unclear objectives, different objectives, incompatible expertise / facilities, lack of partner support and involvement.
Partner Compatibility Evaluation
Before making any decision on selecting a joint venture partner, extensive research and detailed study are required to be carried out to identify the partner’s business prospects, objectives and the environmental and organisational characteristics.
SWOT (strengths, weaknesses, opportunities and threats) analysis is very beneficial and could be utilised to identify the potential partner’s weaknesses and strength and how they match the company’s requirements. This would help to establish if two businesses complement each other (Barnes, 2010).
During the International join venture module and the team exercises, author gathered a list of important criteria that are crucial in the partner selection process:
Past reputation and positive track record of collaboration, good brand, culture (national and corporate culture), Organisation size, mutual benefit potentials, compatibility of CEO’s and the senior management team, ability to work together in operation levels, government laws and regulations, strategic clarity and compatibility, management style, subject matter knowledge and skills, experience in the related market and assets (Barnes, 2010).
In this assignment author is going to analyse and explore “Cultural differences between partners” and ” Compatible management style”.
Why culture is an important factor?
There should be a cultural fit between companies, for example it is difficult to match a bureaucratic culture to non-bureaucratic culture, as resources are not used to obey rigid rules (e.g. manager’s stamp or signature to process tasks).
International joint venture partnership cannot avoid cultural differences; there will always be a case of hybrid structures.
According to Swierczek (1994) majority of joint ventures partnership failures are caused by cultural related issues and mismatches. A study of 110 joint ventures between America and Asia shows 50% of failure is mostly affected by non-complementary cultures and incompatibilities.
Partner’s culture influences commonly known assumptions, unrecorded rules and regulations and common understandings. It is important to evaluate the potential impact of the partnership’s effects on the general skills, quality, resources and the company systems and organisational structure. Due to the cultural differences and the need of cooperation, there would be a need to compromise; however the effect of this needs to be analysed and the impact carefully evaluated (Swierczek, 1994).
One important factor that determines the success rate of an international joint venture partnership is culture compatibility; without this partners cannot work together and conflict can occur. Compatible cultures can create same understanding and harmony between the partners.
To understand cultures and the factors that could impact the possibility of their compatibility, author has evaluated different angles and viewpoints of culture.
According to Hofstede (1984) core aspects of culture are:
High power distance: Communication with higher positioned members and senior managers has formal process with hierarchy organisational system.
Low power distance: Members feel equal, included in decision-makings and communication with senior members and environment is more relaxed and informal.
Individualism: Contributor is focused on self-success, own benefits and objectives.
Collectivism: Contributor has more interest in team success and group interest
High uncertainty avoidance: Keeping away from risk and getting out of conflicts
Low uncertainty avoidance: Comfortable with approaching risks and dealing with disagreement
Femininity: In Feminine cultures values and approaches are modest, emotional and considerate.
Masculinity: This culture is oriented by Competiveness, assertiveness and achievements
In authors opinion it is evident that cultures with different values can face conflicts and disagreements, different nations can have different understandings and interpretations and culture as a foundation affects the conflict management style. In multicultural joint ventures, partners’ communication style will differ and could clash with each other; this could be very frustrating and create unsuccessful results. Different culture means different languages, different outlook, beliefs and problem solving approaches.
According to Swierczek (1994) Asian culture generally avoids conflicts and when it occurs they seek help from senior members to suggest solutions but in European cultures there is less respect for hierarchy and when confrontation occurs, the negatives would be pointed out directly.
In author’s personal experience from Asian and European cultures, people with different cultures have dissimilar attitudes in business, partly because of the educational and discipline methods, that differs in cultural backgrounds.
Partnership between two firms could be successful if cultural differences are realised and analysed in early stages. This would be by identifying the potential problems and conflicts with proposed solutions enabling partners to benefit from constructive aspects of multicultural approach.
According to Swierczek (1994) building a correct and effective organisational culture and considering the involved cultures could reduce the possible conflicts. To make conflict management more effective two methods are introduced:
1. Compromise style
To prevent any win-lose outcome, participants would negotiate and agree to give up their benefits partly so their partner would gain mutual benefits as well. Also when same objectives cannot be reached or more than one agreement is on the table, compromising needs to take place.
2. Collaborative style
All the participants need to get involved and identify roots of conflicts and assess the possible outcomes and damages then introduce solutions agreed by everyone (Swierczek, 1994)
According to Al-Khalifa and Peterson (1999) in many failed international joint venture (IJV) cases, manufacturing process doesn’t last very long and this is caused by the lack of understanding of the local cultural, political and economic environment.
Cultures need to fit between the organisations, a lot of international joint ventures collapse because of cultural misunderstanding and differences; it is useful to research the local market first before entering the collaboration.
An example of cultural difference is looked at by Lynn (2002) between Japanese and American companies, where Americans had the impression that Japanese are efficient and hardworking but were disappointed when saw different results after starting the international joint venture in America.
In Japanese’s view deadlines weren’t as important as it was for Americans, Japanese were more concentrated on what they want to achieve regardless of time but Americans aimed to finish the work by the deadline however possible. This was a big problem for Americans when they used one of Japanese suppliers and received the order six months late.
In author’s opinion the definition of hardworking and efficiency in different cultures differs where Japanese seem to be aiming for the best result and improving the quality and less concerned about the deadlines. This could be very frustrating to opposite partner with different attitude.
It is important that companies find a partner that are compatible and have the same perspective and understanding. Culture awareness and a full initial analysis phase, to gather the required information, helps partners to evaluate the possibility of working together successfully and provide the bases so that parties design a framework and set a realistic plan that would work for both cultures.
Partner complementary skill
According to Zahra and Elhagrasey, (1994) majority of International joint venture failures are caused by selecting a wrong partner. Partner selection by their brand popularity or reputation is not enough and further research is needed to determine if the partners are compatible
If Partner’s skills and strength matches or compliments the business requirements, the partnership objectives could be successfully met; these requirements could be market, skills or resource access related.
The range of skills that each partner can contribute to a partnership varies. A purpose of a partnership would be to fulfill the business requirements where the necessary skillsets such as technical skills, market knowledge skills, production skills, management skills or resource access skills are not at a sufficient level.
This could also be due to the associated costs or time limitations challenges with producing these skills locally / internally.
When two partner’s skill sets complement each other, partnership can work well together, however if two partners have similar or identical skill, disagreements and competition could occur.
Organisations can often learn from the skills and experiences offered by the partner in an international joint venture to enhance their offerings and abilities. This could reduce the needs of future partnerships.
It is challenging to manage International joint venture (IJV) companies that have been created by two or more parent companies. These companies have different structures, goals, management style and organisational cultures.
People management conflicts become evident when partners discuss how the organisation will be managed and who will be in charge.
According to Matthews (1999) the problems with international joint venture that require control and structured management are:
Different background and cultures
Business geographical locations
Inevitable IJV short lifetime
Joint business political issues
The opportunities where management style could have a critical impact include:
Combination of technical and business skills
Access to IJV parents’ staff
According to Matthews (1999), developing ethnocentric mindset in organisations tends to concentrate on parent company’s management methods, be narrow-minded and inflexible. Traditional IJVs used to concentrate on parent company’s management procedures and problem solving process which mostly ended up unsuccessful but some chose to approach global mindset and try to understand different cultures, agree to diversity and apply different management approaches where needed.
Multiple IJVs management style
Within multiple IJVs it is gathered that decentralised approach is more successful than centralised approach. After forming IJVs in different locations and setting up the operations successfully each overseas IJV would plan and react to local market demand. This would improve efficiency and make them able to respond to local customers immediately.
According to (Yan and Duan, 2004) matching partners need to have compatible management culture and strategy, consensus on strategies, control and operations management.
In authors opinion compatible management style is about managers with efficient communication and skills in creating a balanced relationship between partners.
Management control and strategy is the key to be agreed by both parties to prevent any conflicts during the IJV and management control to prevent problems such as rush growth, ineffective use of resources and autonomous goals.
Within this process partners need to have a structured management system and build an independent organisational culture.
According to Gil and Butler (2003) it is easier to work with an international partner when managers have international business experience and cultural knowledge, this awareness enables them to adapt to environment, have positive attitude, respect multicultural environment and identify business partners’ capabilities
Therefore having multicultural market knowledge can create an opportunity for both partners to understand and respect cultures, agreeing on what is best for joint partnership.
According to Gil and Butler (2003) the stability of the relationship depends on trust, conflict and dependence influenced by management skills affecting IJV performance.
Some of the important skills in managing IJV are:
Negotiation skills: Compromise, exchange ideas and make decisions at different levels e.g. Engineers and Stakeholders
Management Political skills: Negotiate and communicate with government members involved in IJV
Diplomacy: Dealing with conflicts and resistance within the partner relationship
Inter-partner skills: Managing partnership, communication, expectations and setting objectives
Influential skills: Influence and motivate team members
Managing ambiguity: Bringing objectives and vision as close as possible.
In author’s opinion in hybrid IJV organisations, it is difficult to avoid conflicts and control system with openness management style.
First steps in IJV early stages are:
To identify problems and related solutions agreed by everyone
To plan and ensure that the management strategy matches the IJV environment
Flexible management approach to adopt as changes happen
Balanced relationship creates harmony and trust, successful management of an international joint venture mainly depends on a balanced partnership which is based on trust and shared ownership, where parties communicate effectively and clearly to help efficient move towards common goals and clear objectives.
At the same time extra cautious needs to be taken when dealing with sensitive cultural and regional issues, with a certain degree of diplomacy, people and language skills.
Creating good condition for partnership
Prior to start of any engagement when forming a joint venture partnership, it is essential for both parties to setup an agreement clearly defining expectations and scope. This will form a clear understanding between partners and helps with effectiveness of communications between parties (Barnes, 2010).
In authors opinion to increase the chances of relationship survivor it is important to be open about every aspect of the business from beginning in particularly about financial matters to gain the partners trust.
Agreements on goals, responsibilities and performance measurements (KPI) in early stages could indicate any problems and warnings, which could be resolved and prevented in early stages.
In the meantime flexible relationship and atmosphere is essential to allow freedom of speech and involvement in suggesting improvements or even change of original objectives. Any partnership would encounter problems and disagreements, however looking at problems positively and promoting an attitude to create situations where win-win approach (Barnes, 2010) is applied is the key for creating a good condition for a successful partnership.
There are a number of elements that would significantly impact the condition of an international joint venture experience and environments:
Invest time and effort to get to know the partner
In an international joint venture partnership it is important for the parties to take the time to get to know each other’s organisational structure, cultural habits and methods of work.
Setting clear objectives and goals prior to any engagements is essential to prevent any ambiguity and conflicts.
IJV complex environment could create conflict and ambiguity between partners, compatible management skills could create balanced relationship.
Roles and responsibility definition and assignment
In a complex joint venture partnership with a large number of unknowns and a mixture of cultures, habits, structures and skillsets, roles and responsibilities ought to be defined clearly to avoid disappointment and ensure effective partnership condition.
Open and honest communications from start of the business to the end is essential, people involved need to understand what will be achieved and when this will be achieved. Everyone needs to understand the objectives and progress of them. Misunderstood or unrealistic expectations can make a successful process ending as a failure.
When an environment is stabilised and partners have agreed on compatible goals with set mutual benefits, both parties need to work on gaining each other’s trust to enable smooth process avoiding unnecessary “red tapes” to maximise efficiency and workforce effectiveness.
Risk forecast, evaluation and prevention
It is important for companies in a joint venture partnership, to identify and evaluate the risks related to the partnership program and the associated impacts.
Identifying problems and risk evaluation in early stages would prevent any unexpected surprises during the process. Also this would give an opportunity to analyse issues and find solutions.
Following are examples of potential risks with IJV partnership:
Multinational partnership involves different languages; a solution needs to be applied to overcome language barriers. Full reliance on interpreters and translators could introduce additional risks where individuals do not have the required technical and related business experiences. It is highly advantageous if the employee involved with the business strategy, have related knowledge, background as well as being bilingual.
Different cultures represent unknowns and risks. Respecting multicultural environment and having awareness could prevent future conflicts, create opportunities to utilise multinational benefits and minimize the level of disagreements between parties.
Government laws and regulations vary in different countries. Time need to be invested to fully understand the local policies where the venture is based.
Organisational strategies mismatch between companies could directly or indirectly affect the objectives. These inconsistencies are required to be identified and highlighted to be considered during the planning phase to avoid potential future issues.
Local and related market condition as well as work ethic should be considered and matching business environment appropriately applied.
Clear communication is crucial in IJV environment where a lot of conflicts and confusion could occur because of cultural differences. Setting an open networks and freedom where employees can approach management levels easily could create an opportunity for everyone to get involved.
For countries to develop, create new technologies, use new facilities market and products, joint venture is very beneficial. Joint venture is an opportunity to boost businesses and continues to occur in more countries. Every international joint venture starts with different cultures and because of its multicultural nature it is unavoidable to experience disagreements.
Creating mutual benefits and harmonious environments with common objectives and agreed values can overcome the cultural differences and create common culture which benefits partners and uses the positive side of multicultural partnership.
It might be more effective to invest in countries that have similar cultures because it would be easier to understand the business networks, market needs and to resolve problems.
With countries developing to be multicultural and expanded communication network reaching further distances, it is getting easier to approach new opportunities. People are interested to know other cultures and learn about others. The challenges and complexity in different cultures is unavoidable but nation’s awareness is very high hence their approach to each other is very positive and relaxed.
While achieving strategic fit is more fundemental to the viability of a partnership,a good cultural fit optimises the potential of the partnership and helps to avoid the threats to its continuation which arise from misunderstanding and antipathy.
While it is important for partners in an IJV to establish a strategic fit to help improve feasibility of a partnership, an effective cultural match between the companies creates opportunities for a stronger relationship. This helps to avoid misunderstanding, risks and potential issues that could cause damage the partnership.
Partners need to establish trust, honesty and priorities to understand elements of successful IJV, structuring relative management style, which is independent from parents company strategy and assigning partners management responsibilities according to their expertise promises positive outcome at the end of the partnership.
Partners require creating a relationship based on honesty trust. It is vital for the parties to invest time and resource to understand fundamentals of a successful IJV partnership. Reforming and creating a relative management strategy, which is independent from partner companies’ are key to a successful joint venture partnership.