Collaboration in International Joint Ventures
This research seeks to identify the selection criteria required by partners for collaboration in International Joint Ventures (IJVs), the effect of positive attributes between IJV partners and also the inter-partner relations on IJV performance.
1.1 INTRODUCTION TO INTERNATIONAL JOINT VENTURE
Joint Venture is a special type of strategic alliance that involves the combination of unique competencies, balancing skills and resources of the participating organisations. The benefits of a joint venture includes a shared costs and risks by involved parties, skill acquisition and access to a new market creating a legal separate entity (Ozorhon et al., 2008).
According to Geringer and Hebert (1989), an IJV can be defined as “a joint venture with at least one of the partner companies based outside the joint venture’s country of operation”.
An IJV can also be seen as an arrangement between two or more firms creating a distinct business entity thereof wherein they all have an agreed stake within said business entity (Woodside and Pitts, 1996).
1.2 PARTNER SELECTION CRITERIA FOR COLLABORATION
In this current global market, the success of a joint venture is based on the selection of a good collaborative partner. At the initial stage, the prospective partners should identify the selection criteria(s) as this is important in selecting the right partner; this can stimulate the joint venture’s adaptability and reduce uncertainty in the venture’s operation (Yan and Luo, 2001).
While according to Geringer (1991), Partner selection provides an IJV with benefits such as skills, knowledge, human and material resources, values and attributes however; the inter-cultural and inter-organisational nature of IJV poses difficulties and challenges in managing an IJV that is formulated across international borders (Luo, 1998). IJVs have to address these issues and arrive at a holistic working arrangement.
In the In-Module exercise, CNI had to evaluate both HC and EM and ensure they both had mutual benefits in the aftermath of the joint venture. CNI did not have industrial experience in manufacturing hospital equipment and thus the government required an international collaboration relationship. Although they had a good relationship with EM, they also had to consider the financial stability of both companies. Other factors CNI had to consider were the requirements by the Government to have 45% of the ownership of the venture, the local content and royalties.
It is therefore important that partners critically examine the strengths, weaknesses, opportunities and threats of their future partners, to determine if the attributes fits their organisation prior to forming a joint venture (Luo, 1998).
Fits between the partners in terms of their strategic, cultural, organizational, financial, governmental traits are important in partner selection as some are discussed below.
1.3POSITIVE ATTRIBUTES TO LOOK FOR IN A COLLABORATIVE PARTNER
1.3.1 STRATEGIC ATTRIBUTES
The success of an IJV depends on how the partners’ strategic traits influence operational skills and resources (Luo, 1998).
Therefore, factors to consider when selecting a partner are its market growth, relationship building and reputation. Here below are some factors considered:
REPUTATION: An organization’s corporate image comprises of customer loyalty, the product brand and organisational reputation (Luo, 1998). An organization with a positive reputation easily lends itself to trust thereby creating an avenue for joint ventures and other inter-organisational partnerships (Dollonger et al., 1997). It is imperative therefore for investors to collaborate with an organization with a good reputation.
Based on the In-module exercise, HC or EM wanted to go into collaboration with CNI because of its good reputation due to reliability, and the better relationship with the Government.
MARKET POSITION: Local market supremacy is a key advantage for foreign investors who are seeking business openings (Luo, 1995). The partner’s local market supremacy can strengthen the IJV’s commitment towards expansion in the local market (Park and Ungson, 1997). This market supremacy can be positively leveraged upon and help the IJV business uncertainties. (Luo, 1998).
RELATIONSHIP BUILDING: A foreign partner stands to be at an advantage over other foreign competitors seeking to do business in the host country if are in good standing with the incumbent government in order to secure favour. It can be surmised therefore that a foreign company can invest in securing its contacts by leveraging on the existing business connections of the local partner (Luo, 1998).
This was evident during the In-Module exercise as HC and EM were dependent on CNI’s connections with the government to help build relationships and increase effective market penetration.
1.3.2 FINANCIAL ATTRIBUTES
A crucial element towards a successful IJV is the financial capabilities of the partner organizations as the partner’s level of profitability has a direct relationship to the quantum of capital contribution, human and material resource commitment towards operations within the IJV (Ozorhon et al., 2008). Here below are some factors considered:
PROFITABILITY: A credible portfolio of revenue streams is a vital performance indicator in formulating an IJV. This elucidates a prospective partner’s ability in terms of capital contribution and availability of assets for deployment in the joint venture (Luo, 1998). It is essential therefore that a prospective partner has the potential to generate sufficient financial resources to support the joint venture. Whilst it is not always possible to detect any financial irregularities, it is imperative that organizations look through the financial history and overall financial ratings such as net profit margin and equity returns of the prospective partner as these can highlight areas of concern (Williams and Lilley, 1993).
LIQUIDITY: The liquidity of a prospective partner is critical to a successful IJV as it affects the financial liquidity of the partner to afford to meet immediate financial obligations (Luo, 1998). It is imperative therefore that the partnering firms be financially and competitively compatible as this will help foster operation synergies when one firm does not feel the burden of running the joint venture all by themselves.
ASSET MANAGEMENT: A crucial performance indicator for partner selection in formulating an IJV is the asset liquidity of a prospective partner. This helps by establishing a regular pattern of maximising return on investments. Thus an indigenous partner with efficient asset management will be a great benefit to a foreign partner seeking short term or long term profitability in the competitive market (Luo, 1998).
The foreign partners should research and analyse the local partner’s efficiency indicators such as turnovers, fixed assets and total assets, drawing a comparison with other indigenous firms and establish by what extent the prospective local partner surpasses its local competitors (Yan and Luo, 2001).
1.3.3 POLITICAL AND GOVERNMENTAL ATTRIBUTES
When partnering with a foreign company, the host country’s government policies that define the partnership play a major role in the success of IJVs.
According to Mohamed (2003), Political stability is crucial to the success of an IJV. Thus foreign partners need to satisfy the host government’s policies for doing trade in the country. For instance, a foreign partner can only operate with a local company if the ownership is shared. The foreign partner may also be allocated a minority of the ownership and must fulfil local employment conditions and purchase of indigenous materials for the joint venture. Furthermore, many authorities forbid complete foreign ownership as difficulties may occur if local partner decides to discontinue the business relationship. A host government may require members of the indigenous firm to be placed in the management position of the venture under a composition ratio for local content in the management structure of the IJV.
For example in the in-module exercise, the Amazonian government ensured set of policies were met before an operating license was obtained by the foreign partner. Policies were set on the local content, ownership, royalties and import duties of the foreign partners.
Most times the host government set such restrictions by encouraging a bigger market size in their own country and also enabling the local partner to have a stronger share of ownership of the venture.
Host government pose a number of risks to foreign partners in an IJV. These are identified as bureaucracy, inflation, expropriation, changes in laws and delay in approval. (Wang et al., 1999).
Lack of appropriate legislation and frequent changes in current political policies can negatively impact on joint venture performance. From the foregoing, Governmental policies pose a threat to prospective international partners and have to be resolved under mutually agreeable terms to ensure a successful IJV (Mohamed, 2003).
1.3.4 ORGANISATIONAL ATTRIBUTES
Organisational fit can be seen as a synchronization of each partner’s administrative procedures, control systems and personnel characteristics which have been known to play a significant role in the efficiency and effectiveness of the partnership” (Yan and Luo, 2001). Here below are some factors to be considered:
COMPANY’S SIZE: A partner’s company size is a determinant to IJV success as this is closely associated with market supremacy, reputation, corporate culture and the benefits to be derived from the economics of scale (Geringer, 1991).
This can lead to a long term success of both partners in the joint venture. Larger firms are more likely to offer a greater quantum of resources towards the development of the joint venture. Thus a significant difference in size of the partner’s firms can be a major problem as might be evidenced in variance in their operational environments and corporate cultures which could result in incompatibility; furthermore there is a possibility of a company dominating the other company (Williams and Lilley, 1993).
It is safe to say therefore that the prospective partners be reasonably matched in terms of company size as this could help mitigate likely challenges due to a mismatch of the companies.
INTERNATIONAL BUSINESS EXPERIENCE: A prospective partner’s experience in international business is significant to the success of the intercultural and cross border IJVs (Yan and Luo, 2001).
Foreign experience affects the organizational fit between partners during the formative stages of the venture and can be used as a measure of how well matched they are as the venture evolves with time. Thus foreign experience is highly valued by local partner firms as a result of exposure to foreign values and business practices and increased ability to effectively exchange correspondence with the foreign partner (Luo, 1998).
This can facilitate better collaboration, commitment and trust which will promote joint venture success.
PREVIOUS COOPERATION EXPERIENCE: Partnering with firms with a portfolio of previous experience in IJVs is a vital step towards ensuring the success of the joint venture. This encourages increased interaction time between partners and therefore establishes trust and an increased benefit for IJV success (Yan and Luo, 2001).
Previous business relationships between partners can be beneficial towards evolving a new joint venture. A positive business experience based on previous interactions allows for development of business practices that address the specific and unique nature of the business relationship, thus encouraging a profound level of transparency amongst the executives and stakeholders in the partnering firms (Ozorhon et al., 2008). An existing relationship therefore is a great benefit towards collaboration of the joint venture firm.
An example of this can be drawn from the In-Module exercise where EM had a good working relationship with CNI in producing hospital equipment; therefore CNI entering into a partnership with EM in the future would be an advantage since there had been a healthy working relationship from past Ventures.
1.4 FACTORS TO CONSIDER FOR A GOOD INTERPARTNER FIT FOR INTERNATIONAL JOINT VENTURE
1.4.1 GOAL COMPATIBILITY
The compatibility of goals set by partners in the IJV affect the extent of cooperation between the partners (Parkhe, 1993b). When partnering firms have incongruent goals for the joint venture it usually leads to dispute and opportunism (Geringer and Hebert, 1989). However, partners in a joint venture may have different goals and expectations. As long as each other’s goals are implicitly agreed, respected and are not in direct variance, one can safely surmise that different goals may still be compatible (Yan and Luo, 2001).
Similar goals stimulate organizational fit and strategic balance between both partners in the joint venture (Park, 1996). Goal compatibility can improve the success of a Joint Venture by strategically inducing financial and operational synergies as each partner will be aligned to a common goal. It can also encourage the commitment of resources by the partnering firms (Yan and Luo, 2001).
Conflict between partners caused by goal dissimilarity can have an unconstructive impact on the success of the IJV while goal congruity harmonises interest between partners. Partnering firms should therefore appraise the objectives of other partners and establish similarities. In a joint venture, compatibility is when strategic goals converge (Yan and Luo, 2001).
For instance in the In-Module exercise, CNI wanted to collaborate with HC or EM, due to sophisticated technology on offer by both partners, whereas HC or EM wanted to collaborate with CNI because it had excellent connections with the Amazonia Government.
Therefore to avoid ambiguity, when an IJV starts its operation, partners should review their present goals within a period of three to six months to ensure that they are aligned to the original goals of the venture.
1.4.2 COMPLEMENTARY RESOURCES AND SKILLS
According to Yan and Luo(2001), joint venture partners with a high degree of complementary business resources and ethos have a greater chance of a successful joint venture than a combination of firms that do not. It is believed that complimentary resources diminish the costs of coordination while stimulating information exchange between the firms. An IJV therefore is a mechanism for the partners to draw upon the complementary resources and skill sets from partnering firms as a means towards achieving its business objectives.
Before forming a joint venture, key success factors and degrees of complementary traits of the resources should be assessed relative to the prospective partner’s current and proposed position. Deficiencies should be reviewed and where the objectives have been clearly identified as being incompatible, then a joint venture should not be created under these circumstances as the JV will be beset with inherent challenges (Williams and Lilley, 1993).
Complementary skills are more potent when partnering firms come from a ‘developing’ and a ‘developed’ economy. A company based in a developed economy looking to invest with an indigenous organization in a developing country contributes to product expertise patents, manufacturing technology, business expertise and technical training, while the indigenous company contributes in the areas of capital management, familiarity with the local environment and market contacts within the government. These are essential combinations towards the success of the joint venture (Yan and Luo, 2001).
For example during the In-module exercise, the developed/ technologically superior partners were HC and EM, while CNI was the developing partner for the IJV under consideration. Although CNI were the largest manufacturers in the region, their weakness was a lack of technological expertise which prompted the need to collaborate with either of the developed partners HC and EM who both had the technological expertise.
From the foregoing, one can surmise that the complementary nature of resources is a crucial tool towards achieving a successful IJV.
1.4.3 CULTURE COMPATIBILITY
Culture can be defined as a way of life that serves to bind individuals and creates organisational cohesiveness. An ideal situation occurs when the degree of cultural fit that exists between the partners is directly correlated to the success of the venture (Ozorhon et al., 2008).
Collaboration can be affected by national and organisational cultures. According to Tayeb (2001), National cultures and other institutional ethos in which the IJV is situated play an important role in influencing the organisation and management style of the joint venture.
The success of a joint venture depends on the cultural compatibility of both partners. Dissimilarity in national culture as well as business culture can have adverse effects on an IJV as there needs to be a mutually agreed or respected value system that guides the business practices of the respective partners (Ozorhon et al., 2008).
Thus culture has a positive impact on the formation of a joint venture, assets preferences and the performance of the venture. An international joint venture brings about a new entity when two companies collaborate , thus in terms of cultures, two organisational cultures merge together to form a unique culture that combines various elements from the parent cultures (Barger, 2007).
A major dilemma in IJVs is that a partner might seek to impose its own cultural values on the other partner without due consideration to the other partner’s values (Yan and Luo, 2001).
According to Pothukuchi et al (2002), most conflicts in IJVs are based on the influence of the national culture and organisational ethos on behaviour and management system, thus IJV partners from different cultures find it difficult interacting and this easily demoralises the joint venture progress.
Thus the success of an IJV is when there is a seamless bond in the relationship between the executives and stakeholders of the partnering firms that constitutes the venture.
1.5 COOPERATING PERFORMANCE OF PARTNERS IN INTERNATIONAL JOINT VENTURES
A cordial relationship between partners is a determinant to the success of the joint venture. According to Ozorhon et al., (2008), the quality of interrelationship between partners is determined by the level of synchronization possible between the partnering firms. Inter-partner relations required from both partners are discussed below.
1.5.1 MUTUAL TRUST
Joint Venture Trust can be defined as a conscious decision to depend on another partner with some element of risk (Inkpen and Currall, 2004). Mutual trust is a decisive factor that could have a profound effect on Inter-partner relations as it affords adaptability, exchange of information and business secrets within a defined framework of confidentiality driven by the ultimate goal being the success of the IJV (Ozorhon et al., 2008).
A long term Joint Venture requires an even stronger relationship between partnering firms, bearing in mind the previous successes, failures and interaction between the firms. This will certainly influence the level of trust. For Instance, an international joint venture is formed, and there is a high probability that one or more of the partners would be uncooperative, it can adversely affect the trust and consequently undermine the Joint venture(Inkpen and Currall, 2004).
Furthermore, trust is based on societal opinions such as assessments of a partner’s competence. Trust therefore is an evolving concept wherein the level of trust varies progressively based on interaction between the partners over the course of the IJV being operational (Inkpen and Currall, 2004).
During the prequalification/ selection process, the executives of the partnering firms should establish the other partner(s) willingness and ability to make the business relationship work as competence ratings can be of a competitive advantage to the Joint Venture (Williams and Lilley, 1993).
It is imperative therefore that without absolute trust between the partnering firms, there is little chance for success of the venture (Williams and Lilley, 1993).
1.5.2 EFFECTIVE COMMUNICATION
Effective Communication as evidenced in the quality and regularity are the vital component on any project and is equally important to the joint venture success. Good communication involves the process of understanding and alignment of goals, interrelationships and dependencies, building trust and establishing levels of commitment which are crucial tools towards achieving a successful joint venture (Kelly et al., 2002).
Poor communication and a total lack of it may be perceived as a sign of ill-advised or ineffective partnering. This can be counter-productive and stifle the chances of success of the venture (Kok and Wilderman, 1998).
Communication can be conceived from a two-pronged approach. It could either be formal or informal communication. Both formal and informal communication need to be established at inception as this usually helps establish a framework and channel of communication for the goals of the venture and resolution of challenges that may occur thereby creating the required trust over the life of the Joint Venture. This helps in resolving early stage behavioural problems and preventing them from destabilizing the venture (Kelly et al., 2002).
Methods for establishing good communication in joint venture vary and needs to be specifically tailored to the unique characteristics of the venture. Some examples of communication methods are through emails, memos, face to face communication and intranets. As effective as all the methods can be, face-to-face communication has proven to be the most effective as it is the most fundamental basis for establishing trust in most joint ventures (Kelly et al., 2002).
1.5.3CREATING A CONFLICT RESOLUTION STRATEGY
Conflict resolution in IJVs can be defined as verbal exchanges between the IJV partners, where the action of one partner mitigates the likelihood of a negative response from another partner(s) (Fey and Beamish, 1999).
Inter-partner conflict is almost inevitable in joint ventures thus it should be anticipated and strategies formulated on how to resolve it. The effects of conflict resolution can either be productive or destructive however; the methodology for conflict resolution can affect the inner workings of the IJV (Mohr and Spekman, 1994).
According to Lin and Germain (1998), a strategy for conflict resolution is characterized by several approaches which include problem solving, compromising, , forceful and legalistic strategy. Different strategies are briefly defined as thus:
Problem solving strategy involves open discussion about ideas and issues that affects the business needs of partnering firms. Compromising strategy is a situation in which partners seek a middle ground for initial positions of both sides. Forcing strategy refers to an independent attempt to dominate decision making and Legalistic strategy might be employed by a partner who resorts to written contracts and informal binding agreements to obtain a desired outcome.
Therefore in some partnerships, the method of conflict resolution can be institutionalised where third party arbitration is required; this can help in producing the desired outcomes. Although internal resolution shows a greater promise of long-term success, use of arbitration via third party may create problems in the IJV (Mohr and Spekman, 1994). An example of conflict resolution strategy adopted during the in-module exercise was the institutionalized strategy wherein CNI and HC or EN required third party arbitration in Singapore, via the International Chamber of Trade in the event of any disputes within the venture.
Problem solving and compromising strategies lead to IJV success in the long run, with a ‘win-win’ orientation between all partners. This enables partners achieve a positive assessment of the overall performance of the venture.
Forcing and Legalistic strategies may adversely affect performance as this usually promotes a win-lose orientation between the partners. Furthermore, a forceful strategy may promote the likelihood of future conflict due to a perception of injustice on the part of the lesser partner(s), Legalistic strategy on the other hand may lead to mistrust amongst partners and may limit the chances of sucess for the Joint Venture (Lin and Germain, 1998).
Commitment is a crucial component that has to be shared by all prospective partners in the formation of an IJV. Getting a business partner with an equal and shared sense of dedication is vital to the success of an IJV. A partner’s commitment to the joint venture can establish trust and persuade cooperation between the partnering firms (Yan and Luo, 2001).
A high level of commitment provides an enabling and suitable context in which all partners achieve individual and joint goals without being guided by the sentiments of selfish behaviour. Consequently, there is every possibility that committed partners will be interested in creating and maintaining a good relationship amongst themselves and consequently be less likely to let differences in business approaches result to conflict(s) that could be detrimental to the Joint Venture Performance (Ozorhon et al., 2008).
Commitment levels can be raised even higher through motivation by distribution of reward from the venture. When success is achieved and there is a clear and agreed distribution formula amongst all stakeholders, there most certainly will be a prolific increase in commitment throughout the Venture (Demirbag and Mirza, 2000).
In the light of the foregoing, it implies that effective partner selection is important in setting up a joint venture. As discussed above, there is an interrelationship between positive attributes for the selection of a partner such as the strategic attributes, financial attributes, organisational attributes and political attributes. Partner selection is not only important for the expansion of the joint venture but also for effective IJV performance.
It can be surmized that every partner selection criteria affects the performance of the joint venture differently. The strategic attributes can be said to contribute to the ventures sales growth and financial return. Organisational attributes can be said to contribute to the overall performance as well as the profitability of the venture. Local market position of the partner and the previous experiences of the partner also help IJV success by contributing to its effectiveness and efficiency. Political attributes enables the host government of the local partner to allow for a more stable and profitable investment of the venture.
However, the compatibility of the partners in the joint venture is also very crucial to partner selection as this enables partners to ensure that they have common goals and objectives, their cultures are compatible, and they have complementary skills and resources as this provides a platform for overall performance of the venture. For instance, if partners’ cultures are incompatible, this can lead to conflict and undermines the success of the venture.
Therefore, skills and attributes required for partner selection acts as a stabilising tool for the venture activities in a dynamic environment as this enables both partners to trust one another, ensure committment to the venture and to have good communicative skills.
Invariably, critical partner selection criteria enable the partners’ attributes that are favourable to achieve the goals of the venture.