Why are some International Joint Ventures a Success whereas others are a Failure?

Table of Contents

1. Fundamentals of International Joint Ventures
1.1 Introduction
1.2 Definition of an (International) Joint Venture

2. Key Factors for Succes or Failure
2.1 Reasons for establishing an International Joint Venture
2.2 Key Factors
2.2.1 Internal Environment 5
2.2.2 External Environment 6
2.3 Importance of Key Factors in Comparision
2.4 Case Studies
2.4.1 Shanghai Volkswagen Automotive Company Ltd. (SVW) 9
2.4.2 Deer Park Refining Ltd. Partnership (DPRLP) 10

3. International Joint Ventures and Foreign Direct Investment

4. International Joint Ventures and international Trade Flows

5. Critical Assessment

6. Conclusion

References

List of Abbreviations

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List of Illustrations

Illustration 1 Classification of market entry strategies (Simyar & Argheyd, 1987)

Illustration 2 Summary of Key Factors for Performance (own property)

1. Fundamentals of International Joint Ventures

1.1 Introduction

Due to all-embracing trends such as globalisation and the resulting international interdependencies collaboration between companies has become gradually important over the last decades. Collaboration, both with regard to the number as well as the extent of interchanges. Since these interactions are no longer limited to only one country but in the majority of cases take place on the international stage the question of how to settle them in the most efficient way is frequent to companies. In the following, one of the possibilities, international joint ventures, and their further implications shall be examined. Based on a definition of this term broad motivational categories for the setting up are highlighted which in turn provide a basis for evaluating the performance of an international joint venture. Afterwards, key factors for success or failure shall be tackled; a comparison with respect to their particular importance shall be drawn and finally illustrated with the help of two case studies. Subsequently, emphasis shall be put on the connection between international joint ventures and both FDI and international trade flows. In a last step a critical assessment as well as a conclusion is to be carried out.

1.2 Definition of an (International) Joint Venture

As a clear understanding of what is meant by the term “international joint venture” is crucial for the following considerations, first of all a glance at its standing regarding other market entry forms and a definition seems to be worthwhile. A prevalent approach to classify market entry strategies is to consider their position in a continuum spanned by the two dimensions “capital expenditure” and “production of goods and services” and their location respectively (cf. ill. 1). In this framework which is freely adapted from Simyar and Argheyd (1987) a joint venture can be situated between export, licensing and franchising on the one hand and strategic alliances and FDI on the other.

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Illustration 1: Classification of market entry strategies (Simyar & Argheyd, 1987)

However, a universally valid definition in absolute terms as an addition to this relative consideration is hard to detect. In the following it shall be referred to Pfeffer & Nowak (1976) who suggested:

“Joint ventures are legally and economically separate organizational entities created by two or more parent organizations that collectively invest capital and other resources to pursue certain strategic objectives.” ¹

With respect to their contribution to a successful joint venture the mentioned components such as for instance investment and strategic objectives shall be examined in detail in chapter 2.1.

In the case that at least one of the partners is located outside the country of operation it is alluded to the term of an international joint venture (hereafter abbreviated with IJV). This may also be the adequate denomination if a joint venture has a vital level of operation in more than one country.² In both cases the cooperation takes place not only across national but oftentimes also cultural borders.

2. Key Factors for Success or Failure

2.1 Reasons for establishing an International Joint Venture

In order to get a guiding principle how to evaluate the eventual performance of an IJV one might consult the reasons for setting up such a cooperation. Consequently, the degree of how these reasons are fulfilled can serve as an indicator for the level of success or, contrariwise, for the level of failure.

As a pure enumeration of reasons for an IJV can be by no means exhaustive, several clusters shall be highlighted and illustrated by means of some particular items. According to Si & Bruton, financial benefits can be identified as one of these broad motivational categories. From an economic perspective a reason is obviously the increase of financial return. Hence, an IJV is supposed to make a contribution to the maxim of profit maximization. Simultaneously, an IJV can be seen as an additional potential with regard to the issue of cost minimization, as well. In comparison with for instance solely exporting goods a huge amount of transaction costs can be saved in the long run. “Only” in the long run because the initial phase of an IJV is evidently rather transaction cost consuming. But on the condition of a successful and therefore long-term cooperation these incipient costs are supposed to be more than compensated by the savings. Furthermore, an IJV may help to achieve economies of scale because of the anticipated increase in entities which are produced. This, in turn, results in decreasing costs.

Moreover, such synergy effects can also be obtained with respect to another cluster of reasons, namely resources or more precisely the access to resources. As “firms, even those within the same industry, differ in terms of resources with a potential for creating sustainable competitive advantage”³ they are beyond any doubt essential in an IJV. Resources can take on quite diverse shapes such as knowledge, technology, skills but also low labour or material costs. Here it becomes clear that not only the companies but also the reasons for establishing an IJV are closely intervened: Of course, the aspect of low labour costs has direct impact on the financial benefits, too.

Last but not least the third category of reasons, strategic behaviour, oftentimes attracts attention in the decision-making process of firms. In this context IJV are supposed for instance to reduce trade barriers because goods do not necessarily have to cross the borders of the production country which is of course the case in exports. In addition to that, risks can be spread or new products can be jointly developed. However, in most cases IJVs shall especially contribute to the opening up of new markets or in general to international expansion of foreign businesses. Owing to the fact that a lot of parameters have to be considered here, this can be classified as multivariate effect.⁴ Against the background of these three broad motivational categories the key factors for success or failure shall be examined now in detail.

2.2 Key Factors

The abovementioned reasons or objectives which are to be achieved in an IJV have to be seen in the particular IJV-specific environment. Metaphorically speaking, the objectives constitute a core which is embedded in the internal situation. This internal environment in turn is surrounded by the external environment which influences the performance of the IJV directly or indirectly by the intermediate step of ruling the internal environment. In the following, key factors in both of these environments shall be examined.

2.2.1 Internal Environment

It seems to be intuitively evident that the partners’ attributes play an essential role as to success or failure of the entire cooperation. As such organisational traits especially the size of the related enterprises and their organisational structure can be denoted. Moreover, soft facts such as the culture of the company and the experience in interfirm collaboration are of importance.

These factors in turn go hand in hand with another crucial one, partner fit⁵.Because an IJV is a cooperation it is by no means purposeful and targetorientedto consider the entities in isolation. As stated in the initial definition of joint ventures they are legally and economically separate, for sure, but for a really successful relationship they have to act and work as one collective. This is of course a huge challenge for the partners but experts agree that a good fit can simplify it. But what does “fit” mean? On the one hand a good fit is characterised by compatibility. Compatibility which is, according to Nippa, Beechler & Klossek (2007), targeted for example on strategic decisions and strategic alignment or on time preference for risk and return. Although this seems to be a paradox at first sight, on the other hand a signal for good fit is a certain degree of complementarity. Complementarity with regard to contributions such as the resources mentioned in the previous chapter. In both cases the connection to the reasons for founding an IJV becomes obvious. Another aspect which is critical for the performance of each alliance and thus for IJV, too, is trust.⁶ Due to the impossibility to fix every detail in the contract of the IJV it is likely that situations arise which give leeway to instability, opportunism and other problems in the context of principal agent theory. In such cases, trust on different levels namely between the respective firms in general, between groups or departments and finally also on a personal level is a bare necessity. In addition to these levels Currall & Inkpen (2000) point out several dimensions of trust. As positive related with trust they consider open communication and information exchange, but also task coordination and informal agreements, whereas surveillance and monitoring manifest a low level of trust.

Nevertheless, the implication that control is purely negative does not suffice,too. Under the heading of governance and oftentimes also related to equity distribution it might also make a contribution to success. However, if there is a chance to substitute control by both extrinsic and especially intrinsic motivation and by creating and nourishing commitment, “the desire to continue [a] relationship and to work to ensure its continuance”⁷, this way should be preferred.

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¹ Pfeffer & Nowak, 1976; in: Yan, 1998, n. pag.

² Cf. Geringer & Herbert, 1989; in: Chan, 1996, p. 19.

³ Merchant, 2005; in: Li, Wong & Luk, 2007, p. 84.

⁴ Cf. Luo, 1997, p. 659.

⁵ Cf. Styles & Hersch, 2005, p. 121.

⁶ Cf. Curral & Inkpen, 2000, p. 480.

⁷ Wilson, 1995; in: Styles & Hersch, 2005, p. 115.