Cultural Distance and the Performance of International Joint Venture

Table of Contents

1. Chapter-1: Aims & Objectives
1.1. Background Context
1.2. Research Question
1.3. Research Objective
1.4. Summary

2. Chapter-2: Literature Review
2.1. International Joint Ventures (IJV) as a Concept
2.2. Process of International Joint Ventures (IJV)
2.3. Cultures within the IJV
2.4. National Culture
2.4.1. Dimensions of National Culture
2.4.1.1. Power Distance
2.4.1.2. Uncertainty Avoidance
2.4.1.3. Individualism & Collectivism
2.4.1.4. Masculinity and Femininity
2.4.1.5. Long-term and Short-term Orientation
2.5. Organisational Culture
2.5.1. Dimensions of Organisational Culture
2.5.1.1. Process vs Result Orientation
2.5.1.2. Employee vs Job Orientation
2.5.1.3. Parochial vs Professional Orientation
2.5.1.4. Open vs Closed Sytem Orientation
2.5.1.5. Loose vs Tight Control Orientation
2.5.1.6. Normative vs Pragmatic Orientation
2.6. Summary

3. Chapter-3: Case Study
3.1. Case Study on International Joint Venture: “Sony Ericsson”
3.1.1. Motive of Joint Venture
3.1.2. Process of International Joint Ventures (IJV)
3.1.3. Partners’ Cultures
3.1.3.1. Partner-1 (Ericsson) Culture
3.1.3.2. Partner-2 (Sony) Culture
3.1.4. Comparative Analysis
3.2. Summary

4. Chapter-4: Discussion & Conclusion
4.1. Discussion
4.2. Conclusion
4.3. Recommendations for Future Studies

Abstract

In the Global Market, Internarional Joint Ventures (IJV) are becoming prevalent phenomeno and many multination companies have managed to experience considerable growth by making alliances (such as Joint Ventures). There are several factors which needed to be controlled carefully, otherwise it would be resulted in weaken the performance of the specified IJV. It has been estimated that about 37-70 percent of IJV are reported to experience the performance problems incurred due to the cultural differences and thus leaded the specified ventures towards the costly Culpan (2002) explained International Joint Venture (IJV) as the process which includes two or more companiess belong to different countries to collaborate together.The decision to decide wheather or not to make a joint ventures included four different stages (Initial, Formation, Operation & Outcome). There are two kinds of cultures which directly makes an impact on the Joint Venture. The first one is the organisational culture and the second type of culture is the national culture. Pothukuchi, et al. (2002) stated that the problem arises in IJV is because of significant Impact of the national culture upon the behavioral and management system which then directed towards conflicts. Same case is observed in the organisational culture as well where any differnece or dispute can cause conflict and also can destablise the Joint Venture’s performance or progress. The case study of Sony Ericsson also fallows the same approach of the Joint Venture as it was collaboration between two multinational companies (Sony & Ericsson) who were coming together with intention of single corporate which could not be possible for both companies to accomplish on the individual basis. It has been found out that the organisational cultural difference has negative impact on the performance of the International Joint Ventures (IJV). On the other hand, national cultural difference can pose either positive or negative impact but the intensity of that difference is not much aggressive. The emphasis of companies engaged in International Joint Venture on the factors which would be resulted in overcoming national cultural difference problems and also on developing the management which would be acceptable for both partners to adopt and implement could contribute extensively to the success of International Joint Ventures.

Chapter-1: Aims & Objectives

1.1. Background Context

In the Global Market, Internarional Joint Ventures (IJV) are becoming prevalent phenomeno and many multination companies have managed to experience considerable growth by making alliances (such as Joint Ventures). Several Corporations belong to different countries and cultures are coming together to work in the form of collaboration with the intension of exp; exploiting the competencies of each other in gaining sustainable competitive advantage (Tayeb, 2001). After involving in the Joint Ventures, the parties are authorised to use each other resources and capabilities (Sharing Assets & Ownership, Pooling Employees’ knowledge & skills).

Wallace (2004) defined IJV as an activity of working together of two or more companies in accomplishing the specific aim (outcome) which would not be possible for them to achieve it alone. The common goal in most of the IJV is to achieve the growth level which is not only competitive for the companies but also incorporates sustainability factor in the long run. So, it has been shown that the definition of IJV is very explicit and representing a clear image of the overall purpose and motivation behind this whole process and hence also described it as far more than the form of partnership.

The global market with embedded rapid has embraced the overall concept of Internal Joint Ventures and exploited aggressively by the business world and now it is regarded as a significant instrument in giving the company an opportunity to gain and experience the rapid economic growth and sustainability in the given market-place. Stiles (2001) has described that the Joint Venture process has supported many companies to enter the inacessible markets and also facilitating the generation of new ideas which thus conttibutes them towards the change of the companies’ conventional structure and makes them to prevail for the long-period of time in a given marketplace (Stiles, 2001).

The concept of Joint Ventures has entitled the strong strategic position when it comes to the expansion of existing business through making a entry in the foreign market. But still there are several factors which needed to be controlled carefully, otherwise it would be resulted in weaken the performance of the specified IJV. These factors are (Organisational Learning process, Knowledge Transfer and the concept of cultural differences). Besides other issues (Deciding the ownership pattern and the control procedures) are also accompanied with the given concept if IJV.

From the above mentioned factors, the cultural difference factor plays an important role especially during the time of alliances between the two major multinational companies. This factor influence more in case of cross border alliances (Park & Ungson, 1997). Barger (2007) shows that two organisational cultures are coming together in the International Joint Ventures with essence of forming the third culture which is actually stimulated either by the companies’ parent cultures or it can form a distinctive culture with the combination of various components exists within the parent cultures. From past few year, substantial amount of effort has been put by the various scholars and practitioners in the Internation Joint Ventures’ formation. Many studies and surveys have been disclosed that the collaboration of two or more organisational cultures could lead the associated partners towards the arising of incompatibility issues and could also be resulted in the dissolving of specified international venture. This fact is also raised by Morisini (1998), he explained that most ordinary causes which leaded the cross border allianced towards failure are: Mimatching of Cultures, absence of shared vision and the occurrence of inefficiency between the partners’ communication.

This study has been conducted for this reason; it will examine the implications of cultural differences with the context of International Joint Ventures. For the thorough understanding of this issue (Cultural Phenomenon) at the organisational level, this report will also incorporates the Case Study which will give the perfect analysis of Joint Venture process and also about the complications of cultural differences associated with it.

1.2. Research Question

IJV (International Joint Ventures) is regarded as the most common type of strategic alliance and is undertake by Undertake by Multinational Companies (MNC’s) on the mostly basis significantly to expand their existing operations to the foreign markets with the intention of achieving the economies of scale. It is a strategic alliance where different firms belong to distinctive backgrounds are collaborating together to exploit the benefits of each other competencies, resources and capabilities. Occasionally cultural differences are very significant which may lead the given venture towards the path of dissolution. From the perspective of several authors and practitioners, it is the major cause of failure of International Joint Venture (Lane & Beamish., 1990; Wagner, 1995; Chen & Eastman, 1997; Xioa-Ping & Meindl, 1998). And this problem arises due to the occurrence of cultural incompatibility between the involved partners. This difference has been observed and analysed in both context (National Level & Organisational Level). In order to get the clear understanding of this given phenomenon, following research question has been outlined which thus put down the basis for the ongoing of Cultural Differences and its effect on the performance of International Joint Ventures (IJV).

Constant growth in the global markets as well as in technologies has guided to the dramatic increase in the cross-border joint ventures despite of the fact that it is determined as the most risky form of strategic alliances (Geringer & Hebert, 1989; Blodgett, 1992). It has been estimated that about 37-70 percent of IJV are reported to experience the performance problems incurred due to the cultural differences and thus leaded the specified ventures towards the costly failures (Fedor & Werther, 1995). Cultural differences existing between the engaged joint venture partners have normally been regarded as the major aspect which might lead the venture towards failure or towards the unsatisfactory performance (Harrigan, 1985; Cartwright & Cooper, 1993).

1.3. Research Objective

This report has adopted the approach of cultural differences in examining the fact that to how much extent the performance of International Joint Ventures (IJV) are affected by the these differences in accordance with cultural dimensions at both levels (National & Organisational). This study will make track at both ways. The first is based on the argue made by Harrigan (1988) that the past studies were focused more on examining the influence of national cultural differences on the performance of IJV and had neglected the role (influence) of Organisational cultural differences on the IJV performance. So, in short the core objective of this report is to examine the affect of both levels (National & Organisational) cultural differences dimensions on the performance of IJV. This purpose will then seeks towards the accomplishment of two more ohectives:

- To gain the confidence that the findings concluded at one level are not being confused with the possible effects of other level.
- To assess the relative effect of Organisational cultural differences in relation to the effect of National cultural difference on the performance of IJV.

The second way is concerned with the view the studies done in past on this significant issue had used macro level cultural differences measures (National Differences & Ethnic Differences), which could not enabled them to differentiate and identify the effect of both cultural differences’ dimensions. This study will take both level cultural differences’ dimensions in to consideration, which thus allow the scholars to differentiate between the both levels cultural differences’ dimensions which thus enable them to deal with the opportunity that the both cultural differences dimensions may influence the performance of International Joint Ventures (IJV) in different manner.

1.4. Summary

In the Global Market, Internarional Joint Ventures (IJV) are becoming prevalent phenomeno and many multination companies have managed to experience considerable growth by making alliances (such as Joint Ventures). The common goal in most of the IJV is to achieve the growth level which is not only competitive for the companies but also incorporates sustainability factor in the long run. Stiles (2001) has described that the Joint Venture process has supported many companies to enter the inacessible markets and also facilitating the generation of new ideas which thus conttibutes them towards the change of the companies’ conventional structure and makes them to prevail for the long-period of time in a given marketplace. He further elaborated that within the context of International Joint Ventures (IJV), there are several factors which needed to be controlled carefully, otherwise it would be resulted in weaken the performance of the specified IJV. These factors are (Organisational Learning process, Knowledge Transfer and the concept of cultural differences). Morisini (1998) explained that the most ordinary causes which leaded the cross border allianced towards failure are: Mimatching of Cultures, absence of shared vision and the occurrence of inefficiency between the partners’ communication. It has been estimated that about 37-70 percent of IJV are reported to experience the performance problems incurred due to the cultural differences and thus leaded the specified ventures towards the costly failures. Cultural differences existing between the engaged joint venture partners have normally been regarded as the major aspect which might lead the venture towards failure or towards the unsatisfactory performance. This study will make track at both ways. The first is based on the argue made by Harrigan (1988) that the past studies were focused more on examining the influence of national cultural differences on the performance of IJV and had neglected the role (influence) of Organisational cultural differences on the IJV performance. The second way is concerned with the view the studies done in past on this significant issue had used macro level cultural differences measures (National Differences & Ethnic Differences), which could not enabled them to differentiate and identify the effect of both cultural differences’ dimensions.

Chapter-2: Literature Review

There is a substantial amount of material are available on the topics termed as Cultural Differences between the International Partners and the Cross-Border Strategic Alliances. It was also being found out that there is an extensive researched undergone by the several Authors on the National and the Organisational Culture. But not much literature is currently available on the formulation and the formation of new cultural which is created in the result of cultural differences. After the critical review of all available academic and journal material on the given, certain concepts and theories has been mentioned in the Literature Review section which is thus helpful in evaluation the research problem discussed in the previous chapter.

2.1. International Joint Ventures (IJV) as a Concept

It is the renowned type of strategic alliances and has been discussed in great depth by several authors and researchers. Culpan (2002) explained it as the process which includes two or more companiess belong to different countries to collaborate together by the contribution of their resources which thus created as an Independent Business Unit, whereas Wallace (2004) defined it as an activity of working together of two or more companies in accomplishing the specific aim (outcome) which would not be possible for them to achieve it alone. The common goal in most of the IJV is to achieve the growth level which is not only competitive for the companies but also incorporates sustainability factor in the long run. So by depicting the both definition, one could easily determined that there are three variables which crucial in every IJV, which are listed below:

- Multiple Independent Firms
- Well defined objective
- Degree of Interdependence

Wallace (2004) outlined that normally there are two companies involved within IJV but in some cases depending upon the nature and the size of the given industry or business, it could involve more than two companies. He further elaborated that one more thing which matters a lot to the independence of the companies is the context of each company varies in term of goals, values, management structure and cultures which could direct the companies towards the compatibility issues.

Joint Ventures are normally made on the basis of mutual interest or common objectives of all parties involved. The core objective should satisfy the needs of the companies in a fair manner otherwise the success of the Joint Venture will last for very short period.

The degree of Interdependence between the companies is the most significant component which thus makes Joint Venturing process distinguishable from the other kind of strategic alliances. Each firm involved in the Joint Venturing process is solely able to accomplish the goal at its own and has to make progress along the other strategic partners to attain the mutual objectives settled at the initial stages.

2.2. Process of International Joint Ventures (IJV)

Generally the process of Joint Ventures can be analysed and evaluated from many perspectives but the approach adopted by Culpan (2002) is the best one which preceived this process from the decision making process undertaken by the partners involved in it, The decision to decide wheather or not to make a joint ventures included four different stages (Initial, Formation, Operation & Outcome).

In the very first stage (Initial), the companies are in a position to take decisive action about entering the joint venture in an effort to gain the competitive edge, If the advantages of the Joint Venture outsmart its cost and risk involved in it then the partners will decide to take further initiative to make the tie strong and also looking for alternative options.

The stage next to the Initial stage is the formation phase where the companies are about to make follow-up decisions. These decisions are linked to the preference and selection of suitable strategic partner and also to decide the term of the joint venture. The decision making involved in the formation stage is significant and critical to the whole Joint Venture process. Tayeb (2001) emphasized that high degree of failures occurs in the strategic alliances are because wrong selection of the partner companies. Culpan (2002) has supported this fact and stressed that it is the most significant factor which matters a lot to the joint venture prospective. He has further added the worth of the compatibility element during the process Joint Venture and recommended that it is the only success factor of the IJV process. The aurhor then discussed that there are basically two kinds of compatiability: 1) Cultural Compatibility and 2) the resources the companies’ owned. Another decision to be taken in the formation stage is linked with deciding the form of Joint Venture. Culpan (2002) has categorised Joint Venture in to three tradional types, each of it depending heavily on the ownership pattern. The first one is nominated as the major equity ownership where the partner involved in the deal holds the equity stake of more than 50%, while the second is termed as equal ownership where the ownership is equally distributed among both parties. And the last type is the minority equity ownership where the one partner owned less than 50% of the equity stake. In general, the form of Joint Venture or the Ownership Pattern eventually influences the conrol procedure contained by the Joint Venture.

At some point in the third stage which is named as the operation stage, the Joint Venture is going to be analysed and evaluated through the control and performance assessment. In relation to Culpan (2002), the performance of the desired Joint Venture can be assessed in two ways: i) Through the measurement of degree of satisfaction of the parties involved in it and ii) Through the measurement of sales and profit margin to be made by the given Joint Venture. The partners have an option to exercise their control based on the stake terms decided at the second stage. The most frequent and effective way of controlling (monitoring) is delegate powers to the assign expatriate managers. This is the way (exert control) in which the partners only focused on the results and the joint ventured benefited through the autonomy. This is also known as Outcome Based Control.

The last stage is called as the outcome stage which is regarding to the determination of making decision either to carry on or to leave the joint venture. This decision is directly linked to the performance of the given Joint Venture. So it is essential for the Partners to consider and have exit strategy in advance in the case that the Joint Venture unable to meet the performance standards settled in the third stage.

In general, the formation stage is strategically valuable to the success of the given Joint Venture. At this stage, the selection of partner is made on the compatibility context which is associated with the resources and culture of the specific partner. As the core objective of this research is related to the cultural differences exists among the partners which matters a lot to the performance of the Joint Venture, so the next section will focused on the cultural differences aspects which will be discussed in accordance to the Joint Venture theory in detail.

2.3. Cultures within the IJV

In accordance to the definition of IJV, it initimates the partnership between two or more independent and different companies. This partnership or the proposed collaboration can directly be affected by the culture developed at the national and the organisational level. The national culture and the other organisations of the country where the IJV is situated plays an important in manipulating the organisation and the management style of the Joint Venture (Tayeb, 2001). As mentioned previously that the Joint Venture’s success depends heavily upon the compatibility existing between the partners and that compatibility factor includes culture as well. Culpan (2002) suggested that each partner involved in the Joint Venture carries its own culture and if there is a case where the cultures are not going to be compatible with eachother then this particular aspect will actually makes the Joint Venture susceptible. It is also being assumed that the cultural aspect can influence three factors: Investment Preferences, Timing of entry and the Joint Venture’s performance (Barger, 2007).

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