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. 

 

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