Hi mayfair,
seeing that strong companies with established proven products in their
home markets are forming joint ventures in foreign markets prompted me
to research the same question your are asking today for myself. I
wasn't clear why a company that was so successful here (in a developed
market) would want to "share" the possible profits from "their"
product.
I will try to duplicate my research here again and list the reasons
why joint ventures can be of great benefits, and why many of them
never get to realize their promisses.
I) What benefits do companies from developed market countries expect
when they search for joint venture partners in emerging markets.
First we should distinguish two possible partners in a joint venture:
a) A joint venture with another foreign company
b) A joint venture with a local company
Most of the reasons for foming a joint venture apply for a) and b) but
I think case b) is more specific to your question, so I will address
this case.
Expectations towards a joint venture:
a) From the side of the foreign company
- Risk Sharing:
This is kind of self-explanatory - the more shoulders the burden is
spread on, the less the individual participant is carrying.
- Lower initial Investment:
Resources like buildings, manufacturing equipment, patents, etc. might
already be present aside from the benefit of having two investor
instead of one. This enables the foreign company to go ahead with an
investment much earlier or to invest in more countries at the same
time.
- Faster market entry
The local partner might either have similar products already in the
market or experience in how to access the market enabling the foreign
company to access the right people in government/administration,
retail, etc. There might also already be a trained management team or
maybe trained workers on site, as well as, existing relationships with
suppliers, advertisers, retailers, etc.
In addition to that there is always the chance that the partner owns
trademarks/names that can be used to give the products an established
"local" look and feel, which is especially important in markets where
outsiders are not well liked.
- Knowledge of the consumer/market
The local partner might have a better understanding of how the
consumer thinks (should we paint it blue or green? Does the name mean
something in the local dialect that we won't find in a dictionary? Are
there religious aspects we should consider? Etc.) and how the market
works (special seasons, giving rebates, bundeling, packaging, retail
channels, etc.). The language is not a foreign one to the local
partner.
- Aquisition of extra knowledge
The local partner might hold key knowledge that might benefit the
Joint Venture (alternative production technology, experience working
with other types of products - especially in the local environment
(e.g. extreme heat/cold, dry or wet climates, etc.))
- Special Laws
Some countries limit the ownership rights of foreign companies.
- Access to limited resources
Natural resources usually will already have an owner.
- Eligibility for government grants and special contracts as well as
subsidies.
b) from the perspective of the local partner:
Most of the points from above are also true for the local partner,
however, there are a few additional points:
- Access to new/hard currency capital
This is especially important in weak currency countries.
- Aquisition of Knowledge
Especially Knowledge that is not domestically available. This is not
limited to production knowledge but also includes administrative,
logistic, etc.
- Internationalization
What goes one way might go the other, too.
- Strengthened market position
Competitors are suddenly facing a much more competitive market with
new/better products and better financial backing
There can be other factors for the formation of joint ventures, like
diversication, research/manufacturing link-ups, etc., however, I don't
think that those are really relevant for the question you have asked
(joint ventures between developed market companies and emerging market
companies).
As for the failing or success of those joint ventures:
a) it succeeds - then your expanation is simple: Look at the points
above. Those companies were able to utilize the advantages companies
hope for when they form joint ventures and they didn't fall into any
of the traps outlined in b)
- Clear goal
Both partners have a clear and agreed upon goal that they stick to.
- Communications
Both partners listen to their project teams and to their management
teams that work inside the joint venture.
- Full integration
The Joint Venture can utilized the resources provided by its parents.
- Conflict resolution is intact
- Clear definition of responsibilities.
b) it fails: Why?
- Communication problems:
Different languages as well as different value systems might make the
communication between the two partners extremely difficult and could
lead to the breakdown of the joint venture.
- Different interests:
Although the partners might be agreeing in the beginning of the joint
venture, they might at some point develope different ideas about goals
and/or how to achieve them.
- Battles for control:
The issue of who controls what has to be resolved right at the start
of the joint venture or it will definitely lead to problems later on.
- No clear definition of responsibilities:
Both partners have to be able to rely on the other partner's
participation (e.g. providing raw materials, people, knowledge,
financial contributions, etc.)
- No common rules to regulate disputes:
Even the best of partnerships have troubles - only those that know how
to solve them survive.
- Financial troubles of one of the participants:
In the best case this leads to the other partner taking over the
operation, in the worst it is the end of the joint venture.
- Lack of trust:
If the partners don't behave like real partners, the relationship
fails quickly (e.g. if information that is important for the company's
success is withheld because of fear of leaks).
- Problems with the legal system:
This is especially true for unstable countries, where the law
governing foreign investments might change quickly. There might also
be a problem with incompatible standards or safety requirements, etc.
- Political problems:
Export Restrictions are just one problem that might occur if the
political situation deteriorates between the partners' countries of
origin.
- Bad integration:
If a Joint Venture isn't integrated into the founder companies' in
some way, it cannot use the advantages its success should usually be
built upon: Economies of scale, contacts, networks, distributors, etc.
There are other reasons for failure, of course, but these aren't
specific to Joint Ventures or to the type of Joint Ventures you
inquired about: lack of financing, failure of product, management
problems, etc.
I hope this answer was helpful to you! If you require additional
details, please feel free to request a clarification. I'll be online
for a while and checking this question, so we can meet your deadline
with a request for clarification, too.
voyager-ga
Additional Resources:
Creating Joint Value: Key to Successful Joint Ventures
http://www1.sim.edu.sg/sim/pub/mag/sim_pub_mag_list.cfm?ID=1031
Management A-Z: Joint Ventures
http://www.ftmastering.com/mmo/mmo11_6.htm
Briefing: Joint Ventures
http://www.cfoeurope.com/200205g.html
Search Strategy:
joint ventures fail
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