Failure of International Joint Ventures - Coursework Example

IJV – International Joint Venture Name Class Unit Introduction International Joint Venture (IJV) is one of the most popular forms of entry into the international market (Rugman, 2002). Over the recent years, most of the international organizations have been involved in joint ventures overseas. While there have been an increase in the number of IJVs, there have been several failures. The number of IJVs failures reported shows a high rate of failure. This is despite the fact that IJVS are the frequently used mode of business when multinationals wants to enhance their international presence. However, with the international collaborative business arrangements, it has become hard to manage the IJV successfully. In some instances, IJVs are faced with problems of instability and poor performance (Yan & Luo, 2016). This article is based on the reason why despite the failure rates for the IJVs frequently reported as being very high, the statement can be misleading. It discusses why companies enter into IJVs and what can be done to enhance their success rates. This is attained through use of examples and relevant literature. Why firms enters into IJVs Globally, IJVs have been a vital tool in international expansion. Through IJVs international firms are able to have access to complementary resources and also benefit from each other. IJVs are also important in bringing new technology to market faster and in an efficient manner (Rugman, 2002). Moreover, joint ventures are able to give the participating firms a good status to the local business environment in the international market. It also becomes easier for the business to navigate the environment in which they are operating in. Through joint ventures, firms are able to cope with their new international relationships and enhance their social capital (Steensma et al., 2008). An example is the joint venture between Jaguar Land Rover and Chery. The partnership known as Chery Jaguar Land Rover Automotive Company has enabled the firms to blend their technologies and experiences (Wachman, 2012). With both firms having experience in the car industry for a long time, the international joint venture acted as a chance to complement their experiences. It helped in harnessing their capabilities and come up with car models which are relevant to the local market. Another successful joint venture has been between Kellogg Company And Wilmar International Limited in China (Kellogg Company News Room, 2012). Through the joint venture, both firms have been able to exchange skills and come up with products that are relevant to the local market (Currall & Inkpen, 2002). A joint venture acts as a form for direct investment into other markets. Use of IJV has made it easy to penetrate international markets. It has also made it easy to share risks through a cooperative arrangement. In fact, forming a strategic alliance through an IJV is a way to reduce the business risks (Yan & Luo, 2016). Country specific factors may lead to firms entering into an IJV. For example, China has a huge population and cheap labour. In addition, personal relationship (guanxi) is used by millions of Chinese to bind them into a social and business web. Guanxi determines the social behaviour and the way of conducting business. Thus, forming an IJV with a Chinese firm act as a sales force in marketing (Yan & Luo, 2016). Another factor is that trade barriers and mitigations can be broken through joint ventures. For example, Japanese firms used IJVs in the 1980s with an aim of addressing barriers that existed in the US markets. An example is the IJV between National Semiconductors and Hitachi. Some countries such as China have strict rules by the government for foreign firms. This leaves the foreign firms with no alternative but to form IJVs with local firms. Using a local partner may enhance access to incentives and enhance efficiency (Currall & Inkpen, 2002). Lastly, IJV can be used for economic reasons. This is due to fact that they reduce the costs and enhance competitiveness (Robson, Leonidou & Katsikeas, 2002). When faced with foreign competition, firms may decide to engage in IJV and reduce costs. In some cases, coming up with new products can be very expensive and engaging with partners makes it cheaper (Rugman, 2002). This can be explained through ICL and Fujistu who came together to develop the mainframes. The extremely high development costs are reduced as well as risks through the IJV. The economic benefits and economies of scale make it very viable to use IJVs (Robson, Leonidou & Katsikeas, 2002). Failure of IJVs and why the statement may be misleading Research indicates that about 50 to 70% of the IJV fails. It is argued that the main reason for the IJVs failure is based on a based on strategic motives and rationales among the partners involved (Kotelnikov, 2017). Despite this, the statement may be misleading on the level of failure for IJVs. First, there is confusion that exists on the failure statistics (Nielsen, 2002). This variance is caused by the fact that there is no clear consensus on the meaning of failure in this context. For example, the definition of failure does not clearly give the performance measures being used, the partners prospective and the time frame involved. For example, an end to partnership does not always signal failure. The end of IJV may be based on the success of the aims and objectives (Nielsen, 2002). Also, failure is based on the specific partners’ aims being met. Thus, to fully analyse the failure of the IJV, one has to look at the extent the aims and objectives have been met (Sim & Ali, 2000). Success or failure is thus based on the specific aims and objectives for the IJV being attained. In some cases, the IJV is formed by partners with opportunistic and short term motives. This is a relationship based on short term goals and it ends once these goals are achieved (Yan & Luo, 2016). For example, a firm may form an IJV if they want to enter a market through low risks. Another example is when the IJV is based on gaining a fast mover advantage. This can be explained by an IJV between PSA Peugeot Citroën and Toyota to develop a new model of city car which was a success. This was a time limited IJV which was aimed at sharing resources and reducing the time and costs. The termination of such type of IJV cannot be looked as a failure. In some cases, firms tell their partners what they want to them to hear. This is especially when their motive is opportunistic. Failure to understand each of the partner’s motives can lead to failure of the IJV (Robson, Leonidou & Katsikeas, 2002). It is vital to understand that the failure of IJV can be caused by internal or external factors. Internal factors include the partner differences, poor negotiations, disputes, poor leadership and unpreparedness. The external factors include changes in environment, interference by government agencies, poor local infrastructure, poor market estimation and cultural differences (Yan & Luo, 2016). It is important to look at some of these causes of failure in order to understand the failure rates. First, for IJV to succeed, they must select the right partner. This involves use of the right criteria in looking for a compatible partner. The partners must have compatible goals, complementary resources, capability and commitment. Failure to have these aspects contributes highly to the failure of the venture (Rugman, 2002). Thus, when an organisation fails to select a partner with the right motive, there is high possibility of failure. Through the joint venture, a firm hopes to access something new such as technology or resources. Based on the motive, the type of relationship varies. When a firm takes an extractive approach on their partner resources, assets and competencies, they may ruin the IJV. This is also based on the involved partners’ willingness to share resources and information. A relationship which is based on extraction needs from the partners may fail if technology development is halted by one of the partners (Child & Yan, 2003). Another reported cause of failure for the IJV is cultural differences. It is almost impossible for two firms to coordinate when their national and corporate cultures differs. This is unless the cultural differences are addressed. When two organisations have different cultures, their partnerships are likely to be a failure (Child & Yan, 2003). An example is the IJV between Chrysler by Daimler which failure due to cultural crashes. When one partner tries to impose their cultural aspects in disregard to the partner, there is high likely of a potential conflict. Despite this, research has shown that joint ventures between firms from distant cultures lasted longer. This is due to fact that they are able to overcome cultural differences at an early stage. An example is the alliance between Air France-KLM who despite coming from different cultures has been able to work together successfully. This was attained through use of intercultural training. Despite this, lack of understanding on cultural differences has been a major cause for failure. The existing experience among the partners has also been found to be a major factor in failure of IJVs (Currall & Inkpen, 2002). If a partner has previous knowledge and experience through a joint venture, there are high chances of success. Lack of previous market experience may lead to poor understanding of the IJVs. Lack of organizational skills and capabilities may lead to failure of the joint venture. For example, if the IJV has been formed between firms with poor workforce, there are chances that it will fail. Organisational capabilities help in overcoming the existing barriers (Reuer & Leiblein, 2000). For example, the entry of KFC into china was based on organizational skills and capabilities. Increasing the likelihood of success for IJVs Based on research, IJVs are the most common form of international business. A successful IJV can be very productive to both partners in attaining their objectives (Killing, 2012). This makes it vital to look into ways in which a firm can decrease the likelihood of failure as they expand using IJV. To enhance likelihood of success for the IJVs, there is need for enhanced trust. The firms must first spend time to build trust and consolidate it. Trust is correlated with time in a positive manner (Yan & Luo, 2016). This includes organisational, functional and individual trust. Trust acts as a prerequisite for the alliance to succeed. Research shows that IJVs which have succeeded have high level of trust (Geringer & Hebert, 1991). An example is the JV between Sony and Ericson which are Japanese and Swedish firms respectively. Their joint venture which is based on trust has led to creation of the best handheld technologies (Yan & Luo, 2016). Another aspect that can lead to successful IJV is partner selection. Selecting the right partner is an important variable that determines the success in the operation of the IJVs (Killing, 2012). This is due to fact that the type of partner selected determines the skills, resources and policies that will be used by the partners. The partners also help in determining the overall competitive capabilities of the firm. Based on the resource theory, a firm enters into an IJV with an aim of attaining new resource or technology and this can only be attained through compatible goals (Reuer & Leiblein, 2000). There is need for the firm to understand the foreign culture. This is especially in partners whose cultures differ greatly. In fact, success in exchange of knowledge is based on the cultural similarity (Child & Yan, 2003). Thus, knowledge acquisition hence the success of the IJV is based on the cultural similarity. There is need for due diligence in understanding each other cultures and areas of conflict before entering into an IJV. Based on Hofstede cultural dimensions, it is important to look at differences and similarities before embarking on an IJV to ensure success. An example is the joint venture between Mazda and Ford which has led to production of some of the world leading automobiles such as Ford Mustang. The firms understood each other cultures before engaging in partnership which has led to long term success. Before entering into the IJV contract, there is need for proper negotiations. This includes negotiating on the terms of the contract, looking at the objectives of the IJV at all stages of the lifecycle and the strategy (Yan & Luo, 2016). There is a need to look at the cultural compatibility, risk management and power sharing. In addition, the firms must be ready to analyse any potential partner behaviour in case of changes in market or arising of new opportunities. The firms must ensure that there is due diligence before engaging in the IJV (Killing, 2012). There must be alignment of goals and objectives between the partners. This is due to fact that finding the right partner is based on aligning goals and objectives (Killing, 2012). For example, the main motivations for Chinese multinationals are obtaining of technology capital and expertise. For the partners wanting to join Chinese market, they look for partners who can help in attaining this goal. Thus, it leads to partnership with compatible goals. Firms in an IJV should ensure that there is an agreement on conflict resolution to ensure success. This leads to efficient dispute resolution and also minimise conflicts. The managers should be able to handle cross cultural differences and communicate effectively. This is due to fact that conflicts in the IJV can lead to failure (Rugman, 2002). There is need to ensure that there is product relatedness before forming a IJV to enhance success rate. Thus, the ideal partner is supposed to have a core business which is directly related to the parent firm. This makes it possible to share compatible goals. This reduces the risk of failure through enhancement of interaction effects (Yan & Luo, 2016). Having related products implies that the partner has the knowledge of the local market which is a vital contribution in market success. An example is the Tesco Lotus joint venture. Through the venture, it was possible for Tesco to adapt to the Thai market since Lotus had the local knowledge. Another example is KFC in China which it was possible to gain access to the local prime restaurant at lower prices and use the existing distribution chains. The firm was able to benefit from the local labour and suppliers. Success for the IJVs includes regular reviews and changes. This helps in determining the required changes and how parents are impacting the IJV. Changes carried out by the partners determine the viability of the IJV relationship (Geringer & Hebert, 1991). Conclusion From the analysis, it is clear that despite the reported high failure rates for IJVs, this statement can be misleading. This is due to the vague and confusing definition of IJVs failure. There is no listing of performance measures used, the partners prospective and the time frame involved in determining failure rates. Moreover, IJVs are terminated for various reasons including an attainment of the set objectives. Firms enters into IJVs for various reasons ranging from complementary resources, country specific factors, economic reasons to mitigating trade barriers. To enhance the likelihood for success of the joint ventures, there is need to enhance trust, select the right partner, align goals and objectives and carry out proper negotiations. There is need to agree on conflict resolution and learn about each other’s cultures. The partners have to work together for mutual benefit in a suitable environment. References Child, J., & Yan, Y. 2003, ‘Predicting the performance of international joint ventures: An investigation in China’, Journal of Management Studies, Vol.40, no.2, pp. 283-320. Currall, S. C., & Inkpen, A. C. 2002, ‘A multilevel approach to trust in joint ventures’, Journal of International Business Studies, Vol. 33, no.3, pp.479-495. Geringer, J. M., & Hebert, L. 1991, ‘Measuring performance of international joint ventures’, Journal of international business studies, Vol.22, no.2, pp.249-263. Kellogg Company News Room. 2012, Kellogg Company And Wilmar International Limited Announce China Joint Venture: Retrieved from: http://newsroom.kelloggcompany.com/2012-09-24-Kellogg-Company-And-Wilmar- International-Limited-Announce-China-Joint-Venture [Accessed 24 Apr. 2017]. Killing, P. 2012, Strategies for joint venture success (RLE international business) (Vol. 22). London: Routledge. Kotelnikov, V. 2017, Why JOINT VENTURES FAIL? Common Causes of Jount Venture Failures, Failure reasons of international joint ventures: Cultural Differences, Poor Leadrship, Poor Integration Process. Retrieved from: http://www.1000ventures.com/business_guide/jv_failure_reasons.html [Accessed 24 Apr. 2017]. Nielsen, B. B. 2002, Why do international joint ventures fail? a strategic mismatch explanation. Copenhagen Business School Department of International Economics and Management Submitted to Academy of Management Review, Working Paper-4. Reuer, J. J., & Leiblein, M. J. 2000, ‘Downside risk implications of multinationality and international joint ventures’, Academy of Management Journal, Vol.43, no.2, pp. 203- 214. Robson, M. J., Leonidou, L. C., & Katsikeas, C. S. 2002, ‘Factors influencing international joint venture performance: Theoretical perspectives, assessment, and future directions’, MIR: Management International Review, pp. 385-418. Rugman, A. M. 2002. International Business: Joint ventures and modes of entry (Vol. 2). Sussex: Taylor & Francis US. Sim, A. B., & Ali, M. Y. 2000, ‘Determinants of stability in international joint ventures: Evidence from a developing country context’, Asia Pacific Journal of Management, Vol.17, no.3, pp. 373-397. Steensma, H. K., Barden, J. Q., Dhanaraj, C., Lyles, M., & Tihanyi, L. 2008, ‘The evolution and internalization of international joint ventures in a transitioning economy’, Journal of International Business Studies, Vol. 39, no.3, pp. 491-507 Wachman, R. 2012, Jaguar Land Rover and China's Chery agree joint venture. The Guardian, Retrieved from: https://www.theguardian.com/business/2012/mar/21/jaguar-land-rover-china-chery [Accessed 24 Apr. 2017]. Yan, A., & Luo, Y. 2016, International joint ventures: Theory and practice, London: Routledge. Read More