Joint Venture: Concept is very broad: two or more companies coming together to co- operate in some way for their mutual advantage There is a whole spectrum of possibilities: Informal Co-operation Licensing in various forms Joint Functional Co-op - R & D - Marketing Joint Management Joint Equity in total enterprise We will focus on RHS - Shared equity in a total enterprise

Paradox: There are more and more JV’s, but experience says they are hard to manage and economic theory says they don’t make sense: - cheaper when costs are internalized - moral hazard of partner going on his own - benefits unequally distributed

Motivation for JV New Markets Existing Markets Existing Products New Products To strengthen existing business To take existing products into foreign markets To bring new (foreign) products into existing markets To diversify into new businesses

Operating questions that arise: - Who does product design? - Which technology should be used? Who gets benefits of any improvements made within the JV? - Which markets should be served? Local? Export? - Which suppliers should be used? - Buy from parent(s)? At what price (transfer price) - Buy on open market? (real price) How to handle management problems arising from different cultures? - national - corporate

JV will have to create/define patterns of interpersonal relationships at all levels and in all directions The dominant parent, especially if it is foreign, may - misread local culture and politics - misread markets - generate resentments in its partner Problem of “tyranny of the majority”

Functional JV’s (mostly associated with Existing/Existing) 1. Marketing - - share sales force - share distribution network - e.g. Air alliances Problem: lose brand identity Possible answer: create a “super brand” e.g. airlines “Star Alliance” Can work pretty well 2. R&D Problems - quality of inputs (researchers, technicians, scientists, equipment - how to share benefits of outputs? Note the contradiction here to the usual approach to patenting Possible solution: joint licensing of results

3. Production (a) Get economies of scale which would not otherwise be possible Problem: unstable: as market grows one or more will become big enough to want to go it alone (b) Get access to technology and management know-how Problem: again it is inherently unstable – partner may go it alone once technology is mastered 4. Other In general to reduce financial risk, e.g. -joint oil/mining exploration, - some banking arrangements such as syndicated loans

Existing Product / New Market Use JV as a way of testing the market. Implication is we will establish a wholly owned subsidiary when the market is proven (Is this fair to our partner?) 1. Follow customers to markets - Japanese auto parts suppliers to US - US and European accounting, consulting and legal firms to SE Asia and China 2. Investing in Future growth 3. Overcome government regulation - may require foreign investor to take a local partner - may have limits on FDI - may have limitations on foreign employment - may have limitations on capital transfer 3 (a) Overcome “political connections” barriers

New Product / Existing Market In some ways this is the mirror image of the previous 1. Improve production capacity utilization 2. Broaden the product line 3. If existing market is in LDC, foreign partner can be a source of hard currency - from sales and profits - from management fees 4. May generate tax advantages Future problems: - Question of market growth- will we go from marketing to assembly to full scale production? - New product means a need for more capital, more management, more commitment - Question of source of supply of product - parent companies? Third party?

New Products / New Markets Most diversification acquisitions or JV’s do not succeed Not a good bet!!

Requirements for Success 1. Strategic logic - is there a market? - is a partnership the best way to go? - is it a balanced partnership? - what are the costs & benefits for the local partner? For the foreign partner? 2. Is there a fit between the partners? - goals -time horizon - measurement of success? - compatibility ? - do respective capabilities fill the gaps? - comfort quotient - with partner - with environment 3. Shape and Design of JV - strategic freedom of JV Note that this will likely change over time - be ready for it! - develop cadre of managers committed to JV and not to one or other parent

4. Payoffs balanced? - trading profits of the parents - selling prices, especially transfer prices - management fees - dividends 5. Management roles and authorities of each partner defined and understood? -dispute resolution by using legal authority or by negotiation? Problem: Can arrive at a decision making stalemate! Possible answer: have one dominant partner, which in practice usually means the foreign partner. However this can lead to: - misreading the local culture - misreading political environment - misreading the market - generate resentment which will further impede co-operation Key Issue is TRUST

Doing the Deal What counts is the relationship, not the contract But contract is important - I like the book’s suggestion of a shotgun divorce clause -I name the price - You decide whether to buy or sell Maturation problems 1. A successful JV will develop growing autonomy from both parents 2. The parents goals will change over time ## Therefore need to have a willingness to recognize changed circumstances and to re-negotiate arrangements

Some results from JV research in Bahrain Dominant motivation is market access - both local and export Costs not dominant so long as critical resources are reasonably available Government involvement is relatively unimportant -subsidies- tax breaks - promotion JV must make sense on its own merits Needs to be an attractive environment for foreign staff - schools - health - social life

Most important factor in partner selection was prior experience with him and his local reputation Recommendations from third parties - banks, governments, not significant factor in partner selection Companies that are in their first JV place more emphasis on cost Companies and managers with prior JV experience are more laid back in their assessment of success Critical variable for success - getting managers with prior overseas JV experience Total years of management experience is not the same thing as JV experience