Failure Rate in International Joint Ventures

Topics: Risk, Joint venture, Risk management Pages: 9 (2759 words) Published: May 5, 2013
The Failure Rate For International Joint Ventures (IJVs) Is Frequently Reported As Being Very High. Why Do Companies Enter Into IJVs And Why May This Statement Be Misleading? Give Examples throughout.

International Joint Ventures became common in the late 20th century when companies wanted to venture beyond their native shores in order to extend their area of influence, capture attractive markets and increase profits. Initially only large business ventured out but soon it became a trend that all companies, big, medium or small, found attractive. Most countries have joint ventures functioning out of their soil. The reason for this can be seen in the globalisation of the markets, easy and speedy communication and the use of rapidly changing technologies. (International Joint ventures: Theory and Practice by Aimin Yan and Yadong Luo) There has been a paradigm shift in the way businesses have been conducted right across the world. Despite the notion that IJVs are unsuccessful, this essay goes to prove why this idea can be deceptive.

Economical and Legal Distinction

What is an International Joint Venture? It has been defined as “a common project between legally and commercially independent companies in which the parties jointly bear both the responsibility for management and financial risk” (Weder 1991). Economically and legally distinct businesses are created by parent companies that pool financial and other resources together to pursuing common objectives. (Anderson 1990; Pfeffer and Nowak 1976) According to Yan and Luo, firms operating in different countries work together across national borders. (Yan and Luo, 2001) In a joint venture, economic activity is the result of collaboration between two entities. Here, the two existing parties enter into a contract or a partnership. Why do companies form joint ventures? As firms expand, they are constantly on the lookout for new markets, products and services. It is not necessary for the parent firms to own 50% of the equity in a JV. In fact, in order to control the amount of investor influence, many countries consider an investment that is less than 20% a good decision (Managing Joint Ventures by Paul W. Beamish and Nathaniel C. Lupton.) Throughout history, countries have laid restrictions on businesses, for example a compulsory involvement of a local partner to facilitate foreign entry. Such discretionary practices are rarely seen today. However, IJVs continue to successfully make up the bulk of foreign entry and investment.

Some Advantages

In a JV, firms can use each other’s strengths in order to introduce new services and develop new products rapidly which would not have been possible had they been alone. Efficiency is maximized as there is little duplication of resources. To a large extent, the presence of a local firm can increase acceptability for an alliance between two businesses. The local firm can ease the passage through unchartered waters for the foreign firm. Other ways to access resources of another firm are through contracting, licensing and other strategic alliances that do not involve sharing of equity. In volatile foreign markets, it is the IJVs that outperform subsidiaries that are wholly owned. This is because of the safety net that the local partners provides. Success rates are higher as commitment is inherent in a joint venture. This commitment leads to better cooperation between parent companies especially when it comes to defeating competitors.

Expansion is the main motive behind joint ventures. The main concern with regards to this partnership is the financial strengths of the participating firms. However, when a strategic alliance is contracted, there is flow of not only capital, but assets, technology and human resources between the companies as well. This is expected to double benefits and halve the risks. Investing in any business carries its own risks but investing in joint ventures provides a larger cushion from risks and often...
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