search

International Expansion with Joint Ventures

Essay details

Please note! This essay has been submitted by a student.

Download PDF

Internationalisation is the process through which a firm expands its business outside its domestic market. It is the growing tendency of corporations to operate across national boundaries. Firms internationalise in many different ways, generally they go international by exporting their products first, then by establishing sale representatives in the foreign countries, and then possibly setting up production facilities. For example, consider Cobra beer, it first brewed in Bangalore, India by Mysore Breweries and later exported to UK. Eventually licensed and brewed in the UK by Wells & Young’s. It similarly started subsidiaries in Australia and other countries. Corporations seek to expand into international markets to,

Essay due? We'll write it for you!

Any subject

Min. 3-hour delivery

Pay if satisfied

Get your price
  • Diversify the market and customer base
  • Extend the sales life of current products
  • Reduce dependence on the home market by spreading risk
  • Counter seasonal fluctuations.

Eventually international firms develop into Multinational corporations (MNC) or Trans-national corporations (TNC). Vernon (1971) asserted a positive relationship between performance indicators such as return on investment (ROI) or return on sales (ROS) and the extent of multi nationality of the firm. Firms go international in multiple ways based on their entry strategy. Entry strategies into foreign markets include, • Exporting into foreign markets with support from trade brokers.

  • Licensing the firm’s production and marketing process. Royalties to be paid for using firm’s assets and resources.
  • Franchising the business in the foreign countries.
  • Directly involving in the business in the foreign countries by controlling production and selling operations.
  • Strategic alliances and Joint ventures with foreign firms.

Farok, Sumit and Chin-Chin (2003) have stated that international expansion has U-shaped and an inverted U-shaped relationship with the firm’s performance. U-shaped relationship suggests that an initial negative effect of international expansion on performance, before the positive returns of international expansions are realized. And an inverted U-shaped relationship suggests that international expansion beyond an optimum level is detrimental to performance, and again results in a negative slope if firms are excessively internationalized. International expansion can help open doors that are unavailable in the firms existing market. Forming strategic alliances or joint ventures with foreign firms is a common business strategy used to reach a specific consumer market and achieve a common goal. Maria (2009) concluded that there are idiographic mechanisms and situations for each international joint venture which depend highly on its position, parents, market and the business.

International Expansion with Joint Ventures

Joint ventures are a tool of international expansion. It is a common way of combining resources and expertise of two otherwise unrelated firms to capture a specific consumer market. Joint venture offers great advantages, but it can also present certain risks due to its highly complex arrangements. Joint venture is a complex phenomenon where a financial relationship is created between the partners, not just cooperation. Maria (2009) stated that international joint ventures(IJV’s) enable firm to access the complementary resources and capabilities of each other, which they need to achieve economies of scale and bring new products, services or technologies into market faster, more efficiently, more reliably and more cheaply than what they could do alone or using other methods. David and Stefan (2003) argue that the key to success is the choice of joint venture partner and given the limited resources of small firms, assistance is required to help them locate and select appropriate partners.

A major joint venture advantage is that it can help grow business faster, increase productivity and generate greater profits. Joint venture is a less risky strategy then outright acquisition- the capital investment is typically half or less. It is more flexible if local conditions change, or if the market or relationship proves unattractive. Joint venture is associated with multiple benefits such as: access to new distribution networks and markets, increased capacity, risks and costs shared with partner and access to specialised staff, technology and finance. Being in a joint venture provides a firm with an incentive to use the joint venture partner’s customer database to market their product, offer partner’s services and products to their existing customers and join forces in purchasing, research and development. JLR, owned by India’s Tata, joint ventured with Chinese company Chery Automobile and invested £1.1bn in china. The two companies provided new research & development and engine production facility. And this new partnership, called Chery Jaguar Land Rover Automotive Company, produced models which are specifically tailored for the Chinese market. This joint venture blended together the heritage and experience of luxury premium vehicle manufacturer Jaguar Land Rover with intricate knowledge and understanding of Chinese customers evident at Chery. This joint venture confirmed formal commitment of JLR into China and would help improve the business of JLR in China and at the same time help Chery Automobile internationally expand. Arnaud and Philip (2017) stated that successful companies build a sustainable joint venture organisation and governance structure designed as much for flexibility as for effectiveness. They also identify additional mechanisms that will ease the day-to-day operations and preserve the strategic intent and balance of power. Aera Energy LLC, a successful joint venture of Exxon Mobil and Royal Dutch Shell, is a natural gas, oil exploration and production company. Aera Energy is California’s largest oil and natural gas producers. Aera Energy is operated as a stand-alone company through its board of managers. Another example of a successful joint venture is Sony Ericsson, a joint venture between Japanese Sony Corporation and a Swedish company Ericsson to make mobile phones and smart phones.

What Can Go Wrong?

Joint Venture is a form of foreign direct investment which serves a company’s expansion into other markets. A local firm and foreign firm combine together to create a legal entity to share the ownership, profit/loss and other benefits of the business. Joint ventures achieve a high failure rate despite a strong understanding between the companies and with huge resource base because of the differences in culture, strategy planning and organising. Doris (2017) has stated that joint ventures are fragile and finding balance is often difficult. The positive intensions and rationale intent behind these alliances are not consistent with strategic ambitions of either firm on its own, let alone the strategic ambition of the joint venture. Factors that hinder the success of a joint venture are,

  • Operational difficulties due to geographic positioning of partners
  • Incompatibility of the culture and management styles of the partner
  • Objectives of the venture are not clear and partners have different objectives for the joint venture
  • Conflict of control to make important decisions in the joint venture.

Nielsen (2002) argued that international collaborative arrangements are very complex to manage. Example of a failed joint venture is HERO HONDA, a merger of HERO group of India and Honda of Japan to produce bikes. An agreement was signed in 2010 to dissolve the partnership due to unresolved disputes. Kedar (2016) stated that there was a conflict of interest about board representation as Honda had 4 representatives in Hero Honda board and had access to all strategies and plans of Hero Honda while Hero Honda had no access to Honda’s plans and strategies. Hero Honda also wanted to invest in R&D to which Honda was not comfortable. Honda also went against the terms of agreement and launched motorcycles in 2010 becoming a direct competitor to Hero Honda. EYML, a joint venture of Yamaha and Escorts to manufacture and market motorcycles in India, is an example of a failed joint venture due to conflict of control. Escorts exited the joint venture by selling its stake in EYML to Yamaha motors. Escorts informed that they were exiting the business because they didn’t have driving control of the company and Yamaha technology was not their expertise. Some of the joint ventures fail very quickly due to the wrong intensions or motives behind the merger. Consider a joint venture where one partner is willing to share its knowledge and expertise, then there is a potential for the other partner with hidden motives to steal the technology and cheat the partner in the joint venture. Joint ventures in China have high intellectual property risks due to government regulations and is currently an important issue in international business.

Another example of a failed joint venture is four life insurance joint venture in China. Stephan, Thomas and Emma (2010) stated that the failure of the company might have been avoided if the CEOs of the parent companies and the joint ventures’ future management teams had spent time collectively developing business plans and preparing for changing market dynamics. Tony (2015) argued that one of the man reasons for the failure of joint ventures is due to the lack of attention paid to cultural differences. Culture is a tricky concept and has always been difficult for firms to understand it in detail. The failure of Daimler Chrysler merger is an example of failure due to cultural differences. Merger of the two-leading global car manufactures strategically made sense, but contrasting cultures and management styles hindered the realization of the synergies. Michael (2007) argued that the failure was mainly because they ran the two organisations as separate operations and realizing synergy in brand architecture and platform strategy would have required deep integration of Daimler and Chrysler.

Emerging vs Developed Host Markets

Risks and benefits of international joint venture differ based on the host market: emerging host market and developed host market. Market dynamics in developed countries and developing countries vary due to various influencing factors. Sim and Yunus (1998) stated that unlike the developed countries – the developing countries need local parental control and good technology were needed to create its venture to success. Beamish (1985) compares joint ventures in developing markets and developed markets and claims that there are significant differences in the reasons for undertaking the joint venture. He notes that in developed countries 83% of the joint ventures are undertaken because the joint venture firms require the technical skills and assets of each other, while the rest are undertaken as a result of government policies. While almost 60% of joint ventures in developing countries are undertaken as a result of government policies and the rest are undertaken because the joint venture firms require the technical skills or assets of each other. Each emerging market presents a different set of risks. Inadequate corporate governance, corruption, lack of enforcement of intellectual property rights and immature dispute resolution mechanisms are common challenges in emerging market. Unpredictable regulatory and political environments make it difficult to run the business. Lack of proper legal documentation makes it difficult to analyse the ownership of the assets related to target company.

Markets in developed countries are more stable due their calm political systems, stable government regulations and strong enforcement of intellectual property rights. Legal documentation and procedures are more standardised and reliable in developed markets and there is a more mature approach towards dispute resolution as well. Witold and Bennet (2010) argued that elections and other political events, economic crises, and changing societal attitudes can disrupt the best-laid plans in both emerging and advanced economies. Developed markets are associated with high cost of operations and immense competition due to already established business corporations. Business corporations with long term business plans are attracted towards developed countries as short-term and mid-term business plans are unlucrative in developed host markets.

From a financial stand point, one of the major challenge in an emerging market is the quality of financial information. Local private companies may lack sophisticated financial reporting functions and may have tax-driven accounting, a tendency to report lower earnings to drive lower effective tax rates. Tax regimes in emerging markets can change significantly due to changes in local political dynamics. Also, many emerging markers depend heavily on indirect tax collection such as VAT. Jerome Booth, the head of research at Ashmore Investment Management, said ‘Basically, all markets are risky; the emerging markets are the ones where that’s priced in. A developed country is one where that risk is not priced in, is ignored.’ (Alexandra,2010) Sundaram and Lamba (2004) argue that international joint ventures are valued more by investors when they are undertaken in countries with a high degree of political risk. Robin, John and Ross (1996) note that changes in political risk have larger impact on returns in emerging markets than in developed markets. During the past 10 years, a global convergence is seen in political risk. Emerging markets have become politically safer, and developed markets have become politically riskier. In emerging market if one can forecast changes in political returns, one can forecast stock returns, as a result emerging market analysts are advised to allocate considerable resources to forecast changes in political risk. In developed markets, political risk is less important so developed market analysts are well advised to devote resources for forecasting other sources of return such as changes in expected future economic conditions. If global political risks continue to converge then the large differential impact of political risk changes between emerging market and developed market may fade.

Conclusion

Global players in the business world are elaborating their channels through the mode of joint ventures, and they are also using their experience into the business they are involved which will result in a high success rate. Milton and Ryan (2011) stated that international joint ventures are an effective way to enter a new market quickly but partnering with, sharing the risks and taking advantage of another firm’s local resources and expertise can be tricky undertaking without proper research, planning and understanding. International joint ventures allow for much faster and less expensive access to foreign markets than can be achieved by purchasing an existing company in the jurisdiction or starting a new venture. The firms which form international joint venture also take advantage of complimentary lines of business and synergies that may exist between the two companies. An international joint venture can result in a frustrating experience and a failure if it lacks necessary planning and strategy due to various influencing factors such as political risks, governance laws, cultural differences and difference in management styles. Emerging host markets and developed host markets have different risks and benefits associated with them. Joint ventures face different challenges in emerging and developed host markets. The choice of the host market and joint venture partner is based on corporation’s ambitions, business plans and its objectives.

Get quality help now

Dr. Diane

Verified writer

Proficient in: Global Economy, Marketing

4.9 (280 reviews)
“She understood my main topic well and follow the instruction accordingly. She finished the paper in a timely manner! I would definitely hire her again! ”

+75 relevant experts are online

banner clock
Clock is ticking and inspiration doesn't come?
We`ll do boring work for you. No plagiarism guarantee. Deadline from 3 hours.

We use cookies to offer you the best experience. By continuing, we’ll assume you agree with our Cookies policy.