A joint venture defined broadly, encompasses any collaborative undertaking by which two or more entities devote their resources in order to pursue a common objective. The forming of a joint venture can range from a mere contractual relationship between two independent companies where they share some direct or indirect control over assets to a completely new entity created through the contribution of assets from each partner organization (Dickson, 2003).
Although joint ventures come in an infinite variety of structures and durations and forms and scopes there are six primary types of competitor collaborations: fully-integrated, research and development, production, marketing, purchasing and network joint ventures.
According to Whitelock (2002), JV can be said to be the most common entry mode for MNCs in developing countries. Kogut (1988) also confirms that MNCs often prefer joint venture over wholly owned subsidiaries regardless of whether it is a prerequisite for operations in the host country.
Much of the literature on international JV can be seen as making comparisons, as it concerns efficiency and cost effectiveness, with other modes of entry (acquisitions, wholly owned and licensing) in order to ascertain the most suitable depending on the circumstances facing the firm.
One such comparison, derived from the theory of transaction cost developed by Williamson (1981), incorporates the question of how a firm should organize its boundary activities with other firms.
In JV the risk and control is shared between two or more companies. International Joint Ventures are broadly defined as joint ventures that involve firms from different countries cooperating across national or cultural boundaries.
However, there are some occasions where the joint ventures are formed by partners from the same county but are located in a country different from their origins (McDonald, Burton, 2002, p 224).
Most of the international joint ventures are formed from only two partners, one from a foreign country, and the other from the local country where the operations are desired, though there are examples where more than two companies also form a part of an international joint venture (Kogut, 1988). It is uncertainty over performance, which plays a fundamental role in encouraging a JV over contracts. An alternative explanation for the advantage of joint ventures stems from the fact that some firms to form joint ventures for strategic reasons.
According to Kogut (1988), this motive for joint venture (strategic behaviour) is due to the fact that the various companies tend to operate in a mode, which would give maximum profits, and hence would improve the company’s strategic position. Hence, the decision to JV is purely profit motivated. The difference between this and a JV motivated by transaction cost concerns are that the latter address the cost specific to a particular economic exchange, independent of product marketing strategy. While the former addresses how competitive positioning influences the asset value to the firm.
The last rational in terms of the choice of JV over other modes of entry, is that JV seen as a vehicle by which organizational learning is exchanged and imitated. This is known to produce efficiency in the form of cost reductions. Buckley and Casson (1998) summarized the conditions that are conducive for the establishment of JVs, as below The partnering company should have assets which complement each other There are ample opportunities for collusion The company cannot fully integrate with each other due to the presence of certain barriers
Notwithstanding these reasons, not all companies directly opt for JVs, but would rather establish a wholly owned subsidiary. Some Multinational Corporations are compelled to, due to the following reasons: Government policies that make it impossible to participate in an industry apart from through joint venture. The joint ventures partner may provide complementary skills. Joint ventures are very useful in the event that a project is much too large for one company to take on. Currently, JV tends to be formed in order to create new activities and facilitate the process of organisational learning.
They have a number of benefits, including the local partner’s knowledge of labour markets and conditions, government policies, institutions and financing, customers, suppliers and other market information. They are also useful in spreading the risk of investment. However, the selection of a JV as a market entry technique tends to focus on host-government requirements. According to Reynolds (1984), when it comes to market entry, less developed countries tend to either require, or at least, strongly prefer participation by firms within the host country.
In a developing country context, JVs also carry with them the same technological-advantages as licence agreements, with technology transferred expected to last for 13 years as opposed to 10 years on average for developing countries (Kogut, 1988). The rise of JV activity is because of the fact that many governments provide restrictive policies as entry barriers for foreign companies to operate in their countries to defend the local industries (Whitelock, 2002).
Having a joint venture in a country give several advantages to the partner companies involved: there is a reduction in required resources and capital, the risk is spread out among partners, companies have access to contacts in each other’s markets and also expertise (Hill, 2002). However, there are some problems associated with joint ventures also such as there could be a fair possibility of conflicts between the partners, the communication across the channels may be complex, and this might cause management problems, also each of the company has only a partial control over the market, which is itself a risk (McDonald, Burton, 2002).
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