+

Principles of International
Joint Ventures
Mahmood Siyadat
Jan 2016
+ 2

n Plan for the two day workshop

n Significance of this topic

+ 3

Session 1
+ 4

Compete or Collaborate?

n Your organizational goal and mission sometimes can be

achieved by collaboration instead of competition

n Alliances have been increasingly used in modern business

practice since 80s

n Some leading companies might have as many as 1000

alliances
+ 5

Strategic Alliance

n A strategic alliance is an agreement between two or more

players to share resources or knowledge, to be beneficial to
all parties involved. It is a way to supplement internal assets,
capabilities and activities, with access to needed resources
or processes from outside players such as suppliers,
customers, competitors, companies in different industries,
brand owners, universities, institutes or divisions of
government.[Wikipedia]
+ 6

What is a Joint Venture

n Definition: a commercial enterprise undertaken jointly by two or

more parties which otherwise retain their distinct identities.

Company A Company B

Joint Venture
+ 7

Mergers
A & B merge together to form AB. A and B cease to exist

Company A Company B
✗ ✗

Company AB
+ 8

Acquisition

n B is buying A, A ceases to exist as an independent entity

Company A Company B
✗
+ Acquisitions and JVs 9

Company A Company A Company B

A owns A1 B buys a
percentage
of A1
Company A1 JV A1

Forming a JV through
acquisition
+ 10

Competitive advantage and

Collaborative Strategy

n Competitive strategy: How to gain advantage over

competitors. Two approaches:
n How to draw superior profit based on the structure of the industry
and generic strategies (cost leadership, differentiation)
n How to draw profit from unique capabilities and resources

n Cooperative strategy can help to improve or gain

competitive advantages in both these approaches
+ 11

Competitive advantage and

Collaborative Strategy

n Industry structure and position of firm:

n Defensive strategy to protect market share against competitor
(Global one, between Deutsche Telecom and France Telecom)
n Offensive strategy to gain leading market position or raise barrier
to entrance and the cost to competitors (proposed alliance
between BT and AT&T)
n One partner can have a defensive industry and the other
offensive (Rover and Honda)
n Often quick way of repositioning oneself in the market
+ 12

Competitive advantage and

Collaborative Strategy

n Gaining access to competencies: sometimes entry into a

market segment or a new industry is only possible through a
partner (particularly in developing countries)
n JV between Toshiba and Motorola gave access to microprocessor
technology
n The collaboration between Honda and Rover (until bought out by
BMW)
n Rover brought understanding of the European markets, network
of competent suppliers and subcontractors and spare capacity,
Honda brought engineering strengths that Rover lacked
 + 13

Cooperation vs Competition Strategies

Partner Adapter
e.g. US’s McDonnel
High
Collaboration Douglas and Japan’s HP and Hitachi
Kawasaki Industries Nissan and Renault
(can lead to stable
alliance or M&A) (can lead to M&A and
break up)
Monoplayer Contender
Low e.g Intel e.g. Airbus vs Boeing, Pepsi
Collaboration vs Coca Cola
(no rationale for alliance- (in case of collaboration
failed Disney and Pixar can lead the stronger to
alliance) take over weaker)

Low Competition High Competition

+ 14

Benefits of Strategic Alliances and

Cooperative Strategies
n Many businesses and organisations seek to complement their
resources, skills and organizational capabilities by forming strategic
collaborations with other businesses and organisations
n Quite often it can be cheaper, more time efficient and more feasible to acquire
n In some cases there is no other feasible way to access desired resource (e.g.
access to proprietary technology, certain overseas market etc)

n Sharing the risk

n Economy of Scale

n Decreasing capital expenditure

n Speed of entry while the window of opportunity is open (includes

opportunities for increasing returns)
+ 15

Increasing return

n Unlike the rule of diminishing returns, it is observed that in

knowledge based industries in particular, there is the reverse
phenomenon- Companies can get an increasing market
share by locking-in consumer base e.g. Microsoft in this case
there will be increasing return not diminishing

n The key is being a first mover to have an early lead in the

market

n This is achieved often by strategic alliance (due to time

factor)
+ 16

Joint Ventures as Real Options

n Increasingly Joint Ventures are treated as a real option

n Options are sometimes bought when there is uncertainty as

with respect to future value and risk of an investment
n Reduce initial investment and commitment
n Reduce loss if the investment market fails
n Provide an option for full investment

n Most JVs provide the option of full buy out by a partner and
many JVSs have ended up in that category
+ 17

Joint Ventures as a Platform for Future

Investments

n In addition to working as real option, JVs and other strategic

alliances allow you to build a lower cost platform in a
particular market and industry, if the industry and the market
conditions proved to be favorable then you have the
opportunity to leverage this platform for further investment
and establishing market position
+ 18

Types of Strategic Alliance

n Horizontal strategic alliances, which are formed by firms that

are active in the same business area.

n Vertical strategic alliances, which describe the collaboration

between a company and it´s upstream and downstream
partners in the supply chain, that means a partnership
between a company and it´s suppliers and distributors.

n Intersectional alliances are partnerships where the involved

firms are neither connected by a vertical chain, nor work in
the same business area.
+ 19

Other Kinds of the Strategic

Alliance
n Other kinds of strategic alliances include:
n Cartels
n Franchising
n Licensing
n Industry Standard Groups
n Outsourcing
n Affiliate Marketing
+ 20

Joint Ventures in Developing Countries

n Joint Ventures are one of the dominant forms for business

organisations particularly when multinational companies
(MNCs) invest in developing world

n JVs are a way of transferring technology and many host

governments in developing countries require them for
foreign investment

n A huge number of international investments in China have

been through Joint Ventures (a few thousand JVs a year)
+ 21

Rationale for Creation of Joint Ventures

n Killing proposes three reasons for Joint Venture

n Government Suasion or legislation
n Partners' need for other Partner’s skills
n Partner’s need for other partner assets or attributes
+ 22

Some Statistics Regarding Reasons

Behind Joint Ventures

Developed Less Developed

Countries Countries
Government Suasion 17% 57%
Or Legislation
Skills Needed 64% 38%
Assets or Attributes 19% 5%

In most cases in developing countries Joint Ventures are formed because of

implicit or explicit government requirements and pressure; or the
multinationals perceived an advantage in winning government contacts or
accessing local market if they have a local partner
+ 23

Benefits of JVs for the International

Investor

n For international investors it can take a long time to understand

local the market, culture and way of doing business in a
developing country.

n Creating a JV with a right partner is a good way of accessing the

market

n International Investor can improve its relationship with local

government

n International investor can better access local staff and mangers

n It can be less expensive to create a JV than in-house

development of competencies and knowledge to navigate and
operate in the foreign market
+ 24

Benefits of JVs for the Local Partner

n Access to technology, skills, knowledge, competencies

professional experts, management systems etc

n Transfer of technology and training of staff and managers

n A potential competitive advantage in local market

n Access to capital

n Potential access to export markets

+ 25

Types of JV

n The type of JVs that are permitted are dependent on the law
in each country and the terminology can also be different in
each country.

n However there are two generic types of JVs that can be found
in most countries (with different terminologies)
n Incorporated Joint Venture (IJV)
n Unincorporated Joint Venture (UJV)
+ Incorporated Joint Venture (IJV) 26

Company A Company B

Joint Venture - a
separate legal
entity

n In an IJV the investors create a new legal entity which is separate from both parents

n Parties enter into a shareholder agreement which sets out their respective interests
in the JV

n Parents will hold shares in the company according to the percentage they own in the
IJV

n Parents typically buy share in the IJV. This is one of the ways that parents can invest
financially in the IJV
n They can also provide a loan to the the IJV.
+ 27

Unincorporated Joint Venture (UJV)

n In UJV a new legal entity is not established and there is no

corporate form.

n Parties enter into a JV agreement which sets out the objects,

term, risk and production allocation and other operational
details such as decision making processes, how the JV is to
be managed.
+ 28

Process for Establishing a JV

Strategic Selecting a Negotiating Setting up Operation

rationale partner(s) agreements the JV
+ Strategic Rationale 29

Be clear about what you need

Consider WOS- cost/benefit of

acquiring/ developing the resources
you need in house

Consider other options

for strategic alliance

Do a cost- benefits analysis

for JV and compare with other
options
+ 30

Advantages of not Having a Partner

n If business is profitable by having a Wholly Owned

Subsidiary (WOS) you will keep all the profit to yourself

n There is more strategic and operational flexibility in WOSs

n It is much easier to manage a WOS than a JV

n There will be more discussion later on in the workshop about

the risk of joint ventures
+ 31

Types of Strategic Alliance

n Horizontal strategic alliances, which are formed by firms that

are active in the same business area.

n Vertical strategic alliances, which describe the collaboration

between a company and it´s upstream and downstream
partners in the Supply Chain, that means a partnership
between a company and it´s suppliers and distributors.

n Intersectional alliances are partnerships where the involved

firms are neither connected by a vertical chain, nor work in
the same business area.
+ 32

Need Assessment- MBA matrix

Ally Invest and Make

High
Strategic make
Importance Ally Ally Make
Medium
of Activity
Low Buy Buy Buy
Low Medium High

Competence compared to the best in market

make-buy-ally (MBA) matrix

§ This matrix assumes firms can determine the strategic importance of an
activity to their organisation if that is not the case the first step is to to get
clear on strategy and priorities
§ Your “ally” responses need to match your potential partner’s “make”
response and vice versa
+ 33

MBA Matrix for Honda- Rover ex-

Alliance
Manufacturing Rover
Quality
Manufacturing Styling skills for
High
Strategic Quality European market
Importance
of Activity Medium

Low
Low Medium High
Competence compared to the best in market

Manufacturing Honda
Quality
Styling skills for Manufacturing
High
Strategic European market Quality
Importance
of Activity Medium

Low
Low Medium High
Competence compared to the best in market
+ 34

Long Term Strategic Fit

n It is not sufficient to understand the current strategy of your

company and that of your potential partner to asses strategy
fit for JV

n JVs are built to last for at least medium to long term

n While assessing strategic fitness of a potential partner you

need to consider what direction you and the other partner
going to go in future, are your strategies likely to be
divergent in future?

n Consider environmental factors that might affect the change

of direction in strategy
+ 35

Cultural Fit with the Partner

n You need to asses the cultural fit with your potential partner
n This does not mean that cultures have to be similar

n There needs to be an attitude of willingness to understand

different cultures and willingness to compromise when
encountered with cultural problems

n However cultures are not easy to define and assess and they
can be changed over time
+ 36

Cultural Orientation

Environmental
Orientation
Employee International
Orientation Orientation

Quality Customer
Orientation Orientation

Cost Technology
Orientation Orientation
Innovation
Orientation
+ 37

Cultural and Strategic Fit

Box 1 Box 2
Many alliances start Optimom Position
High here

Strategic Fit
Box 4 Box 3
Low
No point No competitive
advantage
Low High
Cultural Fit

§ It is important to avoid relationship trap- partnering with a firm

you know from you network but with little strategic benefit
§ If you start in box one you and your partner need to be willing
to make the necessary effort work your way to box 2
+ 38

Due Diligence

n Conduct due diligence for potential partners or companies that you

are going to buy.

Due Diligence is the act of

investigating a company your
are going to partner with or
buy thoroughly from all
different angles
+ 39

Criteria for Selecting a Partner

n Are your resources complementary?

n What is the quality of resources your partner provides

n Conduct a due diligence with respect to the resources your partner is

going to provide in JV

n Wider strategic impacts of partnership: is there potential for conflict or

wider collaborations in future? Can they provide access to other
markets/ products for you?

n What is their reputation in the market or in the industry? How does it

affect yours?

n How successful are they?

n Are they in good financial standing?

n Check their balance sheet and PLO if you can

+ 40

Criteria for Selecting a Partner-

cont.
n Do they have a need for your resources and for how long?

n Are they committed to use of JV

n Are they already using JV structure elsewhere?
n How engaged are their management in the JV discussions?
n What is their corporate norm values on use of JVs?
n Are senior management supportive of the JV or is it just a couple
of people in their organisation pushing the agenda?

n What is their leverage over governmental or local market?

+ 41

Criteria for Selecting a Partner-

contd
n Do they think you can satisfy their need and complement
their resources?

n Can you get on with them?

n Consider compatibility of your organizational cultures and

management systems
+ 42

How Many Partners?

n Do you need multiple partners to access your desired

resources competencies

n What benefits extra partners provide?

n Consider complications in decision making process

n Does it reduce risk?

+ How International Companies Will Assess 43

Developing Countries for Investment

n Project return and economic rent

n Market future potential

n Risk of political stability (internal and international)

n Risk in economic stability , currency and inflation

n Legal system

n Tax rules

n Corruption and transparency of business environment

n Stability of regulations
+ How International Companies will Assess 44

Developing Countries for Investment cont.

n Availability of talents and resources

n Work culture

n Ability to repatriate profits

n Ease of trade

n Ease of getting visa for staff and visitors

n Reliability of local firms and business suppliers

n Local housing

n Security

n Health safety and environmental cuture

+ 45

n Case Practice
+ 46

How to Measure a JV Success

+ 47

Final Evaluations for Establishing a JV

n Pros and Cons of establishing of JV needs to be weighed and

other alternatives such as WOS or other forms of strategic
alliances need to be evaluated first before going a head with
the decision for establishing a JV

n Consider the cost, quality and effectiveness of alternative

ways of acquiring the resources you are looking for via
means other than JV

n Be crystal clear why you want to establish a JV and be very

specific in what you want get out of it
+ 48

How to Measure a JV success

n Some common objective measures to determine a JV success

is:
n profitability, assessed by margins, return on assets, etc.;
n longevity, assessed by the age of the joint venture;
n survival, referring to whether the JV remains an ongoing concern
or terminates;
n stability, assessed by changes in ownership
+ 49

JV success- Results of a Research

Dr. Paul Beamish studied 66

JVs, 12 of which were studied
in depth.
It is one of the most
comprehensive studies on JVs
n The research investigated why some JVs are
more successful than the others.
n It indicated that two most important factors in JV
success are need for a partner and commitment
to JV partner
+ 50

JV Partner Satisfaction

n Satisfaction of parties involved in JV is an important factor in

on-going success and management of JVs.

n One of the most influential researches carried out on JVs,

their management issues and success factor considered
partner satisfaction to be the prime indicator of JV success
+ 51

Need

n What you need a partner for and for how long you need it,
will influence the success of the JV

n How much you need your JV partners is going to impact how

much attention you give to the JV and your partner and this
will influence the JV success
+ 52

Typology of Needs

n Items Readily Capitalized

n Human Resources Needs

n Market Access Needs

n Government and Political needs

n Knowledge needs
+ 53

Summary of Research- need

Perspective of MNE Executives about importance areas of their local
partner contribution
✔ ✗

High local Inexpensive

Preforming Management, labour, raw
Ventures local Knowledge, material supply,
fast access to technology and
market equipment

Low Satisfying local management,

Preforming government local knowledge,
Ventures regulations, fast Inexpensive labour,
access to market raw material supply,
technology and
equipment
+ 54

Summary of Research- need 2

n Multinational Executives in the high performing Joint

Ventures looked to their local partners for greater
contribution than international executives in low performing
ventures

n Interesting observation:
n Executives in high performing venture generally required specific
partners
n Executives in the low performing ventures would be theoretically
satisfied with any local partners
+ 55

Commitment

n Why commitment? An initial survey of 34 JV executives in this

research revealed that nearly all problems in managing JVs could
be viewed in terms of existence of partner need or whether the
partners were committed to the JV structure or not

n In depth study of select group also revealed the importance of

commitment

n JV commitment is defined as the degree to which a firm is bound to

a rationally and/or emotionally derived behavior towards the JV
n Rationale and emotional components
+ 56

Levels of Commitment

n When using the word ‘commitment’ executives mean

commitment towards:
Ø International business
Ø Towards the use of JVs
Ø Towards a particular venture
Ø Towards a particular partner
+ 57

Commitment to JV as Corporate Value

n The commitment to JV (or lack of it) can take the status of a

corporate value rather than rationale cost- benefit analysis

n This status can depend on the previous bad or good

experience with JVs

n Commitment is seldom something that is instantly created

but it is usually developed over time

n Commitment is usually reflected in the behaviors of the

partners in the form of behaviors such as:
n adapting products, employing nationals, forming JVs, holding
regular meetings with JVs, providing assistance and skills and
resources when needed, paying attention to the relationship with
partner
+ 58

Assess Your and Your Potential

Partner’s Need for a Partner!
n Do the parties planning to enter into an alliance/JV actually
need each other? Complimentary resources are not enough
n the need on both sides can be quite different in nature but they
need to be roughly of the same scale and importance
n Otherwise The one partner with less need have a much larger
leverage over alliance

n If the need is one sided a unilateral agreement in exchange

of money might be a better solution than an alliance

n Is your partner interested in the alliance or are they planning

a take over?
+ 59

Importance of Trust in JVS

+ 60

Importance of Trust

n To be able to commit to a JV relationship we need trust

n Trusting that the relationship can be beneficial to us and satisfy
our needs and/ or generate value
n The other party is going to genuinely cooperate
n The other party have the ability to deliver on what they have
promised
n The relationship is not going to be abused by opportunistic
behavior
+ Game theory- generic choices 61

Imagine the following scenario situation.

n A has a friend (C) that is going to be executed
n A knows a person called B who can order the execution to stop,
n Deep down A hates B and does not trust him.
n B also has a personal interest in seeing C dead.
n Despite these, A appeals for the life of his friend to B.
n B tells him if A agrees to bring him some sensitive information he will let
stop the execution of C.
n A agrees to bring what B wants in exchange for release of C, despite the
fact that he really does not want to give the information to B.
n They meet a couple of minutes before execution time, A says he has
brought B what he wants and shows it to him; B picks up the phone and
orders the release of C.
n Context: There is no way for A to assess the validity of B’s claim about
releasing C in that moment , and for B to immediately assess whether what
A has brought is authentic.
n What happens next?!
+ 62

The result of the Game

n B kills A without giving him what he wants!

n A had lied to B about releasing C, so C is also dead!

Why this outcome?!

+ 63

Possible Outcomes
A’s action B’s Action Scenario A B Total
Score Score Gain

1 Defects Cooperates B is dead, C is 3 0 3

released,
information
not given
2 Cooperates Cooperates A gives the 2 2 4
information, C
is released

3 Defects Defects B is dead 1 1 2

C is dead
information is
not given
4 Cooperates Defects Information 0 3 3
given and C is
dead
+ 64

Why this Outcome?!

+ 65

Application of the Game to JV‘S

Business is not a one off interaction- it is more of a long term
n
game, and this will reduce the motive to defect

Sometimes when the first defection happens the game is

n
over

nWe play with limited information so we cant always verify

the facts

Without trust the likelihood of defect and being

n
opportunistic goes very high

n Without trust you will have a JD (Joint Disaster) instead of

a JV

You need to be able to Trust the other partner if you want to

n
play this game and you need them to be bale to trust you
+
Risk and Trust

n Trust is risky by nature, without some form of uncertainty in

the outcomes, there is no need for trust

n It will be easier for trust to develop if the risks are reduced

with strong institutional mechanisms- such as contract law
enforcement
n This is one of the problems in many developing countries

n How can we develop mutual trust to manage this risk?

+
3 levels of trust

n Trust needs to happen in 3 levels

n Partner companies (organizational level).

n Group level (partner managers, negotiation teams etc )

n Individual level
+
Bases of Trust
n Three bases of trust:
n Calculations
n Expectations based on cost-benefit analysis for actions available to
parties
n Common in new relationships and arms-lengths commercial
agreement
n Understanding
n Sharing of cognition and common ways of thinking between
partners
n Based on predictability of other side
n Personal identification
n Based on people sharing personal identity, including values and
views on moral obligation
n Friendship instead of relationship

n Trust builds overtime and evolves from one form to another

overtime
+
Building trust overtime

n Trust builds overtime and evolves from one form to another

overtime
n Trust in formation phase of JV is predominately based on
calculations
n Trust in implementation phase of JV is predominately based
on understanding
n Trust in evolution phase of JV is predominately based on
personal identification and bonding
n Guardians of trust
+
Some Ways to Develop Trust
n Maintain realism and clarity when selecting a partner.
n viable mutual commitment
n strategic fit
n institutional and legislative support
n negotiating a thorough contract

n Avoid and/or deal with hard conflicts in an appropriate way

n Frequent meetings to avoid misunderstandings

n Dealing with conflicts in a factual way so a potential dispute does not

turn into a more widespread personal or emotional issue

n Formalization of processes to avoid conflict

n Clear processes encouraging sharing information within clear

confidentiality boundaries
+ 71

Topics in Shareholder and JV

Agreements
+ 72

Number of Partners in a JV

n An important decision in forming JV is the number of partners

in the JV.

n Generally speaking the more the number of partners are the

more difficult it is to make decisions in the JV and control the JV

n Increased number of partners can have benefits too. For

example to reduce capital requirements on partners, to have
companies with various technologies and expertise in the JV or
to bring relationships or reduce political risk

n If you have too many partners you can try and limit the ability of
partners with small shares in the decision making to make the
process more efficient
+ 73

Ownership

n The percentage of ownership in JV tends to be one of the most

difficult points to negotiate particularly of both parties are
seeking control
n In these cases often parties end up in 50-50 situation

n If multinational firm owns less than 50% (perhaps due to legal

requirements) they might require multiple partner structure in
which their share is equal or greater than the other partners to
ensure control

n Many studies has shown that there is not necessarily correlation

between ownership and control, e.g you can control a JV without
being a majority shareholder but in practice it often exists

n
+ 74

Valuation of Contributions

n In the negotiations there needs to be agreement on

n weather contributions of each side is going to be formally valued
n If that contribution going to affect the ownership percentages
n In case they are going to be valued how this evaluation is carried
out
+ 75

Voting Rights

n In many cases the voting rights are proportionate to

ownership percentage

n But in some jurisdiction it is possible to have shares with

preferential voting rights and shares that do not have any
voting rights

n In these cases, party can be effectively in control without

having the majority shares
+ 76

Veto Rights

n It could be possible to foresee veto rights for parties with

respect to specific decisions

n This is often required by the party or parties with minority

shares as a way of exercising some control on the JV

n If used frequently it can demonstrate existence of tensions or

create disagreement between partners

n Shareholder agreement needs to specify on what instanced

and decisions a party might have a veto right
+ 77

JV Structure
n Types of JV structure:
n One parent dominant
n Shared control
n Split control
n Independent

Results of a Study on the Effect of Control over JV Performance

Dominant Control Shared Control
Unsatisfactory 3 11
Performance
Satisfactory 10 9
Performance

However another study by Janger concluded that there no perceivable

differences between the dominant or shared structure in anther research
+ 78

JV Management Appointment

n The shareholder agreement specifies how the Board Of Directors,

General Manager and functional leaders are assigned

n This will depend on the structure of the JV a discussed in the previous

slide and needs to be consistent with that

n Key positions can be filled by appointment of one of the partners. Or

can be filled in independently via direct recruitment by JV.

n Shareholder agreements needs to specify the rights of each party with

respect to each appointment
n Whether one party can appoint on a unilateral basis or if the other party has
veto rights
n Whether one party can nominate and the other party should accept nomination
n Whether it should be done based on a mutual agreement
n There can be different mechanisms with respect to different positions
+ 79

Accounting Control and Standards

n Shareholder agreement can specify the accounting practice

and standards that are adopted to JV.

n There can be additional requirements on top of what is

required by the law in the host country

n Often international partners wont be satisfied by the reporting

requirement according to the local jurisdictions and require
more control or strict standards.
n Paralleled accounting in 2 different systems could be a possibility
but can increase administration costs significantly
+ 80

Staffing

n Joint ventures can be staffed by:

n employees from one or both parent companies seconded to the
JV
nParties can agree on how to fill in the main positions in advance
n directly hired by the JV
+ 81

Transfer of Technology and

Knowledge
n One of the main reasons for forming JVs is getting access to
other companies technologies, experience and knowledge.

n JV agreement needs to establish clearly what each party will

bring to the JV and the boundaries in which this
technologies and knowledge can be used.

n It also states the mechanism through which one parent

company provides the knowledge and technology to the JV
n JVs can enter into arms lengths contractual agreements with their
own parents companies as a means for acquisition of services,
technology and licenses
+ 82

IP consideration

n In JV s particularly JVs between competitors protecting IP

rights can be one of the most important points for JV
partners.
n There needs to be enough provision for protection of IP right in
the JV agreement.
n In practice sometimes it can be difficult to protect IP in JV

n If there is potential for new IP to be created as the result of

collaboration of partners in a JV. The right of each party with
respect to that IP needs to be specified in advance.
n This is of particular importance for the JVs that focus on new
products, new technology and research.
+ 83

Access to Export Market

n Sometimes one of the drivers for the local partner to

participate in a JV is the access that the international partner
can provide to export markets

n This can be part of the initial discussion in the early stages of

the formation of the JV and
n the agreement between the partners regarding this can be
captured in an appropriate agreement
+ 84

Business Expansion

n If there is potential for further collaboration in the business

outside the immediate project for example in a different
geographical location or market, parameters for such
collaboration can be defined in advance

n For example if the same product is going to be produced in a

new market by the international partner, does the other
partner get a first right of refusal to participate in the project?
IF yes under what terms?
+ 85

Exclusivity and Competition

n While partners are working together in a JV in a certain

market can they compete with each other in other markets
and products or are they to excluded from certain markets?
n This needs to be addressed adequately in the negotiations or
otherwise there can be tension between partners down the line
+ 86

Strategic Decision Making

n The mechanism to make strategic decisions in the JV needs

to be discussed between partners.

n Who makes what decision?

n What decision are made by parents directly or through voting by
the JV Board of Directors etc?

n Is there supermajority voting for certain decisions?

n What is the quorum for Board meetings?

n If there is no quorum for a certain period of time what are

the remedies available according to the law?
+ 87

Profit Distribution

n the parties should agree on whether, and to what extent,

profits will be reinvested in the business of the joint venture.

n If there are major disagreements on this point it cab be

indicative of differences in goals and strategies by the
parent companies with respect to JV

n Different legal jurisdictions can be different with respect to

profit distribution
+ 88

Change of Ownership

n When and how the JV partner sell all or part of its shares?

n Do the existing partners get a first right o buy the shares?

n Do they get to approve or veto the new partner in the

project?

n What are the mechanism for JV partner to sell part or all of its
shares

n This is an important point partially if there is question about

the long term commitment of one of the partners to the JV
n Without appropriate mechanisms in place you can get stuck with
a partner that you do not want to work with
+ 89

Deadlock

n If the JV can not reach decision on how to deal with an

important issue due to disagreement in Board of Directors of
the JV. This is called deadlock.

n Shareholder agreement needs to be clear on steps to follow

in case this happens

n It usually involves a period of time allowed for the issue to be

resolved at JV level
n Then the issue can be escalated to partner management level
n If unresolved this can trigger JV wind up
+ 90

JV Wind UP

n The shareholder agreements needs to state

n Under what scenarios JV can terminate

n Can each partner terminate JV at will

n Does the terminating partner need to compensate the other

partner(S) for an damages that might need to happen as a
result of an early termination
n Decide how such compensation is calculated
+ 91

Indemnifications

n To indemnify means to compensate someone for harm or loss

n In contracts you can agree to indemnify other parties in case of
loss and other parties can indemnify you.

n The JV agreement specifies if parties indemnify each other

as a result if direct damages cause by their actions in JV and
under what conditions
n Typically parties won't agree to pay for consequential damages.
+ 92

Confidentiality

n Partners in a JV might have access to each other’s

confidential information.

n There can be provisions in the JV agreement that protects the

confidentiality of this information and state for wihc purposes
these information can be used
+ 93

n Case Practice
+ 94

JV Management and Control

+ 95

General Manager/ CEO

n Is the general manager going to be a third party or is it going

to be appointed by one of the partners?

n The partner who appoints the general manager naturally will

have more influence over the venture
+ 96

Role of a General Manager of a JV

n Role of a general manager/ CEO in JV is rather different

from a unitary firm
n To make decision and initiate change an handle problems needs
to convince JV board and both parent companies
n Negotiate acquisition of resources with parents and manage
expectations
n Need to manage the internal organisation of JV as well as manage
relationship with and between parents
n Need to motivate and integrate staff from two different
originations with different background and objectives
n To help build trust between partners and employees
n Helps setting the right tome between staff and mangers between
tow companies
+ 97

Role of a General Manager of a JV

n Overcome cultural and perhaps language differences

n Can have significant role in representing the IJV with local
governments and organizations
n Need to ensure appropriate flow of information that might be
inhabited because of cultural and strategic differences
n Decide to know when to make a course correction or revise
strategies based on changes in parent companies strategy and
engagement with JV
n Need to apply a correct organizational structure and processes so
to really integrate two organizations
n Conflict resolution between parents and internally between two
group of people
+ 98

Control

n Control can be defined as a process whereby management

or other groups are able to initiate or regulate the conduct of
activities such that their result accord with the goals and
expectations held by those groups (quoted from Cooperative Strategy, see
references)

n In JVs control can be defined as the process through which a

parent company ensures the way a JV is run conforms to its
own interests
+ 99

Why Control?

Parent companies like to control their JVs to:

n ensure strategic decisions are made in accordance with their
strategic intent
n ensure the quality of products and service are up to their
standards
n protect their brand and market image
n ensure financial integrity
n ensure the resources provided to JV are used effectively
n ensure learning from partner and protecting sensitive information
n create organizational culture
n ensure operational excellence and safety
+ 100

Control and impact on JV

n From one hand it is imperative for partners to control

performance of a JV. From the other hand if one parent
assumes a very dominant control in the JV it risks
n not being able to fully use the complimentary resources that the
partner brings
n damaging trust and relationship with other partner, particularly if
they are not happy with the dominant position of the first partner

n It can be easier to control a a JV with one dominant partner in

terms of processes and organisation. In fact some early
researchs suggest that these firms have a better
performance.
+ 101

Levels of control

n Strategic Control

n Operational Control

Ø They are both important and strategic control does not

guarantee operation control

Ø Operational staff can be from two different parent companies

and working to different standards and incentives

Ø Strategic control does not necessarily create operational

control
+ 102

Who Will Dominate?

n Control can be exercised on the basis of attributes such as :

n Power (such as resources, the more scarce a resource the more power
it brings)
n Authority (equity and shareholder rights)
n Expertise (specialized knowledge and skills)
n Rewards (ability to offer good returns to less active partner and
compensation for alliance staff)

n Larger Share in ownership can mean dominant control but there

are other factors involved too

n As with the organisation structure control can be shared

between parent companies
n Shared control however can risk segmented control and lack of
integration
+ 103

Dimensions of Control

n Control has 3 dimensions:

n Extent of Control

n Focus of Control

n Mechanism of Control
+ 104

Extent of Control

Extent of control is based on where the decisions are made.

Who makes the decisions:

n JV board?
n JV general manger manager?
n One of the partners?
n Both partners?

n The more important decisions are made by one or both

parents the more direct control they exercise and the less
freedom JV has
+ 105

Extent of Control- Three Types of JV

Depending on who makes the important decisions there can be

three different types of JVs (according to Killing)
n Dominant Partner JV
n Shared Management JV
n Independent JVs
+ 106

Focus of Control

n Parents can choose to focus on control of certain aspects or

function of JV

n Different parent can focus on different areas

n Many companies tend to focus their control on the areas they
bring more competency to the venture
n In this case the cost of managing this function of the venture will
be less for them
n This can be negotiated in the JV agreement in advance
+ 107

Focus of Control in Developing

Countries- cont.
High
Split Control JVs MNC partner
Extent in which 1 dominant JVs
an MNC 2
partner
controls
activities in Local Partner
which it has Dominant JV
specific 3
advantage

Low High

Extent in which an MNC partner controls activities in which a local

partner has specific firm advantage
+ 108

Control Mechanisms

Control can be achieved via multiple mechanisms

n Equity

n Board meetings

n Right to assign managers

n Personal relationships

Mechanism also can be distinguished in two ways

n Positive Control
n Ability to make certain decision or encourage certain behavior

n Negative Control
n Ability to stop JV from making a certain decision e.g. through parent approval
process of investments, budgets etc
+ 109

Resource Dependency, Power and

Control
n The more one partner of JV grows dependent on the
resources of the other partner, the more the other partner will
have power in the JV and therefore can gain more control in
the JV

n Therefore it is important for a healthy Joint Venture to

maintain an appropriate balance
+ 110

Why  JVs  Fail?  

JVs and alliances can fail for multiple reasons:

ì The JV does not make sense strategically anymore

ì One of the partners in JV no longer needs what the other partner

provides perhaps they think they have learnt it themselves

ì Management of JV is not fit for purpose

ì One partner takes advantage of the other partner, or one partner

thinks the other partner is taking advantage of it

ì One party thinks the other party is benefiting much more quickly in
the JV than they are
+ 111

Why  JVs  fail?  

ì There is inadequate control in the JV

ì There is too much control on JV by one partner

ì One of the parties is assuming a dominant position and the other

one is not happy about that

ì One or both parties in the JV are unable to provide the resources

to the JV they promised

ì JV is restricting access to certain market or technology etc

ì There is a cultural clash between originations

+ 112

Why  JVs  fail?  contd.  

n Lack  of  commitment  and  a.en/on  form  senior  management  of  the  
parent  companies    

n JV  agreement  is  not  clear,  or  badly  nego/ated  

n Change  of  management  in  one  of  parent  companies,  new  leaders  are  
not  commi.ed  to  JVs    

n Personal  agenda  by  those  involved  in  establishing  and  managing  a  JV  
+

Financial, legal and tax considerations

Shareholder Agreement
+
Deciding the Vehicle for JV

n The laws in each country can be different with respect to the

JV vehicles that can be established in each country, therefore
legal advice needs to be sought from experts to explore all
possibilities

n As discussed earlier there are two broad JV structure that can

be found in many countries IJV and UJV. Thee might be called
different names in different jurisdictions

n Sometimes large organisations have multiple JVs and these

JVs might be different n terms of legal structures
+
Tax Considerations
n One of the main factors in deciding what kind of JV to establish
is tax considerations, as revenue and costs might appear
differently in your accounts depending on the legal structure of
the JV
n In case of IJV
n Parent company receives dividends (and sometimes interests)
from JV
n Parent company will be contributing shares (and sometimes
loans) to JV
n JV will be paying taxes in this host country before dividends
(interest can be different)
n Profits and losses cannot be offset losses against other income
outside of the IJV
n You may be subject to double taxation depending on the tax
regulations in the country
+
Tax Considerations- cont.

n In case of UJV
n Parent company contributes to capital and operating costs

n Parent company directly receive revenue from JV

n The UJV does not make any profit in itself
n Parent company will treat these revenues and expenses as their
own in their books
n Parties are treated independently for tax purposes
n Parties can offset losses from the JV against income from other
businesses outside of the JV.
+
Tax Considerations, cont.

n Tax considerations needs to be given to which legal entity

enters into the JV,

n Sometimes a new SPV needs to be established to hold JV

shares

n You need to understand tax regulations of the countries that

your JV and parent company (and any other intermediate
country ) is established in
n Sometimes a complex chain of companies are involved to reduce
tax liabilities and at the same time optimize financial cash flow in
the company

n You need to seek quality tax advice in the process of

establishing a JV
+
Types of Tax

n When considering JV in a foreign country consider :

n Income/profit taxes;
n Value added tax (VAT)/sales tax
n Real and personal property taxes
n Employee-related taxes
n Customs duties
n Tax holidays
n Withholding taxes
n Double taxation treaties; and
n Marketplace transfer pricing regulations applicable for goods
and services.
+
Liability

n Liability is the state of being legally responsible for

something

n One reason to establish an IJV is to limit liabilities

n In an IJV usually the parties' liability is limited to the assets held
by the IJV.

n In a UJV the JV agreement usually states the liabilities of

parties will be several, proportionate to their interest during
the JV.
n liability to the public can be joint and several and unlimited. Full
recovery can be sought from any of the parties
+
Financing in JVs

n Finance can be sought in different levels to fund a project in JV

n In case of IJV
n Parents bring in equity and can provide loans
n Parents can finance the investment form banks and financial
institutions at parent level
n In case there are multiple projects and businesses in an IJV , IJV can
finance directly from banks and financial institutions
n IJV/ SPV can project finance with project assets as security

n In case of an UJV
n Lenders may be deterred from providing finance solely on the
security of a party's share in JV assets.
n Finance can be sought in the parent companies level
+
Project Finance in JVs

n Sometimes one or more than one parties forming a JV might

want to project finance the project (project-based financing
as opposed to balance sheet financing)

n Particularly if the two partners in the project are not equally

in terms of size , financial and technical strengths. Having a
project finance can help the smaller partner to
n To reduce its share of capital
n To borrow money cheaper based on the strength of the partner
n To provide check and balances on the stronger partner through
the presence of banks
+
Project Finance in JVs cont.

n Project finance is also used to

n Managing political risk
n Have a third party to resort for decisions that can create conflict
with the partner
n To make projects look better!!

n Usually projects assets are used as security for the loan,

however depending on the risks involved banks might
require further securities and guarantees from the parents in
which case the loan can become limited recourse
n If guarantee are provided on joint and several basis this will most
likely expose the stronger partner,
+
Consolidated Accounting

n Parties to a joint venture might want to be able to treat their

interest in the venture on a consolidated basis for financial
accounting purposes..

n In some countries if a party had a controlling position in a JV

they can consolidate treat the accounts on a consolidated basis

n This can have its own advantages and disadvantages but it is goo
to to know if the party you are entering into negotiations with to
form a JV have the intention or desire to consolidate accounts or
not

n Control is generally present where one party owns more than

50% of the voting shares in case of 50/50 a party can be
considered in “control” by having the right to decide very
important decisions without the agreement of the other party
+
Other Financial Issues

n Parents can provide either money via shares or loans

n Shares and loans as mentioned will have different tax treatment
n In case of IJV profit is taxed in the IJV level and then dividend is
distributed.
n the interest for that loan is paid prior to calculating profit and
therefore not taxed at the IJV level
n Loans provided by the stronger JV partner is a way for the
weaker partner to be able to avoid having to have small share in
JV

n Trapped cash: When investing oversees in a JV regulations in some

countries stipulate that dividend can not exceed profit.
n Available cash flow is usually more than accounting profit. This
can lead to cash being trapped in the country and this cash can
build up overtime
+
Other points….

n Before establishing a JV legal due diligence needs to be carried

out with respect to the legal feasibility, benefits and limitations
of IJV , UJV or other JV structures according to the specific laws
of that country

n An UJV is more flexible as its structure and operation will

depend largely on the negotiated terms of the JV agreement.

n In case of IJV company structure can be relatively inflexible as

it governed by with the Corporations Act or similar regulations
in different countries

n An IJV can enter into contracts in its own right

n An IJV has an easily recognized management structure based on

a board of directors.
+
Location of the JV

n Sometime parties form a JV in third country which then owns

the assets in the hot country.

n This option, if legally available, can be sometimes the

preferred method of investment by the international partner

n Benefits of this option could include

n a well-tested corporate law regime,
n specific performance is available as a remedy
n the parties are able to limit the potential liabilities of the
representatives who sit on the joint venture board.
+ 127

Back Up Slides
+

Organisation Learning
In Joint Ventures
+
Importance of Organizational
Learning in JVs
n The term organizational learning implies that organisations
can enhance their performance by acquiring knowledge

n Adaptation to external factors and internal enhancements for

organisations both involve learning

n One of the main objectives for formation of many alliances

and JVs is acquiring know-how and knowledge by
n learning from the JV partner
n learning with the JV partner

n It is important to understand the nature of organizational

learning to be able to to mange the learning process
+
Nature of Organizational Learning

n Organizational Learning is not just at individual level. Learning

needs to be available and retained in organisation as a whole.

n the challenge is
n How to make explicit, codify, disseminate and store individual
learning for organisation to access
n How to reduce barriers created by organizational structure, culture
and personal interest for knowledge sharing

n It is often difficult to turn tacit learning into explicit knowledge

n If one group’s tacit knowledge is challenged or superseded by

the tacit knowledge of the other JV partner, it can create
resistance to learning due to threat to that group’s identity.
+ Three Levels of Organizational Learning for JVs-
Theoretic Approach

n Three levels of learning in organisations

n Single loop learning : improvement and adjustments within the
limits of existing system
n Double loop learning : changes in exist thing organisational
frameworks and systems, adjusting targets
n Triple loop learning: learning to learn

n The ability to learn is one of the most important intangible

assets that an organisation can possess
+
Three Types of Organizational
Learning for JVs
n there are three levels of organisational learning
n Strategic learning: changes in managerial mindsets,
specially in understanding the criteria and conditions for
organisational success
n Systematic learning: changes in organisational systems to
achieve better integration of organisational activities.
n Technical learning: the acquisition of new specific
techniques such as more advanced production scheduling,
or managerial techniques such as more advanced
selection tests

n These 3 types of learning roughly corresponds to the

previous 3 levels of learning discussed
+
Forms of Learning in an Alliance
4 types of learning in strategic alliance
n Learning from past alliance experience: learning from
experience of participating in alliances and joint venture
n Learning about the alliance partner : their motives capabilities
and culture (can start prior to establishing an alliance)
n Learning from the partner: in a strategic alliance learning from
the partner can be very important. In case of JVs this learning can
be limited to JV and not transferred to the parent company
n Learning with partner: it involves the creation of new
knowledge or a substantial transformation of existing knowledge.
Common in R&D and new product development alliance

n In JVs there is the unique opportunity to transfer tacit knowledge

+
Collaborative v Competitive
Learning
n There are two situations regarding learning in alliances
n Collaborative: partners and work together to learn from each
other
n Competitive : one or both partners try to learn as much as
possible from the other partner without giving priority to mutual
learning
n undermines success of alliance
n impairs trust
n it’s more likely in alliances formed between two competitors
+
Requirements for Organizational
Learning
n partners intention for learning
n learning needs to happen in a planned way

n learning capacity
n transferability of knowledge
n receptivity of members
n competency in understanding and learning
n incorporating previous learning is in the process of learning

n converting knowledge into organisational property

n Tacit knowledge to tacit knowledge: socialisation
n Tacit knowledge to explicit knowledge: externalisation
n Explicit knowledge to explicit knowledge : combination
n Explicit knowledge to tacit knowledge: internalisation
+ How to Increase Organizational
Learning
n overcoming cognitive and emotional barriers
n Lack of intent
n Mistrust
n Perceived threat to identity

n Reducing organizational barriers: these barriers can be reduced by

n the rotation of managers from JV to parent companies JV
n regular JV visits by parent companies
n senior management involvement in JV activities
n sharing of information between JV and parent
n appropriate policies and control mechanisms to incentivise learning and
assess and record JV outcomes and learning process
n JV manager to generate a sense of a learning objective through shared
identity
n crucial middle – up – down management role of JV CEO
n breakdown hostile stereotypes that partners might have about each other
+ How to Increase Organizational
Learning- contd
n Open circulation of information
n a climate of openness: sharing of errors and problems and
acceptance of conflicting views- ( needs a mechanism for
circulation of information)
n positive information redundancy: sometimes information needs
to be shared for people who don’t immediately need it for
learning to take place.
n use of IT can help with this information redundancy
+ 138

Corporate Governance
+
Corporate Governance

n Corporate governance is defined as the process of control over

and within a JV to
n Reduce risks to owners
n Ensure sufficient return in the long run

n Companies investing in JV faces risk form different areas

n Finance: are the financial investment secure?
n Resources : are adequate resources available?
n Market: is the market opportunity as good as thought?

n More attention should be given to theses issues when investing

abroad particularly in developing countries
n Western companies investing in countries such as Iran are likely to
seek some form of mitigation for these risks
+
Sources of Risk

n The sources of risk in these three areas are:

n Contextual risk
n Institution: e.g. poor contract enforcement , underdeveloped
intermediate institutions (business support services)
n Economic: Inadequate capital, managerial and technical skills,
insatiability.,
n Agency risk
n JV managers and staff are consider as agents of the investors in the
JV.
n How these agents act affect the return or the investment to the
parents.
n Multiple owners can increase the risk on expected returns to one
parent due to the acts of the agents
n Examples: Exploitation of minority interests, fraudulent behaviors ,
deficiencies in partner capabilities , partner does not provide
access to local market
+
Forms of IJV Control to Reduce
Risk
Control via Control via key Control via non- Control via
equity share and appointments equity resource managerial
IJV board and direct provisions)e.g. monitoring
majority personnel system, training
involvement etc)
Contextual
risks
Financial ✔ ✔ ✔ ✗
Resource ✗ ✗ ✔ ✗
Market ✗ ✔ ✔ ✗
Agency
Risk (all ✔ ✔ ✔ ✔
type)
 +
Governance Preference –
International Investor Perspective
Concentrated personal
governance ( majority Concentrated specialized
High
ownership- strong staff governance
presence- operational (speculated control over
and strategic control) key function and issues)
Agency Risk

Delegated managerial Delegated financial

Low governance (governance governance (monitoring of
mainly through the board financial return)
and sometimes GM)

High Low
Contextual Risk
+ 143

Some Tips for

Negotiation Practice
+ 144

Negotiation tips – Know What You Want

n You need to be clear what your wish list is

n You need to be clear on what is your red line – things that you
wont compromise on

n You need to also now your priorities in other element of your

wish list

n You also need to know how much of achieving a certain

element of wish list is worth for you, preferably in financial
terms

n You need to have an understanding of what the other parties

wish list is
+ 145

Negotiation Tips – Guess what they

want
n You can guess what is it that they are after

n Guess what their real red line – things that they wont compromise on

n Guess their priorities in other element of your wish list And how much
each element is worth to them, in financial terms if possible

n In order to do that you need to have a good understanding of the other

organisations culture, strategy and operation

n Once you have this understanding you can put your self in their shows: if
you were in their shoes what would you be after in these negotiations

n You can refine this knowledge as the negotiations go by based on what

you observe and hear negotiation
+ 146

Potential for Deal

n A negotiation can be successful if there is overlap between what
you are prepared to accept and what they are prepared to accept

They
Overlap- Want
Deal
Potential No Overlap-
No Deal
✗ Potential
They
Want
We We
Want Want
+ 147

No Deal?

n No deal better than a bad deal

n An average deal better than no deal!

+ 148

Walk Away Position

Walk away position

¡
establishes the line that if it is
going to be crossed, you
prefer not to have a deal than
accepting what is being
proposed
n Your walk away position is:
n thepoints that you can not compromise on at all or
beyond a certain point
n Combination of various items that you are not just
prepared to accept

n If
there are multiple elements in negotiations it
can be difficult to establish walk away
+ 149

Difference between haggling and

negotiations

n If we are just talking about one elements like price it is not

negotiations it is haggling not negotiation

n In negotiation there are multiple items

n In most real world examples that is the case

n Bring in other elements if it was becoming like haggling

+ 150

A Good Negotiation is….

n A good negotiation is :

¡ Remember after the negotiation is over it is

most likely the beginning of a long term
business relation with your counterpart.
¡ You do not want to damage the
relationship at the outset
+ 151

JV Agreement Negotiation Practice

+ 152

References

n Cooperative Strategy, Managing Alliances, Networks and

Joint Ventures, John Child, David Faulkner and Stephan
Tallman, Oxford Press

n Multinational Joint Ventures in Developing Countries by Paul

Beamish, RLE International Business

n ww.wikipedia.com

n www.minterellison.com