BMAN73172 INSTITUTIONS AND FIRMS’

INTERNATIONALIZATION STRATEGY
Lecture 2 Managing International Joint Ventures: Strategic
and Institutional Perspectives

Pei SUN

Professor of International Business

9 February 2024
 Outline of Today’s Lecture

• Entry mode choice:

• When do firms prefer joint ventures (JVs) to wholly-
owned subsidiaries in the case of foreign entry?
• Strategic and institutional considerations

• Partner selection and JV formation

• Exercising control and managing risks in

international joint ventures (IJVs)
Higher Education
Internationalization
 Higher Education Internationalization

• UoN Malaysia Campus

• Established in 2000
• A franchised branch campus majority owned by a
local company
• The first purpose-built UK university campus in a
foreign country

• UoN China Campus in Ningbo

• Established in 2004/5
• The first Sino-foreign university in China
• Who is the local partner?
Higher Education Internationalization
Higher Education Internationalization
Entry Mode Choice
Equity Modes
Non-equity modes
• A mode of entry that does not involve
owning equity in a local firm.

Equity modes establishes an

organization overseas that the parent
MNE owns, at least partially. It always
entails larger, harder-to-reverse
commitments.

Wholly-owned Subsidiaries (WOS):

Subsidiaries located in a foreign country
that is entirely owned by the parent
MNE.

JV is a corporate child that is a new

entity jointly owned by two or more
parent companies.
 Sequential Decision Marking

Greenfield

WOS
Foreign Acquisition
Entry Mode
Decision
Partner
IJV
selection
 Why Ally with Local Partners?

• In general, established MNEs prefer wholly-owned

subsidiaries to joint ventures with host country
players, unless there are strong strategic and/or
institutional justifications

• Why generally prefer WOS?

• What are the inherent problems of JVs?

• Integration
• Coordination
• Opportunism
 Strategic Drivers of JVs
• MNEs may lack requisite resources, knowledge, or skills
at least in the early stage of entry
• Recall liability of foreignness/outsidership
• Resource need: Seeking resources needed to respond to
external threats or opportunities
• Learning of local knowledge
• Corollary: If learning is complete, no need of JVs
• Risk limitation: Seeking to spread financial/operational risk
• Speed to market: Seeking to achieve market presence at a
faster speed than going it alone
• Current poor performance: Seeking an alliance to improve
the current poor performance
 Institutional Perspective of
Foreign Entry
• Host country government regulation
• China: Numerous sectors (Sun et al, JIBS, 2010, 2021)
• India: The retail sector
• EU and US: Airline companies
• In emerging markets with institutional voids, many
key resources are likely to be controlled by socio-
political actors, with extensive use of networks. This
makes arm’s-length transactions less feasible and
desirable (Meyer et al., SMJ, 2009).
• Government intervention
• Contract enforcement and rule of law
• Social legitimacy of MNEs in host countries
 Partner Selection
• Potential for Value Creation
• Does your partner possess key
resources/knowledge that you really need for joint
value creation?
• The degree of synergy (mutual dependence)
• Potential for Value Capture
• Is your partner in a strong position to
capture/appropriate the surplus created through
the joint venture? (power imbalance)
• The degree of goal congruity
• The potential for a “learning race” (Inkpen &
Beamish, AMR, 1997)
 Partner Selection: Value Creation

• The most successful strategic alliances are those that

achieve both high strategic fit and high cultural fit.

• Strategic fit is the degree to which a potential alliance

partner augments or complements a focal firm’s strategy
and resource profile.
• Compatible resources and goals

• Cultural fit is the compatibility between partner firms as

reflected in the similarity of their corporate culture and
their national culture.
• Compatible management styles
 Partner Selection: Value Capture
• Think about the trade-off between the resources
needed from your potential partner and the degree of
control you wish to exercise in the JV
• If you value control over the JV, you may wish to
choose a relatively weak partner
• If you are interested in leveraging the local partner’s
resources and skills, you may have to give up some
degree of control
• Be conscious of the “elephant-and-ant” complex that
occurs when two companies are greatly unequal in
size and power
• “Dancing with gorillas” (Prashantham &
Birkingshaw, California Management Review, 2008)
 Partner Selection

Cooptiti
Ideal
High ve
Partner
Partner
Value Creation

Predato
Quiet
Low ry
Partner
Partner
Low High

Value Capture
 Exercising Control in JVs

• Control can be defined as “the process by which one entity

influences, to varying degrees, the behaviour and output of
another entity through a wide range of bureaucratic, cultural
and informal mechanisms”.

• Insufficient control can limit a firm’s ability to align the

strategic direction of the partnership with its own strategy,
and it can limit a firm’s ability to protect its interests in the
partnership.

• Equity ownership in JVs ≠ control

 Control in Strategic Alliances

• Strategic control is “control over the means and

methods on which the whole conduct of an organization
depends” (e.g. control over the use of capital, the setting
of strategic priorities and the making of senior
appointments).

• Operational control is “control over the production

process within an organization, in the sense of
determining how the employees of an organization
perform their work” (e.g. control over purchasing,
manufacturing and quality control).
Control in Strategic Alliances
 Bargaining within JVs

• Sources of bargaining power: Tangible and intangible

assets
• Inkpen, A. C., & Beamish, P. W. 1997. Knowledge,
bargaining power, and the instability of international
joint ventures. Academy of Management Review, 22(1):
177-202.

• Game theory suggest that to improve your own

bargaining position, the presence and value of your
outside options is the key.
 Risks in JVs

• Relational risk (value capture): The probability that

partner firms lack commitment to the alliance and that their
possible opportunistic behaviour could undermine the
prospects of an alliance.
• Performance risk (value creation): The probability that
an alliance may fail even when partner firms commit
themselves fully to the alliance.
• Environmental and market factors
• Lack of competence
• Luck
• Das, T. K. & Teng, B-S. 1999. Managing risks in strategic
alliances, Academy of Management Executive, 13(4): 50-
62.
 What If the JV Does Not Work

• Average failure rate can be above 50%

• Average life span for a strategic alliance is about 7 years
and many alliances end up as an acquisition by one of
the partners
• Negotiate an end or improve implementation; Know when
to quit/invest more
• Try to distinguish between relational risk and
performance risk
• Avoid “escalation of commitment”
• The eventual termination of an alliance does not
necessarily mean failure
 Essential Readings

• Chapters 12, Peng & Meyer (2023)

• Inkpen & Beamish (1997), Das & Teng (1999), Hamel et

al (1989), and Meyer et al (2009) in the reading list

• Next week: Managing Headquarter-Subsidiary Relations

Thank you!