The Characteristics of Joint Ventures in Developed and Developing Countries Paul W Beamish, Columbia Journal of World Business, 1985,

, pp13-19 Harrigans dynamic model of joint venture activity (1984) suggests in part that the external environment influences both the initial configuration and the stability of a joint venture. He demonstrates that developed and developing nations represent different external environments; the LDCs are considered a more complex and difficult environment in which to manage joint ventures than developed nations. Also, he shows that JVs in LDCs are characterised by higher instability rate and greater managerial dissatisfaction. Venture Creation Rationale In a sample of 34 JVs in developed nations, Killing (1983) divided the reasons for creating a venture into 3 categories: a) government suasion and legislation; b) partners needs for other partners skills; c) partners needs for the other partners attributes or assets. For Killing (1983), 64% of JV were created because each partner needed the others skills. Only 38% for Beamish (1984) were created for such reason for LDCs. The primary skill required by the MNE partner of the local firm was its knowledge of the local economy, politics, and culture. 19% for Killing were created because one partner needed the others attribute or assets while it was only 5% for Beamish. 17% were created for Killing because of government suasion or legislation while it was 57% for Beamish. Janger (1980) found same result when he postulated that nearly half of the companies in his sample in LDCs did so because of governments requirements. Same results were found for Gullander (1976) and Tomlinson (1970) for India and Pakistan i.e. because of governments requirements. The governments reasons include legislation, to MNEs seeking an advantage in attracting governments contracts to import restrictions whereby MNEs would

lose its access to the local market if it did not establish a local manufacturing plant. Stability A JV instability rate of 45-50% was observed in LDCs by both Reynolds (1979) and Beamish (1984). This is higher than the 30% instability rate found for JV in DCs by Killing (1983) and Franko (1971). Performance Beamish (1984) MNE managers assessed 61& of their JVs as unsatisfactory performers as compared to the 36% for the DCs. Frequency of Government Partners Few of the studies of JVs in DCs made any significant involvement of government partners. However, where the scale of investment was high, or the business lay in an industrial sector important to the local economy, the use of government partners was higher Stuckeys (1983) while for LDCs it is significantly higher (Beamish, 1984). Yet, foreign private firms that had a local private partner were satisfied with performance much more than with other types of partners (although still lower than in DCs). These performance observations support the view that for MNEs to be successful, they require partners with knowledge of the local economy, politics and customs. Ownership The use of equal ownership was advocated by Killing (1983) in developed countries ventures. In the LDC samples of both Beamish (1984) and Reynolds

(1979), in approximately 70% of cases, the foreign firm was in a minority equity position. This contrasts sharply with DCs ventures where 50% had 50-50 ownership (this also confirmed by Berg and Friedman, 1978 for US chemical JVs). In Beamish (1984) LDCs sample, when the MNE owned less than 50% of the equity, there was a greater likelihood of satisfactory performance. Also they performed better than where MNEs were the largest shareholders. They used minority shareholding because of existing regulations; local tax advantages; because of high level of corruption, better to keep a low profile; also where minority could report in financial statements as merely investment. Ownership-control relationship While there is no necessary correlation, in practice a correlation has often existed (Killing, 1983 for DCs). For developing nations, local JVs partners are rarely passive shareholders (Stopford and Wells, 1972; Schaan, 1983). But for Beamish (1984), no correlation was found. Control-performance relationship Killing (1983) found that dominant-parent ventures perform better given they are managed more like wholly-owned subsidiaries whereby all decisions are made by the dominant parent. But Janger (1980) does not identify either dominant or shared ventures as being more successful than the other. Schaan (1983) on the other hand concluded that parent companies were able to turn JVs around by creating a fit between their criteria of JV success, the activities and decisions they controlled, and the mechanisms they used to exercise control. Surprisingly, Tomlinson (1970) found that JVs with a more relaxed attitude towards control outperformed their competitors. He suggests that the sharing of responsibility

with local associates will lead to a greater contribution from them and in turn a greater return on investment. Hence the literature tends to indicate a weakening of the link between dominant management control and good performance as the emphasis shifted from DCs to LDCs.

Beamish 19XX Check JVs, not fully-owned subsidiaries, are the dominant form of business organisation for MNEs in LDCs (Vaupel and Curhan, 1973), and are frequently used by Fortune 500 companies in the developed nations (Harrigan, 1985). The limited literature on JVs suggests that performance problems are more acute in developing rather than developed nations (Janger, 1980; and Franko, 1976). The purpose of the paper is to address the question of how the performance of JVs in developing nations can be improved. Performance difficulties are costly for the MNE in time and capital. In addition, there are social costs to the host country when JVs experience difficulties or fail (Casson, 1979). By creating viable joint ventures in LDCs, international development can be speeded up. However, given the declining share of direct investment flows from the industrialised countries to LDCs (Robbock and Simmonds, 1983), the costs of joint venture failure in LDCs are magnified. The distinction used for developed/less developed countries is: 1978 per capita GNP over/under US 3,000. In this research, JVs are defined as share-equity undertakings between two or more parties, each of which at least holds at least 5% of the equity. The most common partner for MNEs in LDCs is a local private firm. Other partner combinations are not included in the sample because they

are either not typical or because the partners might not share the same profit motivation. Conclusions: 1. Characteristics of JVs in LDCs differ from those developed countries. These characteristics assessed in terms of stability, performance, ownership, reason for creating the venture, frequency of government partners and autonomy were observed to differ following an analysis of, and comparison with, developed country JVs samples. 2. Decision making control in JVs in developing countries should be shared with the local partner, or split between the partners. There was support for the observation that there is a weakening of link between JV performance and the MNE having dominant management control, when one considers developing, rather than developed countries. 3. Both partners need and commitments prove to be good predictors of both satisfactory and unsatisfactory JV performance. For example there is a positive association with performance of MNEs using local management, being willing to use voluntarily the JV structure and looking for the local partner for knowledge of the local economy, politics and customs. 4. While it may be possible to operate a JV for a short period with a dissatisfied partner, refusing to recognise differences is ultimately costly in terms of the long-term viability of the JV. 5. When the MNE partner has 2 sources of income, additional to that of the local partner, poor performance resulted. When the sources of income were close for both partners, performance was more satisfactory. This is generally consistent with Contractors (1985:44) point that in some cases the optimum for the local partner is to try to disallow a royalty or component supply agreement altogether and negotiate only on an equity sharing basis.

Characteristics of Joint Ventures The external environment influences both the initial configuration and the stability of a joint venture (Harrigan, 1984). The external environment includes things such as industry structure, competitive behaviour, technology and government policies. (already done check first article).

Equity Joint Venture and the Theory of the MNE Limited consideration has been given to the rationale for equity JVs in the theory of the MNE. While recent theoretical contributions utilising the internalisation approach has significantly advanced our understanding of MNEs (Buckley and Casson, 1976; Casson, 1979, 1982; Rugman, 1979), the theory offers only partial explanations of the ownership preferences of MNEs for other than wholly owned subsidiaries (Davidson and McFetridge, 1985; Teece, 1983; Thorelli, 1986; Horstmann and Markusen, 1986; Wells, 1973). Although the elegance and comprehensiveness of transactions costs reasoning has provided the internalisation approach with a powerful logic (Rugman, 1981, 1985), it is still deficient in some respect as a general theory of the MNE given it focuses primarily on one mode of hierarchy i.e. the wholly owned subsidiaries. Yet, there a number of other modes which firms can and do adopt to deal with imperfections in international markets including licensing, management contracts, sub-contracting, joint ventures etc. Moreover, firms often employ different modes simultaneously in addressing the needs of a particular foreign market (Contractor, 1985; Davidson and McFetridge, 1985). Hence, the internalisation theory should also encapsulate an economic rationale for the

other modes (Hennart, 1985) and specify the conditions under which each would provide efficiency gains over WOSs and the market.

To justify the use of JVs within the internalisation framework, 2 necessary conditions must be present: the firm possesses a rent-yielding asset which would allow it to be competitive in a foreign market; and JV agreements are superior to other means for appropriating rents from the sale of this asset in the foreign market (Teece, 1983). A detailed explanation for the possession of a sustainable competitive advantage regardless of the means employed for exploiting it in international markets has already been provided by Dunning and Rugman (1985). Likewise Stuckey (1983) using the transaction costs paradigm has considered the conditions within which JVs provide a superior means of exploiting those assets for firms pursuing international vertical integration. But, research in the context of horizontal integration is lacking. Following Teece (1983), it is argued that the attractiveness of JVs is a function of both the revenue-enhancing and cost-reducing opportunities they provide the MNE. However, according to the internalisation theory, firms would have a strong incentive always to avoid JV agreements since these are regarded as inferior to WOSs in allowing the firm to maximise the returns available on its ownership specific advantages (Caves, 1982; Rugman, 1983; Killing, 1983; Poynter, 1985; Harrigan, 1985). However, JVs which conform to certain preconditions and structural

arrangements can actually provide a better solution to the problems of opportunism, small numbers dilemma and uncertainty in the face of bounded rationality than WOSs. Also, rents can exceed those available through WOSs due to the potential synergistic effects of combining the MNEs assets with those of the local partner. In situations where a joint venture is established in a spirit of mutual trust and commitment to its long-term commercial success, opportunistic

behaviour is unlikely to emerge (Buckley and Casson, 1987). Furthermore, if these positive attitudes are reinforced with supporting inter-organisational linkages such as mechanisms for the division of profits, joint decision making process and reward and control systems, the incentives to engage in self-seeking pre-emptive behaviour could be minimised (Williamson, 1983). A small numbers situation, particularly when combined with opportunism, would normally result in serious transactional difficulties for the firm (1975). But in the absence of local partner opportunism, and also by establishing those interorganisational linkages mentioned before, it is possible to manage many of the types of difficulties associated with exchange between bilateral monopolists regarding individual of joint maximisation of profits (Contractor, 1985). There will be much less incentive to secure gains by strategic posturing and the interests of the JV can be promoted. Thus under certain conditions, the small number dilemma can be effectively dealt with in JVs. The problem of uncertainty can also be handled efficiently within some JVs. In the absence of opportunism and small number disabilities, there are strong incentives for the parties to pool their respective resources. By doing so, it is possible for the MNE to economise on the information requirements of FDI (Caves, 1982; Beamish, 1984; Rugman, 1985). The MNE can provide firm specific know-how regarding technology, management and capital markets while the local partner can provide location-specific knowledge regarding host country markets, infrastructure and political trends. By pooling and sharing information through the mechanism of a joint venture, the MNE is able to reduce uncertainty at a lower long-term average cost than through pure hierarchical or market approaches. The low costs associated with opportunism, small numbers, uncertainty and information impactedness in JVs under the conditions specified above would render this mode of transacting the most efficient means of serving a foreign market.

But, JVs do have limitations. First, they can suffer from the same goal distortions as hierarchies. For e.g. conflict of interests between MNE objectives and JV objectives. However, several approaches to ensuring that profitability gains are not subordinated to other considerations or that the JV mode is not uncritically preserved can be taken. Contractor (1985) has noted that many overseas ventures are being formed as a mix of direct investment, licensing and trade. He suggests that a JV partner may be compensated by a package involving some return on equity investments, royalties, technical service, and management fees, and/or margins on components or finished goods traded with the JV. Both Schaan (1983) and Beamish (1984) found evidence of such approaches. The risk of leakage of proprietary knowledge also serves to limit the efficiency gains available through JV arrangements. Leakage can occur as follows: First, a local employee may decide to resign and use the knowledge acquired in the JV to establish a competing firm. Second, The local partner may decide to dissolve the JV as a basis to continue to serve the local/foreign market through his own organisation. Leakage is a problem in JVs and its costs do limit the efficiency gains JVs offer markets and hierarchies (Parry, 1985; Rugman, 1985). Irrespective of the damages caused by leakage, what is often overlooked by management in the overall economic evaluation of JVs is that though the start up costs of a WOS may be lower, the long-term average costs may be much higher due to the very significant costs associated with independent efforts to overcome a lack of knowledge about the local economy, politics and culture. Caves (1982) provides 2 reasons that cause MNEs to seek out JVs. The first is the MNEs lack of capacity or competence needed to make the investment succeed. The second lies in the MNEs need for specific resources possessed by local JV partner. These needs include knowledge about local marketing or other

environmental conditions (Stopford and Wells, 1972). Caves adds that JVs seem to be prevalent as MNEs proceed towards more unfamiliar host nations, citing Sahams (1980) finding that JVs are uncommon in culturally familiar LDC settings. Unlike Killing (1983) and Kolde (1974), Janger (1980) found in his study of JVs in DCs and LDCs that one control structure could not be identified as more successful than the others. Tomlinson (1970) concluded that MNEs should not insist on dominant control over the major managerial decisions in JVs in LDCs. He felt that the sharing of responsibility with local associates would lead to a greater contribution from them and in turn to a greater return on investment. Also, Artisien and Buckley, (1985) found that where the MNEs motive for preferring JV mode was to achieve greater participation in decision making, the mean success rating for the JV was very successful. In both LDCs and socialist market economies (Cory, 1982), MNEs from DCs may well be confronted with higher adaptation and information requirements than they are accustomed, thus reinforcing the appropriateness of JVs. Wells (1983) 90% of the manufacturing subsidiaries established by third world MNEs were JVs. These are considered similar to the MNEs from the developed countries in Beamish (1984) study in that presumably they could benefit equally well from local market knowledge their partners could provide. The benefits of what Wells calls partial internalisation would seem to be shorter for third world MNEs than for MNEs from developed countries in Beamish study (1984). Also, Stuckey (1983) feels that JV firms can be more efficient because it allows some of the economically important relationships between otherwise separate partners to be internalised by one organisation. Also same for Cory (1982).

International Joint Ventures in Developing Countries IFC Discussion Paper No. 29 R. Miller, Jack Glen; F. Jaspersen; Y. Karmokolias Developing nations have been growing faster than the industrialised world and companies have not been oblivious to such trends. One way firms are entering these markets while minimising financial risks is via the establishment of JVs with local firms. Joint Ventures have been defined as a common project between legally and commercially independent companies in which the parties jointly bear the responsibility for management and financial risk (Rolf Weder, 1991). But there has been problems witnessed with the survey namely that partners in a JV often are similar to partners in a marriage, and in both cases they are unwilling to disclose their problems to outsiders. This gives rise to what is known as the halo effect that may affect the data leading us to believe that the relationship appear more positive than it really is. One need to bear in mind that JVs are considered as second best alternatives. But, the reality of global competition today is that few companies possess all of the competitive advantages that will enable them to compete successfully. But, for a variety of reasons, doing business in LDCs is considered riskier. Also, firms from LDCs are now more open to international competition and hence firms have to evolve to become more competitive. For this reason, many company management now attempt to complement their firms strengths through alliances with other companies. Reasons for JVs by industrial country companies. 1. Local investment regulations e.g. India. Also governments restrictions. 2. Cost and risk sharing JVs offer mode by which firms can limit their financial exposure while at the same time gaining experience in a new market.

3. Lack of country familiarity for example lack of knowledge about local product market and distribution channel familiarity, knowledge of labour conditions, likely problems in managing the local environment; knowledge of the legal system and government, and familiarity with local customs and conventions. 4. Lack of relevant contacts within the government and elsewhere to reduce the level of bureaucracy and time wasting which may be critical for a firms success. 5. Existing facilities local companies often have existing production and distribution facilities which can also be of use to the JV. For example, Ford in India has used the local partners existing facilities to set up operations. 6. More effective technology use: Combining with a local partner can provide the MNC with an opportunity to earn additional returns from its R&D operations over and above what might have been anticipated from alternative methods of exploiting the technology such as licensing and export sales.

Reasons for JV by developing country companies 1. Financing 2. Access to technology 3. Access to management know-how 4. Access to export markets

Potential problems that may arise with JV agreements:

1. Valuation problems how to value the financial and other assets that each partner may bring into the JV. Also, how to value the technology to be supplied. 2. Transparency Getting accurate data upon which to base valuations and other decisions. For example for a family business the accounting standards may be different from internationally acceptable rules. 3. Conflict resolution need specify how disputes are to be settled. 4. Division of management responsibility and degree of management

independence. 5. Changes in ownership shares. 6. Dividend policy and other financial matter.

Problems that arise in JV relationships 1. Problems related to multinationality - there may be differing basic objectives of the 2 types of firms. MNCs hope to operate through the JV in a way that will be optimal over their entire global network, not just within the local market, the usual interest of their JV partner. The MNC looks upon the JV as one piece of a complex global web, and it is not likely to allow that single piece to dictate its own policies where other pieces or, indeed, the web itself might be compromised. The rule in such situations is for the MNC to put strict limitations on the rights of the JV to export. 2. Tax issues MNC wish to maximise its global tax burden. But there may be problem due to transfer pricing especially if import components from parent company.

3. Dividend and investment policies the problem is that the MNC may have global inv. Programs that involve the transfer of funds from one region to another; it might prefer dividends to reinvestment in the JV. 4. Differences in partner size. 5. Ownership and Control problems for example product line disputes; where to source raw materials; technology utilisation. 6. Cultural problems partners may come from a complete different background; MNCs partners were often characterised as being arrogant and narrow-minded; problem of embedded corruption; also procurements may be directed towards a friendly firm. 7. Problems related to the dynamic changes in the relationship: Experience in a JV results in learning and learning can modify how one views the contributions of ones partner. For e.g. with time, the MNC may be more familiar with the local environment and hence could be the basis for more equity by the MNC; also if there is once-and-for-all transfer of technology, then local partner may be reluctant to continue paying royalty fees.

Hence, mutual trust and respect among the partners is important to such relationships, but so too is attention to maintaining compatible corporate goals and to assuring that the JV business continues to depend importantly on contributions from all partners.

Joint International Business Ventures in Developing Countries Case Studies and Analysis of Recent Trends W. Friedmann & J. Beguin Columbia University Press, 1971

The host country will strive for the following: 1. The JV must be integrated in the national economic development plan. This means that it will generally be assigned a certain priority in the national development plan. This is normally done by making the allocation of FE, the importation of foreign materials, the repatriation of capital, profits, salaries etc, dependent upon the value assigned to the enterprise in the national development plan. 2. Since LDCs usually lack investment capital, and particularly FE, the capital contribution brought by the investor in the form of cash, assets etc will be very important. 3. Training of local skills gradual replacement of foreign by local staff. 4. Increase the local sourcing factor. 5. Development of local infrastructures by foreign capital.

The foreign investor will seek: 1. A return on investment that will justify the investment decision from a commercial point of view. 2. Some legal guarantee of the security of his investment. 3. Obtaining certain privileges with regard to taxation, repatriation, earnings, capital etc.

The reasons for the frequency and importance of the joint venture capital may be as follows: (See W.Friedmann and G Kalmanoff, Joint International Business Ventures, New York, Columbia University Press, 1961). 1. Sharing of financial risk as the foreign partner may be short of capital. 2. Availability of the best local entrepreneurial and managerial talent is linked with local participation. 3. Because of legal local requirements. 4. Also, for developing nations JV is a symbol of equality.

Joint venture is an important symbol of the changing relationship between the developed and less developed countries, but it cannot be regarded as a panacea. Confidence between the partners will overcome the most difficult obstacles; lack of confidence will destroy the most perfect devices. As a major negative factor there is the issue of disparity of outlook between the foreign and local partners. In JVs between developed nations, there is a certain community not only of tradition and of scientific, technical and legal standards, but there has also been more experience with more responsible investment practices and legal supervision. In LDCs, this stage has not yet been reached in the business environment. Power and wealth are often concentrated in relatively few hands and they are not matched by a corresponding sense of responsibility. Tax considerations may provide an additional incentive to reinvest in a developing foreign enterprise. Inflationary situation may produce the reverse situation.

Like other forms of cooperation they are in themselves neither good nor bad. Their value depends entirely on the degree to which they meet each partners

requirement. Only successful and mutually satisfactory JV serve the cause of world economic development. The government and the administration in the host country should be sympathetic, understand the requirements of modern enterprises and be reasonably equipped to meet these. If a government agency is a local partner it should be fairly free from day to day politics.

The answer to the question as to whether a joint venture was likely to be a permanent or a transient phenomenon in the evolution of relations between the developed countries of the west and the developing world is as follows: from the point of view of LDCs a joint venture serves three essential purposes: 1. It stimulates the engagement of responsible local capital in productive enterprises; 2. It helps to develop a nucleus of experienced managerial personnel in the public and in the private sectors, in proportion to the participation of public authorities and private capital in joint ventures; 3. It helps to advance the training of native labour and technicians.

As the less developed countries advance in these respects, their need for joint ventures is likely to decline. Some of our most experienced collaborators from the less developed countries have pointed out that it is advisable for foreign investors to begin their enterprises in the form of joint ventures from the outset rather than the later on as a belated concession or as a result of pressure. They believe that local enterprises will eventually exploit a growing proportion of industrial production without the participation of foreigners, unless the foreigners are associated with the enterprises from the start.

Enterprise and Competitiveness A Systems View of International Business Mark Casson, Clarendon Press, Oxford.

Introduction The conventional economic theory of international business explains well the stylized facts relating to the growth of horizontally integrated multinationals in high-technology industries during the 1950s and 1960s (Buckley and Casson, 1976; dunning, 1981; Hymer, 1976; Kindleberger, 1969). It is less successful, however, in explaining some more recent developments (Borner, 1986) These include: 1. the emergence of new international division of labour, based on offshore processing in newly industrialised countries (NICs) according to which a production process is split up into constituent activities dispersed over developed countries and NICs; 2. the rapid growth of multinational operations in the service sector during the 1970s especially banking, professional business services, retailing and tourist-related industries; and 3. the growing prominence of joint ventures and other collaborative

arrangements involving enterprises in both the public and private sectors of global industries; and

4. the growing importance of Japanese foreign direct investment (FDI) in the world economy.

The systems view of production makes it natural to think of joint ventures as a compromise contractual arrangement. Three main conditions must be satisfied in order for a joint venture to be preferred to an alternative arrangement (Buckley and Casson, 1988). First, there must be some reason for integrating the operation of the facility with that of other facilities owned by two partner firms. In other words, internationalization economies must be present, for otherwise there is no reason why, on operational grounds, each partner should not deal with the facility at arms length. Secondly, there must be a reason why the two firms prefer to share a single facility rather than operate a separate smaller facility. This implies that there must be an economy of scale or scope, such that the cost of operating the single large facility is less than the sum of the costs of operating two smaller facilities generating a similar output. Thirdly, there must be a reason why the two partners do not simply merge their entire operations, creating a single ownership unit which encompasses the partners operations and the jointly owned facility itself. Given the costs arising from the ambiguity of shared control, the merger option is, on the face of it, very attractive. Obstacles to merger arise, however, from managerial diseconomies due to the difficulty of monitoring and motivating managerial employees and from political constraints stemming from competition policy (fear of high levels of industrial concentration) of fear of foreign control (when the merging firms are based in different countries) Joint ventures, therefore, are most likely to occur in situations where there are significant internationalization economies involving two or more existing firms, the facility concerned exhibits economies of scale or scope, and the potential

partner firms are already sufficiently large for merger to be difficult because of either managerial diseconomies or political constraints. The pooling of corporate expertise in new product development frequently satisfies these conditions, particularly where the product concerned is a versatile component which can be used in different ways for different firms. Each partner can feed back experience gained in the use of the component to help improve the design, while spreading the fixed costs of development by avoiding wasteful duplication of research. Another potential role for joint ventures is in the ownership and operation of network infrastructure. When there are just a few major users, each of whom is heavily dependent upon the network, and the infrastructure exhibits significant economies of scale (as is usually the case), joint venture operation may be an attractive alternative to ownership of the network by an independent monopolistic common carrier. In established modes of transport and communication, publicly owned or regulated monopolistic common carriers are often very well established on a national basis. International traffic is organised through a conference formed by national carriers, with individual cartels being used to organise traffic over particular segments of the network, or over particular routes. In more novel modes, however, such as optical fibre communications, an alternative arrangement based upon joint ventures between major private uses has evolved. The preceding analysis suggests that the joint venture arrangement is a viable alternative in some cases where, at present, nationalised or regulated common carriers supply a small number of major users. Thus one of the consequences of deregulation in transport and communications may be the proliferation of international joint venture arrangements where national monopolies previously existed. Because of the ambiguity of control inherent in the joint venture, social mechanisms play a key role in successful joint venture operation. Social

mechanisms are most effective, it has been argued, in growing industries, and it is certainly true that it is in growing industries that joint ventures tend to be most conspicuous. It is possible, indeed, to regard joint ventures as a mechanism for building trust between partners. When two firms are in conflict with each other on some fronts, and collaborating on others, a progressive development of joint venture operations can help to strengthen the collaborative forces between them, and weaken the competitive ones. Joint ventures are sometimes dismissed by their critics as inherently unstable, and therefore transient, arrangements. It is certainly true that many joint ventures have a relatively short life, but it cannot be inferred from this that short-lived joint ventures are failures. Many joint ventures are terminated when one partner buys out the other and maintains it as a going concern. It is by no means the case that the termination of a joint venture implies the closure of a facility.

One of the features of joint venture arrangements is their flexibility a flexibility that stems partly from the reliance on social mechanisms of coordination, and partly from the fact that it is relatively easy for one party to sell out to the other at a future date. It is quite plausible to argue that the recent turbulence in the world economy, and the associated uncertainty about how the division of labour is likely to evolve, has encouraged the use of flexible arrangements such as joint ventures, and equally plausible to argue that should conditions stabilise and the future become more predictable, joint ventures will lose favour and existing arrangements be terminated. But it is just as plausible to argue that had joint ventures not been used to provide the necessary flexibility during recent periods of great uncertainty, the adjustment problems encountered within the world production system would have been much more acute than they have actually been.

Cultural and Economic Interactions Joint Ventures Joint ventures have always been an important aspect of business organisation. The partnership, which is common in the professions, is an example of a joint venture between individuals. Inter-firm joint ventures have played an important role in the expansion of MNEs into new markets as when a sales affiliate is established with an indegenous distribution company as a partner. Recently joint ventures have become a popular form of alliance between established MNEs and the high profile of joint ventures means that JVs have attracted much more attention (Contractor and Lorange, 1988; Harrigan, 1985; Hladik, 1985; Killing, 1983) As a result of this trend, JVs are playing an important role in the restructuring of international economy. In come cases they are simply transitional arrangements, associated with the gradual spinning of an existing plant to a new owner. The joint venture, in other words, is a form of staggered disvestment or acquisition. This approach may be useful in avoiding loss of face for the disvesting firm, and in minimizing the risk of unfavourable political reaction when the acquiring firm is a foreign one. It also allows the disvesting firm to tutor the acquiring firm in managerial and technical skills during the transition period. Given that such JVs are specifically transitional, the fact that they last only for a limited time does not necessarily mean that they have failed in their purpose (Kogut, 1988)

The internationalization approach to joint ventures The analysis focuses on a 50:50 JV involving two private firms. Although

arrangements involving state-owned firms and government agencies are very

important in practice (particularly in developing countries), they raise issues which lie beyond the scope of this chapter. To the extent, however, that the state sector is primarily profit-motivated, the analysis below will still apply. It is assumed that each partner in the JV already owns other plants. It is also assumed that the JV is pre-planned, and that the equity stakes are not readily tradable in divisible units. This means, in particular, that the joint ownership of the venture cannot be explained by a mutual fund effect in other words, it is not the chance outcome of independent portfolio diversification decisions undertaken by the two firms. Working under these assumptions, theory must address three key issues. 1. Why does each partner wish to own part of the JV rather than simply trade with it on an arm's length basis? The answer is that there must be some net benefit for internalizing a market in one or more intermediate goods and services flowing between the JV and the parties other operations. A symetrically motivated JV is defined as one in which each firm has the same motive for internalizing. This is the simplest form of JV to study, and is the basis for the detailed discussion presented later. 2. Why does each firm own half of the JV rather than all of another plant? The force of this question rests on an implicit judgement that joint ownership poses managerial problems of accountability that outright ownership avoids. To the extent that this is true, there must be some compensating advantage in not splitting up the jointly owned plant into two (or possible more) separate plants. In other words, there must be an element of economic The way this indivisibility manifests itself will indivisibility in the plant.

depend upon how the JV is linked into the firms other operations.

(a) If the JV generates a homogeneous output which is shared between the partners, or uses a homogeneous input which is sourced jointly by them, then the indivisibility is essentially an economy of scale. (b) If the JV generates two distinct outputs, one of which is used by one partner and the other by the other, then the indivisibility is essentially an economy of scope. (c) If the JV combines two different inputs, each of which is contributed by just one of the parties, then the indivisibility manifests itself simply as a technical substitution and non-decreasing returns to scale).

3. Given the above, why do the partners not merge rather than creating a JV?

It is clear that a JV operation is to be explained in terms of a combination of 3 factors, namely internalisation economies, indivisibilities, and obstacles to merger.

Furthermore, JV agreements may arise because of the following: 1. Insuring against defective quality in components: This relates to forward integration involving 2 distinct flows of materials. 2. Adapting a product to an overseas market: Involves combination of 2 distinct but complementary types of know-how in the operation of an indivisible facility. Usually there is complementarity between technological know-how and the other is knowledge of an overseas market possessed by an indigenous firm.

3. Management training and the transfer of technology: In some cases a JV may be used as a vehicle for training. Usually, training is administered by personnel from industrialised nations partners.

It can be argued that the political risk of expropriation, the blocking of profit repatriation and so on are lower for JVs than for WOSs. Also, tax minimising TP is more difficult to administer in the case of JV than WOSs. So far as the general concept of co-operation is concerned, the international dimension is much less important than the inter-cultural dimension. In purely conventional analysis of transaction costs, the focus is on the legal enforcement of contracts, and so the role of the nation state is paramount in respect of both its legislation and its judicial procedures. The mechanism of co-operation however is trust rather than the legal sanction, and trust depends much more on the unifying influence of the social group than on the coercive power of the state. Trust will normally be much stronger between members of the same extended family, ethnic group, or religious group, even though it transcends national boundaries, than between members of different groups within the same country. Hence, cultural attitudes are certainly likely to dominate in respect of the disposition to co-operate with other firms. It is clear that the JV operations involving firms with different cultural backgrounds are of particular long-term significance. Once established, they provide a mechanism for cultural exchange, particularly attitudes to co-operation. The success of this mechanism will depend upon how receptive each firm is to ideas emanating from an alien culture. To sum up: JVs are first and foremost, devices for mitigating the worst consequences of mistrust. In the language of internalisation theory, they represent a compromise contractual arrangement which minimises transaction

costs under certain environmental constraints. But also, JVs provide a suitable context in which the parties can demonstrate mutual forbearance and thereby build up trust. This may open up possibilities for co-ordination which could not otherwise be entertained. An important role for JVs from the limited perspective of internalisation economics, is to minimise the impact of quality uncertainty on collaborative research and training. From the more open-ended perspective of long-term cooperation, however, JVs designed to cope with quality uncertainty are also well adapted to help partners to reciprocate, and also learn the values which inspire the other partner to unreserved commitment to a venture.

Why Should Firms Cooperate? The Strategy & Economics Basis for Cooperative Ventures. F.J. Contractor & P.Lorange Traditionally, cooperative arrangements were often seen as second-best to the strategic option of going it alone in the larger firms. Licensing, JV etc. have been viewed as options reluctantly undertaken, often under external mandates such as government investment laws or to cross protectionist entry barriers in developing and regulated economies. What makes the recent spate of cooperative associations different is that they are typically being formed between firms of industrialised nations where there are few external regulatory pressures mandating the link-up. Instead of the traditional pattern of a large firm trying to access a market by associating itself with a local partner, many of the recent partnerships involve joint activities in many stages of the value-added chain such as production, sourcing, and R&D. These associations often involve firms of comparable rather than unequal size, both may be international in scope, and each may make similar rather than complementary contributions. Further, the territorial scope of some of these new cooperative ventures is global rather than

restricted to a single country market as in the traditional pattern of JV and contractual agreements.

Traditionally, MNEs have been seen as monolithic entities, controlling or owning its inputs and outputs, and expanding alone into foreign markets, based on its O advantages (Caves, 1971). It could be seen as a transitional chain of control, internalised within the firm (Buckley and Casson, 1976). In this view the corporation reserves for itself the gains from global vertical and/or horizontal integration. Nowadays, in many situations, the international firm is better seen as a coalition of interlocked, quasi-arms-length relationships. Its strategic degrees of freedom are at once increased by the globalisation of markets (Levitt, 1983) and decrease by the need to negotiate cooperative arrangements with other firms and governments. In linking up with another firm, one or both partners may enjoy options otherwise unavailable to them, such as better access to markets, pooling and swapping of technologies, enjoying larger economies of scale and benefiting from economies of scope. As a corollary, each partner is less free to make its own optimising decisions on issues such as product development, TP, territorial scope, and retention of earnings and dividends payout. Seen in isolation, a cooperative venture may only be a simple start-up, technical training arrangement, or standard patent license. But, if the effect of this cooperative move is to create a long-term customer for a part or active ingredient, the strategic impact goes beyond the arrangement itself. On the other hand, there could be negative strategic impacts external to the venture itself, for example the worry of creating a future competitor (Reich, 1984; Abegglen, 1982). But how significant in cooperative arrangements is this problem of creating a new competitor will depend on many factors such as the

duration of the agreement, the ability of each partner to go it alone on the expiration of the arrangement, and their resolve to independently keep up with technical and/or market related changes in the industry. Also, if an industry is territorially fragmented or multi-domestic, an improved technology can be easily spread by a partner that is already global in scope (Reich, 1984; Hamel, Doz, and Prahalad, 1986). Rationale for Cooperation JV formed to crate value added. Done via either a vertical or horizontal arrangement. If vertical, then useful to draw on the value chain approach suggested by Porter (1985, 1986). The combined efforts of all partners must add up to a value chain that can produce a more competitive end result. It is important that partners have complementary strengths, that the strategies of the partners are compatible and not in conflict. If horizontal, then done to limit excess capacity, risk reduction and to save costs. 1. Risk reduction: Spread the risk of a large project over more than one firm; enabling diversification of product portfolio; enabling faster entry and payback; cost subadditivity (cost less than go alone) E.G. Herriott (1986) regional electric company makes lower investment by JV; also the experience of all the partners, their mutual sharing or abdication of markets in favour of JV make for faster entry with a better design and quicker payback. The risk sharing function more important in research intensive industries where successive generation of technology tends to cost much more to develop while at the same time life cycles are shrinking (Friedman, Berg and Duncan, 1979). Also, decrease the political risk by linking with a local partner. Also, may be due to government regulations. 2. Economies of scale and product rationalisation: Production rationalization means that certain components or subassemblies are no longer made in two

locations with unequal costs. Production of this item is transferred to the lower-cost location which enjoys the highest comparative advantage, thus lowering sourcing cost. But, there is an added advantage Volume in the more advantageous location is now higher, further reduction in average unit cost is possible due to economies of larger scale. In many situations, too, particularly in more mature businesses, there may be excess capacity and need for industrial restructuring. A joint venture approach may be a practical vehicle for achieving this. Thus, production can be rationalised and output levels reduced within the joint venture context. High exit barriers can thereby be overcome. Potential synergistic effects of joint ventures can possibly also be inferred from the findings of McConnell and Nantell (1985), who show that the value of the shares of over two hundred firms listed on the New York and American stock exchanges was increased for those companies that had undertaken jopint ventures. 3. Exchanges of ComplementaryTechnologies and Patents: Joint Ventures, production partnerships and licensing agreements may be formed in order to pool the complementary technologies of the partners. In general, it is important to consider joint ventures as vehicles to bring together complementary skills and talents which cover different aspects of state-ofthe-art know-how needed in high technology industries. Such creations of electric atmospheres can bring out significant innovations not likely to be achieved in any one parent organisations monoculture context. There are also pressures on a company that has invested heavily in developing a new technology breakthrough. But, on its own it may not have sufficient production or global marketing resources to secure a rapid, global dissemination of the new technology, making it hard to achieve an acceptable payback for its investment. A JV approach can be an important vehicle in

achieving such dissemination and realistically securing the necessary payback. This may be especially true for smaller firms lacking the internal financial and managerial resources to make their own investments or expand rapidly. Hence, direct investment in fully owned subsidiaries is reserved for the most interesting combinations, while many of the rest are handled by cooperative ventures. Stopford and Wells (1972) confirm in their study that the propensity to form JVs is higher when the entry entails product diversification. Berg, Duncan and Friedman (1982) indicate that the large average firm size and rapid growth in an industry correlate positively with JV formation. 4. For Co-opting or blocking competition and Overcoming Governmentmandated investment and/or trade barriers please check page 14 of article. 5. Facilitating Initial International Expansion: For medium or small-sized companies lacking international experience, initial overseas expansion is often likely to be a joint venture. This may be especially true when the firm is from a socialist or developing country (Lall, 1981). In a cross-sectional study, Dunning and Cantwell (1983) show that the lower the GDP per capita of the host nation originating a MNE, the more likely it is to use JV in its initial international expansion. Also, it takes time to build up a global organisation and a significant international competitive presence and JV may help in this respect. 6. Vertical Quasi Integration: Whereby the inputs of the partner are complementary rather than similar. In such a case the ventures can be described as a mode of interfirm cooperation lying between the extremes of complete vertical integration of raw materials from raw materials to consumer, to the opposite case where stages of production and distribution

are owned by separate companies which contract with each other in conventional market mechanisms (Thorelli, 1986). A firm may therefore integrate vertically because it may more easily permit longer-run strategic decisions. There is a large literature on vertical integration (Richardson, 1972; Buckley and Casson, 1976). But, briefly stated its advantages are: a. avoidance of interfirm contracting, transaction and negotiating costs (Williamson, 1975); b. reduction in cost or achieving economies of scale from combining common administrative, production, transport, or information processing activities in 2 or more stages of production or distribution; c. internalising technological or administrative abilities and secrets within a single firm d. gaining a better understanding of strategy within the industry as a whole; e. the ability to implement technological changes more quickly and over more stages of the value chain.

But there drawbacks to integration as well. a. Investment capital may be too high for just one company to bear and JV may be used to simply spreading the investment and risks involved. b. The vertically integrated firm tends to increase its fixed costs thereby potentially increasing its vulnerability to cyclical fluctuations (Moxon and Geringer, 1984 on Boeing).

c. Forward integration to internalise more elements of marketing channels requires market access, links with major buyers, and brand recognition which can be a critical impediment to international expansion. d. Lastly, Porter (1980), indicates some other strategic disadvantages of full integration such as reduced flexibility to environmental and technological change, dulled incentives for an individual operating unit to remain competitive if internal transfer prices do not reflect their external values, and being deprived of the marketing or technical insights available from outsiders. A middle position between the 2 extremes of full integration and purely contractual relationships is often optimal for many companies. JVs, coproduction, management service agreements and so on provide a means whereby each partner can contribute its distinctive competencies. The relationship is neither purely contractual nor entirely integrative. It can be described as a mode of quasi integration, as Blois (1972) puts it.

Potential strategic advantages under the distribution-type JV category include rapid access to an existing marketing establishment, links with key buyers, knowledge of the local market and culture and benefits from a recognisable brand name in total a better market access.

Costs and Benefits of JVs: 1. Incremental benefits from cooperative JVs: a. Higher revenues from cooperation: project revenues can be improved are the other partners market knowledge, technology, market access, ties to important buyers and governments, faster entry and thus more favourable cash flows.

b. Lower costs of cooperative ventures: given larger economies of scale and rationalisation gains; government incentives available to JVs and licensing; lower capital investment and overheads due to utilising slack capacity in the partner firms; cheaper raw materials/components and more productive methods acquired through the partner; also might gain cost advantages from productivity gains and other efficiency improvements learned from the partner.

2. Detrimental aspects of cooperative ventures: a. Lower revenues: given JV does not allow firm to expand into certain lines of business in the future; partners reap the benefits of future business expansion that is not proportional to its future contribution; lower price is set at the behest of partner; partners desire to export decreases sales made by other affiliates in international markets; partner becomes more formidable competitor in the future. b. Higher costs: costs of transferring to partner technology and expertise; increase coordination and governance costs; pressures from partner to buy from designated sources or sell through its distribution channel; increase in headquarters administrative, legal and other overheads; opportunity costs of executives and/or technicians assigned to CV; global optimisation of MNC partner may not be possible for: sourcing, financial flows, tax, TP, rationalisation of production.

3. Risk reduction effects of cooperative ventures: lower capital investment at stake partial investment, excess capacity utilisation, economies of scale, economies of rationalisation and quasi integration; faster entry and/or

certification; use JV as a guinea pig; for large risky projects limit risk per venture diversify risk over several firms; lower political risk; lower asset exposure for medium and small-sized firms.

There are also softer issues that need to be considered before reaching a decision on whether to form a JV. This may include the anticipated ease of working with the other partner; possible language difficulty, cultural differences; style incompatibilities and differences in values and norms; the anticipated political climate within the context of the partners organisation; and the presence of a sufficiently strong mentor who will push the cooperative venture. But the fact remains that the strategic rationale prevailing when a JV was formed may shift over time. Moreover, the traditional impetus for JVs remains in many nations. Economic nationalism, protectionism, transport costs, differing local cultures and standards, as well as the presence of entrenched domestic firms encourage a linkup with a local company as a means of serving the particular needs of a geographic market and/or for getting political permission to produce and tap natural resources.

Cooperative Strategies in developing Countries: The New Forms of Investment Charles P. Oman. The changing international division of risks and responsibilities reflects a tendency for some MNEs to modify their views on the advantages and disadvantages of NFI (New Forms of Inv.) over TFDI (Traditional Forms of Inv.). Some firms are finding they can earn attractive returns from certain tangible or intangible assets that they can supply without having necessarily having to own or finance projects. Also, NFI often means reduced exposure to commercial and political risks that accompany TFDI. There is also evidence that newcomer MNE

and market share followers frequently use NFI to compete with the more established multinational firms. They may offer host nations shared ownership or greater access to technology in return for preferred access to local markets. In other cases these newcomers can use NFI more defensively in a context of globalised oligopolistic rivalry in which their managerial and especially financial resources are stretched thin because of increased competitive pressures to take investment positions in numerous markets. By sharing technology, control, and profits with local partners, they can benefit from the latters knowledge of local markets, access to local finance and willingness to share or assume important risks. Finally, as technology diffuse and products mature and become increasingly price competitive, the firms may initiate the use of NFI as part of a strategy of divestment.

Impact of NFI on the Textiles industries It is in the apparel industry, more than in any other segment of the textile complex that NFI have been of crucial importance. Companies of industrialised nations and from NICs delocalising to other developing nations. The main motivations have been labour costs reduction in the context of slow demand growth and intense price competition. Continued expansion will also depend on protectionist trends in the OECD region and the distribution of the MFA quotas among developing nations. It should also be noted that the MFA quotas along with the high costs of new production technology and other barriers to international marketing create major obstacles to developing nations aspiring to join the ranks of leading textile and wearing apparel exporters (exception of China). The quota system has had a major influence on the spread of production to second-tier producing nations, a movement in which the NFI has played a central role.

Implications of NFI The continuing proliferation of NFI may entail the latter being used as a vehicle by many small and medium sized firms to internationalise their operations. For the host nation, the most important benefit is undoubtedly the possibility for increased local control over the process of capital formation and for a larger share of returns from investment. But for a host nation the crucial question is how to take advantage of NFI and whether it might do better with TDFI. The evidence suggests that the answer generally depends less on the countrys foreign investment policies as such than on the coherence and effectiveness of its overall industrial and macroeconomic policies. Much also depends on the relative BP of local elite vis--vis their international counterparts. This bargaining strength in turn depends on such factors as the size and dynamism of the local market, and the level of development of local technological, managerial and entrepreneurial capacity and hence also on the ability of local elite to take advantage of rivalry among foreign firms.

Successes and Failures of JVs in Developing Countries: Lessons from Experience William A. Dymsza Key factors that lead to success in JVs: 1. Achievement of Major Goals: The successful JV fosters the achievement of major goals by each party to the JVs. 2. Complementary Contributions by Partners: A successful JV provides for complementary contribution of resources by the major parties involved contributions that are valued by the principals. The contribution of the MNE will depend upon the industry in which it is involved, its product or product

lines, its business orientation and many other factors. In many manufacturing operations, the major contribution of the TNC comprises manufacturing technology, product know-how, patents, business expertise, technical training, and management development. The national partner may contribute some combination of capital, management, knowledge of the country environment and the market, and contacts with the government, financial institutions, local suppliers and labour unions. 3. Synergies of combining the Contributions of the Partners: A more successful JV creates synergies through the partners pooling their resources, capabilities, and strengths. These synergies lead to the establishment of a manufacturing operation in which the total results are greater than the sum of the contributions of the partners. As a result of combining the modern production process, the product know-how, technical training, management development and management systems of a transnational company with the national partners local capital, management, existing plant, marketing expertise, and knowledge of the country environment, the JV results in a more efficient and productive enterprise than the participants could achieve on their own. The synergies occur through the partners working closely together, reinforcing each others strength, cross-pollinising with ideas concerning management of the enterprise, responding to competition, and developing the potential of the business in the country environment. 4. Entry for smaller and medium-sized TNCs JV provide suitable entry into a manufacturing operation in a developing country for a smaller and mediumsized international firm with limited capital and some management with international experience but no great breath in such management. It also limits the risk exposure for such a firm. The national partner in such a JV provides a combination of local financing, an existing plant and facilities, most of the management, its marketing expertise and relationships with the government, financial institutions and other groups. The manufacturing

technology, the product know-how, technical training and business expertise contributed by the TNC lead to a more efficient manufacturing and marketing operation, introduce new products, or improve existing products. 5. Comprehensive Joint Venture Agreement Check Article 6. Joint management responsibilities a JV performs better if the TNC and the local partner assume major managerial responsibilities and share in key decisions. Based upon its greater managerial experience and competence, the TNC commonly assumes greater managerial responsibilities during the initial phases of the JV, but joint management is fostered by using the particular competencies of the national partner, its involvement in major decisions over time, and training and development of local managers to assume top and middle management positions. Involvement of the national partner in more and more managerial decisions develops its capabilities in joint management. 7. TP and joint ventures Problems can exist with respect to purchase of intermediates, components and other products from a TNC and the issue of TP. The national partner may want, in cases where they source raw materials from the TNC, assurance that the prices charged by the TNC are arms length, competitive and fair. 8. Reduction of Ownership by a TNC in a JV Over time, as the TNCs contributions become less significant to the operations of the manufacturing JV, it may have to reduce its ownership as a result of pressures of its national partner, and the government and turn major managerial responsibilities over to its partner. Vernon (1977) has described the obsolescing bargain under which the BP of the TNC declines and that of the partner increases, as the partner gains considerable experience and expertise in production, finance, marketing, and other managerial functions and does not need the resources of the TNC as much.

Key Factors in Failures of JVs: TNCs managers prefer to present information about the problems and weaknesses of the JV forms in general terms rather than grant specific details on projects that fail. 1. Significant differences in major goals of parties: One may want to plough the profits in the company to expand the business while the other may want to maximise short term return and hence seek maximum dividend payout. 2. TNCs Global Integration and local partners national orientation: TNCs maximise their profits on a global basis rather than maximise the return in a particular country. Also, they may not wish to grant high priority to businesses in resource allocation, management and technological effort if the operation only represents a small percentage of their total operations. 3. Perception of equal benefits and costs: What counts is not only the actual contribution made by each party and the benefits obtained by each one, but more importantly what the partners perceive over the life of the operation. Such perceptions of the benefits accruing to each partner may also change over the life of the JV. 4. JV agreements and failures: When the JV does not specify clearly the goals of each party, the resources contributed by the partners, their responsibilities and obligations, their rights, the character of the business, their share of profits and their mode of distribution, ways of resolving disputes, etc, disputes may arise. 5. Conflicts over decision making, managerial process and style: The strife between a TNC and a local partner to control major policies and decisions constitutes a major reason for the failure of JV. For e.g TNC may be dictated by decisions from the parent ffice. Also, major differences with respect to

management processes, style of management, and corporate culture between the TNC and national partner can lead to serious conflicts which may contribute to the failure of the JV. The TNC may strive to impose their processes of strategic and operational planning, an information and control system, budgeting and accounting on the JV affiliate. On the other hand, the national partner, which is often a family run business in developing nations, may have a more authoritarian management, with no delegation of responsibilities to subordinates and very little formal planning and control. 6. Differences between the partners concerning marketing: Check Article. 7. Transfer Pricing Conflicts: Problems of pricing when sourcing products especially on grounds that it assures required quality standards and meet delivery requirements; on the other hand national partners may want to explore alternative sources to obtain the lowest costs materials. 8. Decline in resource contribution by the TNC: The national partner may have significantly developed the capabilities to take charge of manufacturing, marketing, finance and other key aspects of the venture and may find that it has far less need for the expertise of the TNC expertise. Hence he may wish to renegotiate their benefits and ownership rights. 9. Other factors: Given host country regulations including performance requirements and operational restrictions; increased political instability and risk; high rates of inflation; frequent and sharp currency devaluations; and exchange control on remittances on dividends and royalties.

Competition Policy and JVs OECD Numerous JVs are found in the area of manufacturing and production. They are set up for the following reasons:

1. Common Production 2. Penetration of a new geographical market: By linking up with an enterprise which is already active in the underlying market. Such ventures may be generally based on financial, fiscal, psychological and legal considerations; the foreign company needing the help of the indigenous firm which has the necessary local knowledge, goodwill and experience. 3. Manufacturing new products or providing new services.

Motives for JV: 1. To make use of complementary technology and research activities. Usually involves firms from different industries and segments of the same industry to acquire knowledge they do not possess. May serve as an important vehicle for transfer of knowledge. 2. Lack of capital to undertake activity on sole basis. 3. To reduce the level of risk. 4. JV may increase technical efficiency. In industries where economies of scale are substantial, a vertical JV may produce substantial distributional and transactional savings. 5. To overcome entry barriers to product markets, especially in highly concentrated markets and those protected by trade and investment barriers against foreign competition. 6. Political and legal considerations.

Advantages of JVs: 1. Risk Spreading Ferguson found a positive correlation between the riskiness of an industry and the use of JV as the preferred form of entry. 2. Possibility of sharing initial cost of starting operations especially in high capital intensive industries. 3. To reduce transaction costs especially in manufacturing sector. 4. Pooling R&D costs may constitute a mechanism for firms to solve the problem of free-riding and may reduce the social costs of excessive duplication of research efforts. 5. For exporting JVs, may enable firms unwilling or unable to face the costs and extra risks of exporting alone to enter into new export markets with consequent benefitial effects of a countrys export performance.

Disadvantages of JVs: Check article on pages 24-25

Joint International Business Ventures W.G.Friedmann and G.Kalmanoffe, Columbia University Press, New York and London In the widest sense, the JV comprises any form of association which implies collaboration for more than a transitory period and it excludes pure trading period.

Attitudes and Motivations

Decisions on JVs in LDCs involve acceptance or rejection of a close quasifraternal partnership with foreigners who are of different cultural and often of different racial backgrounds. In such matters, unconscious attitudes are understandably present, for example, attitudes towards familial patterns, racial and cultural differences, and hierarchical and impersonal relationships versus human relationships based on equality and face-to face dealings. Indications of rationalisation and other symptoms of unconscious motivation have not infrequently appeared in respondents discussions, especially in their objections to JVs. Non Specific Motives: General economic or business advantages of given JV which are not necessarily connected with their being a JV. Specific Motives: Refer to the advantages of a JV as such. There is also the matter of motives underlying the preference for a particular form of JV or degree of participation.

Non Specific Motives: 1. Local legislation e.g. in the Philippines; also investor companies will often explain their participation in joint ventures by reference to broad business identical to those which would apply to solo ventures e.g. market costs; control of supply of raw materials; tax advantages. 2. Profitability reasons. 3. Also the benefits of integration. 4. Opportunity or challenge offered by a particular situation. Quite frequently, the challenge is a threat to continuation of an existing profitable situation.

E.g. imposition of import tariff by host nation may result into the exporting firm setting up a JV and servicing within the local economy itself. 5. Positive opportunity: for example a source of raw materials in rising world demand.

Specific Motives: 1. Lack of finance to go alone. 2. For developed nations: JVs permit local capital to participate more fully in the benefits of economic development, and that it transmits technical and business know-how more rapidly and effectively than either purely local; and hence it lessens the danger of foreign domination of industry. But the JV may use local funds which could have been used elsewhere. Also if business venture is too risky. 3. For capital exporting nations: The trend is towards increased acceptability of joint ventures. The motives for JV in LDCs may be analysed in various ways and the advantages usually mentioned are: the achievement of capital savings and the reduction of business risks; the obtaining of management skills and the maintenance of employee morale; the facilitating of sales; the improvement of government relations; the achievement of good public relations. a. The savings of capital usually more relevant for developed nations. Usually not relevant for LDCs because the proposed JV is commonly a brand new production operation; most of the equipment usually imported and paid for by the foreign partner; local group very often unable to finance a sizeable proportion of the JV; also the initial inv. In LDCs is not such a critical factor since there are other more important hazards and difficulties.

b. Closely connected with capital savings is the reduction in business risk. By sinking less K into a venture and diversifying investment between industries and countries, the investing company obviously gains an element of protection. Also, the entrepreneurial skills and experience of local partners permit easier adaptation to the potential dangers of a new business environment with which the investor company may be relatively unfamiliar. Also, given local partner, the company may be less subject to the danger of adverse action by the local government. c. In cases where management objectives play a part in motivating a JV, the aim is not to avoid management responsibilities entirely so much as to supplement the investor companys managerial resources with locally available resources. The main contribution that the local management may bring is its qualitative consideration. Local management can contribute a knowledge of local conditions and an ability to deal with labour, government, and suppliers with no foreign management could match. There is an important managerial advantage of JV of a relatively intangible type: the favourable effect on the morale of the local employees of inviting local capital participation. Also, national pride may provide substantial economic effects (where local participation is permitted). d. Also easier to sell its product on the local market if a JV rather than FOS. e. Also hope of obtaining more favourable treatment form the government. Also, the success of a JV may be affected by the positive actions which the government may take. Protective tariffs to protect the new industry; tax burdens/exemptions; authorised transfer of dividends or repatriation of K; Government attitudes may be very important. f. Local partners may influence government actions by private negotiations with government officials and politicians. The local partners are more experienced

in dealing with local administrative procedures because they know the ropes; have well-established connections; and have the feel of the situation and also because such activities on their part are more readily accepted by the government and local opinion. g. Exchange controls have also stimulated the formation of JVs. Also where exchange controls and import restrictions. h. Also, lack of technical know-how or administrative resources to start up a project by government or local partner though has the financial capabilities. They may invite a foreign partner to bring in the missing ingredient. i. The creation of a JV may sometimes be motivated by the desire to aid in the process of transferring technical and managerial knowledge and skills to LDCs as a contribution to their economic development. This has been a legitimate and important motive of various development banks.

Problems: JV reduces capital requirements but at the same time reduces profits. Also, provides potential communication problems of co-operating with local managerial resources. Also, sometimes local partner gains a return incommensurate with its contribution. Also the choice of a local partner may be limited; lack of local capital may also be a problem; also political instability present in LDCs. There may be a real and inevitable conflict of interest between the partners or there may be differences in management philosophy. Different tax laws and foreign exchange considerations affecting the 2 partners may be a source of conflict. Also problem of dividend distribution and declaration of earnings figure parent co v/s JV. Staffing and employment policies and in particular the problems of nepotism are further causes for controversy. Also, promised government influence may be a source of conflict. If government

change, then local partner influence may decrease and its expected contribution to the JV may decrease.

Interesting Aspects JVs are not an invention of the postwar period. They existed before, although predominantly between industrially developed nations. But as a significant phenomenon of international business relations, the JV is overwhelmingly a postwar phenomenon, one of many attempts to bridge the gap between the vast material and technological superiority of the industrially developed nations and the urgent needs and aspirations of the less developed nations. At the other extreme, there is the wholly foreign-owned subsidiary. Critics of the JV have rightly pointed out that WOSs which make the maximum use of local personnel on all levels, which avoid discrepancies in the remuneration and standard of living between foreign and local personnel, and which are guided by experience and understanding of the country and its people can be a far more successful equipment in partnership than a JV which is merely a financial device. Also, to many of the governments and the people of LDCs, partnership in the full sense that is a JV is a symbol of equality. Such symbols are important regardless of the immediate business aspects because they help to reduce deeply ingrained suspicions of foreign economic domination. Quite often the question of joint venturing will be decided by the nature of previous relationship between the parties concerned and the degree of intimacy to be achieved in continuing collaboration. In essence, the JV is an important symbol of the changing relationship between the developed and the LDCs, but it cannot be regarded as a panacea. It is a device to be adopted, rejected, or modified after a sober consideration of the many legal, psychological and technical factors prevailing in a given situation.

Confidence between the partners will overcome the most difficult obstacles; lack of confidence will destroy the most perfect devices. More important even than the technicalities of legal, financial and technical arrangements is the question of how much the JV can contribute to the vital battle for the progress of the LDCs, a battle that is fought simultaneously on the political, economic and personal level. At its lowest, the JV is a device of financial arrangement or company law, a minor variation of equity investment. At its highest, it can be an important experiment for the sharing not only of legal and financial, but also of human responsibilities. It expresses well the idea of partnership, and it is only on the basis of partnership that the economic progress of the less developed countries can be achieved, and that it will be possible to impart the experience and resources of the more developed nations to nations that want to bridge the gap without sacrificing national pride and human dignity.

JOINT VENTURES E.Herzfeld, Second Edition, Jordans, 1989.

Defn: JVs: Planning and Action, pp11-15 by Young and Bradford: An enterprise, corporation or partnership formed by 2 or more companies, individuals or organisations at least one of which is an operating entity which wishes to broaden its activities for the purpose of conducting a new profit motivated business of permanent duration. In general the ownership is shared by the partners with more or less equal distribution and without absolute dominance by one party. Purpose of JV:

1. Horizontal Integration 2. Vertical Integration 3. Conglomerate JV Operate in a field unrelated to the existing activities of the participants.

Advantages and Disadvantages of JV Berg and Friedman (1978) quote the view that most JVs are born out of sets of unique circumstances and also draw attention to the fact they represent an organisational form for achieving economic objectives which neither parent could normally attain acting alone. Advantages: 1. Limitation of investment: attractive especially if investment made in country with existing or potential exchange control problems affecting possible repatriation. 2. Limitation of risk: especially the financial risk to the foreign investor. 3. Overcoming nationalistic prejudice 4. Merging skills and strengths. 5. For above check article pages 22-24 Disadvantages: 1. Decision making management style 2. After-effect of failure effect on parents image

3. For further information check article. The Strategy of MNE Ownership Policies Advantages of JVs: 1. Technical resources: The JV may present the opportunity for local firms to acquire needed managerial, technological or productive resources at a substantial saving in time and expense. For the foreign partner, the benefit will be in finding a partner with the knowledge of the local market. Often the local partner can offer a trained sales organisation or labour force or productive facilities to complement the special know-how or resources or both of the foreign investor. But, unless the partners are of comparable size and strength, such marriages of convenience are often shortlived or at least full of strife. 2. Financial Considerations: Lack of finance from foreign investor. 3. Political considerations: Main reason for seeking local shareholdings. A policy of local ownership was desirable and essential to maintain satisfactory public relations in the host country though performance is more important than public relations. Disadvantages: 1. Conflicts of interest: The growing tendency towards unification of markets and the rationalisation and integration of production and other functions on a regional or even wider basis means the concentration of manufacture in certain plants and the assignment of export markets on mainly economic criteria. Under such conditions, the interdependence of the various subsidiaries of the group makes any attempt to measure their individual profitability a difficult if not an arbitrary exercise. Often too, for tax or other reasons, a companys foreign business may best be structured so that more

of the ultimate profits are taken in one subsidiary than in another. But problems might arise if have local partner. The parent company might use TP to bring down profit and minimise group tax payments while the local partner may demand higher dividends and fees. Also conflicts of interest may arise especially concerning reinvestment of earnings. A parent company is often willing to wait considerably longer for its return on investment than its local partner especially if it is claiming royalties or fees. The parent company may want to reinvest the profits while the local partner may want to distribute the bulk of it. Also the parent company may want to delay the dividend payments. 2. Disclosure of information: Many of the practices used by the MNEs to avoid or defer taxes, to protect themselves against exchange losses, or to achieve other corporate objectives are neither feasible nor appropriate where there are local shareholders in the subsidiary. This is especially so for quoted companies which need submit published accounts. 3. Unwillingness to share earnings: especially so in the technological advanced industries where the parent company enjoys a monopoly or near-monopoly position. And in such cases, the local partner hardly makes any contribution and companies find it difficult to see any justification at all for sharing the equity. 4. Too much time wasted in settling petty disputes among partners. 5. Also differences in the approach to business between head office and local management.

But there are costs in a policy of local participation. Less income from tax from withholding taxes lost on dividends paid to the minority holdings and from lower

profits if there is TP used. It could also have an impact on BOP if the proceeds of the sale to create a minority holding were repatriated.

Third World JVs: Indian Experience in eds. Multinationals from Developing Countries 1981 By R.G.Agrawal, edited by Krishna Kumar and Maxwell G Mc Leod. In some cases, the MNEs acquired a bad image for it failed to relate itself well to the problems of host nations. In other cases, it transgressed certain limits making it socially and even economically detrimental to the interests of the host nations. It is against this backdrop that one has to view the emergence of joint production and marketing enterprises of the third world. Motivations: 1. sharing of experience and expertise in fields where adequate capabilities have been developed in the home country; 2. setting up enterprises of a comparatively medium/small size in industries where the MNE did not evince interest; 3. safeguarding of markets to which goods have been exported and using the venture for promoting exports; 4. expectation of a reasonable return on investment coupled with technical know-how fees and royalties; 5. participation as a means to secure larger orders for machinery and components; 6. an assured supply of raw materials; 7. diversification of business risks among two or more countries.

For the host nation: 1. obtaining investment without use of own foreign exchange 2. acquiring technology best suited to its needs 3. setting up of IS and XO industries 4. participation in management 5. stronger bargaining position vis--vis TNCs.

Other factors that govern the decision to invest abroad include the dynamic desire to make a name abroad, use of the JV country as a production base for the supply of components to the investing nation, indirect fringe benefits such as easy foreign travel on behalf of the JV, creation of an outpost through the JV for commercial intelligence, using it as an instrument of trade development on a two way basis, demonstration of a dynamic spirit of enterprise in carrying out a job in a foreign nation, and absorbing new ideas through such operation in a competitive environment. One of the major impulses of the investing nation in venturing abroad can be explained by the growth theory of trade. If restraints on expansion of a firm are placed at home, growth can be achieved by diversifying risk across the borders through transfer of the appropriate technology suited to the needs of the host nation. Also the acceptability of JV has been increasing among developed nations since they are easier to control the TNCs. For information of JV on a regional integration scope please see article pages 119-122.

Use of Minority and 50-50 JVs by US MNEs during the 1970s: the interaction of host country policies and corporate strategies Franko, L.G, JIBS, 1989 vol.20:n1. Beamish and Banks (1987) and Buckley and Casson (1988) discuss the conditions under which JVs as a concept may be compatible with the internalisation paradigm. The internalisation view of the MNE does however posit that MNEs will minimise transactions costs by using internal and presumably wholly owned structures as opposed to arms-length, market intermediaries to serve foreign markets. Thus according to the internalisation theory in its present formulation, firms would have a strong economic incentive to always avoid JVs since these are regarded as being inferior to WOS in allowing the firm to maximise the returns available the returns available on its ownership specific advantages (Beamish and Banks, 1987). But why is there a trend towards JVs? Beamish and Banks (1987) provide 2 possible modifications to the internalisation paradigm which would allow for the willing acceptance of JVs by MNEs: mutual trust and commitment, and hedging against uncertainty. Buckley and Casson (1988) note a third: governmental barriers to complete merger (or takeovers) or JV partners.

Reasons for increasing use of JVs in LDCs: 1. LDC Policy Shifts: Shifting of host policies towards an insistence on increasing amounts of local ownership. Check Salehizadeh, 1983; Robinson, 1976; Black, Blank and Hanson, 1978). 2. Country Ownership Policies and Economic Performance: It has been frequently noted in the literature that the JV form and a high degree of

product exchange and trade with home country or other parts of the MNE system are different bedfellows, if not indeed fundamentally incompatible (Fagre and Wells, 1982; Gomes-Casseras, 1985; Franko, 1971; Stopford and Wells, 1972). The Asian NICs appeared willing to adapt themselves to this MNE characteristic, thus clearly placing first priority on export-success as opposed to local ownership though in some cases they have allowed 100% ownership in EPZs while encouraging or requiring reduced equity in ventures aimed at the local market. 3. JV Stability: A considerable body of evidence pointing to the fragility of the JV forms exists (Franko, 1971; Reynolds, 1979; Killing, 1973; Beamish, 1984; Beamish, 1985). Moreover, studies by Reynolds and Beamish suggest that both JV instability rates and suppressed JV instability in the form of acute MNE management dissatisfaction with JV performance may be higher in LDCs than in advanced nations. The trend found in this article accords with expectations derived from the relative technological and marketing bargaining power school of thought on JV formation generally associated with the writings of Prof. Wells (Stopford and Wells, 1971; Fagre and Wells, 1982). High levels and trends towards JVs are found in lower technology sectors. 4. The MNE Company Strategy Dimension (Check article page 7) The shift towards use of JVs was mainly in nations whose industrialisation policies were largely oriented towards IS mode of development. But MNEs tend to retain 100% ownership or majority ownership when they had notable propriety technological or marketing strengths. Although host government policies can be held largely responsible for triggering the move toward increased use of MJVs, company strategies and behaviour both allowed these policies to succeed in obtaining MNEs assent to minority positions,

and conditioned the kinds of MNEs that accepted limited or reduced ownership. Smaller, latecomer MNEs anxious to catch up with or match or marginally go ahead of dominant firms would logically sell their services to host governments and locals by offering a better deal in the form of local majority or equal ownership. One risk for the country or local partner was that the outsider firm may not be as technologically dynamic or experienced and hence not as competitive in terms of world cost levels, product specifications or quality as one of the majors or segment specialists who might insist on WOS. Another risk for the economy was that majority local ownership might be obtained largely at the price of offering permanent protection for an IS venture. But such outsider presence might be rewarding. It may help develop local competencies. But, the economic result of any MNE activity, be it judged in terms of costefficiency, quality of output, FE earned, technology transferred, or whatever will be the joint product of MNE conduct; host country objectives, rules and conduct; and host entrepreneurial conduct and motivation. The legal form of the activity may facilitate or inhibit particular outcomes, but it alone does not determine them.

Environmental Risks and JV Sharing Arrangements, Shan.W, JIBS, 1991, v22:n4 There are unfamiliar territories in which the rules of the game are likely to be dissimilar from those of market economies. The challenge to a foreign investor is how to adapt investment strategies to those economies in order to succeed under the peculiar conditions of diverse political and economic systems. Much of modern theory of FDI has been developed against the framework of transaction costs economics (Caves, 1982). A MNE can compete successfully in a foreign market because of its possession of monopolistic or unique advantages

(Hymer, 1976; Kindleberger, 1969). These ownership advantages (Dunning, 1977) must be sufficiently great to offset the disadvantages of being a nonresident firm. Full ownership need not be the only organisational alternative to simple market exchanges. There is a spectrum of intermediate modes of organisations that are designed to govern inter-firm relationships including for example JVs. As an alternative to full integration or simple market exchange, the JV facilitates interfirm learning and transfer of intangible assets (Kogut, 1988) while mitigating incentives for opportunism by creating interdependence between the transacting parties (Buckley and Casson, 1988; Stuckey, 1983; Hennart, 1988). Moreover if the benefits derived from a JV minus the transactions costs specific to the formation and operation of an international JV, are greater than the sum of these benefits from exploiting firm specific advantages separately, a JV creates synergies and enhances economic rents to the partners (Beamish and Banks, 1987; Shan, 1990; Teece, 1983). These synergies can be the result of risk reduction, economies of scale and scope, product rationalisation, convergence of technologies and better local acceptance (Harrigan, 1985; Contractor and Lorange, 1988). Therefore under the right conditions, JV can be a first best choice. As a corollary, the synergistic effects are larger the greater the complementarity between foreign and indigenous firms. Hence, the greater the complementarity, the higher the probability that the foreign firm will enter the market through a cooperative arrangement with a local firm, ceteris paribus. Therefore, in a country in which the cultural, political and economic systems differ greatly from its own, a foreign firm is more likely to cooperate with an indigenous firm which may have developed unique country and firm specific skills and advantages that are very costly, if not impossible to duplicate by a foreign firm (Davidson and McFetridge, 1985). In less developed nations, in which requirements for adaptation and information are greater, the appropriateness of an MNE forming JVs is reinforced (Beamish

and Banks, 1978). The transaction costs implications of the degree of integration or the extent of ownership of productive assets, are complicated under conditions of uncertainty. When uncertainty is high, a larger degree of ownership potentially entails greater switching costs should undesirable events occur. The ownership of productive assets may deprive the owner of the flexibility of low cost exit from the market. Therefore firms should shun ownership under such conditions (Williamson, 1979). There are however different types of risks and uncertainties according to the extent to which they can be controlled and managed by the firm through the organisational strategies. Uncertainties and risks embodied in the contextual environment are usually beyond the control of the firm (Root, 1988). Transactional risks such as the exposure of dedicated assets to the potential opportunism of transacting parties, may be reduced or eliminated through internalisation of markets or integration (Williamson, 1975, 1985; Monteverde and Teece, 1982). In contrast, uncertainties of the contextual environment might not be eliminated through expansion of the boundaries of the firm. Therefore transactional and contextual uncertainties may have opposite effects. The former may lead to increased integration while the latter may cause firm to shy away from ownership. The risks due to the opportunistic behaviour of the transactional parties are more substantial for those ventures with a higher degree of dependence on these relationships. A JV can be viewed as a hedging vehicle against both transactional and contextual risks imposed by the political system, in addition to other types of benefits it might bring to the foreign firm. But the JV does not necessarily align the interests of the local partner to those of the foreign firm. The goals of the JV partners might well be incongruous due to the divergent interests of their stakeholders, private shareholders and the host government (Boisot and Child, 1988). While the foreign firm may find it desirable to minimise the labour costs, the state owned enterprise may want to maximise the benefits accruing to its employees (Milking a JV). The challenge of the foreign firm is how to synchronise the interests of the local partner to that of the JV and to proactively control

contextual risks through offreing appropriate incentives to its partners in the JV. Empirical evidence suggests that the williongness of American firms to commit equity in entering in a foreign market is inversely related to perceived uncertainties of doing business in that country (Stopford and Wells, 1976; Davidson and McFetridge 1985; Gatignon and Anderson, 1988; Kobrin, 1988). Needless to say, the perception and the ability to manage risks are likely to differ across firms. Indeed the JV literature is rife with empirical studies that examine firm-level variables as determinants of JV formations and other types of entry strategies. Moreover, the degree of the vulnerability of a foreign venture to host government intervention is a decreasing function of its position within, and the degree of inter-dependence of, the multinational network (Poynter, 1982). Therefore, the higher the degree of dependence of the venture on local relationships, the more the venture is prone to political and other contextual risks. It should be noted however that intended strategy may very well be modified over time as a firm adapts its strategy either to the changing market conditions or to its perception of the environment (Mintzberg and Waters, 1985). Neither is it unusual for JVs in LDCs to be renegotiated as market conditions and bargaining powers shift (Wells, 1977). It is theorised that committing the local partner to a larger share of the JV under conditions of political, bureaucratic and legal uncertainties in a CPE aligns its interest to that of the JV and reduces the incentives for it to pursue divergent goals to the detriment of the JV. To the extent that it is possible, the foreign investor may proactively manage its contextual relationship (Williamson, 1979). To the extent that this is possible, the foreign firm may proactively manage its contextual relationships in such market. The sharing decision of a JV is undoubtedly a strategic decision. Clearly, ownership does not only affect the share of profits or losses from a JV, it is an

essential part of an incentive system for both partners of the venture. The incentive extends beyond the local partner to the contextual relationships in as much as transactional parties are linked to the bureaucratic hierarchy. An MNE can therefore proactively manage the contextual environment through its sharing agreement in a JV. The optimal share must be calculated taking into consideration the peculiarities of the relationship between transactional and contextual environments of the foreign country as well as the risk bearing capabilities of the foreign partner. However, to the extent that equity share increases the power of a partner, there is a trade off between the share controlled by the foreign firm and the degree of control over the operation of the venture. Therefore, while the foreign firm may be tempted to induce its local partner to commit a larger share of the equity, it must also negotiate the terms of the agreement to allow itself to maintain or share control over decisions related to key issues such as TP, technology protection, and the expansion of operations and crucial functions of the venture (Schaan, 1988). Finally the MNE must constantly reevaluate its policies towards the JV as the environment changes over time. (For information on tests and results check article).

UK JV Activity in the Czech Republic: Motives and Uses E. Davies, B. Kenny, R. Trick European Business Review, Vol. 96 No. 6, 1996, MCB University Press JVs and collaborative agreements between firms have become a distinct feature of international business. In the 60s and 70s the collaborative structures were perceived to be second-best options and were restricted to cases where host governments required the use of local partners. In examining the changing environment of IB and the increasing use of collaborative arrangements by Western nations, Buckley (1991), listed certain developments in the international

arena that have challenged MNEs and in turn posed new questions for the development of IB theory. They include: 1. an increase in both competition and collaboration between firms; 2. political changes including deregulation, political, economic and financial integration, and changes in trade policies. 3. The increasing resource put into research and development which play a major role in international competition. 4. Changes in social patterns including an increasing interest in environment, green issues and equality of opportunity. 5. A restructuring of the world economy and of its constituent parts at national, regional, firm, and intra-firm levels; 6. Relations between advanced nations and less developed nations. For Survey and results check article The Changing Characteristics of JVs 1960s-1970s transitional: Testing the water entry strategy strategies second best to other modalities free standing as part of a polycentric global or multi-domestic strategy of MNEs strategy of MNEs as first best entry strategy integrated with a geocentric or 1980s-1990s frequently non transitional or complementary to other

undertaken by mainly small or medium increasingly undertaken by larger sized firms or smaller MNEs especially MNEs from leading K intensive firms

from smaller home nations market seeking or resource seeking Investment Especially favoured by developing Nations Especially prevalent in mature Sectors or in those producing intensive Standard goods sectors in which economies of scale Are prevalent Designed primarily to reduce complementary Risks of 100% commitment synergy. assets and capture economies of intended mainly to acquire spread throughout sectors including technology and information both DCs and LDCs strategic asset seeking inv.

Formation

and

Performance

of

Multi-Partner

JVs:

Sino-Foreign

Illustration D.Griffith, M.Hu, H.Chen, International Marketing Review, vol15, no.3, MCB University Press. Many MNCs have gained access to markets via the formation of international JVs. JVs are formed to achieve synergy through combining complementary partners (Kogut, 1988). International JVs are formed to improve a firms competitive positioning with the global marketplace. To accomplish this objective, parent firms attempt to create synergies through combining resources, capabilities and

strengths (Dymsza, 1988). Local partners, particularly from LDCs benefit from the technological know-how, management skills and capital brought in by their foreign partners (Kim, 1996; Shao and Herbig, 1995). MNCs depend on local partners knowledge and networks in the host country to reduce risks and increase revenue. International JVs allow partners to share information, resources and risks, hence creating synergistic effects. JVs have also created problems for partners because of different goals, values and cultures. Researchers have adopted a formation orientation to better understand criteria leading to successful IJVs. Researchers indicate that size (Kogut and Singh, 1988; Pan, 1996), control (Anderson and Gatignon, 1986; Beamish, 1984; Blodgett, 1991; Dymsza, 1988; Geringer and Hebert, 1989; Geringer and Woodcock, 1989; Gomes-Casseres, 1989; Hladik, 1988; Pan, 1996; Schaan, 1988; Wei, 1993; Williams and Lilley, 1993), socio-cultural (Agarwal, 1994; Hu and Chen, 1996; Kogut and Singh, 1988; Pan, 1996; Wei, 1993), industrial characteristics (Blodgett, 1991), and location (Dunning, 1979, 1980, 1988, 1990, 1995) are important factors contributing to the establishment and ongoing administration of a cooperative and/or contractual organisation. If these factors are critical to the formation of IJVs, they may also increase our understanding of why IJVs differ in numbers of partners. Under an outcome orientation, performance has been widely investigated (Beamish, 1987, 1993; Cavusgil and Zou, 1994; Chow and Fung, 1997; Davidson, 1987; Geringer and Hebert, 1988; Hennart, 1988; Hu and Chen, 1996; Killing, 1983; Osland, 1994; Osland and Cavusgil, 1996; Reynolds, 1984; Schaan and Beamish, 1988; Shenkar and Zeira, 1992; Woodcock et al., 1994). If IJVs differ in terms of the number of partners during formation, performance may also vary. The sensitive nature of competitive capabilities shared within the IJV inherently creates a need for control (Williams and Lilley, 1993). Control has been used to better understand inter-organisational cooperative behaviour (Anderson and

Gatignon, 1986; Blodgett, 1991; Dymsza, 1988; Woodcock et al., 1994). Control within an IJV can be defined as the process through which the aprent companies ensure that the management of the JV conforms to their interests, thus protection their proprietary assets (Geringer and Hebert, 19989; Hladik, 1988; Schaan, 1988). Socio-cultural distance significantly influences inter-cultural business operation (Agarwal, 1994; Chan, 1996; Hofstede, 1980; Kogut and Singh, 1988). Kogut and Singh (1988) as well as Agarwal, (1994) and Chan (1996) indicate that socio-cultural significantly influences the entry mode choice of an organisation. Kogut and Singh (1988) found that the greater the socio-cultural distance of the investing firm and the country of entry, the more likely the firm was to utilise a JV over a wholly-owned entry method. During the formation process, partners with a low socio-cultural distance gap are more likely to share values, beliefs and knowledge and create a more cohesive organisation. Wei (1993) found when analysing Chinese foreign JVs that those partners having the smallest socio-cultural distance gap dominated the number of JVs during the period of 1979-1986. (For analysis and results check article). Potential Problems that might take place in JVs 1. Meeting the Expectations of 2 parents: A challenge facing JV managers is not only that the parent companies may have different set of expectations, but, more importantly, that those expectations are seldom clearly communicated and that they change over time. Managing a JV involves a subtle balancing act between the parents priorities, the JV strategic and operating priorities, and the personal objectives, beliefs, and values of the managers representing the various stakeholders in the JV. Finally, the observed differences in expectations regarding good management practice have been explained by

Reynolds (1979) on the basis of the parents attitudes towards the role of management in 5 areas: a. the source and the scope of the managers authority; b. status; c. personality versus position; d. responsibility for decision making; e. responsibility for future events. 2. Insuring the Economic Viability of the JV: In the country where the JV was located, the MNE partners were not strictly dependent on local earnings in determining the overall return. However, venture profits were often the only source of revenue for local partners, and, as Reynolds (1979) notes, the JV was much more often the major industrial interest of the local partner. 3. Drawing from Partners contribution: A mutual long-term need between JV partners is another significant variable associated with the success of JVs. In Beamishs study (1984), partner needs were characterised into 5 groups with 3 items in each group. These 5 groups encompassed: a. needs for items readily capitalised; b. human resource needs; c. market access needs; d. government/political needs; e. knowledge needs. 4. Managing in an environment constrained by the parents control practices: Parent companies have been found to exercise control through both positive and negative mechanisms. A parent uses positive control when it is in a position to influence activities or decisions in a way consistent with its expectations and interests. It uses negative control when it is in a position to prevent decisions or activities it does not agree with from being implemented.

Even if not coerced into a JV, companies may use them to achieve what appear to be important benefits, including: a. faster and easier access to the local market and the distribution system; b. improved knowledge of the local economy, politics and culture; c. improved access to local human resources, including managers and labour; d. a sharing of risk;

e. preferential treatment. This could include the repatriation of dividends, the registering of investment to increase the capital base on which dividends may be computed, and the securing of government contracts and work permits for expatriates. Too often, entering into a JV is a result of organisational and individual pressures rather than for good strategic or economic reasons. Euphemistically, regarding a venture as a sharing of risk, may only be delaying the day that it is recognised as a bad deal. Strategic and economic benefits are crucial first considerations. However, they are analogous to the proverbial tip of the iceberg. Implementation and operating difficulties lie hidden below the surface. In order to cope with the political and interpersonal constraints of their job, JV managers must show great sensitivity to the parent companies differences in culture, management style and expectations. Being under the scrutiny of 2 or more parents they have to reconcile their achievement of their personal and career objectives with the parents objectives and with the unique strategic and operating imperatives of running a company in a LDC. There is a tendency in MNEs to insist on providing management personnel to the JV. But, they have to recognise that the skills and knowledge required to manage a JV successfully in a LDC are very different from those developed in managing WOSs and/or in developed nations. Hence, a major challenge facing JV managers is that they have to be good diplomats, able to operate constantly within two or more frames of reference and set of values, and to manage the idiosyncrasies of their parent with success.

Effective Leadership in JVs in Vietnam: a cross-cultural perspective T.Quang and W.Swierczek and D.Thi Kim Chi, Journal of Organisational Change, vol11, no.4, 1998. In 1998, nearly 800 foreign businessmen identified the current FDI problems (a substantial decrease in FDI in recent years) which have not changed in 5 years: 1. inadequate implementation of the legal framework; 2. red tape and bureaucracy 3. unfair treatment in costing projects 4. import/export tariffs 5. corruption As the Saigon Times (1998) put it: there have been too many high profile failures or withdrawal cases between JV partners, too many problems associated with the lack of transparency in the law which allows for too many different and changing interpretation by bureaucrats which in turn create unforeseen delays and costs for investors. In such a culturally complex business environment, expatriate managers are not only judged with respect to their technical and international business knowledge and experience, but also on their personal characteristics and leadership skills. Insufficient knowledge and limited understanding of each partners culture often create open and long lasting conflicts between international managers and local counterparts and employees. In the worst cases, this leads to the failure of the business partnership (Quang, 1997). Cooperative ventures are increasing in IB because of the well-known imperatives to be simultaneously global and local. The role of culture in the success and failure of JVs is still not well researched despite the seminal efforts of Lane and Beamish (1990) who recognised that: many Western corporations seek co-

operative ventures as quick fix to global competitiveness without understanding the relationship being established and the behavioural and cultural issues involved Failure stem from the influence of culture on behaviour and management systems which create unresolved conflicts. Compatibility between partners is the most important factor in the endurance of a global alliance. Differences between national cultures, if not understood, can lead to poor communication, mutual distrust and the end of the venture (Lane and Beamish, 1990). Since trust is a major dimension of effective partnership, those cultures which emphasise trust would minimise the impact of cultural distance. In high trust ventures, organisational controls are often based on shared values such as duty or obligations to others (Shane, 1992). Cultural distance is most clearly shown in terms of communication. This causes problems, particularly when the partners do not share a common work language. The local values, beliefs, norms for getting the jobs done are generally constrained by the international partners approach to managing the JV (Walters et al., 1994). JV management characteristics: 1. JVs will be more successful where there is a high degree of compatibility in the leadership styles of the partners. 2. JVs will be more successful where there is a great emphasis on closing the cultural distance and on developing a multi-cultural foundation for management; 3. JVs with a leadership style which emphasise trust, communication and mutual objectives will be more successful;

4. JVs in which the partners emphasise a relationship style based on teamwork and collaboration will be more successful; 5. The greater the complementarity of leadership styles of the partners in the JV the greater the likelihood of success in the JV; 6. The greater the emphasis of multicultural leadership characteristics and skills in the JV such as flexibility, empathy, understanding problem solving, communication and relationship building the greater the likelihood of success of the JV. For analysis and results check article. Conclusion: The example of successful JVs emphasise building relationships, creating a mutual understanding and shared values. In organisational change they are more adaptive, focused more on teamwork and they provide a stronger role for local managers. From the perspective of organisational learning, successful JVs promote the management development of Vietnamese managers and reduce the involvement of expatriates. These JVs enhance their strategic capability by having long term commitment and a vision for the JV which will be implemented by Vietnamese managers with effective leadership skills.

THE

CHARACTERISTICS

AND

PERFORMANCE

OF

KOREAN

JOINT

VENTURES IN LDCs Lee and Beamish Journal of international Business Studies Third Quarter 1995. A joint venture is the investment form used by nearly half of all multinationals from developed countries to enter developing countries (Austin, 1990; Kobrin, 1988). Much of the research work on JVs has been from a DC perspective (Sohn, 1994; Woodcock et al., 1994; Negandi et al., 1987). It has shown that certain characteristics of joint ventures differ when located in DCs and LDCs. Specifically, JVs from DCs into LDCs are characterized by: a. a higher instability rate and greater managerial dissatisfaction than those in DCs; b. equal ownership being more frequent DCs and minority ownership most common in LDCs JVs; c. strong relationship between ownership and control in DCs but not LDCs based JVs; and d. an inconclusive relationship between JVs performance and management control in DCs JVS and shared control showing some more satisfactory performance in LDCs JVs (Beamish, 1995; Reynolds, 1979; Killing, 1983; Franko, 1979; Tomlinson, 1970). This study suggests that the characteristics of Korean Joint Ventures in LDCs are as follows. First, the need for the local partners knowledge is a more important reason for creating a venture than government regulation on ownership. Second, Korean JVs are more stable than developed country JVs. Third, the stability of the Korean JVs is related to the type of local partner. Fourth, the most common ownership level of Korean partners is a minority one. Fifth, overall satisfaction with the performance of Korean Joint Ventures is higher than that of developed country JVs in LDCs.

HOW MNCs CHOOSE ENTRY MODES AND FORM ALLIANCES: THE CHINA EXPERIENCE Tse, Pan and Au JIBS Fourth Quarter, 1997. Entry mode has been the cornerstone of a firms market entry strategy. To investing firms, different entry modes represent varying levels of control, commitment and risk. These factors are of particular significance to firms entering new or unstable markets (Dunning, 1988; Shenkar, 1990). In China, Joint ventures are popular because there are government regulations (Davidson, 1987; Eiteman, 1990). It is the oldest form of business in China (Beamish, 1993) and has a proven success record (Pearson, 1991; Shenkar, 1990). Faced with rapid technological advances, changing market structures and increasing global competition, firms are motivated to form alliances with other firms to reduce investment risks, share technology, improve efficiency, enhance global mobility and strengthen global competitiveness (Auster, 1987; Harrigan, 1988). The reasons for a foreign firm to enter a JV also include risk sharing, resource pooling, asset protecting and the ability to react quickly to market changes (Pan and Tse, 1996). WHAT DIFFRENCES IN THE CULTURAL BACKGROUNDS OF PARTNERS ARE DETRIMENTAL FOR INTERNATIONAL JVs Barkema and Vermeulen JIBS, Fourth Quarter, 1997. Entering a foreign country through an IJV has several advantages. The IJV allows the firm to share the costs and risks of foreign entry and to use the local partners knowledge about the local institutional framework local consumer tastes, and business practices (Agarwal and Ramaswami, 1992; Erramilli, 1991; Erramilli and Rao, 1993; Gatignon and Anderson, 1988; Gomes-Casseres, 1989, 1990; Kogut and Singh, 1988). However, IJVs also entail unique risks owing to the potential problems of cooperating with a partner from a different national

culture (Brown et al., 1989; Harrigan, 1988). The cultural differences may create ambiguities in the relationship, which may lead to conflicts and even dissolution of the venture (Barkema et al., 1996; Shenkar et al., 1992; Woodcock et al., 1991).

THE ENVIRONMENT FOR FDI AND THE CHARACTERISTICS OF JVs IN CHINA Chen, Development Policy Review, Vol. 11, 1993 The investment environment of a country includes both physical factors, its geography and resources (hardware) and man-made factors such as infrastructure, political stability, the structure and development of the economy, the rate of inflation, the culture etc (software). Obviously both the hardware and the software are important determinants of FDI which is governed by a complex set of economic, political and social factors (Frank, 1980; Hood and Young, 1979; Hughes and Seng, 1969; and Vernon, 1975) Several studies have shown that joint ventures are more efficient than whollyowned subsidiaries under certain circumstances and they are also an important means for developing countries to obtain foreign capital and technology and make a contribution to their development process (Beamish, 1988; Dunning, 1981; Stuckey, 1983; Vaupel et al., 1973). MOFERTs (1986) study showed that the popularity of JVs in China was mainly due to the fact that foreign partners expected their local counterparts to help them overcome specific obstacles to operating in China. For e.g. an unfamiliar environment; different political and economic structure; cultural and languages differences, current business practices different management systems and knowledge of government procedures in both local and central government. Furthermore, the pooling of resources reduced uncertainty and duplication of effort.

The popularity of Hong Kong as a source of investment was mainly because of its adjacent location, cultural affinity and the Chinese Connection.

INTERNATIONAL JVs IN DEVELOPING COUNTRIES MILLER ET AL., 1993, FINANCE AND DEVELOPMENT JVs between local firms in LDCs and foreign companies have become popular means for both management to satisfy their objectives. They offer at least in principle, an opportunity for each partner to benefit significantly from the comparative advantages of the other. Local partners bring knowledge of the domestic market; familiarity with government bureaucracies and regulations; understanding of local labour markets and possibly existing manufacturing facilities. Foreign partners can offer advanced process and product technologies, management know-how and access to export markets. For either side, the possibility of joining with another company in the new venture lowers capital requirements relative to going it alone. FOR PROBLEMS RELATING TO JVS CHECK ARTICLE.

CHARACTERISTICS OF JOINT VENTURES There are a large number of potential partner needs and these can be classified in various ways. 1. Items readily capitalized: To Roulac (1980), capital was one of the 2 reasons for which partners are needed (the other was expertise). Also the second reason was to ensure supply of raw materials. Third, technology and equipment. 2. Human resource needs 3. Market access needs: better access to local markets (Stopford and Wells, 1972). 4. Government political needs need to meet government requirements (Killing, 1978). 5. Knowledge needs (Newbould et al., 1978) general knowledge of the local economy, politics and customs.

Equity JVs and the Theory of the MNE Beamish and Banks, JIBS, Summer 1987 MNEs often prefer JVs over fully owned subsidiaries regardless of whether they are required by a host country as a condition of entry (Beamish, 1984). Nevertheless, fairly limited consideration has been given to the rationale for equity JVS in the theory of the MNE. The theory of internalization only offers partial explanations of the ownership preferences of MNEs for other than wholly owned subsidiaries (Davidson and McFetridge, 1985; Teece, 1985; Thorelli, 1986; Horstmann and Markussen, 1986; Wells, 1973).

In order to justify the use of international JVs within the internalization framework, 2 necessary conditions must be present: the firm possesses a rentyielding asset which would allow it to be competitive in the foreign market; and JV arrangements are superior to other means for appropriating rents from the sale of this assets in the foreign markets (Teece, 1985). Hence, following Teece (1983), the attractiveness of JVs is a function of both the revenue-enhancing and cost-reducing opportunities they provide the MNE. However, JVS are viewed as inferior to fully-owned subsidiaries (Caves, 1982; Rugman, 1983; Killing, 1983; Poynter, 1985; Harrigan, 1985). The value of the foreign local partners assets would apparently be insufficient in any conceivable situation to offset the strategic risks and transaction costs faced by the MNE in exploiting its ownership-specific assets. One of the most significant transactional contingencies faced by MNEs considering a joint venture would apparently arise due to the problem of opportunism. But in situations where a JV is established in a spirit of mutual trust and commitment to its long-term commercial success, opportunistic behaviour is unlikely to emerge. Furthermore, if these positive attitudes are reinforced with supporting inter-organisational linkages such as mechanisms for divisions of profits, joint decision making processes and reward and control systems, the incentives to engage in self-seeking preemptive behaviour could be minimized (Williamson, 1983). A small number situation, particularly when combined with opportunism would normally result in serious transactional difficulties for the firm (Williamson, 1975). But in the absence of opportunism, this might not arise. The problem of uncertainty can be handled efficiently within some international JVs. In the absence of opportunism and small numbers disabilities, there are

strong incentives for the parties to pool their resources. By doing so, it is possible for the MNE to economise on the information requirements of FDI (Caves, 1982; Beamism, 1984; Rugman, 1985). The MNE can provide firmspecific knowledge regarding technology, management and capital markets while the local partner can provide location specific knowledge regarding host country markets, infrastructure and political trends. By pooling and sharing information through a JV mechanism, the MNE is able to reduce uncertainty at a lower longterm average cost than through pure hierarchical or market approaches.

INTERNATIONAL

JOINT

VENTURE

INSTABILITY:

CRITIQUE

OF

PREVIOUS RESEARCH, A RECONCEPTUALISATION AND DIRECTIONS FOR FUTURE RESEARCH. A. YAN AND M. ZENG, JIBS, 30, 2, 1999, PP 397414. Factors contributing to instability: 1. Inter-partner conflict in co-management: Killing, 1983; kogut, 1989. Harrigan (1988) found that differences between the partners in founding goals, strategic resources and corporate cultures were responsible for shorter JV duration. 2. Cross-cultural differences: See Turner, 1987; Jones and Shill, 1993. The findings of several recent studies demonstrate that the relationship between partner cultural differences and IJV stability may be more complex than previous research has suggested. Barkema et al. (1997) found that inter-partner differences in uncertainty avoidance and long term orientation have a significant negative impact on IJV survival while differences in power distance, individualism and masculinity did not affect IJV survival.

3. Control/ownership structures: Killing (1993) found that a dominant management structure can minimize co-ordination costs and hence outperform shared-control JVs. However, too much power may prove detrimental to the minority. Therefore a balanced ownership structure is more likely to produce mutual accommodations (Harrigan, 1988). Bleeke et al. (1991) found that alliances with an even split ownership had a higher success rate than dominant JVs. Beamish (1984) found improvement in performance when control shared with local partner. Performance suffered however when the foreign partner exercised dominant control (Yan, 1993; Hebert, 1994; Yan, 1997). 4. External environments: It has been widely documented that unanticipated major changes in local political environments affect international business operations and contribute to IJV instability (Vernon, 1977; Blodgett, 1992; Brewer, 1992; Boddewyn and Brewer, 1994).

THE

IMPACT

OF

ORDER

AND

MODE

OF

MARKET

ENTRY

ON

PROFITABILITY AND MARKET SHARE PAN ET AL., 1999; JIBS, 30, 1, PP81-104. There are 2 streams of explanation for the impact of entry mode on profitability. One is the cost argument (Contractor, 1990; Hennart, 1991; Kim et al., 1992; Madhok, 1997; Woodcock et al., 1994). Contractor and Lorange (1988) provide a framework to analyse the various costs and benefits in choosing the appropriate mode of entry. It is suggested that the costs of setting up and running a WOS may be lower than those of an equity JV (Woodcock et al., 1994). This is because firms often simply duplicate what they have done successfully in other overseas markets. Thus they incur minimal new resource-based costs. Equity JVs, however, entail costs related to searching for appropriate local partners and integrating the assets pooled together by the venture partners (Madhok, 1997).

In addition, some resources are consumed in coordinating the interests, goals and management between the partners. The main premise is that the total combined costs are often higher for JVs than WOS, holding other things constant (caves et al., 1986). As such WOS can be more profitable than JVs (Li and Guisinger, 1991). The second explanation stems from the need for managerial control. WOSave few reservations about extending their competitive and proprietary assets abroad (Davidson et al., 1984). Most importantly, WOS avoid the conflicts of interest and objectives that occur in the case of partnerships with local firms (Tse et al., 1997). As a result it is often believed that the preferred mode of entry is by WOS (Woodcock et al., 1994). However, this is subject to local knowledge not being required. Otherwise they may perform sub-optimally compared to other modes (Vanhonacker, 1997).

THE ENTRY MODE CHOICE OF MNEs: AN EVOLUTIONARY APPROACH M. MUTINELLI ET AL., 1998, RESEARCH POLICY, 27, 491-506. A number of empirical studies have analysed the factors which influence the choice of mode of entry. Those approaches mainly reflect and explain the choice of MNEs within the conceptual framework of transaction costs and market imperfections (Anderson and Gatignon, 1986). Therefore, firms resort to governance structures which reduce risks and the hassle costs of going abroad. JVs and strategic alliances may be regarded as organizational forms that under specific circumstances allow the firm to economise on the costs associated with the use of both arms length trade based on market mechanisms and the administrative mechanisms typical of hierarchies.

Entry in foreign markets and the unrelated uncertainty are also crucial for international neophytes which lack experience in managing foreign operations. This may lead to WOS taking inappropriate decisions on matters such as the choice between producing certain inputs locally or importing them, the location of plants in the foreign country, production levels, adaptation of products and services to local market requirements, management of relation with workforce, suppliers, customers, banks, local authorities (Mariotti and Piscitello, 1995). These risks might not be present for IJVs since the foreign partner can exploit the positive externalities deriving from having a local partner. Once the experience of FDI has been gained, the firms set in motion a cumulative evolutionary learning process in going abroad. The perception of uncertainty decreases and the firm acquires increasing capabilities and knowledge about how to manage foreign operations and to correctly assess the risks and the expected economic returns of FDI. Johanson and Vahlne (1977) explain the phenomenon of incremental

internationalization, i.e. a step-by-step increase of a firms involvement in a foreign market. More generally, the capability of a firm to capture the gains from an internationally integrated structure depends positively upon its degree of multinationality (Cantwell et al., 1993) and the cumulative and incremental learning experience which determines the set of opportunities for growth. As a result, the propensity to gain full ownership for WOS tends to increase while experience in dealing with international operations is accumulated (Davidson, 1982; Anderson and Gatignon, 1986; Gatignon and Anderson, 1988; Kogut and Singh, 1988a; Zejan, 1990; Vahlne, 1977). The empirical evidence confirms that earlier operations in the target country by the parent company increases the probability of choosing a WOS (Kogut and Singh, 1988b; Hennart, 1991b; Larimo, 1994).

In this context it is also worth mentioning the role of differences in geographical spread of FDI. Ceteris Paribus, high physical and psychical or sociocultural distance (Hofstede, 1980) between the parents home country and the target country engenders high information needs because of the uncertainty perceived by executives and the problems in transferring values, management techniques and operating methods from the home to the host country (Buckley and Casson, 1979; Davidson, 1982; Hedlund et al., 1983; Ronen et al., 1985; Anderson and Gatignon, 1986; Gatignon and Anderson, 1988; Kogut and Singh, 1988a; GomesCasseres, 1989; Agarwal and Ramaswami, 1992; Larimo, 1994).

JVs are particularly important in the internationalization strategy of small-sized firms because of their different attitudes towards risks with respect to large firms and also because of their lack of complementary assets and their financial and commercial and managerial constraints which leave them with few means of reducing risks. Likewise, very large, widely diversified and highly internationalized MNEs show a propensity towards collaborative ventures. The availability of a great variety of specialized, non-reproducible assets which are complementary to the ones possessed by other firms, the bureaucratic inefficiencies, and the ability of these MNEs to deter opportunism credibly by threatening retaliation in response to defection by the other party explain their inclination to JVS and agreements. Joint ventures are also the favoured internationalization device for less experienced firms which prefer to co-operate with local partners representing a precious accumulation point for information on the local economy and environment.