What are the motivations of multinationals from developed markets in entering joint ventures with locals in EMs? What are the motivations of EM partners? How do these motives affect the ventures?

Question

What will be an ideal response?

Answer 1

Joint ventures are a special type of ownership-sharing in which equity is owned by two or more companies. Joint ventures are a common form of participation for firms moving beyond the exporting stage to regular overseas involvement, in which local participation is advantageous. Depending on the equity share of the companies, they may be classified as majority, minority, or 50-50 ventures. Joint ventures, in many cases, may be the only feasible form of investment participation in countries in which sole ownership is prohibited or discouraged.

Joint ventures provide a mutually beneficial alternative for foreign and Western businesses to join forces. For both parties, ventures are a means to share both capital and risk and make use of each other’s strengths. Problems may arise in these ventures when more than one party is involved in the decision-making process. Joint ventures can be managed successfully with the patience and flexibility of both partners. Usually, however, one of the partners must play the dominant role to steer the business to success.

The most critical decision in a joint venture involves the choice of a local partner. For that reason, joint ventures are often compared to marriages. Likewise, joint ventures frequently end in divorce when one or both partners conclude that they could benefit more by severing the relationship. In EMs which are relatively unfamiliar to multinationals, the importance of partner selection is further highlighted (Li et al., 2009). As networks and relations are very important within these markets, forming informal relations within the selection processes becomes essential.

Forming a joint venture with a local company in EMs provides multiple advantages for multinationals, such as the ability to access local know-how related to the market and the consumers. Moreover joint ventures may also provide access to networks such as suppliers or distributors and thereby contribute to the efficiency of the operation. Networks can also take the form of regulatory authorities or interest groups and the ability to leverage the local partners’ relation with such networks can significantly accelerate the multinational’s operations in the market (Hitt et al., 2000). In some cases, in an effort to protect local firms and to boost their operations, governments may demand compulsory joint ventures as a condition of entry (Onkvisit and Shaw, 2008).

Each partner enters a joint venture to gain the skills and resources possessed by the other partner. The contribution of the foreign entrant to a joint venture depends on both its own capabilities and those of the local partner, as well as the joint venture’s purpose and scope. Usually, the key contribution of the partner from a developed market consists of technology and products, and the local partner provides the knowledge and skills necessary to manage the operation. Under this scenario, both partners face risks (Rui and Yip, 2007). Alternatively, the local partner, having accessed the know-how, may default from the venture and continue operations using the knowledge gained. In order to prevent the local partner from accessing knowledge and disrupting the venture, many multinationals try to limit the transfer of technological know-how to the local partner. In such cases however, the level of contribution of the foreign investment in the local economy is restricted (Saebi and Dong, 2009). In order to prevent such occurrences, a pre-selection period becomes integral to forming a joint venture in an EM economy. Here, within the process, a multinational needs to ensure that their goals are aligned with those of the local partner and they both envision the venture as a long-term partnership (Hite and Hesterly, 2001).

In operating joint ventures, each firm takes an active role in decision making. This may include distribution, manufacturing or R&D arrangements. Joint ventures have costs for each partner but if the partners recognize that cooperation will result in better performance, they will engage. In joint ventures, the resources of a firm can improve its bargaining power, however the firms’ need to cooperate can decrease the bargaining power. The bargaining arrangements determine the conditions of the joint venture, inputs necessary, outputs expected, and the control mechanism partners need to use to ensure that benefits expected are received (Kamminga and Van der Meer-Kooistra, 2007). Especially in developing countries, joint ventures have been used to cope with uncertainties and the need to meet the demands in local markets.