According to Bucley (1991), the increasing attention towards research on various structures, control of alliances and cooperation between firms has led to enrichment of international business studies. International Business research shares the view that there is still lack of conceptual integration, as well as empirical support concerning normal operations of International Equity Joint Ventures (IEJVs) (Macharzina, 1991, p. 3). However, according to Oviat and McDougall (1994, pp. 46-56), great change has been experienced in IJVs due to shift from ownership of locations to crucial factors such as knowledge, information system, nature of coordination and management system.
According to Glaister (2004), International equity joint venture refers to alliances comprising of more than two equity partners from different countries. The principle company may hold a small share of up to 5 % in equity stake in a joint venture even though in most places it is below the minimum acknowledged of 20% of total shares. International Equity Joint Ventures (IEJVs) are formed for the purposes of satisfying certain conditions such as meeting various national social, economic and technological demands, gaining competitive advantages and economies of scale within the value chain. IEJV also assist in decreasing dependency amongst firms, as well as creating endemic market imperfections (Parkhe, 1991, p. 581). Nature of operations of IEJV has successfully guided national development and technology transfer where market access through IEJVs was preferred by governments compared to Independent Foreign Market Servicing (FMS) (Beladi and Chao, 1993, p. 184).
The levels to which partners cooperate are based on know-how and experience, as well as special working relationship that create a wide range of new possibilities hence leading towards improvement of various businesses (Vernon’s, 1983). Chung et al. (2010), give an account on various reasons associated with changes in ownership within International equity joint venture (IEJV) and the nature of effects such changes posed on performance. Chung et al. (2010) theory on IEJV challenges some theories on adaptation commonly used in describing alliances within research domains. This is done by scrutinizing partners’ responses towards initial dissatisfaction which results into rearrangement of ownership structure. However, such changes at times lead towards negative choices capable of pushing firms into downward spiral. Chung et al. (2010), continue to propose that application of controls within shared ownership leads to creation of some stability within IEJV, this is attributed to cooperative forces of mutual interdependence between partners. The level of conflict increases within the alliances in cases where power balance is breached.
Beamish and Lupton (2009, pp. 75-94), asserts that formation and operations of Joint ventures assist firms in accessing emerging markets and, at the same time, provide knowledge, capabilities and new resources. However, major challenges emerge in management due to claim of ownership by more than one parent firm. Research on performance of joint ventures (JV) done by Beamish and Lupton (2009), focuses on key implications capable of improving joint ventures, which include necessity of honesty, trust, as well as level of commitment towards success of joint ventures. Settling of disputes should focus on benefits of Joint Venture rather than individual partners; the same applies to handling managerial responsibilities which should be based on functional expertise of each partner rather than superiority in terms of resource capabilities. The same opinion is shared by Larimo (2004), who asserts that firms form International Joint Ventures for reasons that satisfy crucial areas within their business strategies.
Larimo (2004), comprehensively groups such reasons leading to formation of JVs into resource-driven, market-driven as well as risk-driven objectives. There are also a number of benefits associated with JVs based on market entry modes despite firms being exposed to greater risk on resource commitment. Additionally, Intercultural and inter-organizational management within IJVs creates some level of complexity (Luo, 1997).
Factors influencing Performance of IJVs
According to Lee and Beamish (1995), cooperation arrangements within IJVs plays a crucial role in ensuring that progressive results are obtained in the internationalization process of multinational companies. Various factors influencing general performance of IJVs have been under scrutiny within the domains of strategic management. The research done on IJVs basically considers structural, operational as well as environmental domains. Additionally, successive comprehensive research that has been done resulted into cumulative knowledge concerning strategic management within equity joint ventures. Such qualitative literature reviews have enabled provision of valuable knowledge used in the construction of required theory surrounding the subject on IJVs. In such cases, meta-analysis is used for the purposes of estimating authentic empirical relationship existing amongst variables and at the same time exposes conflicting results if any.
Reus and Rottig (2009), conducted first meta-analysis research based on International Joint Ventures where they examined several independent variables considered within domains of strategic management. These variables comprised of hierarchical control, nature of conflicts between partners, various cultural differences as well as existing level of commitment amongst partner firms. The same analysis is applied in this research for the purposes of establishing various factors responsible for IJV performances. According to Dyer and Sigh (1998), there are several contending or dissimilar objectives, varied management practices, or conflicting government policies and business traditions existing within the domains of international trade. The choices made by parties involved in joint ventures are very important to consider in such a case. According to Dyer and Singh (1998), major significant factors include; the need for sincerity, trust and dedication, conflict resolution mechanism focused on fostering agreements within Joint Venture partnership.
Strategy management has drawn the attention of many scholars who have attempted to explore differential performances of various firms (Rumelt, Schendel & Teece 1991, p. 22). Firm’s competitive advantage likely translates into productivity based on the kind of strategies implemented. Such a view is based on the idea that the gap in company accomplishments is basically as a result of heterogeneity as opposed to that of trade organizations (Barney, 1991; Rumelt 1984, 1991; Wernerfelt, 1984). Companies with abundant resource capabilities gain exceptional capacities that are considered to be uncommon, un-alterable and hard to emulate hence capable of gaining competitive advantage over their counterparts within the same market (Barney 1991; Dierickx and Cool, 1989; Rumelt, 1984). The industry structure and Resource Based View greatly contribute towards the knowledge on resources and productivity (Mahoney and Pandian, 1998). However, proponents of Resource Based View theory assert that competitive advantage emanates from assets and abilities within company’s possessions and nature of organization structure in use (Barney 1986).
Theories used for Researching IJVs
Research done by Robson et al., (2002) on IJVs literature implicates major theoretical paradigms applied in the process of explaining organizations, various operations and outcomes within joint ventures. Amongst theories used within empirical studies are transaction cost theory, resource-based view as well as organizational learning perspective which have been used in development of various hypotheses surrounding IJVs operations (Nippa et al., 2007). Transaction cost theory (TCE), is usually applied in the process of verifying economic dynamics within market environments and nature of governance structures (Glaister, 2004). Application of Transaction cost theory framework within IJVs calls for appropriate control and management of governance structures for success of partnerships (Nippa et al., 2007).
Reus and Rottig (2009), researched on the effects of various variables such as hierarchical control dealing with partner conflicts, cultural differences, as well as level of commitment. However, Beamish and Lupton (2009) consolidated additional variables from their findings that were considered as impact factors on IJVs performance, these include; effects of prior experiences, relatedness, level of trust between partners and compatibility of partner goals.
Effects of relatedness between partner firms
Business relatedness between firms forming joint ventures can be described based on industry-product or kind of technology utilized and also nature of vertical linkage within value chain. According to Luo (1997), product relatedness existing between parent firms and IJVs has greater influence on the venture economies of scale, as well as productiveness within transaction costs. Such relationships influence level of productiveness of IJV’s within either domestic or international markets since it determines the extent to which a joint venture can utilize existing experiences within the industry, existing expertise, establishment of distribution channels and production facilities (Luo, 1997).
Organizational learning theory asserts that existing differences between partners in a joint venture based on business operations should be used positively in transfer of beneficial knowledge (Larimo, 2004). On the other hand, interdependence within vertical linkage existing between parent firm and IJV is important. According to Child and Yan (2003), it is possible for parent companies to reduce various uncertainties which may occur within local markets and distribution systems based on their abilities to absorb significant share within IJV output.
However, there are divergent views on performance based on empirical findings of IJVs and parent firm’s relatedness. Pangarkar and Lee (2001), in their research reveal that there is no sufficient evidence supporting relationship between supplier-buyer relationship and the level of performance IJV can achieve. However, on the same note, Lu and Xu (2006), in their research reveal that there is significant positive impact on relatedness between parent firma and IJV based on sales and survival rates.
Strategic management within JVs
According to Barney (1991), firms which are capable of accumulating resources in the international market and, at the same time, operating based on unique principles and strategies usually achieve competitive advantages over other competing firms within the same market. Such a firm is considered as primary unit of analysis based on Resource Based Value theory. At times, firms fail to achieve expected returns due to poor network of relationships and communication within the industry of operation. However, firms in supports of RBV uphold the fact that competitive advantage is usually a result of resource capabilities emanating from parent firm having unique capabilities. However, higher productivity levels can be achieved within value chain through collaborations which enable the firms to have a competitive advantage over other firms.
Management of joint ventures and parent firms shares same criteria for assessing performance. This is done through evaluation of company’s objectives and strategic goals. Various performance indicators within joint ventures should be outlined through implementation of appropriate business processes (Yan & Zeng 1999, p. 399). At the same time, performance of joint ventures can be assessed through means such as process performance and outcome performance. Process performance is associated with ways through which managers handle arising issues within the course of business operations. Nature of outcome performance can be realized through financial performance, for instance profitability levels (Arino 2003, p. 311).
Firm’s relatedness based on assets
Amit and Shoemaker (1993) contend that in order for a state of rent to occur then there has to be specialization of assets. Strategic assets are naturally specialized for the purposes of attaining competitive advantage within markets of operation. However, companies should concentrate on their areas of specialization since this makes it easier for differentiation purposes. In pursuit of competitive advantage, companies develop assets congruent to goals of formed IJVs (Klein, Crawford & Alchian, 1978; Teece, 1987). This shows that firms are capable of attaining significant output growth through specific business ventures (Perry, 1989). According to Williamson (1985), there are three categories of asset specificity i.e. location specificity, physical asset specificity, and human asset specificity. He defined site specificity as progressive output phases that are stationary in character and are adjacent to each other. Preceding analysis indicates that site- specific ventures can significantly decrease the expenses involved in moving commodities as well as that of keeping stock.
There could also be reduction in expenses incurred while managing actions (Dyer, 1996a). Williamson (1985), refers to physical asset specificity as to business specific principal ventures that adapt procedures to actual exchange between partners. Physical asset specification permits separation of commodities and could be used in improving value of the product (Clark and Fujimoto, 1991; Nishiguchi, 1994). For example, Asanuma (1989) asserts that relation – specific ability initiated amongst Japanese merchants and their motor vehicle manufacturers was responsible for the extra income and competitive advantages for the partnering companies.
Dyer (1996a) gives good example encouraging connection between relation – specific ventures and accomplishments existing between the motor vehicle manufacturers and their suppliers. Saxenian (1994) discovered that Hewlett Packard and other companies within the Silicon Valley enhanced productivity by adopting enduring partnerships with neighboring suppliers. The author asserts that proximity in advanced technology enhances alliance production capabilities. Many researchers have proven that physical proximity developed through site – specific ventures ensures company collaboration and coordination that increases accomplishments (Dyer, 1996a; Enright, 1995; Nishiguchi, 1994). Parkhe (1994) discovered that dedication of “non ventures” in a test of strategic alliance was absolutely related to performance. The analysis implies that relational rents attained via relational specific ventures are fulfilled by way of minimal total value chain expenses, advanced commodity separation, lesser imperfections and quicker manufacturing Processes.
Recent researchers have revealed that the necessary and sufficient condition for maximum realization of rents is the specialization and accumulation of assets. Ideally, many strategic assets have been found to be specialized (Amit & Schoemaker 1993, p. 39; Klein, Crawford & Alchian 1978, p. 302; Teece 1987, p. 215). Firms gain in terms of productivity through investing in relation-specific assets within shared value chain (Perry 1989, p. 190; Dyer & Singh 1998, p. 662; Williamson 1985, p. 302).
According to Williamson (1985, p. 302), specificity according to site relates to the location of immovable stages of production close to each other. This kind of investment is mainly preferred by IEJVs since it minimizes the cost of transportation and inventory, in addition to limiting the costs incurred when coordinating the related activities (Dyer 1996, p. 276). On the other hand, specificity according to physical assets relates to capital investments that aim at customizing processes to fit the needs of the associated firms. These capital investments are transaction-specific and they foster product differentiation, thus, enhancing quality of products (Clark & Fujimoto 1991, p. 156; Nishiguchi 1994, p. 302). Lastly, specificity according to human asset relates to the skills, expertise and talents that have been acquired as a result of long term relationships. For instance, the relationship created between a committed supplier and a dedicated buyer. Through constant interaction, IEJVs can be created that will result in the quality of products enhanced in addition to the speed of completion of the processes (Asanuma 1989, p. 23; Dyer 1996, p. 279; Klein, Crawford & Alchian 1978, p. 302).
Due to the fact that a number of investments have fixed cost, group of firms working together need to assess and evaluate the expected returns on the investment after the number of years it is expected to pay back, or after the period of the contract elapses. Dyer (1997, p. 542) in his work pointed out that the Japanese automakers preferred to invest in durable relation-specific assets because of the long duration of the contract. On the other hand, he also pointed out that the opposite was true in the US whereby the suppliers were very reluctant to invest in relation-specific assets which had a longer length of contract. Therefore it can be deduced that when the length of the contract is long enough to care for opportunism, more relational rents will be generated from the invested relation-specific assets, and vice versa (Dyer & Singh 1998, p. 664).
One of the factors that limit the ability of associated firms to generate sufficient rents is the scale and the scope of transactions between associated firms. Large firms with greater economies of scale have the potential to raise the level of their production by preferring to work with specialized assets as opposed to utilizing general assets. Firms in partnerships also have tendency of increasing the size of transactions between them, thereby improving the level of efficiency that is connected to inter-firm interactions. When such interaction between partner firms continues, stable relationship between firms is created, making the firms invest in specialized relation-specific assets (Williamson 1985, p. 226). Therefore, it can be pointed out that the frequency and the size of interaction amongst partner firms determine their ability to make efficient relational rents (Dyer & Singh 1998, p. 664). However, the length of the payback period and the size of interactions amongst the partner firms influence JVs ability to make relational rents.
Formation of Joint ventures
The ability of a firm to access relevant and timely information determines its ability to locate and assess firms with complementary assets and resources. Under normal circumstances, the access to information is determined by the kind and level of firm’s network. A firm with wide network is better placed in terms of access to quality information compared to firms with smaller network. Position of firms within marketplace is determined by the kind of network it enjoys and its ability to access information, since development of communication network determines nature of market ventures within business allies (Mitchell & Singh 1996, p. 33; Walker, Kogut & Shan 1997, p. 123).
Basis of the formation of IEJVs
This article explores various aspects involved in management of joint ventures with regard to performance assessment, management of information, control, management of cultural differences and valuation of performances. Management of joint ventures involves adjustment of several tasks from partners involved for the purposes of distributing shares amongst partners. For international joint ventures, partners from developed countries prefer owning major stakes based on percentage contributions. Partner firms are always chosen with regard to their resource endowments and capabilities. However, Joint ventures have direct effect on economies of countries of operations. This is based on percentage of revenues generated and level of employment opportunities created. According to the study, equity venture is used to refer to a situation where joint venture is owned by more than one parent firm. Research reveals that Joint ventures have capability of boosting firm’s abilities of gaining complementary resources, thereby improving its economies of scale. In addition, the firm’s ability to innovate new products is boosted through shared knowledge within JVs. International joint ventures guide foreign firms in the process of penetrating local unfamiliar markets (Dyer 1996).
Cooperation from each partner ensures that all relevant complementary resources are shared amongst parent firms. Whenever a firm is looking for a potential partner, it is necessary for the firm to consider its overall objectives and goals. This enables potential partners to be in a position to evaluate business worth of other partners. International joint ventures have an upper hand when it comes to transfer of technological capabilities when compared to non-equity alliances. This is attributed to the fact that personnel involved are accountable for every action and can be utilized at various capacities within the JV (Dyer 1996).
There are always a number of difficulties involved in the process of managing joint ventures, especially when partners have divergent objectives. It is highly recommended that firms involved in partnership should craft governance decisions during the initial stages of negotiations. Partners have to agree on division of managerial slots, as well as on equity ownership. In addition, performance of joint ventures is highly boosted based on level of contributions from foreign companies in developed economies (Dyer 1996).
The development of relation-specific skills between parties is very influential in enhancing competitive advantage and generating profitability. In fact, the relation-specific investments and the performance of the firm are positively correlated. Creation of a healthy relationship between firms and their suppliers also has an effect on the overall performance of the firm; thus, the performance is bound to increase (Saxenian 1994, p. 101). Location of firms also determines overall performance of JVs. For instance, firms located next to one another develop inter-firm cooperation, which in turn improves quality of their products (Dyer 1996, p. 278; Enright 1995, p. 112; Nishiguchi 1994, p. 312). Efficiency in product development, product differentiation, and reduced costs within value chain enables relation-specific investments to give rise to relational rents. It can therefore be stated that higher relational rents are achieved when there is a good partnership between firms with regard to their investments.
Inter-firm knowledge sharing routines
Researchers have pointed out to the fact that through inter-firm learning, firms are able to achieve competitive advantage at a faster rate. Indeed, firms normally learn through continuous interactions with other partners within the JVs (Levinson & Asahi 1996, p. 54; March & Simon 1958, p. 202; Powell, Koput & Smith-Doerr 1996, p. 123). Innovations within firms can be attributed to ideas from both, customers and suppliers (von Hippel 1988, p. 37). Firms that constantly share knowledge with partner firms, suppliers or customers are likely to be innovative as compared to those operating individually. The process of knowledge transfer is therefore very instrumental in fostering innovation. Building a network is the first step towards realization of the process (Powell, Koput & Smith-Doerr 1996, p. 123). In the same study, Powell, Koput and Smith-Doerr (1996, p. 123) argue that firms dealing with biotechnology with in-efficient networks find it very difficult to gain competitive advantage. The inter-firm knowledge sharing routines mainly deals with firms working in an alliance. Actually, the firms will realize higher relational rents when they focus more on inter-firm learning (Dyer & Singh 1998, p. 665; Grant 1996, p. 379).
There are various ways in which partner firms can form knowledge sharing systems that can enable individual firms to have a competitive advantage. This enables generation of maximum relational rents. Knowledge can be classified into two groups; information knowledge, and technical know-how (Grant 1996, p. 379; Kogut & Zander 1992, p. 386; Ryle 1984, p. 230). Information knowledge is the kind of knowledge that shared without compromising its reliability. The elements of information are facts, sayings, and signs (Kogut & Zander 1992, p. 386). On the other hand, technical know-how is associated with the kind of knowledge that is unspoken, adhesive, multifaceted, and difficult to classify (Kogut & Zander 1992, p. 386; Nelson & Winter 1982, p. 145; Szulanski 1996, p. 32). The nature of technical know-how (i.e. unspoken, multifaceted and adhesive) makes it so difficult to copy and transmit. These attributes can also mean that technical know-how can provide competitive advantages that last for a longer period. Taken this into consideration, partner firms that are good at transmitting know-how are bound to perform better than other competing firms which do not transmit know-how.
Firms are able to capitalize on external sources of knowledge when it already has pre-existing knowledge and also when the recipient can easily cooperate. This is whereby the recipient is in a position to comprehend information given and appreciate its significance, incorporate it and practice it for business purposes (Cohen & Levinthal 1990, p. 128; Dyer & Singh 1998, p. 665).
The ability of a firm to comprehend and appreciate the significance of the knowledge is called the absorptive capacity of the firm. This capacity varies from one firm to another. Firms working as an alliance have a better absorptive capacity; their absorptive capacity depends on the amount of knowledge base available from all the firms, and the level of interaction routines that control the concentration of interactions. The receiver, on the other hand, will decipher and incorporate the knowledge of the firm only when the firm has a big knowledge base that corresponds to the knowledge of the source (Mowery, Oxley & Silverman 1996, p. 82; Szulanski 1996, p. 37).
The absorptive capacity of the alliance firms can be greatly boosted when the firms plan efficient inter-firm knowledge sharing routines. This will in turn increase the level of social communication and collaboration. The information sharing routines are very essential due to the fact that the transfer of information through technical know-how encompasses a repeated process of information exchange. The exchange of information in this kind of set up will be more successful when the partners are directly connected and continuously engage in face to face communication (Arrow 1974, p. 281;Szulanski 1996, p. 38). The framework that guides the inter-firm learning should support the process of sharing knowledge through the incentives. The incentives can be either formal or informal. Equity arrangement is an example of formal financial incentive. It has been identified by scholars as the best option in terms of incentives due to the fact that it highly encourages the transfer of knowledge between firms (Mowery, Oxley & Silverman 1996, p. 83).
In a typical example, the production networks within Toyota Company and General Motors Company are compared and contrasted with the purposes of exhibiting how inter-firm knowledge learning can contribute to inter-firm competitive advantages. With regard to Toyota Company, there is a framework that is in place to ease the transfer of knowledge between the company and the suppliers. The transfer of information between management and suppliers is crucial for effective publicity (Nishiguchi 1994, p. 316; Dyer & Singh 1998, p. 666). In addition, the Toyota Company normally conducts exchange program whereby they take some of their staff to the suppliers so that they can integrate and practice the new knowledge acquired. Finally, the staff members from Toyota Company already know the kind of knowledge that would beappropriate for the supplier, paying attention to the absorptive capacity.
On the other hand, General Motors Company always maintains their innovations with regard to the stipulated rules. Many scholars have acknowledged this as the appropriate way for firms to generate relational rents. Unlike the Toyota Company, the General Motors does not have a large network base of suppliers, thus, the process of inter-firm learning is quite affected. The company does not send its personnel to the suppliers like Toyota does. Their suppliers, on the other hand, avoid knowledge sharing as they consider it to be expensive. Thus, it is worth noting that there is much interaction between the Toyota Company and its suppliers than it is for General Motors Company and its suppliers (Dyer & Singh 1998, p. 666; Dyer 1997, p. 554).
Complementary Resources and Capabilities
According to Tripsas (1997), there is a need to analyze nature of technological changes within JVs, their responses in terms of production, as well as market orientation. Creative destruction process is an important aspect which determines firm’s capabilities and nature of its complimentary resources. New entrants within industries usually operate based on new technological innovations which enable production of superior products hence displacing veteran firms. Several factors influence the nature of performance of firms within the market, these include factors such as development of new technologies, capabilities within technical aspects, as well as availability and adequate utilization of specialized complementary assets. However, there exists defined relationship between firms based on technological changes and competitive positions creating some importance in knowing benefits of innovation within product markets. The level of investment on new technology by firms is determined by its sustainable nature where there is potentiality of the technology to meet needs of existing customers. Incumbent firms are known to posses dynamic abilities capable of developing and utilizing new resources. This gives them adequate capacity required for development and adaptation of its key competencies within defined period of time.
Adequate resources are a prerequisite for any firm aiming at capturing significant market share. Previously, the majority of firms formed alliances with the aim of gaining advantage over market penetration. It is often easier for firms to strategize on specific markets based on corporate management (Anderson 1990; Smith, Carroll & Ashford 1995). Lately, there has been heightened interest to associations existing among firms. In occasions where scholars overtly examined the means by which companies teamed up to create fiscal rents, interest has been inclined towards exact gains resulting from partnership (Dore, 1983; Dyer, 1996a; Hamel, 1991; Larson, 1992; Powell, Koput, &Smith-Doerr, 1996; Teece, 1987).
There are a number of essential trade-offs that firms make in the process of undertaking activities within IEJVs. Various organizational mechanisms are involved in the process of engaging firms in exploration and exploitation of available knowledge. It is important for managers to highlight merits on balancing conflicting needs based on exploration and exploitation within firms. Theory and evidence have been provided to assist in filling the gap that exists in organizational learning and, at the same time, demonstrate the kind of balance existing across domains. Knowledge concerning market trends is used in generating appropriate strategies applicable in exploration and exploitation of resources (Lavie and Rosenkopf, 2006, pp. 797-818). According to research done by Park et al. (2002), exploitation alliances are majorly formed by resource-poor firms, especially within unstable industries. Exploitation and exploration have been considered as value-adding activities to Joint Venture processes. Explorations are associated with knowledge-generating research and development alliances while exploitation relationships are considered as knowledge-leveraging marketing alliances. Exploration can be based on either attributes or structure, whereby structure exploration refers to decisions made based on new partnership agreements. While attribute exploration refers to a situation where formation of JV’s is based on organizational attributes that seem to be different from those of former partners.
At times, firms form alliances for the purposes of exploiting existing knowledge as well as exploring new opportunities. There are several value-chain functions that partners serve within alliances. Usually, engaging partners in research and development activities enables creation of innovative technologies leading to exploration. Such exploration partnerships enable creativity within upstream activities of value chain and this is appropriate for development of new knowledge. On the other hand, commercialization and application of already available technologies lead firms towards exploitation. Such conditions characterize downstream activities such as marketing which enable utilization of existing capabilities based on explicit knowledge. Knowledge of network positions of a firm’s partners is an important aspect to consider in exploration-exploitation domain.
There are instances where firms form additional alliances with already existing partners, this enables exploitation and, at the same time, presents opportunities where existing relationship is reinforced based on current knowledge base. Such collaborations ensure adequate flow of information amongst firms hence efficiency of collaboration easily realized (Lavie, 2006).
Efficient knowledge management within IEJVs
In order for any organization to have a competitive edge, there has to be an efficient way of managing and evaluating its knowledge and capabilities. In this case, knowledge is in terms of human capital. In addition, knowledge can encompass customer value and the market knowledge. Capability in this case is in terms of the quality of the production process and the expertise available for research and development. Actually, joint ventures have an added advantage when it comes to accessing new and fresh knowledge. In addition, they have a similar advantage to gain from the existing knowledge (Beamish & Lupton 2009, p. 81; Inkpen & Crossan 1995, p. 602; Shenkar & Li 1999, p. 137). For international joint ventures, there is free flow of knowledge amongst partners, when compared to wholly owned subsidiaries. In the same way, capabilities are easily crafted in international joint ventures. The local knowledge access for international joint ventures has a long term effect of improving the performance level. Learning and transfer of knowledge boosts the competitive advantage of the joint ventures.
The main reason why multinational firms form partnerships with the local firms is to have a right of entry into emerging markets. Such moves boost the process of locating and identifying with cultural set-up and traditional values (Beamish 1987, p. 26). In order to meet this goal, international firms often exchange knowledge with existing joint ventures with the aim of expanding market for their products and services. In central Europe, wholly owned subsidiaries have worked together with international joint ventures to transfer knowledge of the local firms in order to access the markets (Fahy et al. 2000, p. 72). The process of knowledge transfer in international joint ventures is not that smooth as there are some factors that influence it either directly or indirectly. The local subsidiaries or firms should have the desire and the urge to receive the knowledge from the international joint ventures. In addition, the capability and readiness of international joint ventures to transfer knowledge is also an influencing factor in the process of knowledge transfer. Therefore, for learning to take place, there has to be a motivation to learn.
International joint ventures have an upper hand when it comes to the transfer of technological capabilities when compared to non-equity alliances. The main reason for this is that personnel can be easily transferred into a joint venture as opposed to transferring personnel’s implicit skills and capabilities from one firm to another (Inkpen & Beamish 1997, p. 183; Mowery, Oxley & Silverman 1996, p. 83). Many researchers have pointed out to the fact that there is more learning and knowledge transfer in joint ventures as compared to other forms of alliances. This can be attributed to high quality of personnel hired in the joint ventures (Hill & Hillriegel 1994, p. 598).
Protection of rights within IEJVs
In as much as knowledge transfer provides great benefits to the joint ventures, it is incumbent upon the partner firms to protect their secrets, especially information dealing with their intellectual property rights. There are fewer patents associated with joint ventures that have been established in new or emerging business environments. This is due to the fact that the technology is ever changing. Firms often tend to use joint ventures within risky business environments where there is uncertainty regarding future investments. Therefore joint ventures provide resource capabilities when handling risky situations within the market. The level of knowledge transfer is dependent on the level of trust developed among the partner firms. This trust may at times take a longer time to develop. This is the reason why some firms rely on research institutions or universities to gain knowledge regarding the latest advancements in technology (Hill & Hillriegel 1994, p. 598).
When partner firms get valuable knowledge from other firms within joint ventures, the recipient firm will have an added advantage as a result of the new knowledge gained (Inkpen & Beamish 1997, p. 183; Beamish & Lupton 2009, p. 81). The main reason why firms are in so much pursuit of knowledge is to out-match their competitor firms and have a higher competitive edge. This competition between partner firms is not healthy for smooth existence of joint venture since it reduces the level of cooperation, thus capable of creating some level of instability. Consequently, instability within joint ventures is not a good sign due to the fact that knowledge transfer in the joint venture is expensive based on resource utilization. Instability therefore interferes with the course of learning (Inkpen & Beamish 1997, p. 183). Instability in a joint venture can be caused either by the type of knowledge received in the joint venture, and also by the way the joint venture obtained that knowledge. Other studies have pointed to the fact that when the process of knowledge transfer from parent firm to partner firms has been successful, then the performance of the joint venture improves (Inkpen & Beamish 1997, p. 183).
Knowledge can be useful to a joint venture or useless to a joint venture depending on how it is utilized. This is dependent on the nature of industrial sector within the country. in addition, activities within countries dictate whether the knowledge gained by a firm is useful or useless. As an illustration, many Chinese firms mainly seek for information regarding access to technologies within foreign markets as opposed to seeking for information regarding managerial skills (Shenkar & Li 1999, p. 136). With regard to access to this information, the Chinese firms have over the years managed to penetrate the new foreign markets of their partners. In addition, Chinese firms have advanced their technological capabilities which have improved the standards of their products. Therefore, whenever the Chinese firms want to expand, they always partner with foreign firms highly established and having strong position and experience in the market. Firms seeking improvement of their level of profits normally seek for partners with more power within the market (Hennart, Kim & Zeng 1998, p. 388).
Transfer of knowledge amongst partner firms normally brings them to the same level. In this regard, firms share the same capabilities hence becoming more identical. But for the joint venture to operate efficiently, each partner should focus on exploiting its capabilities so as to complement the capabilities of other partner firms (Arino 2003, p. 311). Partners in a joint venture should have complementary capabilities and knowledge so that they can blend well. The process of sharing inter-firm knowledge is also based on the level of trust among the firms. For international joint ventures, some firms withhold their knowledge to benefit within the local market (Arino 2003, p. 311; Beamish & Lupton 2009, p. 82). Both trust and support from the international partners can raise the performance of the firm. Joint ventures should also work on developing the knowledge acquisition skills among the firms. For these skills to be developed, firms require ample time and patience. For international joint ventures, these skills are shaped through constant and extensive visits to foreign markets (Hennart, Kim & Zeng 1998, p. 388).
In as much as joint ventures can transfer knowledge from one firm to the other, the partner can gain information whenever other party willingly provides it. It is therefore required that firm managers clearly define the mode of knowledge transfer when negotiating the terms of contract. Access to fundamental knowledge contributes to the stability of the joint venture. Firms should also gather and code information with regard to the management systems. Firm managers should be highly skilled and informed by adequate corporate experience. Business success of the joint venture greatly relies on how the business manages access the knowledge. International joint ventures are known for adequate knowledge and information transfer. Knowledge management for joint ventures is not an easy task; partner firms should therefore handle this transfer with professionalism and care. The firms should also make investments in areas that can boost their pursuit in search of knowledge.
Complementary Resources and Capabilities
A firm can earn relational rent by controlling corresponding resources of partner firms. In other cases, firms are required to utilize their resources together for the purposes of generating relational rents. Before firms come together to form alliances, they have to engage each other and discuss the way forward on how to handle complementary resources and capabilities. A complementary resource is a major ingredient used for generating rents for firms working jointly (Hill & Hellriegel 1994, p. 600; Shan, Walker & Kogut 1994, p. 389). Complementary resource is used to refer to typical resources of partner firms that produce more rents (when used jointly) than the sum of what the firms can generate individually. These complimentary resources can only generate the required relational rents when each partner firm does not acquire more related resources in a subordinate market. Complementary resources are always indivisible in nature; this itself is a motivation for the firm to partner and form alliances and have the freedom to use the resources. When firms form strategic alliances, they are able to obtain relational assets, proficiency, or skills that they cannot get in markets that are highly competitive (Oliver 1997, p. 707).
By exploring the attributes of close market relationships, there are signs that point to relational advantages. Markets where firms are closely related have several attributes some of which include; non-specificity of asset investments, limited flow of information from one firm to the other based on prices, each firm functions independently and never works jointly in the process of creating of new products, and the transaction costs are relatively low and firms do not largely invest in governance (Williamson 1985, p. 281).
With regard to attributes mentioned above, firms find the process of changing trading partners practical without facing heavy penalties due to homogeneity of products. Close market relationships are therefore considered unable of creating maximum relational rents. This happens since traders in the market cannot realize above average profits. Buyers in such cases come to the realization of differential advantages when their bargaining power is at maximum (Dyer & Singh 1998, p. 662). This framework therefore points to the fact that firms that work together in groups can achieve maximum competitive advantage if and only if they shift connection away from known characteristics within market associations. Scholars have revealed that competitive advantages which accrue to business associations can be categorized into four groups namely; those focusing on relation-specific assets when it comes to investments, sharing of knowledge through joint learning, putting together complementary resources with aim of creating new and exclusive products, and relying on effective governance for the purposes of keeping transaction costs lower than that of competing firms.
In this literature review, relational rents are considered as revenue realized jointly by firms working together; and cannot be realized by single firms operating individually. Consequently, higher relational rents can be achieved when firms cooperate when working together by investing in relation-specific assets, sharing knowledge through joint learning, putting together complementary assets with the aim of creating new and exclusive products, and relying on effective governance for the purposes of maintaining transaction costs at the lowest level possible.
Utilization of complimentary resources within IEJVs
One illustration that shows how rents can be generated through complementary resources is the relationship between the Coca-Cola Company and Nestle Company, whereby the main aim was to oversee the distribution of hot canned drinks via retailing machines. With regard to this relationship, both brand names associated with Nestle Company, (i.e. Nescafe and Nestea) were pooled together with the capability to manufacture the finest tea and coffee. These are all supported by the large network of distributing outlets of the Coca-Cola Company (Hamel & Prahalad 1994, p. 187). This partnership between Coca-Cola Company and Nestle Company presented competitive advantages over the closest competitors, like Suntory, which is based in Japan. Suntory does better than Coca-Cola Company in terms of production of tea or coffee. It also has a bigger distribution outlet than Nestle Company, but still cannot be compared to the strength of the association between Coca-Cola Company and Nestle Company in terms of resource capabilities.
Cross-border partnerships have also been on the rise. One factor that has contributed to this is the complementary of resources, both for the firms and for the home country. A study was conducted in the US with regard to this, and the results revealed that both the local and foreign firms relied on complementarity resources to achieve cross-border alliances. In this relationship, each partner in the alliance brought in a good number of resources. These resources when combined together summed up to a massive number of valuable and scarce resources that the competitors could not copy. In addition, resources enable alliances to develop a stronger competitive advantage which the firms cannot attain individually.
In as much as the complementary resources are positive for the firms, it presents some challenges that hinder the firms from meeting the objective of achieving the maximum relational rents. Problem arises when firms strictly search for partners with similar needs. In addition, a firm which has great strength will have the capacity and freedom to evaluate and choose specific firms that have required potentials to match them. In this regard, many firms are short changed and hence left without any potential partners (Gulati 1995a, p. 623; Walker, Kogut & Shan 1997, p. 123).
Consequently, many firms have innovative methods of verifying the capabilities of firms before forming alliances with them. They achieve this by monitoring the potential partners. With regard to this, big firms in the corporate world like Microsoft or Xerox have created departments for strategic alliances within their organizational structure to oversee the screening and verification of potential partner firms. In addition, the department assists in managing and monitoring the already existing alliances. Major benefits of these departments are that they foster accountability in the process of selecting potential partners and managing or monitoring the already existing alliances (Singh & Zollo 1997, p. 140; Dyer & Singh 1998, p. 668).
Previous researchers have pointed out to the fact that the main reason for the lack of success of alliances or acquisition is attributed to incompatibility of partner firms. These firms may have different opinions regarding the decision making process. In addition, the existence of divergent culture and the lack of complementary of strategic resources have also contributed to this failure (Buono & Bowditch 1989, p. 136). The level of compatibility among the partner firms will boost their potential to generate maximum relational rents given the complementary resources associated with them. In a nutshell, strategic complementarity, in terms of resources and organization, plays a bigger role in helping the firm to generate the maximum relational rents (Doz 1996, p. 73).
Companies stand good chances of exploring unchartered markets, gaining expertise, acquiring new abilities and assets by entering joint ventures. However, it may prove to be difficult to administer joint ventures owing to the ownership structure that may involve more than one institution. There may be dissimilar objectives, varied management practices, or conflicting government policies and business traditions in case of global trade. Companies engage in Joint venture arrangements so as to develop inventive commodities and services. Whereas many countries have done away with constraints associated with alien proprietors by involving local partners, global joint ventures constituted a significant part of foreign access and investment. Equity joint venture can be defined as two separate businesses that lawfully belong to more than one partner companies.
The principle company may hold a small share of up to 5 % in equity stake in a joint venture even though in most places it is below the minimum acknowledged 20% stake that would give the venture control. Companies are facilitated to use resources and abilities of their partners so as to attain an appropriate level in the playing field and create innovative commodities rapidly, consistently and at a low cost which is an achievement that can not be attained by a single entity working autonomously. The significance of native allies in an international joint venture is replicated when alien companies find their way through foreign trade customs and rules, and from time to time advance a company’s reputation in the local market. It is worth noting that Joint Ventures is more favored compared to other strategic alliances.
Whereas licensing, contracting and other non-equity strategic partnerships are also considered to be alternative avenues of acquiring resources from other firms, they are not perceived as the most favorable. The alliance with a native company enables a foreign firm to do better than a wholly owned subsidiary in an extremely doubtful market. There is a higher chance of gaining through equity joint ventures because of the principle amount those ties down a partner, which is not the case for non-equity alliances. The principle companies involved in partnerships develop collaborative relationships from such commitment. The benefits that come with a Joint Venture partnership cannot be replicated hence significance of Joint Ventures in the international market is mirrored by the interest that administrative researchers have accorded them (Geringer & Hebert 1989, p. 243; Beamish & Lupton 2009, p. 76).
Effective management styles
Governance is the main driving force that propels firms towards generating maximum relational rents. Effective governance influences the firm’s transactional costs and at the same time pushes firms towards engaging in advanced value creation of resources. Usually, firms involved in partnerships use related specific assets for investments for the purposes of generating maximum relational rents, however, research reveals that the more the specific assets the less attention accorded due to their limited applications. This has made general resources more preferable than specialized resources (Klein, Crawford & Alchian 1978, p. 302). Firms engaging in several transactions normally prefer the use of efficient, cost-effective governance systems (North 1990, p. 276; Williamson 1985, p. 226). Governance is considered one of the most important aspects in Joint Ventures since most decisions influencing operations are made based on terms negotiated by partners.
Effective governance influences a firm’s transactional costs and, at the same time, pushes the firm towards engaging in advanced value creation activities based on its resources. Partner firms can use related specific assets for their investments in order to generate maximum relational rents; but it is worth noting that the more the assets become specific, the more limited its uses become. General resources are therefore strictly preferred to more specialized resources. Firms engaging in many transactions normally prefer the use of a system of governance which is cost sensitive and promotes efficiency. Effective governance can help a firm to generate maximum relational rents in two ways, for instance, reducing the costs of the transaction, and at the same time boosting value creation. Value creation can be achieved through provision of relevant knowledge required for effective combination of complementary resources.
Partner firms working in an alliance normally prefer using two systems of governance. Such systems include external and internal administration of agreements (Telser 1980, p. 27). With regard to external administration of agreements, firms require involvement of the third party or legal contracts for security purposes. In such a case, third party can be represented by either government or any relevant authority (Williamson 1991, p. 77). On the other hand, internal administration of agreements does not require third party mediations incase of trouble.
Researchers have alluded to the fact that internal administration is less expensive and, at the same time, efficiently spearhead the steady inflow of information to the firms (Hill 1995, p. 123; Sako 1991, p. 458; Uzzi 1997, p. 54). The level of trust existing among the partner firms has a direct effect on lowering the costs of transactions in terms of negotiating and administration, thus, improving the performance of the firms. With proper systems of governance, many firms will find that internal administration has an upper hand as compared to external administration. External administration is quite challenging to define, supervise and implement. A firm will generate maximum relational rents when it makes parallel its transaction costs with its systems of governance
The thread of the discussion above mainly dwells on limiting the transaction costs and improving the efficiency of the firm. The mechanisms associated with governance help a firm to generate maximum relational rents that impact the efficiency of the firm. Effective governance contributes to a higher value creation of the products of the firm. Therefore, effective governance can help a firm generate maximum relational rents in two ways, for instance, reducing the costs of the transaction, and boosting value creation. Value creation within IEJVs can be achieved through providing the relevant knowledge required to necessitate the effective combination of the complementary resources. Lower transaction costs create a competitive advantage to a firm due to the fact that the firm will highly maximize on the relational rents generated. In the same way, through effective governance, the firm can highly invest in relation specific assets, which also improves its ability to compete with other firms. Knowledge sharing among firms in an alliance is sometimes slowed down because some partner firms find it hard to share valuable information with other firms, reason being that other firms might turn to be competitors (Dyer & Singh 1998, p. 670).
In general, effectiveness of internal administration is greater than that of external administration with regard to associated costs of transactions and promotion of the process of value creation. This is due to the fact that there are no other costs involved in hiring external agents to arbitrate in cases of disputes. In addition, the operating costs are low because the firm does not hire external agents to oversee the governance. Also, internal administration lowers the adaptation costs of the complex processes of operations. In the same way, internal administration goes on for a very long time as compared to external administration that relies much on contracts that are written to last for a specific period of time, thereafter it is subject to renewal or further renegotiations (Uzzi 1997, p. 48).
Internal administration requires that the exchange partners should be involved in extensive value creation. Value creating mechanisms is not so easy to outsource, therefore, it is recommended that through internal administration, partner firms should share the relevant knowledge and resources with the aim of fostering innovation. The main motivating factor that encourages the partner firms to engage in knowledge and resource sharing is the fact that they are assured of a positive outcome out of it. External administration dealing with contract agreements cannot create a good competitive advantage due to the fact that the terms of the contract can be copied by competing partners as they can contract the same lawyer to draft the terms of contract. Therefore, when partner firms adopt internal administration as a mode of governance, there is a high likelihood that the relational rents will be maximized as a result of reduced costs of operation, reduced costs of supervision, reduced costs of adapting to complex processes of operations, reduced costs of contracts, and maximum motivation for creating more value.
The main limitation associated with informal safeguards (internal administration) is the fact that they take so much time to develop, and also the level of trust needed from the partner firms can be abused (Granovetter 1985, p. 495). Studies have shown that many firms use both the formal and informal safeguards concurrently (Borch 1994, p. 127). The firms prefer to start with the formal safeguards and then change to informal safeguards as time goes (Gulati 1995b, p. 107). Effective governance which is associated with lower costs of transactions is a good sign of maximum relational rents.
Management and control
It is always difficult to manage joint ventures, especially if the partners have divergent objectives (Hennart, Kim & Zeng 1998, p. 392). It is highly recommended to craft governance decisions during the initial stages of negotiating the terms of a joint venture. It is very crucial to make the governance decisions at this stage as it will be very hard to make governance decisions once the joint venture is up and running. Foreign participation brings about advanced processes of production and abundant knowledge, leading to improved quality of products and services.
Many researchers in the recent past have tried to find the link between the division of ownership and the performance of the joint venture. The results of these studies point out to the fact that there is a link between the spread of equity ownership among the associate firms and the overall performance of the joint venture. When there is no equal balance in terms of equity ownership, the joint ventures cannot perform better (Hennart, Kim & Zeng 1998, p. 388). In the same way, a joint venture will perform better when partner firms from developing countries owns more equity stake than partners from the developing countries. The amount of equity stake is dictated by the origin of the parent firm, for instance, the US partner firms always prefer to have a large share of the equity stake.
Joint ventures can attain a balance in terms of their governance through having each partner firm maintain an optimum level of shares that will help them obtain a maximum return. This balance of equity ownership will be subject to the amount and value of resources that each partner firm brings into the joint venture. In addition, the country of origin of each partner firm will also dictate the amount of equity ownership that should be allocated to it. A partner firm that brings in many resources to the joint venture will have more bargaining power and can be guaranteed more equity stake than for a partner firm that brings in fewer resources. For international joint ventures, any firm that owns less than 20% of the equity is an indication of lack of commitment, therefore, such a firm cannot survive for a longer period (Hennart, Kim & Zeng 1998, p. 388). The local partner can have an advantage in terms of higher bargaining power, but this advantage cannot translate to the entire joint venture.
Joint ventures should raise the level of teamwork amongst the partners, rather than each partner working individually to attain separate strategic objectives. Strategic objectives are very essential to any joint venture; the attainment of these objectives should be supported by adequate cooperation among the partner firms. An illustration of this can be seen in the partnership between Lockheed Martin and Boeing, who together formed the United Launch Alliance in order to spread the high cost of creating launch spots. With regard to this, they achieved their objective by cooperating to share the costs, and thereby compete more successfully. For the smooth governance of the joint venture, trust and cooperation should be formed and maintained. This is so due to the fact that the act of governance is an on-going concept which encompasses more learning and renewal of contracts (Hennart, Kim & Zeng 1998, p. 388).
The level of trust among the partner firms in a joint venture can be boosted by having an all-inclusive joint venture contract that brings all the partners on board. In addition, an accommodating relationship among the partner firms also has an effect in building the level of trust for the joint ventures. The satisfaction of partner firms and their level of commitment will be enhanced by trust. When the partners have a good and a favorable working relationship, their chances of meeting the strategic goals or objectives will be highly boosted. With regard to this, unscrupulous manners by the joint venture partners will be highly unfavorable. Trust, therefore, is a very important element for the survival of any joint venture. The joint ventures should work hard to build and maintain this trust (Shenkar & Li 1999, p. 141).
It is important for partner firms to clearly define whether the control of the joint venture will be under one large firm or will be shared among the partner firms. And if it will be shared, the partner firms should clearly define the criteria for allocating the powers. For international joint ventures, shared control is strictly favored over dominant control by a single firm (Beamish & Lupton 2009, p. 84). In addition, split control is preferred by many international joint ventures. This is whereby each partner will be assigned a role in which it excels the most. In most cases, split control is used more than shared control due to the fact that shared control is bound to bring up conflicts of different kinds between the parent firms and the joint venture. Various researchers have found out that partners originating from the US normally prefer dominant control as compared to partner firms that originate from China always prefer split control as they are more attracted to controlling the technology transfer (Luo, Shenkar & Nywa 2001, p. 45). Dominant control by a single firm leads to a higher performance for a joint venture. This is evident from the results of the study done by Ding (1997, p. 36) on the international joint ventures between the US and the Chinese firms.
Shared control is normally unfavorable to the international joint ventures. It should only be used when partner firms have adequate resources or capabilities which the joint venture can highly rely on for success. Before a firm agrees to joint venture, it should perform a cost-benefit analysis to deliberate on whether the expected benefits are more than the anticipated costs. If the expected benefits are less than the anticipated costs, then it will be very detrimental for any firm to form a joint venture (Beamish & Lupton 2009, p. 84).
Governance of the joint ventures also depends on the number of partner firms. More so, it is influenced by stages in the value chain in which the partners are in. Researchers have pointed out to the fact that international joint ventures with only two partners can perform much better than international joint ventures with more than two partners (Barkema, Bell & Pennings 1996, p. 165). In addition, partnerships between small firms which are established as non-equity agreements always outdo partnerships between bigger firms which start out as joint ventures.
The level of equity contributed by partner firms is based on specific factors. The first one is that the restrictions with regard to foreign ownership should be observed. In addition, bigger firms should contribute a bigger stake if the smaller partner firms cannot match the high amount of the contribution. The level of an equity stake of a foreign partner will be a carbon copy of its commitment. The level of commitment of these firms will contribute to the survival of the joint venture. In a joint venture to be high performing, it should adopt split control, whereby partner firms will be assigned to control in areas in which they excel the most. The most important element in a joint venture is how to build and maintain the level of trust. If in any case a conflict arises, the partners should find a solution that will benefit the entire joint venture rather than an individual firm.
Performance of Joint ventures
Joint Ventures are usually managed by multiple parents making overall organizational politics little more complicated. This is since there are high possibilities of parent personnel to consider other firms within the partnership as “outsiders” based on their level of commitment. Performance of joint ventures directly correlates to quality of management and nature of employees. At the same time, kind of strategies implemented by partners determines performance levels. Managers within joint ventures are endowed with responsibility of making important decisions at each section partnering process. Such decisions are crucial in ensuring that ventures perform to the satisfaction of involved partners. The kinds of decisions made during formation process of the venture plays a key role with regard to the future of the venture (Griffith, Cavusgil & Xu 2008, p. 1224). Nature of financial statements kept by the joint venture also acts as good measure of performance. In addition, joint ventures do not float their shares in the security markets, thus, the financial statements in this case become inappropriate way of measuring JV’s achievement.
Level of performance of joint ventures forms the core issue in the event that parties come together for purposes of operating joint business. Appropriate measures of JV performances becomes key issues within operational processes, these include nature of profitability, duration of operations, ability to survive and level of stability based on ownership. Other factors influencing performances of JVs include patent counts and variations within firms’ market value.
However, information regarding performances of joint ventures is usually provided by managers or third parties. The managers provide subjective information while the external sources provide objective information. Subjective information is obtained through information from managers and getting their views with regard to their level of satisfaction on overall performance of joint ventures. Objective information is provided by profitability measures of the venture (i.e. looking at the financial statements), the endurance of the venture (i.e. the number of years it has been in existence), survival of the joint venture (i.e. whether it is permanent or temporary), and the stability of the joint venture (i.e. whether there are constant changes in terms of management or ownership). Figure 1 below illustrates the nature of relevance management decisions play during partnering process.
Some scholars point out that the best way to evaluate performance of joint ventures is to rely on the subjective information. This is due to the fact that each joint venture has different goals (Anderson 1990, p. 22; Geringer & Hebert 1991, p. 247; Glaister & Buckley 1998, p. 93). Stability of the joint venture at times proves difficult to classify owing to the fact that different ventures have their own strategy interpretations. Due to such cases, there is a need for managers to critically assess level of performance of firms for the purposes of ensuring stability hence avoiding conflict amongst partners. It is important to specify measurable indicators capable of differentiating between negative and positive performances. For purposes of restoring stability some ventures might end-up terminating un-productive contracts while other ventures would consider making changes within management or ownership structure. This means that reorganization of the entire venture or reviewing contracts presents a possibility whenever negative results are anticipated (Yan & Zeng 1999, p. 402). Restructuring management of joint ventures enables appropriate adjustment within changing market environment; this ensures possibility of gaining competitive advantage and at the same time achieving economies of large scale (Gomes-Casseres 1987, p. 99). There are possibilities of joint ventures getting dissolved based on breach of signed agreements (Hennart, Kim & Zeng 1998, p. 388). At the same time, Joint ventures can also be dominated by other larger firms based on percentage of shares owned depending on performance based on level of commitment.
At times, joint ventures become short-lived hence do not achieve the set objectives. In case a parent manager feels dissatisfied with the overall performance of joint ventures, then some procedures with regard to operations of the venture might not work effectively. Therefore, the level of satisfaction of parent managers should be considered as a means of improving overall performance. Making decisions relating to performance of joint ventures by parent managers takes a long process. The managers are first required to determine whether formation of joint venture results into a worthy course. Cooperation from each partner is required for the purposes of ensuring that all relevant complementary resources are easily shared amongst the parent firms. Various firms looking for potential partners should unveil their intended objectives and goals. This enables potential partners to be in a position of evaluating the worth of other partners (Beamish & Lupton 2009, p. 80). It is not a necessity that firms partnering within joint ventures have identical objectives; what is important is the willingness of all the firms to share resources.
Secondly, all the partners have to agree on the mode of assessment of the joint venture. Mode of assessment utilized should be fully engraved in the contract signed amongst partners. In case of disagreement amongst partners, either before or after negotiation process and implementation process, a standard rule should be adhered to for the sake of continuity (Beamish 2008, p. 81; Beamish & Lupton 2009, p. 80). A joint venture is regarded as inefficient whenever one partner exploits others for its own personal gain.
Performance of the joint venture can be measured in several ways. These performance measures are different due to variations in the nature of objectives used for setting up a joint venture. Before negotiating terms with potential partners, parent firms should first agree on mode of assessing performance of joint ventures; without addressing this issue during initial stages of formation, there is bound to be lots of conflicts based on interests. In addition, objectives of joint ventures cannot be fully met when every partner is at loggerheads with others. In future, researchers should adopt several performance measures so as to provide a clear understanding of the same (Hill & Hillriegel 1994, p. 598).
Managing cultural differences
Close relationships between firms, suppliers and customers are considered as some of the most profound business strategies capable of expanding range of benefits to business parties involved in IEJVs. Firms usually form close relationships and at the same time rely on these alliances for economic benefits based on growth of existing pie of benefits. Despite the nature of benefits obtained, it is believed that close relationships are not always the same as good relationships since there are high chances such relationships would fail whether they be joint ventures or loose alliances. The concept of close relationships can be analyzed from several perspectives such as psychological, marketing, management as well as economics with each concept providing unique explanations. There is always high probability of conflicts arising in situations where parties enjoy closer and safer relationship. According to strategic management research, there are stronger indications that partners within joint ventures depend highly on each other at initial stages. However, as they proceed each party gets an opportunity of learning from one another making the relationship to become unstable and vulnerable. Such scenario is referred to as growth of opportunism by economists.
Negative side of close relationships between firms is often marked by conflict, strife, competition as well as frequent disagreements. A lack of such disagreement usually signifies that both parties are satisfied with ongoing benefits hence no apparent need for changing operational strategies. Such situations cause some level of pain in case of any arising dissatisfaction since parties involved operate in some form of initial denial. Trust between partners, at times, becomes extremely difficult to prove especially in cases where partners have difficulties in accessing vital information from their counterparts. However, some commonality existing in capital investment, human resources as well as specialized information systems makes situation of parting ways difficult. It is important for parties involved to outline preventive strategies which can be used in reinforcing relationship within the alliance. In most cases, mechanisms created by parties within the joint ventures ultimately turns to be poisonous with potential of ruining efforts made by both partners. Such mechanisms include creation of immediate benefits; there is also development of strong relationships as well as adaptation of unique processes. Anticipation of immediate benefits (whether short-run or long-run) from such close business relationships usually give parties strong foundation for sticking together. This can further be reinforced through formation of quality network capable of improving communication network hence minimizing market risks through efficient resource distribution. However, trade-off existing between short-term and long-term gains usually presents some point of controversy for many existing business relationships. This is since in cases where business relationship is based on short-term incentives; there is high possibility of partners exiting after exploiting each other. Long-term oriented partnership can also wane due to lack of motivation in case there are no periodic benefits experienced (Anderson and Jap, 2005, pp. 75-81).
Management of international joint ventures can face some level of dis-organization depending on the existing level of cultural differences. This is since there are high chances of lowering communication processes and the level of decision making within managerial duties (Shenkar & Li 1999, p. 140). Management within joint ventures should seek for appropriate knowledge capable of producing positive results within international market. In addition, international managers should have knowledge on how to work corporately with domestic firms within their territories of operation (Barkema, Bell & Pennings 1996, p. 156). According to Barkema et al. (1996, p. 156), cultural differences can at times lead to detrimental results within joint ventures in the long run. Hu and Chen (1996, p. 169) conducted their study with regard to Chinese joint ventures and found out that performances of the joint ventures are not directly proportional to cultural differences. Park and Ungson (1997, p. 302), also conducted a study with regard to the US and the Japanese joint ventures of which results pointed out to the fact that cultural difference did not have adverse effects on performance and survival of joint ventures.
As a result of these mixed results from the researchers, there is a need to closely evaluate how the various cultural attributes interrelate. Hofstede (1980, p. 203; Hofstede 1991, p. 326) pointed out that there are various cultural attributes that are associated with the performance of an individual in a firm. These attributes are improbability avoidance, long-run orientation, and uniqueness. Improbability avoidance is the level in which an individual is contented given the uncertain conditions in the firm. Personnel who have a long term commitment to the organization or a long run orientation to the organization normally consider the future when making decisions at the present time. Uniqueness is the ability of the personnel to perform exceptionally and earn recognition. When a joint venture is established in a country which has big differences in the three attributes (improbability avoidance, long run orientation, and uniqueness), then it has limited chances of survival (Shenkar & Li 1999, p. 141). Variations in uniqueness have a positive effect in terms of raising the profitability and productivity level of the joint venture.
Before negotiating the terms of a contract with a potential partner in a joint venture, managers are supposed to acknowledge the level of cultural difference. When a partner firm has low resistance to uncertainty, the other partner firm will have to work hard in terms of raising the portion of its equity stakes and bringing in new advanced technologies into the joint venture. Firms with varied long run orientation have the biggest challenge. For instance, one firm can be so much committed in meeting only the short term objectives while not having in mind the long run goals of the joint venture. This is a demonstration of a serious lack of commitment by the firm and the joint venture may not survive for a long time under this condition (Beamish & Lupton 2009, p. 87). All the partners should define which goals are more important to each firm and which ones are for the benefit of the joint venture. The difference in the uniqueness of the individuals may lead to conflicts of interests among all the unique individuals in the joint venture. On the other hand, uniqueness can be positive for the joint venture as it will trigger internal competition which will lead to the improvement of performance in various dimensions. All these issues relating to the differences in culture can be controlled and avoided. This can be achieved by adequately training managers before deploying them to manage the foreign joint ventures.
Cultural differences within organizations normally present a great challenge based on management of the joint ventures. Study done by Pothukuchi et al. (2002, p. 256) revealed that differences in organizational culture are more difficult to manage in joint ventures involving Indian firms and foreign firms. In contrast, Fey and Beamish (2001, p. 867) in their study found out that the probability of success was very high in joint ventures that shared the same organizational cultures. Differences in organizational culture have more effects on joint ventures than two firms which are related either through mergers or acquisitions. This is so because in a merger or acquisition, the management of the parent firms is independent. It is recommended that when selecting potential partner firms in a joint venture, managers should assess the in-house atmosphere of the potential partner firm and carefully evaluate if it is compatible with their own firm. If it is otherwise, measures should be taken to address this before a contract is signed (Beamish & Lupton 2009, p. 86).
Valuing a joint venture
During the formation process of a joint venture, the management team of partner firms usually keep in mind anticipated effects of the joint venture on the valuation of individual capabilities, especially when listed publicly on the securities exchange. Valuation of these firms is determined by the amount of information available to its shareholders including various processes leading towards formation of joint ventures. In addition, the level of proficiencies of potential partner firms impacts on valuation of joint ventures. Shareholders often find it very hard to value proposed joint ventures due to their inability to monitor their performances. With regard to this, many researchers have shifted focus towards evaluation of the impact created through formation of joint ventures to that of parent firms. Management of partner firms anticipates that by investing much capital or other kinds of resources into a joint venture, there are possibilities of receiving additional economic benefits
In a joint venture, value can be maximized through efficient combination of complementary resources. More value is realized when resources are consolidated than when they are utilized in separation (Beamish & Lupton 2009, p. 86). There are various factors that directly impact the market value of parent firms after the formation of joint ventures. The factors include the degree to which business orientation of the joint venture is connected to the business orientation of parent firms, the need for research and development, and the level of equity ownership.
Whenever market value of a firm changes after securing equities from joint venture, there are clear indications on whether joint ventures are valuable depending on whether the change is positive or negative. Study conducted by Reuer (2001, p. 36) indicates that when firms from the US acquire joint ventures established in research and development, there is bound to be a positive shock within international market. On the contrary, when the same firms acquire international joint ventures, the market’s reaction is negative; this is attributed to organizational cultural differences and the level of political stabilities within foreign countries which ultimately affect smooth management of investments. Joint ventures which are highly controlled from within usually guarantee the acquiring firm with a higher percentage of gain in terms of stock. This is in line with the notion held by the shareholders that the stakeholders of the joint venture have a true picture regarding the value of the joint venture (Shenkar & Li 1999, p. 137).
Investing in joint ventures proves to be reliable form of investment due to the fact that possibilities of losses are minimized while returns are maximized. The opinion of a partner firm regarding the exponential growth of the joint venture is a true picture of its real value (Beamish & Lupton 2009, p. 85). The value of the joint venture is therefore connected to its potential for growth. The value of a joint venture increases when partner firms own bigger proportion of equity stakes. In addition, when joint ventures have the ability to exploit new technologies and increase returns, its value goes up. The ownership of large equities does not automatically translate to excellent performance of joint ventures; it is therefore the duty of the management to relay information to shareholders concerning joint venture operations and expected returns.
Sources of Inter-organizational competitive advantage
Firms with massive resources find it easier to penetrate the market as it will have the ability to expand its current boundaries. In the previous decades, many firms have been forming alliances with aim of penetrating new markets. This is made easier through teamwork. Firms can network and come together to form relationships that help them gain competitive advantage. Forming alliances proves formidable because the structure and standards within market places change to the extent that no single firm is capable of managing its operations is isolation. These relationships are based on sharing complementary resources and generating maximum relational rents. The necessary and sufficient condition for maximum realization of rents involves specialization and concentration of assets. Ideally, many strategic assets have been found specialized. In order for a firm to gain competitive advantage, there is a necessity of applying extra effort and this can be achieved through forming specialized assets in tandem with the assets of the associate firm.
The development of relation-specific skills between parties is very influential in enhancing competitive advantage and generating profits. In fact, the relation-specific investments and performance of firms are positively correlated. Creation of a healthy relationship between firms and their suppliers also has an effect on overall performance of firms. Asset specificity according to site relates to the location of immovable stages of production close to each other. This kind of investment is mainly preferred because of the fact that it minimizes the cost of operations within the marketplace.
Through inter-firm learning, firms are able to achieve competitive advantage at a faster rate. Indeed, firms normally learn through continuous interactions with partner firms. Innovations that happen in firms can be attributed to ideas from both customers and suppliers. Firms that constantly share knowledge with partner firms, suppliers or customers is likely to innovate as compared firms that operates in isolation. The process of knowledge transfer is therefore very instrumental in fostering innovation. Building a network is the first step to realize this process. The primary source of new ideas to a firm is the partner firms. These new ideas or information will in the long run have an impact in the performance of the firm. Therefore, firms working together in alliance are more likely to make good rents by relying on the greater inter-firm learning. Inter-firm learning can therefore be said to be a consistent design of inter-firm collaboration and communication that allows for the transmission, dissemination and formation of knowledge. The inter-firm knowledge sharing routines mainly deals with firms working in an alliance. Actually, the firms will realize higher relational rents when they focus more on inter-firm learning.
Information knowledge is recognized as the kind of knowledge which can be shared without compromising its reliability. Elements of information include facts, sayings, and signs. On the other hand, technical know-how is associated with kind of knowledge that is unspoken, adhesive, multifaceted, and difficult to classify. The nature of technical know-how, (i.e. unspoken, multifaceted and adhesive) makes it so difficult to copy and transmit. These attributes can also mean that technical know-how can provide competitive advantages that last for a longer period. In this regard, partner firms which are good in transmitting know-how are bound to perform better than other competing firms which do not transmit know-how.
The ability of a firm to comprehend and appreciate significance of knowledge is compared to its absorptive capacity. This capacity varies from one firm to another. Firms working as alliances have better absorptive capacity; their absorptive capacity depends on the amount of knowledge base available from all firms, and the level of interaction routines that control level of interaction concentrations. The absorptive capacity amongst partner firms is greatly boosted when individual firms share good and formal relationships with each other. This enables each firm to have clear understanding of each partner in terms of their knowledge and strength. Constant interaction and information exchange amongst firms ensures adequate development of inter-firm knowledge. The amount of relational rents generated is positively correlated to the absorptive capacity of the partners; therefore, when the absorptive capacity of partners improves the level of relational rents generated also rises and vice versa.
Complementary resource endowment can be described as typical resources of partner firms within IEJVs that produce more rents (when used jointly) than sum of what firms can generate individually. These complimentary resources generate required relational rents whenever partner firm fail to acquire more related resources within subordinate market. Complementary resources are always indivisible in nature; this itself is a motivation for the firm to partner and form alliances and have the freedom to use the resources. When firms form strategic alliances, they are able to obtain relational assets, proficiency, or skills that they cannot get in markets that are highly competitive.
Strategic management within IEJVs should be restructured for the purposes of reflecting perspectives on emerging markets, key policy factors as well as location attractiveness. This would assist in moderating instability within JV’s and at the same time shift the focus to more important issues surrounding operation of JVs such as appropriate skills and higher value production. Various researches highlighted within the literature review explain differences between ownership, management and control of resources. Tension is majorly created within such areas as degree of formalization, functional dependency as well as nature of managerial procedures. There is also a discussion on the nature of consistency experienced within IEJVs over a period of time. Common mission statement, objectives as well as strategic decision making are crucial aspects required for smooth running of organizations. However, it is evident that one of the key components contributing towards IEJV performance involves contributions of parent firms. Many companies within the international market participate in joint ventures as indicated by Glaister (2004), however, it is evident that termination of such ventures is based on poor management, perpetual inefficiencies owing to principle conflicts, difficulties in adoption by parent firms and increased management costs. One of the most important and difficult negotiation points within joint ventures revolves around ownership structure.
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