Risk And Problem Associated With International Joint Ventures

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Joint ventures between the International Company and the domestic company offer lot of benefits for both the sides. The local company brings with it, the knowledge about the local conditions, managing the bureaucracies, and available manufacturing facilities. Likewise, the international company offers advanced technologies, management capabilities and access to other markets. Also for both the local and the international companies, it reduces the capital investment that they would have to make, if they decide to go alone. Both the local and the international company can benefit from each other by taking advantage of the comparative offering offered by either of them.

Though the Joint ventures seem to offer advantage to both the local as well as the international company, it frequently fails to perform or the performance seems to be unsatisfactory for most of the time. Lot of studies indicates that large percentage of Joint ventures performs very poorly. There are lot of factors that contribute to this unsatisfactory performance.

Negotiating Agreement

Agreement between the negotiating companies is very critical for the successful Joint ventures. It requires both the companies to willfully cooperate among themselves to reach a satisfied agreement. Studies indicate that negotiating the agreement takes lot of time to reach a solution but the ultimate satisfaction of the Joint venture operation lies only to a very lesser extent on the agreement negotiated.

There are two issues that are very critical for Joint venture negotiation. Equity structure is the first issue and is often the most difficult of the problems to come to a conclusion. Most often companies do not want to share or surrender the control of the organizations and in some cases even if the majority ownership is achieved, it does not necessarily confer all the control rights to all the aspects of the Joint venture operations.

The second issue is about the technology transfer from one company to the Joint venture operations. There are lot of critical factors that govern the technology transfer issue, right from what and how much of the technical knowhow should be transferred to who will have the rights to the derived technology when it is developed. There are also issues relating to royalty fees especially when the technology loses its value in the market.

Valuation Problems

Both the local as well as the international company bring financial and other assets to the Joint venture operations and it is very difficult to calculate the true value of these assets. Also some company might not have issued any shares issued and trading and in this case it becomes particularly difficult to value the assets brought in by these companies. The value of the technology brought in by the companies is also difficult to measure and value as its true worth cannot be established until it reaches the market.

Transparency

Data transparency between the companies is also very difficult to achieve during the stages of negotiation. If the accounting standards of both the companies are different, it will be very difficult to base the calculation of the assets.

Conflict Resolution

Conflicts between the companies forming the Joint venture are inevitable. Sometimes the conflict can be so high that one company might try to dissolve the joint venture itself. Hence it is very important that some sort of mechanism is established for conflict resolution in the initial stage of formation of Joint venture itself.

Management Responsibility

The chance of failure of Joint venture in which the parent companies try to manage all the aspect of the joint venture operations is high. The Joint venture’s management should be separated from the parent companies and the critical decisions needs to be best left to the management of the Joint ventures.

Ownership Structure

The Joint venture ownership structure is one critically argued point, and it affects who and how much one controls the Joint venture. The structure can be used to gain the control of the Joint venture and as such the one parent company needs to be wary of giving too much ownership to other company with whom they are trying to forge a partnership.

Marketing Issue

Marketing and the control of the distribution is also critical functionality in the Joint venture which the local company would like to have its control undiluted to have say in the operation of the Joint venture. It might also be the issue which the international company would like to gradually bring under its control to gain knowledge about the local condition and reduce its reliability with the local company. Hence there is a potential conflict between the goal of the local company and the international company which may lead to further difficulties in the operation of the Joint venture.

Multinationality Problems

International organization usually tends to have lot of joint ventures with the domestic companies and even though the domestic companies are big as per the local market but usually they will be dwarfed by the size of the international organization. The international company’s objective will be very different from the objective of the local companies and the international company would like to see the Joint ventures operate as per their global perspective whereas the domestic company would like it to operate as per the local needs. This different perspective leads to lot of problems in the Joint venture

Right to export:

International companies that have presence in lot of markets would like to limit the export capability of the Joint ventures to the countries they already serve. Allowing the Joint ventures to expand to other countries can cannibalize the existing market of the international companies in countries they already doing business with the similar products or technologies. The domestic company would like to expand to other markets through the Joint ventures for their other products. Hence there is potential for conflict in this situation.

Tax issues:

The Joint ventures can be significantly affected by the tax saving objective of the international companies. The international organization tends set objective to minimize the global tax burden. This can have its effect felt especially in Joint ventures, where the domestic company import raw materials or technology from the international company and use the international company to export its finished goods. In order to reduce the overall tax effects international company tend to manipulate its transfer prices, and which might affect the profitability of the local company.

Investment Policies:

International organization tends to increase its overall profitability and the growth and hence prefer to get the dividends from the Joint ventures rather than reinvest in the same Joint venture itself. They can use this dividend to invest in the companies that will give them the maximum return. But the domestic companies would like to reinvest in the same Joint venture to grow and expand.

Size of companies:

Size of companies has an important role to play in the way the Joint ventures are operating. The international organization tends to be larger than the domestic companies and they would want to infuse large capital for the rapid expansion of the Joint ventures, which the domestic companies would not be able to support. The international organization tends to have lot of joint ventures and hence might not give much attention to a specific Joint venture whereas for the domestic companies, the Joint ventures are critical.

Ownership Problems

The change in ownership of both the domestic as well as the international companies can affect the Joint venture. This is specially the case when the Joint venture formation is an initiative of the management which got changed. As the attitude of the new management tends to be very different from the earlier management, problems tend to rise.

Control Problems

Product line:

The interest of domestic as well as the international company varies over the period of time and their attitude towards the changing market conditions and hence one might want to continue and expand the current product whereas the other might want to remove the product.

Supply:

The cheaper raw material and better technology could become available locally, but the international company would want to continue with their supply and hence the Joint venture might become non competitive.

Technology Utilization:

The company which gives technology input, usually the international organization, would want to withhold critical technological solution, which again reduces the competitiveness of the Joint ventures or at the least reduces the profitability of the Joint venture.

Cultural Problems:

International Joint ventures are formed by the companies from different countries that have varies in their cultures significantly. Local and domestic companies might perceive things differently than what is meant and this gives rise to lot of problems. For example, corruption can be widely prevalent in one country and the company that forms Joint venture with the company from this particular country can view this as unacceptable.

Dynamic Conditions

The relationship governing the Joint venture changes over time as the market conditions and the organizations learns. For example, the international companies tend to learn more about the local conditions and might increase the control in the Joint venture. The changes in the technology might increase the control of the local company at the cost of the international company. The change in the market condition might require heavy capital infusion to maintain the competitiveness of the international organization and the partners might take different view on this matter. Hence the relationship is always dynamic in the Joint Venture

The rigid legality enforced during the formation of the Joint ventures might also lead to problem when the market condition changes. For example, if the agreement spells that the international organization will buy a percentage of the product produced by the Joint venture, and when the market condition changes, making the international organization uncompetitive in other markets due this buying behavior, this will lead to lot of problems. The renegotiation tends to be longer, the more rigid the agreement is.

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