Magazine article Ivey Business Journal Online

The International Joint-Venture: A Discussion with Professor Paul W. Beamish

Magazine article Ivey Business Journal Online

The International Joint-Venture: A Discussion with Professor Paul W. Beamish

Article excerpt

Joint ventures are becoming more common for North American companies wanting to do business in China or other Asian countries. What accounts for their popularity?

A Joint Venture (JV) can be an excellent vehicle for doing business in a foreign market, while sharing the start-up and operating risks - and profits - with a partner there. A JV can be just as profitable and successful as a wholly-owned subsidiary. There are still some managers and business leaders who believe that a JV, by its very nature, is not as profitable or easy to manage. They also believe that they may lose their proprietary technology and intellectual capital, especially if the JV fails. But research and the experience of many companies have proven these concerns can be managed.

What sort of due diligence should a firm do to determine if a JV is the best way to establish an international footprint?

Mostly it involves testing the strategic logic underlying your decision. You need to ask a series of questions that, if answered satisfactorily, will lead you on to discuss the fit, shape and design of the partnership. First, you need to ask yourself why you are discussing working together. There must be a solid underlying rationale that tells you that an equity JV makes more sense than any other type of partnership or investment, and that it will provide the required returns. Second, the two partners must be convinced that they will be able to resolve the sticky but predictable issues that may develop in a JV. These include such things as each partner's role in managing the JV, in which country the profits will be booked, how additional funding needs will be provided, etc... Adequate planning and capitalization will go a long way towards laying the proper groundwork for a successful JV.

How can they determine if a potential partner is a good fit?

You'll need to determine if the measures that you and your partner will use to measure performance are congruent. These have to be looked at from multiple perspectives. The first is the foreign partner's point of view. For example, this partner may want to use the JV to maximize local sales and exploit peripheral or mature technology. In contrast, the local partner might see the JV as an opportunity to begin or boost exports and to obtain the newest technology. Obviously, if congruity between the two partners' does not exist, major efforts must be made to adjust or eliminate conflicting goals. (Otherwise, don't use a JV.) Then you have a third perspective, namely the JV's General Manager, who must hold the interest and performance of the JV itself above those of either partner. Those charged with leading a joint venture must be allowed by both partners the actual freedom to lead it.

How can you evaluate a potential partner?

You need to group your questions under three very broad questions: Does the partner have the skills and resources I need? Will I get access? Will we be compatible?

The best joint ventures, i.e., those in which the partners work toward ensuring the long-term viability of the business, are those formed by companies that recognize their specific long-term needs and recruit partners to fill those needs. They also recognize the needs of their local partner and how they will fill those needs.

It's also important to distinguish between the skills a partner possesses and what the JV needs to succeed. They may not be the same thing. You also need to make sure that your proposed partner has been reinvesting and upgrading its skills, and not just coasting.

As far as getting access, it follows that if you don't understand each other, you won't have access to the skills your partner has. If your managers who will be working in China, for example, don't speak Chinese, you won't be able to easily communicate with the Chinese managers about local market opportunities.

Finally, you're going to have to "live with" your JV partner, so you want to be sure that you'll be compatible. …

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