Joint Ventures

A joint venture entails establishing a firm that is jointly owned by two or more otherwise independent firms. Fuji-Xerox, for example, was set up as a joint venture between Xerox and Fuji Photo (see the Management Focus). Establishing a joint venture with a foreign firm has long been a popular mode for entering a new market. The most typical joint venture is a 50/50 venture, in which there are two parties, each of which holds a 50 percent ownership stake (as is the case with the Fuji-Xerox joint venture) and contributes a team of managers to share operating control. Some firms, however, have sought joint ventures in which they have a majority share and thus tighter control.¹⁴

Advantages

Joint ventures have a number of advantages. First, a firm benefits from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems. Thus, for many US firms, joint ventures have involved the US company providing technological know-how and products and the local partner providing the marketing expertise and the local knowledge necessary for competing in that country. This was the case with the Fuji-Xerox joint venture. Second, when the development costs and/or risks of opening a foreign market are high, a firm might gain by sharing these costs and/or risks with a local partner. Third, in many countries, political considerations make joint ventures the only feasible entry mode. Again, this was a consideration in the establishment of the Fuji-Xerox venture. Research suggests joint ventures with local partners face a low risk of being subject to nationalization or other forms of government interference.¹⁵ This appears to be because local equity partners, who may have some influence on host-government policy, have a vested interest in speaking out against nationalization or government interference.

Disadvantages

Despite these advantages, there are two major disadvantages with joint ventures. First, as with licensing, a firm that enters into a joint venture risks giving control of its technology to its partner. The joint venture between Boeing and a consortium of Japanese firms to build the 767 airliner raised fears that Boeing was unwittingly giving away its commercial airline technology to the Japanese. However, joint venture agreements can be constructed to minimize this risk. One option is to hold majority ownership in the venture. This allows the dominant partner to exercise greater control over its technology. The drawback with this is that it can be difficult to find a foreign partner who is willing to settle for minority ownership.

A second disadvantage is that a joint venture does not give a firm the tight control over subsidiaries that it might need to realize experience curve or location economies. Nor does it give a firm the tight control over a foreign subsidiary that it might need for engaging in coordinated global attacks against its rivals. Consider the entry of Texas Instruments (TI) into the Japanese semiconductor market. When TI established semiconductor facilities in Japan, it did so for the dual purpose of checking Japanese manufacturers' market share and limiting their cash available for invading TI's global market. In other words, TI was engaging in global strategic coordination. To implement this strategy, TI's subsidiary in Japan had to be prepared to take instructions from corporate headquarters regarding competitive strategy. The strategy also required the Japanese subsidiary to run at a loss if necessary. Few if any potential joint venture partners would have been willing to accept such conditions, since it would have necessitated a willingness to accept a negative return on their investment. Thus, to implement this strategy, TI set up a wholly owned subsidiary in Japan.

A third disadvantage with joint ventures is that the shared ownership arrangement can lead to conflicts and battles for control between the investing firms if their goals and objectives change or if they take different views as to what the strategy should be. This has apparently not been a problem with the Fuji-Xerox joint venture. According to Tony Kobayashi, the CEO of Fuji-Xerox, a primary reason is that both Xerox and Fuji Photo adopted an arm's-length relationship with Fuji-Xerox, giving the venture's management considerable freedom to determine its own strategy.¹⁶ However, much research indicates that conflicts of interest over strategy and goals often arise in joint ventures, that these conflicts tend to be greater when the venture is between firms of different nationalities, and that they often end in the dissolution of the venture.¹⁷ Such conflicts tend to be triggered by shifts in the relative bargaining power of venture partners. For example, in the case of ventures between a foreign firm and a local firm, as a foreign partner's knowledge about local market conditions increases, it depends less on the expertise of a local partner. This increases the bargaining power of the foreign partner and ultimately leads to conflicts over control of the venture's strategy and goals.¹⁸

Wholly Owned Subsidiaries

In a wholly owned subsidiary, the firm owns 100 percent of the stock. Establishing a wholly owned subsidiary in a foreign market can be done two ways. The firm can either set up a new operation in that country or it can acquire an established firm and use that firm to promote its products (as Merrill Lynch did when it acquired various assets of Yamaichi Securities).

Advantages

There are three clear advantages of wholly owned subsidiaries. First, when a firm's competitive advantage is based on technological competence, a wholly owned subsidiary will often be the preferred entry mode, because it reduces the risk of losing control over that competence. (See Chapter 6 for more details.) Many high-tech firms prefer this entry mode for overseas expansion (e.g., firms in the semiconductor, electronics, and pharmaceutical industries). Second, a wholly owned subsidiary gives a firm the tight control over operations in different countries that is necessary for engaging in global strategic coordination (i.e., using profits from one country to support competitive attacks in another). Third, a wholly owned subsidiary may be required if a firm is trying to realize location and experience curve economies (as firms pursuing global and transnational strategies try to do). As we saw in Chapter 12, when cost pressures are intense, it may pay a firm to configure its value chain in such a way that the value added at each stage is maximized. Thus, a national subsidiary may specialize in manufacturing only part of the product line or certain components of the end product, exchanging parts and products with other subsidiaries in the firm's global system. Establishing such a global production system requires a high degree of control over the operations of each affiliate. The various operations must be prepared to accept centrally determined decisions as to how they will produce, how much they will produce, and how their output will be priced for transfer to the next operation. Since licensees or joint venture partners are unlikely to accept such a subservient role, establishment of wholly owned subsidiaries may be necessary.

Disadvantages

Establishing a wholly owned subsidiary is generally the most costly method of serving a foreign market. Firms doing this must bear the full costs and risks of setting up overseas operations. The risks associated with learning to do business in a new culture are less if the firm acquires an established host-country enterprise. However, acquisitions raise additional problems, including those associated with trying to marry divergent corporate cultures. These problems may more than offset any benefits derived by acquiring an established operation.¹⁹

Selecting an Entry Mode

As the preceding discussion demonstrated, there are advantages and disadvantages associated with all the entry modes; they are summarized in Table 14.1. Due to these advantages and disadvantages, trade-offs are inevitable when selecting an entry mode. For example, when considering entry into an unfamiliar country with a track record for nationalizing foreign-owned enterprises, a firm might favor a joint venture with a local enterprise. Its rationale might be that the local partner will help it establish operations in an unfamiliar environment and will speak out against nationalization should the possibility arise. However, if the firm's core competence is based on proprietary technology, entering a joint venture might risk losing control of that technology to the joint venture partner, in which case the strategy may seem unattractive. Despite the existence of such trade-offs, it is possible to make some generalizations about the optimal choice of entry mode. That is what we do in this section.²⁰

Core Competencies and Entry Mode

We saw in Chapter 12 that firms often expand internationally to earn greater returns from their core competencies, transferring the skills and products derived from their core competencies to foreign markets where indigenous competitors lack those skills. We say that such firms are pursuing an international strategy. The optimal entry mode

Table 14.1

Advantages and Disadvantages of Entry Modes

Entry Mode		Advantage		Disadvantage
Exporting		Ability to realize location and experience curve economies		High transport costs Trade barriers Problems with local marketing agents
Turnkey contracts		Ability to earn returns from process technology skills in countries where FDI is restricted		Creating efficient competitors Lack of long-term market presence
Licensing		Low development costs and risks		Lack of control over technology Inability to realize location and experience curve economies Inability to engage in global strategic coordination
Franchising		Low development costs and risks		Lack of control over quality Inability to engage in global strategic coordination
Joint ventures		Access to local partner's knowledge Sharing development costs and risks Politically acceptable		Lack of control over technology Inability to engage in global strategic coordination Inability to realize location and experience economies
Wholly owned subsidiaries		Protection of technology Ability to engage in global strategic coordination Ability to realize location and experience economies		High costs and risks

for these firms depends to some degree on the nature of their core competencies. A distinction can be drawn between firms whose core competency is in technological know-how and those whose core competency is in management know-how.