joint ventures holdings can vary substantially in size, although

it is usually important to establish clear lines of

Derek F. Channon and Tanya management decision-making control in order
Sammut-Bonnici to achieve success.
A lesser form of participation, which may or
Joint ventures are a form of cooperative strategy may not involve equity participation, involves
where firms create an alliance in order to strategic alliances. Joint ventures do tend to have
combine their resources and capabilities. The a relatively high failure rate. Nevertheless, they
objective is to establish a stronger competi- also enjoy a number of specific advantages.
tive position. Firms can diminish the negative
effects of competitive rivals by building higher ADVANTAGES OF JOINT VENTURES
barriers to entry through amalgamating financial
resources, research and development, produc- First, for the smaller organization with insuf-
tion, and distribution channels. Joint ventures ficient finance and/or specialist management
increase the profitability of an industry by skills, the joint venture can prove an effective
reducing competition in markets where both method of obtaining the necessary resources
firms are present. to enter a new market. This can be especially
The most common entry strategy for global true in attractive developing country markets,
firms to enter international markets is through where local contacts, access to distribution, and
joint ventures with local firms, followed by political requirements may make a joint venture
acquisitions. The supermarket chain Groupe the preferred, or even legally required, solution.
Auchan created the joint venture Sun Art Retail Second, joint ventures can be used to reduce
Group with Taiwan conglomerate Ruentex to political friction and local nationalist prejudice
establish China’s largest hypermarket chain. against foreign-owned corporations. More-
Global rivals Carrefour and Wal-Mart Stores, over, political rules may discriminate against
United Kingdom’s Tesco, and Germany’s Metro subsidiaries that are fully foreign-owned, and
had to slow down plans in the country in view in favor of local firms, through the placing
of the strength of the venture. Auchan recently of government contracts or through discrim-
restructured its stake in the joint venture with inating taxes and restrictions against foreign
Ruentex, leading to the acquisition of a majority firms importing key materials, machinery, and
stake in Sun Art Retail Group. components. With the development of trading
Microsoft and General Electric set up blocs such as the European Union and NAFTA,
Caradim, a joint venture aimed at helping the intergovernmental negotiations have seen the
health industry use online medical records to introduction of tariff walls to protect the partic-
improve health services. Google and Motorola ipants. As a result, despite the development, the
joined forces to satisfy Google’s strategy to
use of joint ventures to gain access to trading
acquire patents and Motorola’s efforts to
bloc markets has increased.
compete with Apple’s iPhone. Volkswagen
Third, joint ventures may provide specialist
Group and GM Motors have set up joint
ventures with corporations in China, Mexico, knowledge of local markets, entry to required
Taiwan, Turkey, and India, among others. The channels of distribution, access to supplies
objective was to establish manufacturing pres- of raw materials, government contracts, and
ence and distribution chains in the respective local production facilities. Japanese companies
countries. have actively exploited joint ventures for these
Joint ventures may well prove to be a useful, purposes. Triad alliances have, thus, often led
and indeed necessary, way to enter some new to Japanese manufacturers linking with Euro-
markets, especially for multinational firms. In pean and/or North American manufacturers
some markets, which restrict inward investment, to provide badge engineered products, which
joint ventures may be the only way to achieve have enhanced the global volume production of
market access. Within joint ventures, the partic- the Japanese suppliers and gained them access
ipants usually take clear equity positions. Such to Western developed country markets without

Wiley Encyclopedia of Management, edited by Professor Sir Cary L Cooper.

Copyright © 2014 John Wiley & Sons, Ltd.
2 joint ventures
political friction. Similarly, after the first oil- multinationals that generate joint ventures may
price shock, the Japanese moved swiftly to use do so outside a policy of global strategy integra-
joint ventures in order to gain access to secure tion, making use of such operations to service
supplies of oil. restricted geographic territories or countries
Fourth, in a growing number of countries, in which wholly owned subsidiaries are not
joint ventures with host governments have permitted.
become increasingly important. These may be A third serious problem occurs when the
formed directly with state-owned enterprises objectives of the partners are, or become, incom-
or directed toward national champions. Such patible. For example, a global firm may have
ventures are common in the extractive and a very different attitude to risk than its local
defense industries, where the foreign partner is partner and may be prepared to accept short-
expected to provide the necessary technology to term losses in order to build market share, to
aid the developing country partner. take on higher levels of debt, or to spend more
Fifth, there has been growth in the creation of on advertising. Similarly, the objectives of the
temporary consortium companies and alliances participants may well change over time, espe-
to undertake particular projects that are consid- cially when wholly owned subsidiary alternatives
ered to be too large for individual companies to may occur for the global firm with access to the
handle alone. Such cooperations include new joint venture market.
major defense initiatives, major civil engineering Fourth, problems occur with regard to
projects, new global technological ventures, and management structures and staffing of joint
the like. ventures. This is especially true in countries in
Finally, exchange controls may prevent a which nepotism is common and in which jobs
company from exporting capital and, thus, make have to be found for members of the partner’s
the funding of new overseas subsidiaries diffi- families, or when employment is given to family
cult. The supply of know-how may, therefore, members of local politicians or other locals in
be used to enable a company to obtain an equity positions of influence. From the perspective of
stake in a joint venture, where the local partner the global firm, seconded personnel may also be
may have access to the required funds. subject to conflicts of interest, in which the best
actions for the joint venture might conflict with
DISADVANTAGES OF JOINT VENTURES the strategy and objectives of the global firm
Despite the advantages of joint ventures, there shareholder.
remain substantial dangers that need to be Finally, many joint ventures fail because of a
carefully considered before embarking on a joint conflict in tax interests between the partners.
venture strategy. Many of these could actually be overcome
The first major problem is that joint ventures if they were thought through in advance;
are very difficult to integrate into a global however, such problems are rarely foreseen. One
strategy that involves substantial cross-border common problem occurs as a result of start-up
trading. In such circumstances, there are almost losses. Owing to past write-offs, accelerated
inevitable problems concerning inward and depreciation, and the like, it is common for
outward transfer pricing and the sourcing of capital-intensive businesses to report operating
exports, in particular in favor of wholly owned losses in their first few years. It is, therefore,
subsidiaries in other countries. possibly more attractive for the local partner
Second, the trend toward an integrated system if these losses can be used to offset against
of global cash management, via a central trea- other locally derived profits. To obtain such tax
sury, may lead to conflict with local partners advantages, however, certain minimum levels of
when the corporate headquarters endeavor shareholdings may be necessary, and this may
to impose limits or even guidelines on cash be in conflict with the aspirations of an MNC
and working capital usage, foreign exchange partner. The precise nature of the shareholding
management, and the amount, and means, of structure of joint ventures, therefore, needs to
paying remittable profits. As a result, many be considered at the formation stage in order to
 joint ventures 3
maximize fiscal efficiency and avoid this form of • Arbitration clause indicating how disputes
conflict. between partners are to be resolved.
• Conditions under which the articles of the
JOINT VENTURE joint venture agreement may be changed.
Because of the potential difficulties that can • Consideration of how the joint venture can
occur with joint ventures, they should be formu- be terminated.
lated carefully and the Articles of Association
only drawn up after consideration of the objec- See also acquisition strategy; complex adap-
tives and strategies of the participants, both tive systems; conglomerate strategy; cooperative
at the time of formation, and as they might strategies; coopetition; corporate venturing; lever-
reasonably be expected to evolve in the future. aged buy-outs; joint ventures; strategic alliances;
Furthermore, such an agreement should set out, strategic networks
in clear language, the rights and obligations of
the participants, taking care that differences in
interpretation due to translation are not intro- Bibliography
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The country of jurisdiction under which any Chung, C.C. and Beamish, P.W. (2010) The trap
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Harrigan, K.R. (1988) Joint ventures and competi-
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30 (8), 865–884.
partners.
Kumar, M.V. (2011) Are joint ventures positive sum
• Constitution of the management and
games? The relative effects of cooperative and non
appointment of the managerial staff. cooperative behavior. Strategic Management Journal,
• Conditions under which the capital can be 32 (1), 32–54.
increased. Sammut-Bonnici, T. and McGee, J. (2002) Network
• Constraints on the transfer of shares or strategies for the new economy. European Business
subscription rights to nonpartners. Journal, 14, 174–185.
• Responsibilities of each of the partners in Sammut-Bonnici, T. and Paroutis, S. (2013) Developing
respect of assets, finance, personnel, R&D, a dominant logic of strategic innovation. Management
and the like. Research Review, 36 (10), 924–938.
• Financial rights of the partners with respect Yao, Z., Yang, Z., Fisher, G. et al. (2013) Knowl-
to dividends and royalties. edge complementarity, knowledge absorption effec-
• Rights of the partners with respect to the tiveness, and new product performance: the explo-
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use of licenses, know-how, and trademarks
national Business Review, 22, 216–227.
in third countries.
• Limitations, if any, on sales of the joint
venture’s products to certain countries or
regions.

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