International joint ventures (IJVs) as a means of foreign market entry have accelerated sharply during the last 20 years. Besides serving as a means of lessening political and economic risks by the amount of the partner’s contribution to the venture, IJVs provide a way to enter markets that pose legal and cultural barriers that is less risky than acquisition of an existing company.
A joint venture is differentiated from other types of strategic alliances or collaborative relationships in that a joint venture is a partnership of two or more participating companies that have joined forces to create separate legal entity. Joint ventures are different from minority holdings by an MNC in a local firm.
Four characteristics define joint ventures: (1) JVs are established, separate, legal entities; (2) they acknowledge intent by the partners to share in the management of the JV; (3) they are partnerships between legally incorporated entities such as company chartered organizations or governments and not between individuals and (4) equity positions are held by each of the partners.
IJVs can be hard to manage. The choice of partners and the qualities of the relationship between the executives are important factors leading to success. Several other factors contribute to their success or failure as well: how control is shared relations with parents, institutional (legal) environments and the extent that knowledge is shared across partners. Despite this complexity nearly all companies active in world trade participate in at least one international joint venture somewhere many companies have dozens of joint ventures. A recent Conference Board study indicated that 40 per cent of Fortune 500 companies were engaged in one or more international joint ventures. Particularly in telecommunications and internet markets, joint ventures are increasingly favored. For example, Excite At Home has established joint venture relationships in Belgium, the Netherlands, Germany, Australia and Japan.
In the Asia Pacific Rim, where US companies face unfamiliar legal and cultural barriers joint ventures are preferred to buying existing businesses. Local partners can often lead the way through legal mazes and provide the outsider with help in understanding cultural nuances. A joint venture can be attractive to an international marketer when it enables a company to utilize the specialized skills of a local partner, when it allows the marketer to gain access to a partner’s local distribution system, when a company seeks to enter a market where wholly owned activities are prohibited, when it provides access to markets protected by tariffs or quotas, and when the firm lacks the capital or personnel capabilities to expand its international activities.
In China, a country considered to be among the riskiest in Asia, more than 50,000 joint ventures have been established in the 25 years since the government began allowing IJVs there. Among the many reasons IJVs are so popular is that they offer a way of getting around high Chinese tariffs, allowing a company to gain a competitive price advantage over imports. Manufacturing locally with a Chinese partner rather than importing bypasses China’s historically high tariffs manufacturing locally with a Chinese partner rather than importing achieves additional savings as a result of low cost Chinese labor. Many Western brands are manufactured and marketed in China at prices that would not be possible if the products were imported.