THEORETICAL AND EMPIRICAL STUDY ON THE ECONOMIC MOTIVATION OF A JOINT VENTURE CORPORATION
Sara Helena Otal Franco ()
Ramiro Serrano García ()
Universidad de Alcalá
Departamento de Ciencias Empresariales
Facultad de Ciencias Económicas y Empresariales
Pza. de la victoria s/n
28802 Alcalá de Henares – Madrid (SPAIN)
Teléf. +34 918854293
Fax +34 918854294
ABSTRACT
An overview of the international businesses reveals the habitual use of the term “joint venture” to talk about to certain systems of cooperation or strongly shared management marked by the casuistry. Although usually they are identified with an associative profile able to satisfy the double exigency (a) with integration of resources to obtain a common aim and (b) of preservation of the legal autonomy of the associated subjects, an exhaustive bibliographical revision demonstrates the lack of agreement on the main characteristics of that concept (joint venture) from the economic as well as from the legal point of view.
About this, we think that joint venture is based on the ability to share the power and the control in a cooperation relation –quality that contrasts with the habitual tendency in the businesses: the domination; turning out to be, indeed the joint control, the only distinguishing, specific and own characteristic of joint ventures. Actually, this is the view on which the recent American jurisprudence has been pronounced in repeated occasions as much as the Commission of the European Communities.
The present work tries to find out the reasons that lead to the companies to share the control of some of their activities, or what is equal, the causes about which the venturer decides to create a joint venture. This study is made on the 75 cases of requests of creation of joint ventures that have appeared published in the Official Journal of the European Union between years 1989 and 2005. The study consists, on one side, in characterizing the contributions that venture makes each contributor to joint and, on the other, to analyze what is what each one of them, as well, obtains by means of the creation of the joint venture, or say, what has motivated the alliance.
By means of an analysis of principal components as well as a cluster analysis of the characteristics that define the proposals of joint ventures, the characterization of the operation for the venturer reveals in each them the necessity to obtain intangible strategists for whom a market does not exist –due to the difficulty to transmit them if it is not in collaboration with the organization who has them– and whose internal development is expensive and slow. However, its obtaining is desirable, favor to the potential of value creation that of its maintenance is still derived at the cost of even sacrificing part of the control into the hands of a competitor.
The study finds that the general objective of the companies at the time of constituting one joint venture base the competitive advantage surroundings to two axes, intangible are the key with great generating potential of benefits: the knowledge and the market. Joint ventures favors the interchange of knowledge because they diminish the assimilation risk and because they allow that the corporations react on time and they adapt better to changes of the market. As far as the penetration in the markets, joint ventures are one of the routes easiest and simple to implement. In addition, so that such interchange of intangible is effective, the complementary contribution needs fixed assets an so on, in spite of not constituting the economic essence of the operation, they are necessary for the accomplishment and improvement of this one. In summary, joint ventures are the answer to a market of interchange of intangible whose transmission cannot take place of which it is not thanks to these strategic alliances.
1. INTRODUCTION: THE INCREASE IN COOPERATION STRATEGIES, AND THE PROLIFERATION OF INTERNATIONAL JOINT VENTURES
An overview of markets developed at present shows that the globalisation of the economy, the speed with which technological changes are made and the immense development of computer and communication systems, have become constant features. Consequently, cooperation and specialisation have become increasingly necessary, both at local and international level, because businesses now require stronger and closer links, needing to join forces with foreign or national allies to ensure growth.
This involves adapting to a new environment in perpetual change, which companies must face in all aspects of their activity, and which cannot always be approached alone. These reasons are enough to justify the growing number of alliances and the need to be able to reach rapidly to change [García Canal, 1996:111]. Garcia Canal [1993: 128] has also analysed European-level alliances, identifying certain common features and recognising the importance of joint ventures as the most widely-spread contractual form[1], as over 70% of agreements are signed between two partners. This shows that joint ventures have become a habitual figure in world business.
This study aims to analyse the situations in which companies decide to create a joint venture corporation as a form of strategic alliance, rather than other kinds of association, such as fully-owned subsidiaries, trans-national mergers, etc. In other words, what is the aim sought by the co-partners or the economic background of the operation?
In order to do this, we will first describe, from a theoretical point of view, the reasons why, in our opinion, companies will accept to loose half of the control by forming a joint venture with a partner. Joint control is the main feature that characterize a joint venture and is somewhat atypical in the business world, which normally favours domination. We have to think what companies who enter into a joint venture want, so important, that could justify the voluntarily surrendering of half of the control of a business, with all the uncertainty that this implies in a constantly changing market.
We will then compare our theoretical reasoning with reality at European level, analysing a database that we have drawn up and structured using data obtained from the Official Journal of the European Union. We will carry out two multivariable analyses by means of analysing interdependencies –principal component analysis and cluster analysis- on the variable Economic Background of the Operation. The aim of the former technique, the principal component analysis, is to reduce the number of original variables, in order to obtain a new, interdependent series, known as factors, which will show what is common to the variables grouped in each factor. The second technique used, the cluster analysis, aims to establish groups which are internally homogenous but different to each other, on the basis of their common behaviour in relation to each of the variables studied.
However, before beginning with the theoretical reasoning behind the economic background of the operation, we must first make two clarifications in order to better understand the figure. The first is of a legal nature. Esteban [1999:27] remarks that the notion of joint venture covers two different realities, as regards its possible legal organisation: on the one hand, contractual or non-equity joint ventures, normally set up to execute a certain project of limited duration, in which the cooperation between the two partners is on a purely contractual basis, not acquiring any separate legal personality, and, on the other, the equity joint venture or joint venture corporation[2] characterised by the instrumental presence of a company whose stock is jointly controlled by the partners. The database on which our analysis is based consists entirely of European joint venture corporations.
Although, from an economic point of view, for a joint venture to exist, it is enough that two companies to create a jointly-controlled one, from a legal point of view it must be defined with reference to the prior collaboration agreement, the incorporation of the company –as the case may be- and the complementary agreements. Apart from its corporate aspect, for legal purposes the joint venture agreement is the hub of the cooperation between the partners. In other words, the joint venture is a contractual form, as the incorporation of the joint corporation is preceded by an agreement establishing the basis for the cooperation, known as the joint venture agreement[3]. The term “joint venture corporation” refers to the company incorporated by virtue of the preliminary contractual agreement.
In addition to the preliminary agreement and the subsequent incorporation of the capital company, there is also a series of complementary agreements, such as patent or know-how licences, and technical or commercial service agreements. The preliminary agreement consists, not only of the decision to create a company and define objectives, but also clauses that affect the subsequent operation of the company itself. Both the preliminary agreement and the complementary agreements have the advantage of being very flexible structurally: as they are negotiated directly with the other party, the parties can adapt its terms and clauses to suit specific needs.
The second clarification to be made refers to the defining characteristic of a joint venture operation, the joint control. We are not completely in agreement with authors such as Killing [1988], Kogut [1988], Valdés [1966], Fossas [1966] or Chuliá and Beltrán [1999:81], who define joint companies as:
(a) Dominant, referring to the partner with more power than the others, holding the majority of the stocks or having greater management capacity, the other partners playing a more passive role;
(b) Shared, when the power of the partners is balanced, and they control the company jointly;
(c) Independent, when no partner plays an important role in the management of the joint venture, as doing so does not affect their interests. The partners are simply investors.
From our point of view, neither the first nor the third are joint ventures, as, firstly, control is not shared, and, secondly, both partners have to be involved in management to some extent. Bortolotti and Morresi [1983:539] maintain that one of the characteristics of a joint venture is the common management of the company by all partners, and that this balance of power in the joint venture corporation should be maintained, in order that it may be considered as such and not be modified without the agreement of all partners. Certain parcels of power and control may be distributed among the companies on the basis of their specialisations, i.e., the element behind their being chosen as partners, but this will in no way mean that they assume a passive role.
Likewise, Guardiola [1998: 301] maintains that the contributions of the partners and their presence on the governing bodies should not imply the absolute domination of any over the others: Miquel [1998: 139] comments that “the true feature that defines a joint corporation is not equal participation, but rather joint control”. These points have been maintained by the European Community Commission and by International Accounting Standard No. 31 of the International Accounting Standards Board, among others,
The rest of this paper identifies the characteristics of joint ventures in accordance with the contributions made by the partners and what they may receive in exchange. Section 3 describes the sample being analysed, and sections 4 and 5 contain the multi-variant analyses necessary to find the ultimate aim pursued by the partners in joint ventures. The paper ends with our conclusions, and the bibliography.
2. ECONOMIC CHARACTERISATION OF JOINT VENTURES FOR THE CO-PARTNERS: CONTRIBUTIONS TO THE JOINT VENTURE AND WHAT IS RECEIVED IN EXCHANGE
In order to analyse the economic background of the operation, we have to consider what the parties to the agreement hope to achieve. The economic reasons are many and, without a doubt have a lot to do with the type of joint venture in question, the functions it carries out and the characteristics of the sector to which it belongs, with the added complication that nowadays many joint corporations may be involved in activities belonging to more than one business area.
The economic changes, to which we have already referred as being behind the necessity for inter-company cooperation, have raised new problems as regards the organisation of economic activity. In this context, alliances in general and joint ventures in particular are organisational-contractual forms, used, according to Hennart [1997: 8] “for the exchange of productive inputs on which the market places high costs, and are more costly to develop internally than to supply or combine through strategic alliances.”
We can capture the specific motive or motives behind the decision to form a joint venture by examining what each participant contributes to the operation and what they receive in exchange. These and other matters are set down in the joint venture agreement. The contents of the agreement may vary immensely in each different case, depending on the object pursued, but in general contain the following mentions [Esteban, 1999: 34]:
(a) Parties involved and their statements regarding their interest in the project.
(b) Stipulations concerning the creation of the joint venture.
(c) Contributions to be made by the partners to the joint venture.
(d) Clauses regarding control and management.
Of these four types of basic clauses, the final two are of most interest to us. Under the heading of contributions by the parties, or similar, the joint venture agreement regulates in detail the contributions to be made by each participant to the joint venture, defined in accordance with the capacities or characteristics that led to their selection as partners, e.g., recognised experience in a certain area of commercial activity, strategic placement in a market, etc. Harrigan [1985: 28] divides the economic motivations behind the formation of a joint venture into three types: