CULTURE IN INTERNATIONAL JOINT VENTURE 2
Cultural Challenges In Managing International Joint Ventures: A Proposition For Success
Atik Aprianingsih
School of Business and Management - Institut Teknologi Bandung
ABSTRACT
Firms have opted to adopt collaborative strategies to win the competition to win the global competition. Among many types of international collaboration, the international joint venture is preferable for its potential benefits. However, research shows that that international joint venture has a high rate of failure. Cross-cultural conflicts between parent companies of different nationalities are often cited as reasons for high dissolution rates in the international joint venture. The purpose of this paper is to provide a proposition that will enhance the likelihood of success of international joint ventures. Since the cultural difference between parent firms is often cited as the reason of international joint venture dissolution, this paper suggests using culture to minimize potential conflict between parent firms. This paper has three limitations. First, it does not discuss how the degree of parent firms’ involvement in the joint venture management may affect the possible conflict between parent firms. Second, it is based on the assumption that partners have already had previous business experience with each other. Third, it assumes that a firm comes from a certain has similar culture with other firms come from the same country.
Keywords: Joint Venture, International, Cultural Challenges, Likelihood Of Success
Cultural Challenges in Managing International Joint Ventures: A Proposition for Success
Background
The increasing intensity of global competition causes firms to be always under pressure to enhance its competitiveness continuously. For the last few decades, companies have opted to adopt collaborative strategies to win the competition, especially in the context of international business (Hamel, Doz, & Prahalad, 1989; Ozohron, Arditi, Dikmen, & Birgonul, 2006). The resource-based view of competitive advantage and resource dependency theory (Pfeffer & Salancik, 1978) provide a motivational background of firms initiating a collaborative strategy to win the competition (Faulkner, 2003). From resource-based view theory of competitive advantage, businesses only invest in an enterprise which is strongly related to its competencies. When opportunities require specific competencies, in addition to those already present within a firm, a collaboration provides a lower risk to attain the complementary assets compared to developing the assets from scratch (Hamel et al.,1989). Meanwhile, resource dependence theory, which stems from social exchange theory, states that it will be more beneficial for organizations with similar objectives with different types or combinations of resources at their disposal to exchange resources.
Among many types of international collaboration, international joint venture is preferable because local knowledge, assets, and skills embedded in the local partner can increase the likelihood of success, as well as the network of political and personal connection with the local partner, can increase the acceptability by the local political authorities, banks, distribution networks, suppliers (Dussage & Garret, 1999). International joint venture itself is defined as a joint venture with at least one partner headquartered outside the joint venture’s country of operation (Geringer & Herbert, 1989). Although joint venture is preferable as a collaborative strategy, research shows that international joint venture has a high rate of failure. In Kogut (2002) sample, the mortality rate of the international joint venture is up to 66.7%. Hennart and Zeng (2002) found that Japanese-American joint venture had a shorter lifespan compared to Japanese-Japanese joint venture. Although many factors may influence the termination of international joint ventures, cross-cultural conflicts between parent companies of different nationalities are often cited as reasons for high dissolution rates in the international joint venture (Brown, Rugman, & Verbeke, 1989).
The purpose of this paper is to provide a proposition that will enhance the likelihood of success of international joint ventures. Since a cultural difference between parent firms is often cited as the reason of international joint venture dissolution, this paper suggests using culture to minimize potential conflict between parent firms. However, this paper does not discuss how ownership composition affects the culture of the joint venture (i.e., how things are done in the joint venture), since equity ownership, in reality, does not necessarily mean that the management is controlled by the majority equity holder forever (Pucik, 2002).
Literature Review
International Joint Ventures
A joint venture is a form of strategic alliance where at least two firms contribute equity and resources to a semi-autonomous legally separate entity (Geringer, 1988). Kogut (2002) categorizes the motivation to form a joint venture from three theories, transaction cost economies, strategic behavior, and organizational theory. From the transaction cost economics perspective, a joint venture is a strategy used to minimize the transaction and production costs. From the strategic behavior point of view, a joint venture is a move to maximize profit. The firm may do so by arranging to hurt other competitors or by making collusive arrangement to enhance market power, often at the expense of buyers. The third perspective, the organizational theory, focuses on the cooperative motivation. This perspective view organization as a set of skills and each organization own different set of skills. One organization may have the technical knowledge owned while other organization may have the local market knowledge. A firm may then cooperate using a joint venture to obtain these skills since they are not readily available in the local market or difficult to obtain due to its tacitness.
The International joint venture is defined as a joint venture with at least one partner headquartered outside the joint venture’s country of operation (Geringer & Herbert, 1989). It is a preferable mode of a strategic alliance in the international context because of its possible benefits, such as the opportunity to spread costs and risk in research and development, the access to technology and technical know-how, the access to markets, and the opportunity to gain competitive positioning (Hladik, 2002).
In many industries, it is costly to develop a new product or technology. A joint venture in research is one of the ways in which a firm with limited financial resources can participate in a new product development and stay at the forefront of technology. Sometimes, even if a firm is capable of securing the necessary funding, they still opt to form a joint venture because there are several risks involved that also can put the research and development beyond the capabilities of many firms in the industry. The first risk is the obvious possibility that the expected research development breakthrough does not occur, does not occur fast enough, or requires more financial or technical resources than originally expected. The second risk related to the considerable lead time between the start of research efforts and the time the new product reaches the consumer. During this time, market factors can change, reduce or divert consumer demand even before the product reaches the marketplace. The third risk involves the achievement of certain market share, which depends on the number and quality of rival products competing for the same market. This market share achievement determines whether the investment made in the research and development pay off or not. The last risk is that the possibilities that no one firm competing in the same market using the same technology and entering the market at the same time cannot obtain the economic return from their investment.
The second most common motivation of international joint venture is access to new technology or proprietary know-how or to provide technical skills complementary to its own (Hamel et al., 1989; Prahalad & Hamel, 1990). Almost all the collaborative arrangements in the semiconductor field by NEC were oriented toward technology access (Prahalad & Hamel, 1990). When there is a higher degree of overlap between the technical resources and contributions provided by each of the partners, one partner may have a comparative advantage in technical ability and take the lead in joint research and development work. When joint venture partners have had more closely matched research and development capabilities, they structured their product development to integrate the two sets of technologies and technical skills accordingly.
Another advantage of a joint venture is the access that a joint venture can provide to large domestic and international markets. The increasing market size provides increasing expected return on the investment of research and development initiatives. Immediate access to a vast market is critical where product lifetime is short. Expected return depends on the market size and the length of time over which the product is sold in the market. Penetration to a local market requires local marketing expertise to succeed. A joint venture partner may provide the know-how or provide established local distribution channels through which to market the new product.
Joint venture with a potential competitor can reduce the risk of research and development in two ways. By creating a joint venture with other firms in the industry, firms reduce the number of competitors in the market competing for market share. This will strengthen their market position and will remove the incentive for the competitor to enter the market, enable the firm to have some control on the structure of the industry (Cool, Costa, & Dierickx, 2002). Moreover, if this cooperation takes place at the initial stage of product research and development, a firm has the opportunity to develop common technical standards which form the basis for subsequent product design and development. This can ensure a higher degree of compatibility between product lines within an industry.
Although joint venture has been adopted as a more favorable method to compete internationally, a joint venture is not without problems. Perceived problems in the joint venture are threefold: it is hard to direct its goals, it requires a long and hard formation period, and it is difficult to manage (Koot, 2002). The difficulties to direct its goals relate to the difficulties to measure its effectiveness and success. It is because the joint venture definition of success itself is ambiguous, whether attention should be focused on the success of the joint venture itself, regarding its survival, growth, or profit, or should it focused on the consequences of the alliance for each parent firm (Dussage & Garret, 1999). There is a fair chance that short- and long-term objectives of partners are misunderstood so that the combined direction of the venture may not be feasible for everyone (Roberts, 1980). An example of diverging objective between parent firms can be seen from Danone and Wahaha joint venture (Munro-Smith, 2008; Dussage, 2009). Danone wanted to become a significant player in the Chinese beverage market whereas Wahaha wanted to gain the know-how and knowledge to other businesses and the profit did not have to be shared with the foreigners. The French thought that the terms of joint venture agreement gave them control over the use of the joint venture brand and tried to use that control to stop the Chinese parent firm to expand. Thus any expansion using the joint venture brand should be handled by the joint venture. The Chinese had narrower interpretation and interpreted that the joint venture board can block the use of the brand only when it could damage the brand value; thus it is acceptable to apply the knowledge gained from the joint venture to the Chinese parent other businesses.
The second problem with international joint venture is long and hard formation period started from the first step abroad until the rounding up of negotiation (Koot, 2002). The lengthy consultation is necessary because each partner needs to make a clear stand and to make agreements concerning the area of potential conflicts, such as management contracts, technical assistance arrangement, the policy of the joint venture, provisions for ending the venture. The third area which can cause a problem is the difficulties in managing an international joint venture (Koot, 2002). The composition and functioning of the joint venture’s board and management, the informal and formal lines of communication, recruitment of key staff, and adaptation to political forces contribute to the problem in managing interacting firms (Killing, 1993).
Culture and International Joint Venture
According to Schein (1992), organizational culture is embedded in how the organization works. Culture comes from the assumptions of what is working when members of an organization faced with problems of internal integration and external adaptation and become guidelines for the members when faced with a similar situation. It affects the way collective groups approach, evaluate, and negotiate opportunities (Ozorhon et al., 2008; Dussage, 2009; Hamel et al, 1989; Munro-Smith, 2008; Prahalad & Hamel, 1990). According to Hofstede (1997), individual living in a country tend to share similar values, and they bring this values to firms for which they work. Hence, firm values are largely a reflection of its national culture. International joint venture partners based in different countries will, therefore, tend to have different values. These differences in values will, in turn, make it difficult for international joint venture partners to agree on common goals, a solution to problems, and resolution to conflicts than if they come from the same countries. Cross-cultural conflicts between parent companies of different nationalities are often cited as reasons for high dissolution rates in the international joint venture (Brown, Rugman, & Verbeke, 1989). In Kogut (2002) sample, the mortality rate of an international joint venture is up to 66.7%. Hennart and Zeng (2002) found that Japanese-American joint venture had a shorter lifespan compared to Japanese-Japanese joint venture.
The language barrier also counts as challenges in international joint ventures because different mother tongue may ignite misunderstanding between two parties, which inhibit communication (Hennart & Zeng, 2002; Graham 2002). An example is a misunderstanding between French and Japanese during collaboration. While ‘hai’ in Japanese means yes, there is a deeper meaning when used in a certain context. When the French presented how they wanted the design to be implemented, and the Japanese responded with ‘hai’. The French assumed that the Japanese partner would do as they wanted because the Japanese showed agreement with the design when they presented it to them. However, later the French found that the implementation of the design is different from what they wanted. When confronted with this situation, the Japanese replied, that they did answer it with a, yes, but this yes meant that the Japanese understood what the French wanted, but that did not necessarily mean that the Japanese would do what the French wanted.