Lesson VII The Joint Ventures
Learning Objectives
International market entry modes
Joint Ventures
China’s investment vehicles
International Market Entry Modes
Export entry Modes
Contractual Entry Modes
Licensing
Franchising
Investment Entry Modes
Sole venture: new establishment
Sole venture: acquisition
Joint venture: new establishment/acquisition
Other
Licensing
Advantages
Requires no capital outlay nor detailed involvement with foreign end customers
Can provide revenues to offset high fixed costs (Research and Development costs of drug companies).
Disadvantages
Quality control can be an issue.
May set-up future competitor in market.
Franchising
Advantages to Franchisee (buyer of business)
Reduces business risk because franchisee is using proved concept!
Advantages to Franchisor (seller of business)
Using local managers reduces cultural risk (can adapt to local customs, local tastes).
Disadvantages
Control over franchisee:
Product quality, training and management of personnel
Joint Venture Entities Defined
Joint-Venture: A combination of two or more companies into a single business organization.
Each party contributes to the organization (money, technology, plant, labor)
Each party owns a portion of the organization (equal or majority/minority stakes)
Each party shares risk of failure.
Characteristics of joint ventures
Limited scope and duration
Generally involve only two firms
Involve only small fraction of participants' total activities
Each participant offers something of value
Joint production of single products
No sharing of assets/information beyond venture
Need not affect competitive relationships
Joint Ventures
Advantages
Combining with another firm and building on both firm’s comparative advantages.
Limits capital outlay.
Permits potentially better relations with government, banks, labor unions.
Minimizes cultural risk.
Minimizes expropriation risk.
Disadvantages
Corporate disagreements
Sharing of profits
Foreign Direct Investment
Subsidiary Vs. Joint Venture
Easier to control
No Profit Sharing
Protects Know-How
Faster geographical spread
Fixed costs spread (. R&D, Marketing)
Complementary resources
May be legal requirement
Joint Venture
Subsidiary
Reasons for failure
Inflexibility problems similar to other long-term contracts
Implementation requires substantial commitments of managerial resources
Joint ventures do not last as long as planned
About 70% are disbanded before scheduled maturity
On average they do not last as long as one-half the term of years stated in agreement
Reasons for disbanding joint ventures
Inadequate preplanning
Technology did not develop as expected
Disagreement between parties on approaches to joint venture objectives
Refusal to share knowledge with counterparts in venture — firms wants to learn as much as possible but not to convey too much
Inability of parent companies to share control or compromise on difficult issues
Public policy concerns — conflict with firms' long-term strategies
Joint Venture Examples
Toyota and General Motors: United Motor Manufacturing Inc.
Hong Kong Government and Walt Disney Co: Hong Kong Disneyland
Legend and AOL establish
a Joint Venture Company
Two world-class companies joining forces to provide interactive services for customers in the world’s fastest growing market
Ownership Structure
Equal representation on the
Board for business decisions
Joint Venture
51%
49%
Shareholders’ Contributions
Contribute approximately US $100 million over time
Provide relevant latest technology, software, products and services of AOL, know-how, intellectual property rights
Operational and technical support to develop interactive services for China
Access to global marketing, advertising and relationships
AOL’s contribution builds on Legend’s existing investments in FM365
Shareholders’ Contributions
Contribute approximately US $100 million over time
Customer resources of Legend consumer PCs and other devices
Management team of FM365, and the experience, expertise and relationships in offering Internet services in China
Exclusive cooperation with Legend FM
A local Chinese company wholly-owned by Legend’s parent company that holds an ISP permit
Business of the Joint Venture
Engaged in activities that are allowed under the regulations and government policies in China
In the near term, provide Legend FM (a wholly-owned subsidiary of Legend’s parent company) technical support and services
Upon China’s accession to WTO, consider expanding the scope of activities that will be allowed under government policies
Legend Holdings and America Online Announce Joint Venture
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