Joint-Venture Road Map for the Little(r) Guy
Bottom
Line: International partnerships can put
parties at odds, but there are ways for smaller firms to avoid common conflicts
and stick up for themselves.
International
joint ventures (IJVs) have become a staple of the global economy. They enable firms to apply
both their own and their partner’s core capabilities to projects in markets
that each might otherwise not be able to access effectively. For small- and
medium-sized companies, in particular, IJVs provide a way to operate in new or foreign
countries while sharing responsibility and resources, whereas larger firms can
benefit by gaining access to a smaller partner’s niche expertise, access to
scare resources, or foothold in a specific market.
But
for all the win-win talk, IJVs rarely endure over the long term. They can break down for
a host of reasons: culture clashes, operational inefficiencies, and
differences in strategic goals. Conflicts between collaborators have been
recognized as the main explanation for why IJVs come to an unscheduled
end, especially when the balance of power is unequal. And that’s
often the case. Because of their limited resources, smaller firms typically have to cast their lot with larger partners in
order to launch an IJV.
Not
much research exists on the roots of conflict in IJVs, presumably because of
the sensitive nature of fall-outs in international business and the difficulty
of obtaining data on complex cross-border initiatives. The few studies that do exist tend to focus on larger firms’
experiences. But the authors of a new study set out to shed light on the minority partners’
perspective, reasoning that this lesser-heard viewpoint could hold valuable
lessons for both large and small companies looking to profit from IJVs.
The authors conducted a case study of a
Swedish high-tech firm that joined with a larger Eastern European company to
build and operate a factory in the majority partner’s home country. The
proposed arrangement was that the minority (Swedish) owner would contribute its
expertise on selling the finished product, whereas the majority (Eastern European)
partner would provide the raw materials to make it.
Over time, conflicts began to emerge. The
majority owner thought sales should have been more robust, and the minority
partner didn’t appreciate that its collaborator shifted responsibility for manufacturing
to its parent company. Long, protracted disputes resulted, sucking up valuable
money, time, and other resources in fruitless attempts to end the conflicts.
Eventually the IJV folded.
The authors read all email communications
between the partners during the IJV’s lifespan from 2005–14, as well as all
emails sent between the minority partner and its lawyers. They were given
access to the contracts, statutes, and other documents governing the IJV. In
addition, they conducted interviews with the key managers at the minority firm.
The authors performed a textual analysis to reveal the most common and
important themes that emerged, which formed the basis of the following
recommendations for managers of minority partners in IJVs.
Thoroughly
vet potential collaborators.
Beyond
the obvious steps — scrutinizing the financial background of prospective
partners, analyzing the success or failure of their previous partnerships, and
confirming that their ethics and values jibe with your own — it’s crucial to
have your legal representatives dig deeply into any of their past litigation or
partner dissolutions. What do your possible partner’s partners have
to say?
In addition, carefully consider the culture
and language of the country where the IJV will operate — do you have in-house
knowledge of the legal and regulatory framework there, or will you be relying
on a third-party consultant or the majority partner to provide that? Think,
too, about geography; if your majority partner is physically closer to where
the IJV operates, you may need to work harder and monitor proceedings more
closely to ensure your collaborator doesn’t exert an undue influence owing to
their proximity.
Ensure
you have enough representatives in key positions.
One
way to secure authority and ensure transparency in an IJV is to appoint the
right personnel to the supervisory or management boards overseeing the project,
and fighting for your right to do so in the fine print. In the case analyzed
for this study, the minority owner seemed to have a fair
amount of power — it could appoint a vice president to the management board and
two members to the supervisory committee — but in reality, its larger partner
held all the cards. The majority firm had the right to choose the president of
the management board, who had a ruling vote, as well as three members of the
supervisory committee. As a result, it was almost impossible for the minority
partner to influence the IJV through the governance channels, even though
ownership of the project differed by only two percentage points between the
partners (51 percent to 49 percent).
Build
a stable foundation.
It all
starts with clear and concise contracts, which not only govern the
collaboration, they also provide dispassionate guidance in case disputes arise.
When drawing up the contracts, managers might want to bring in outside opinions
apart from the attorneys working on the project to ensure the utmost clarity
and specificity. Most importantly, contracts must be obligatory, and each firm
should retain the right to perform its own audits. Although everything seems
rosy at the outset of an IJV, managers should always be thinking of worst-case
scenarios that might crop up — and that means crafting bulletproof exit
clauses.
Seek a
true balance of power.
Even though
a minority partner holds less sway, it’s important that it retains input on big
decisions. If a junior partner at least has veto power over the appointment and
dismissal of the president of a management board or chairman of a supervisory
committee, a majority owner can’t just act with impunity. It’s also important
for both parties to reserve the right to revoke powers of attorney, which
typically govern an IJV’s day-to-day operations. Writing these rules into the
contracts is an important first step toward a fair and balanced power-sharing
arrangement, the authors write.
Source: “Partner Conflicts in
International Joint Ventures: A Minority Owner Perspective,” by Christoffer Westman and Sara
Thorgren (Luleå University of Technology), Journal of International Management,
June 2016, vol. 22, no. 2
http://www.strategy-business.com/blog/Joint-Venture-Roadmap-for-the-Littler-Guy?gko=ab0ce&utm_source=itw&utm_medium=20161122&utm_campaign=respB
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