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International Joint Ventures in
Developing Countries
ROBERT MILLER, JACK GLEN, FRED JASPERSEN, AND YANNIS KARMOKOLIAS
venture lowers capital requirements rela- for example, 36 percent were rated by par-
International joint ventures tive to going it alone. ticipants as having performed poorly—a
offer attractive opportunities, As attractive as joint ventures might high proportion indeed. An obvious set of
seem, however, they frequently perform questions therefore arises: If international
yet they frequently perform unsatisfactorily and are comparatively joint ventures are established to exploit the
unsatisfactorily. Why do they unstable. This seems to be true even when
the partners are two companies from
run into trouble, and what the same industrial country; inter-
can partners and managers national joint ventures seem
to be more vulnerable
do to maximize the chances of still. In a study of the
success? latter (Killing, 1982),
OINT ventures between domestic
companies in developing countries
Jand foreign companies have become
a popular means for both manage-
ments to satisfy their objectives. They offer,
at least in principle, an opportunity for
each partner to benefit significantly from
the comparative advantages of the other.
Local partners bring knowledge of the
domestic market; familiarity with govern-
ment bureaucracies and regulations; under-
standing of local labor markets; and,
possibly, existing manufacturing facilities.
Foreign partners can offer advanced pro-
cess and product technologies, manage-
ment know-how, and access to export
markets. For either side, the possibility of
joining with another company in the new
Robert Miller, Jack Glen, Fred Jaspersen, Yannis Karmokolias,
a US national, is a Consultant to a US national, is a Principal a US national, is Lead Economist a Greek national, is a Senior
the International Finance Corpora- Economist in the International in the International Finance Economist in the International
tion’s Economics Department. Finance Corporation’s Economics Corporation’s Economics Finance Corporation’s Economics
Department. Department. Department.
26 Finance & Development / March 1997
complementary features of each partner, Importance and difficulty of virtually inevitable in a relationship as
why are the partners frequently disa- negotiating points in joint complex and dynamic as a joint venture. At
pointed with their joint performance? What venture agreements the extreme, conflicts can lead to the desire
problems cause them to be unstable? Can (percentage of respondents noting category) of one partner or the other to dissolve the
these problems be alleviated to improve enterprise, so provisions detailing proce-
these ventures’ prospects for success? On Important Difficult dures to be followed in the event of a disso-
behalf of the International Finance Equity structure 80 33 lution are obviously necessary.
Corporation (IFC), we surveyed joint ven- Technology transfer 78 26 Division of managementresponsi-
tures between domestic companies in Marketing issues 45 28 bility and degree of management
developing countries and foreign compa- Staffing issues 44 26 independence. There is some evidence
nies based in industrial countries to try to Dividend policy 42 21 that protection of a joint venture’s manage-
understand the difficulties that arise in Source: Robert Miller, Jack Glen, Fred Jaspersen, ment from parent company interference is
negotiations leading up to a joint venture and Yannis Karmokolias, 1996, International Joint an important determinant of the venture’s
Ventures in Developing Countries, IFC Discussion
agreement and those that arise during the Paper No. 29 (Washington: World Bank). success. Attempts by parent companies to
venture’s implementation and operation. micromanage an enterprise that may be
About 75 joint ventures in 6 countries were thousands of miles away are doomed to fail-
included in the study. ure. A better strategy is for them to set up
Both sides are aware that payments for clear operational parameters and then let
Negotiating agreements technology are an important means of the venture’s management succeed or fail
The managers we contacted expressed transferring benefits from the venture and on its own.
mixed feelings about the formal joint ven- of indirectly maintaining control, which Changes in ownership shares.How
ture agreement, with some managers view- inevitably leads to prolonged discussion of should the ownership structure be changed
ing it as a critical element in defining the technology transfer. Technology providers as a joint venture matures? Although most
longer-term relationship and others dis- are interested in protecting their intellectual partners agree that they should address
counting its significance. The latter group property and, therefore, want to set limits this issue early on, rather than waiting for a
tended to stress that no agreement can on where and how the technology can be crisis to occur, it remains a sensitive one.
work without the good will and dedication used by the joint venture and to place Developing country partners, especially,
of both partners, a point that may be true restrictions on who controls derivative tech- can be leery of such provisions, which they
but that does not diminish the importance nologies, no matter where developed. The see as potential death warrants—that is, as
of a well-crafted working agreement. The developing country partners hope to set vehicles that industrial country partners
former group, which included the vast bounds on the royalties and fees they will may, for one reason or another, use to take
majority of managers contacted, believed have to pay providers, especially as the full control.
the agreement to be an essential building technology becomes older, and to broaden Dividend policy and other finan-
block in structuring the joint venture. On the joint venture’s control over its use. cial matters. Dividend policy goes to the
the one hand, an indication of the serious- There are other problems that frequently heart of why companies enter into joint
ness managers attached to such agree- arise during negotiations: ventures, with some companies hoping to
ments was that nearly 85 percent of the Valuation problems. Each partner expand and gain market share rapidly
agreements required at least 6 months, and brings financial and other assets to the joint while others are striving to achieve quick
about 20 percent took more than 18 venture, and it is often not easy to deter- increases in cash flows that they can use to
months, to negotiate. On the other hand, the mine what these assets are worth. One side support other operations. Potential con-
survey found no relationship between the may bring a going business, which may not flicts between these differing objectives are
length of time required to complete an have equity shares traded on a secondary best handled when the joint venture agree-
agreement and the partners’ ultimate satis- market. Or technology may already be ment is being negotiated.
faction with the venture’s operation. incorporated into a product that is to be Marketing and staffing issues.
Two issues were clearly more important produced and sold by the venture. What are Because marketing is so critical to the joint
in joint venture negotiations (see table). such assets worth? Such problems are venture’s success, it should not be surpris-
First was the equity structure (noted by among the most difficult to sort through in ing that it can be a difficult matter to nego-
four-fifths of respondents), which was also negotiations. tiate. From the viewpoint of the local
viewed as the most difficult issue to negoti- Transparency. Getting accurate data partner’s management, maintaining control
ate. Control of a joint venture is not some- upon which to base valuations and other over distribution channels and marketing is
thing surrendered easily, although, as decisions can be very difficult in some one way in which its continuing contribu-
noted below, majority ownership does not countries, especially where accounting tion to the joint venture can be assured.
necessarily confer control of all aspects of a standards are quite different from interna- Such a view, however, may conflict with the
joint venture’s operations. Second was the tional standards. Transparency is a par- plans of the multinational company (MNC)
set of conditions for technology transfer, ticular problem in former command partner, which may see the joint venture as
almost always from the industrial country economies, where, until recently, there have only part of a larger strategy to enter the
partner. Important aspects include defining been no real markets for outputs, supplies, developing country market. Similarly, insis-
precisely what technologies (possibly or financial instruments. tence by the MNC partner on control of
including technologies not yet developed Conflict resolution. Many joint ven- key positions in the joint venture may be
by either side) are to be covered in the ture agreements spell out how disputes seen by the local partner, first, as overly
agreement and the terms under which they between partners are to be resolved. These expensive and, second, as an effort to
are to be made available to the venture. provisions are important, since disputes are marginalize it.
Finance & Development / March 1997 27
• Differences in partner size. The local
Box 1 partner is likely to be considerably smaller
How joint ventures can adjust: than the MNC partner, a difference that can
Manufacturing consumer electronics products in India have important consequences for operating
One joint venture included in our study had brought together Indian and US partners to manu- the joint venture. MNC managers note, for
facture a consumer electronics product. The joint venture was established with a clear division example, that early, rapid expansion of the
of responsibilities, and, at the beginning, its target market was India. Since the Indian partner venture can require substantial capital
had existing complementary products, it was agreed that this company would be responsible infusions that the developing country part-
for marketing and distribution channel development, while the US side would supply product ner may not be able to provide. It is also
and process technologies. The joint venture has been enormously successful, manufacturing true, however, that the joint venture may be
high-quality products throughout the country. Now the question of exporting these products far more important to the smaller partner
has arisen. The agreement specifies that exporting must be done through the US partner—a than to the MNC partner; several managers
multinational company that distributes similar products, manufactured in plants in a variety of we spoke with noted that the joint ventures
countries, through its worldwide network. The difficult question now arising is how the Indian they were involved in seemed to be unim-
joint venture’s products can best be exported through the US company’s existing distribution portant to the MNC and to have received
structure. too little of its attention. The MNC might
This evolving problem is one that has been confronted by countless other joint ventures, assign managers to the venture on a rotat-
and, judging from their accumulated experience, the solution is likely to be an incremental one. ing basis, allowing too little time for them
First, exports will probably be shipped, through the US parent, to regions not now covered by to become truly effective there.
its distribution network. If that works out, then the joint venture could be asked to supply prod-
ucts ancillary to the US firm’s main product lines—line fillers, so to speak—that would be dis- Ownership and control problems.
tributed through its normal channels of distribution. As the joint venture’s volume increases One problem that frequently arises in the
and the quality of its output improves, its costs could come down to those of other, now much management of joint ventures occurs when
larger, manufacturing plants in the MNC partner’s system. At that point, a decision would need an owner’s attitude changes. For example,
to be made as to whether to include the joint venture as part of the US company’s global sourc- the local partner might be a closely held
ing network. family corporation in which the driving
force behind formation of the venture has
come from the family patriarch, often the
founder of the company. Not infrequently,
Operational problems in such situations. The developing country the partner’s commitment to the venture
Once joint ventures are in operation, they partner, however, often has quite different changes materially when the patriarch is
may experience various problems, some of ideas, looking to the venture as a natural succeeded by other family members who
which might have been foreseeable at the vehicle for expanding into foreign markets. may not share his original interest. Similar
time the agreement was negotiated, others In most of the agreements we examined, attitudinal shifts can occur in MNC part-
of which could not. exports were restricted in one way or ners when their management, or even their
Problems related to multination- another (see Boxes 1 and 2). ownership, changes (see Box 2).
ality. Many joint ventures undertaken in • Tax issues. An MNC generally wishes There may be other control problems:
developing countries involve large MNCs to minimize its worldwide tax burden. This • Product line disputes. The interests of
that participate in a variety of other joint objective can dramatically affect its rela- the two partners diverge over time, with
ventures and run wholly owned sub- tions with a joint venture, especially when one desiring to extend the current product
sidiaries elsewhere in the world. The devel- the latter either imports parts and compo- line while the other demurs.
oping country firms that are their joint nents from the MNC or, as is usual, exports • Material and component sourcing.
venture partners, though they may be quite products through the MNC parent. The Local, and possibly cheaper, sources of
large by local standards, are often dwarfed MNC may manipulate transfer prices—that components can emerge, but the MNC part-
by their MNC partners. One possible source is, the prices charged by one part of the ner, which has been supplying them,
of difficulty, for example, is the differing MNC when transferring them to another remains adamant about continuing the sup-
basic objectives of the two types of firms. part—to lower its taxes, a strategy that is ply relationship unchanged.
An MNC may hope the joint venture will not necessarily in the interests of the local • Technology utilization. The MNC part-
operate in a way that will be optimal from partner—a problem frequently mentioned ner withholds some technologies, to the
the standpoint of its entire global network, by local partners in our interviews with perceived detriment of the joint venture.
not merely within the local market on them. Or new technology extensions developed
which their domestic joint venture partner • Dividend and investment policies. The within the venture are prevented from
usually focuses. These differing objectives MNC partner may have global investment being used more widely by the MNC part-
can lead to a variety of disagreements, programs that involve transferring of funds ner’s management.
including the following: from one region to another. It might, there- • Cultural problems. Joint venture man-
• Export rights. Typically, the MNC fore, prefer to receive dividends from the agements often are drawn from different
would prefer not to allow the joint venture joint venture instead of reinvesting earn- cultures, and misunderstandings can occur
to export products, which may be of infe- ings, a position not necessarily compatible for that reason alone. MNC executives
rior quality (compared with those it manu- with that of its domestic partner. The oppo- assigned to a joint venture can be seen by
factures elsewhere), into markets already site situation—in which the MNC partner local nationals as “arrogant” or “narrow-
served by other manufacturing points in its is content to delay dividends in favor of minded” individuals who are not able or
own system. It therefore favors insertion of faster expansion, and the local partner willing to comprehend the nuances of the
strict export limitations into the agreement demurs—also occurs on occasion. culture where the venture’s business is
28 Finance & Development / March 1997
overly legalistic document to provide the
Box 2 basis for overcoming these future conflicts
When joint venture partners disagree in an orderly manner.
The need for care in negotiating and, when necessary, renegotiating joint venture agreements • The agreement is best considered as a
can be illustrated by briefly describing cases from the International Finance Corporation (IFC) “living” document, in the sense that among
study in which serious disagreements arose between the partners. In one case, a large foreign its provisions should be procedures for
company that had failed in an attempt to become established in India retreated by forming a changing the agreement. Partners need to
joint venture with a local company with roughly comparable products. All worked smoothly realize at the outset that their respective
until recently, when new management in the foreign partner called for a new strategy that comparative advantages in the joint ven-
would, once again, involve trying to establish the company on its own. The negotiated agree- ture can change over time. Such ventures,
ment between the joint venture partners prevents such an attempt, however, because it reserves after all, necessarily entail power relation-
to the joint venture any local product manufacturing and sales. No resolution to this dilemma ships. Wise partners make sure that their
had been found at the time of the IFC’s study. companies are vital to the venture’s success
In a second case, a provision in the agreement setting up a joint venture in Turkey to manu- over the long run. It is not sufficient for
facture automotive components called for all export sales to be made through the foreign part-
ner, and this eventually became a constraint for the joint venture. The venture, which made firms to depend on their intimate knowl-
products carrying the foreign company’s well-known brand, originally made products for only edge of government affairs or familiarity
the domestic market. As time went on, however, the venture’s products became internationally with local financial markets if they wish to
competitive, both in quality and in price, and there was perhaps a natural inclination to take have continuing relevance to the joint ven-
advantage of this competitiveness by beginning exports to Europe. Unfortunately, the foreign ture, since the perceived value of these con-
partner’s headquarters and main factories were in Europe, and it had little interest in displacing tributions is bound to erode over time; more
its own production with Turkish-made items, despite what appeared to be clear cost advan- substantive advantages—technology, dis-
tages. Time may change the foreign partner’s viewpoint and provide a stronger incentive for tribution channel control, export control,
modification of the joint venture agreement, but in the meantime, the venture’s ability to etc.—will be required.
expand its sales beyond Turkey’s borders will remain tightly circumscribed. • Technology transfer is one of the more
sensitive and difficult issues confronting
joint venture managements. Although
the relevant provisions of the venture
being done. For their part, MNC managers tive costs and quality. Such a change can agreement provisions are important in
may dislike some business practices that necessitate new and large capital infusions establishing an operational framework,
they view as unacceptable and deeply that might be acceptable to one partner but technology is one area where formal provi-
embedded corruption that local nationals not the other. sions cannot serve as an adequate substi-
might see as quite normal. At the root of Obsolescing provisions of a joint venture tute for good will and understanding
such problems is the fact that common agreement are another cause of disputes. between the partners.
events can be interpreted in different ways Disputes occur in instances where excessive • Agreements need to contain fairly
by individuals from different countries (or detail has been initially inserted into the detailed provisions covering dispute resolu-
companies). This can be a particular prob- agreement, and they are difficult to resolve tion and, in the event of failure to reconcile
lem in transition economies, where the eco- once the conditions that motivated the pro- differences, the exit mechanism to be
nomic and political system may persist in visions change. An example of a problem employed in terminating the joint venture.
transmitting ambiguous signals to individ- provision is one dictating that the MNC Negotiation of such provisions should not
uals on what behavior is expected of them. partner will purchase a fixed proportion of be avoided because of an optimistic belief
Changing relationships. Joint ven- the joint venture’s output, which may ulti- that good relations will be maintained over
tures involve dynamic relationships, and it mately prove to be inappropriate for sale in the life of the venture, since trying to
is almost impossible to foresee at the time the MNC’s other markets. In general, too resolve disputes in an ad hoc fashion can be
of agreement just how underlying condi- strong a drive for legalistic purity in highly problematic. F&D
tions might change. For example, learning spelling out the precise joint venture rela-
takes place, and it can modify how one tionship in the partners’ initial agreement
partner views the contributions of the creates rigidities that may require lengthy
other. A developing country partner often renegotiations later on.
is seen at the outset as mainly contributing
knowledge of local practices, and the per- Conclusions
ceived value of its contribution can Joint venture relationships are often frag-
decrease as the MNC partner learns more ile and both difficult to negotiate and, once
about the local setting. negotiated, to hold together. Yet many do
Technological change also can lead to succeed and, indeed, thrive. Some of the
modifications in the partners’ relationship. lessons learned in this study are as follows: This article is based on the authors’
Unforeseen advancements in product or • Although no joint venture agreement International Joint Ventures in Developing
process technologies can obviate the origi- can serve as a substitute for the commit- Countries, IFC Discussion Paper No. 29
nal need for the joint venture from the per- ment of the partners, even deeply commit- (Washington: World Bank, 1996).
spective of one or the other partner. Or new ted partners can expect to have conflicts. A Reference:
technology might require the venture to suitable agreement, therefore, is a vital J. Peter Killing, “How to Make a Global Joint
adopt much more capital-intensive produc- component of a successful relationship. Venture Work,” Harvard Business Review,
tion methods in order to maintain competi- Such an agreement does not have to be an Vol. 60 (May/June 1982), pp. 120–27.
Finance & Development / March 1997 29
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