Strategies for International Joint Ventures: How to Choose the Right Partner
With growth slower in the U.S. than in emerging economies and
international competitors staking out domestic turf, globalization is
rapidly becoming imperative for U.S. businesses. Last year, 82% of
Middle Market companies expected more than 20% of their sales growth
would come from foreign markets, according to a survey by the National
Center for the Middle Market. Furthermore, the U.S. government will be
hard-pressed to achieve its goal of doubling exports within five years
without the active participation of such firms.
However, just 58%
of U.S.–based Middle Market companies are active outside of the country,
according to the NCMM study. And many of those have only limited
foreign operations. Roughly a third of mid-sized companies cite lack of
knowledge about international markets as a significant barrier to
International joint ventures are among the most common
mechanisms used by such companies to overcome the lack-of-knowledge
handicap. Unfortunately, approximately 50% of international joint
ventures fail. By virtue of their size and lack of experience, Middle
Market companies are more vulnerable to failure than their large
counterparts. Since their bargaining power tends to be weaker, they are
also more likely to be exploited by unscrupulous partners or government
agencies. Consequently, they must learn to get these alliances right.
Shenkar, fellow of the National Center for the Middle Market
investigated the effect of a parent companies’ size on the success of
international joint ventures. He analyzed data from a nationwide survey
of 265 CEOs of such alliances, based in China. The data was gathered
between 1996 and 1997. Professor Shenkar focused on China due to Middle
Market companies identifying the country as their top investment
priority. It is also home to hundreds of thousands of alliances and is
one of the most challenging investment environments for foreign
businesses. The following are his key findings:
1. Choose larger company partners.
international joint ventures, Middle Market companies will naturally
gravitate toward other Middle Market companies, with whom they share
characteristics ranging from strategy to culture. But large
international companies are better able to deliver what Middle Market
companies need. Large partners will likely have connections to key
government agencies, which translate into favorable policies and
incentives. They will have better access to local markets and greater
brand recognition. And they will have significant expertise in how to
modify goods and services for those markets. Partnering with a large
company is more advantageous to Middle Market companies.
2. Be proactive about managing risks.
ventures with large foreign partners have a greater likelihood of
financial success for U.S. Middle Market companies, but they also
present greater risk. Large foreign firms are often in better bargaining
positions than their smaller U.S. partners. In places like China,
collusion between state-owned enterprises and local regulators can leave
Middle Market companies with little recourse, as in cases of
unauthorized technology transfers from the joint venture to a large
local partner. Middle Market companies should study the risks of such
alliances to see whether they can be mitigated. In addition,
information-sharing is especially challenging between partners of
different sizes from different countries. Middle Market firms should
open direct communication channels with their large partners and
increase the national and cultural diversity of their boards and senior
3. Leverage Middle Market company expertise in running the joint venture.
Middle Market companies should partner with larger corporations, the
joint ventures they produce need not be large. Mid-sized joint ventures
have sufficient heft to garner attention and resources from their
corporate parents. At the same time they are small enough to respond
quickly to changing circumstances. Middle Market firms, which have the
experience and capability to run mid-sized organizations, can leverage
their expertise and best practices to run joint venture operations.
Large and influential foreign partners who are more familiar with the
host environment but may be less proficient in running mid-sized
enterprises should not intimidate Middle Market companies.
To learn more download the white paper or watch the webinar.