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 expansion.

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.

Oded 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.

In 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.

Joint 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 management teams.

3. Leverage Middle Market company expertise in running the joint venture.

Although 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.

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