Joint Ventures and Alliances

1. Joint Ventures and Alliances

2. Mode of entry greenfield acquisition Partial acquisition Greenfield EJV shared ownership Greenfield WOS Full acquisition full

3. Why Joint Ventures? • Joint ventures imposed by governments • Joint ventures as a first best strategy

4. A firm which does not have all the capabilities it needs can • Internalize • Obtain access

5. Equity Joint Ventures vs. Contracts (Alliances) Contracts: • Licensing • Technical cooperation • Distribution

6. Equity Joint ventures vs. Contracts • Contracts: pay specified ex ante • Equity joint ventures: parties get paid for their contribution ex post from the revenues of the venture

7. Advantages of Equity Joint Ventures • Reduces incentives for opportunism in the supply of inputs • Reduces negotiation and renegotiation costs

8. Equity Joint Ventures vs. Contracts • Joint ventures have stronger incentives (more stable) • Joint ventures are more flexible • Joint ventures have higher fixed costs

9. When are Equity Joint Ventures efficient? • When two or more parties hold complementary assets • When these assets are hard to evaluate and price ex ante

10. Complementary Assets • Similar (scale joint venture) • Dissimilar (link joint venture)

11. Hard to sell assets • Materials and components • Know-how • technological • marketing • country-specific • Distribution services • Capital

12. Link joint venture Obtain complementary resources • Distribution and Country Specific Knowledge (Market Entry JV) • Complementary know-how (CFM= GE + SNECMA) • Capital (Ebara-Cryodynamics)

14. Scale joint venture • Obtain scale economies in manufacturing, research, distribution • Aramco • Power PC (Apple + Motorola + IBM) • Francaise de Mecanique (Renault + Peugeot) • Toyota-PSA Kolin

15. Aluminum Oxide Stade Reynolds 50% VAW 50% . . . . . . . . . . . . . . . Reynolds Reynolds . . . . . . . . . . . . . . . . . . . . VAW VAW Bauxite Alumina Aluminum Scale joint venture

16. Necessary and sufficient conditions for scale equity joint ventures • Differences in scale across stages of the value chain • Need for stages to be vertically integrated

17. Licensing or Integration? Assets held by the MNE hard to sell/acquire easy to sell/acquire MNE licenses/ franchises Local firm Hard to Sell/ acquire Equity Joint Venture between MNE and local firm assets held by a local firm easy to sell/ acquire Wholly-owned subsidiary of MNE

18. ‘Market ‘Sugar- R&D scale entry’ R&D link daddy’ Distribution Tripartite Japanese scale and link Nationality- based raw Downstream Downstream materials vertical vertical scale Marketing/ country- Intermediate specific Tacit Distribution Nationality inputs Capital knowledge technology A B C D E F 1. Capital 2. Country knowledge 3. Tacit technology 4. Distribution 5. Nationality 6. Intermediate inputs

19. EJV vs. Replication and Acquisition • Replication more expensive than access if • desired assets public goods • desired assets unique • Acquisition more expensive than access if • illegal • acquired assets indigestible • damage to incentives

20. Ratio of majority acquisitions to joint ventures (aversion ratio), European Community, 1983-92

21. Joint ventures less stable than wholly-owned affiliates • Raw data • Hennart, Kim and Zeng (1998)

22. Instability of partial and full Japanese stakes in US manufacturing 1980 to 2000source: Hennart database

23. Why instability? • Are EJVs learning races? • Some EJVs are short-lived by design • JVs are not intended to be learning races, but may degenerate into learning races

24. Alliance partners seek “collaborative specialization” • but collaborative specialization exposes parties to opportunism • protection against opportunism requires appropriate conditions • defective conditions cause learning races

25. Alliance partners seek “collaborative specialization” Trade and specialization -exchange of capabilities -joint asset building

26. Causes of Instability • Poor structure • goal conflicts • holdup • spillovers • parent interference • gridlock • Poor process • values and goals • communication • interface

27. Solutions • Structure • structural design • legal safeguards • partner selection • Process • structural design • partner selection

28. Goal Conflicts/Free riding • Partners have different goals • Free-riding

29. Goal conflicts/free riding Global vs. local • Reinvestments • Advertising • Exports • Transfer pricing

30. Solutions to goal conflict/free riding • Have potential partners spell out goals ex ante • Give partner control over performance aspects vulnerable to free-riding

31. Holdup When dependence becomes asymmetric, party less dependent can exploit the other • Anamartic&Fujitsu

32. Solutions to holdup • Specify market price transfers • Symmetrical structure • Set up mutual hostages • (Pernod-Ricard & Heublein) • Co-specialized assets • (Oris & Syncor)

33. ASYMMETRIC Firm 1 Firm 2

34. SYMMETRIC Firm 1 Firm 2

35. Spillovers Parties divert their partner’s contributions to the alliance to activities outside the alliance (Wahaha and Danone)

36. 50% 50% 100% 100% Parent 1 Non JV operations Parent 2 Non JV operations JV

37. Solutions to spillovers • Choose right partner (McDonalds &ToysRUs) • Change the scope of the alliance • expand (Shin Caterpillar-Mitsubishi) • segment (Fuji-Xerox) • Blackbox knowhow (CFM Int’l) • Legal protection (patents, trademarks)

38. Change the rules of the game • Extend the shadow of the future • Make unilateral commitments

39. Relationship with EJV parents • Parent interference • Pricing of parent contributions • Gridlock

40. Strategic Gridlock Air Canada Lufthansa Canadian Airlines Int’l United American

41. Process • Different culture • Communication and interface

42. Stage in Process Strategy formulation Partner Search Negotiation Start-Up Operation Adjustments Management Tasks Define logic of collaboration Match goals & capabilities Allocate roles & design structures Invest & build trust Contribute & receive capabilities Monitor changes & renegotiate Managing Alliances