International joint venturesoffer attractive opportunities,yet they frequently performunsatisfactorily. Why do theyrun into trouble, and whatcan partners and managersdo to maximize the chances ofsuccess?

OINT ventures between domesticcompanies in developing countriesand foreign companies have becomea popular means for both manage-

ments to satisfy their objectives. They offer,at least in principle, an opportunity foreach partner to benefit significantly fromthe comparative advantages of the other.Local partners bring knowledge of thedomestic 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 exportmarkets. For either side, the possibility ofjoining with another company in the new

venture lowers capital requirements rela-tive to going it alone.

As attractive as joint ventures mightseem, however, they frequently performunsatisfactorily and are comparativelyunstable. This seems to be true even whenthe partners are two companies fromthe same industrial country; inter-national joint ventures seem to be more vulnerable still. In a study of thelatter (Killing, 1982),

for example, 36 percent were rated by par-ticipants as having performed poorly—ahigh proportion indeed. An obvious set ofquestions therefore arises: If internationaljoint ventures are established to exploit the

J

26 Finance & Development / March 1997

International Joint Ventures in Developing Countries

R O B E R T M I L L E R , J A C K G L E N , F R E D J A S P E R S E N , A N D YA N N I S K A R M O K O L I A S

Robert Miller,a US national, is a Consultant tothe International Finance Corpora-tion’s Economics Department.

Jack Glen,a US national, is a PrincipalEconomist in the InternationalFinance Corporation’s EconomicsDepartment.

Fred Jaspersen,a US national, is Lead Economistin the International FinanceCorporation’s EconomicsDepartment.

Yannis Karmokolias,a Greek national, is a SeniorEconomist in the InternationalFinance Corporation’s EconomicsDepartment.

complementary features of each partner,why are the partners frequently disa-pointed with their joint performance? Whatproblems cause them to be unstable? Canthese problems be alleviated to improvethese ventures’ prospects for success? Onbehalf of the International FinanceCorporation (IFC), we surveyed joint ven-tures between domestic companies indeveloping countries and foreign compa-nies based in industrial countries to try tounderstand the difficulties that arise innegotiations leading up to a joint ventureagreement and those that arise during theventure’s implementation and operation.About 75 joint ventures in 6 countries wereincluded in the study.

Negotiating agreementsThe managers we contacted expressed

mixed feelings about the formal joint ven-ture agreement, with some managers view-ing it as a critical element in defining thelonger-term relationship and others dis-counting its significance. The latter grouptended to stress that no agreement canwork without the good will and dedicationof both partners, a point that may be truebut that does not diminish the importanceof a well-crafted working agreement. Theformer group, which included the vastmajority of managers contacted, believedthe agreement to be an essential buildingblock in structuring the joint venture. Onthe one hand, an indication of the serious-ness managers attached to such agree-ments was that nearly 85 percent of theagreements required at least 6 months, andabout 20 percent took more than 18months, to negotiate. On the other hand, thesurvey found no relationship between thelength of time required to complete anagreement and the partners’ ultimate satis-faction with the venture’s operation.

Two issues were clearly more importantin joint venture negotiations (see table).First was the equity structure (noted byfour-fifths of respondents), which was alsoviewed as the most difficult issue to negoti-ate. Control of a joint venture is not some-thing surrendered easily, although, asnoted below, majority ownership does notnecessarily confer control of all aspects of ajoint venture’s operations. Second was theset of conditions for technology transfer,almost always from the industrial countrypartner. Important aspects include definingprecisely what technologies (possiblyincluding technologies not yet developedby either side) are to be covered in theagreement and the terms under which theyare to be made available to the venture.

Both sides are aware that payments fortechnology are an important means oftransferring benefits from the venture andof indirectly maintaining control, whichinevitably leads to prolonged discussion oftechnology transfer. Technology providersare interested in protecting their intellectualproperty and, therefore, want to set limitson where and how the technology can beused by the joint venture and to placerestrictions on who controls derivative tech-nologies, no matter where developed. Thedeveloping country partners hope to setbounds on the royalties and fees they willhave to pay providers, especially as thetechnology becomes older, and to broadenthe joint venture’s control over its use.

There are other problems that frequentlyarise during negotiations:

Valuation problems. Each partnerbrings financial and other assets to the jointventure, and it is often not easy to deter-mine what these assets are worth. One sidemay bring a going business, which may nothave equity shares traded on a secondarymarket. Or technology may already beincorporated into a product that is to beproduced and sold by the venture. What aresuch assets worth? Such problems areamong the most difficult to sort through innegotiations.

Transparency. Getting accurate dataupon which to base valuations and otherdecisions can be very difficult in somecountries, especially where accountingstandards are quite different from interna-tional standards. Transparency is a par-ticular problem in former commandeconomies, where, until recently, there havebeen no real markets for outputs, supplies,or financial instruments.

Conflict resolution. Many joint ven-ture agreements spell out how disputesbetween partners are to be resolved. Theseprovisions are important, since disputes are

virtually inevitable in a relationship ascomplex and dynamic as a joint venture. Atthe extreme, conflicts can lead to the desireof one partner or the other to dissolve theenterprise, so provisions detailing proce-dures to be followed in the event of a disso-lution are obviously necessary.

Division of management responsi-bility and degree of managementindependence. There is some evidencethat protection of a joint venture’s manage-ment from parent company interference isan important determinant of the venture’ssuccess. Attempts by parent companies tomicromanage an enterprise that may bethousands of miles away are doomed to fail-ure. A better strategy is for them to set upclear operational parameters and then letthe venture’s management succeed or failon its own.

Changes in ownership shares. Howshould the ownership structure be changedas a joint venture matures? Although mostpartners agree that they should addressthis issue early on, rather than waiting for acrisis to occur, it remains a sensitive one.Developing country partners, especially,can be leery of such provisions, which theysee as potential death warrants—that is, asvehicles that industrial country partnersmay, for one reason or another, use to takefull control.

Dividend policy and other finan-cial matters. Dividend policy goes to theheart of why companies enter into jointventures, with some companies hoping toexpand and gain market share rapidlywhile others are striving to achieve quickincreases in cash flows that they can use tosupport other operations. Potential con-flicts between these differing objectives arebest handled when the joint venture agree-ment is being negotiated.

Marketing and staffing issues.Because marketing is so critical to the jointventure’s success, it should not be surpris-ing that it can be a difficult matter to nego-tiate. From the viewpoint of the localpartner’s management, maintaining controlover distribution channels and marketing isone way in which its continuing contribu-tion to the joint venture can be assured.Such a view, however, may conflict with theplans of the multinational company (MNC)partner, which may see the joint venture asonly part of a larger strategy to enter thedeveloping country market. Similarly, insis-tence by the MNC partner on control of key positions in the joint venture may beseen by the local partner, first, as overlyexpensive and, second, as an effort tomarginalize it.

27Finance & Development / March 1997

Important Difficult

Equity structure 80 33Technology transfer 78 26Marketing issues 45 28Staffing issues 44 26Dividend policy 42 21

Source: Robert Miller, Jack Glen, Fred Jaspersen,and Yannis Karmokolias, 1996, International JointVentures in Developing Countries, IFC DiscussionPaper No. 29 (Washington: World Bank).

Importance and difficulty ofnegotiating points in joint

venture agreements(percentage of respondents noting category)

Operational problemsOnce joint ventures are in operation, they

may experience various problems, some ofwhich might have been foreseeable at thetime the agreement was negotiated, othersof which could not.

Problems related to multination-ality. Many joint ventures undertaken indeveloping countries involve large MNCsthat participate in a variety of other jointventures and run wholly owned sub-sidiaries elsewhere in the world. The devel-oping country firms that are their jointventure partners, though they may be quitelarge by local standards, are often dwarfedby their MNC partners. One possible sourceof difficulty, for example, is the differingbasic objectives of the two types of firms.An MNC may hope the joint venture willoperate in a way that will be optimal fromthe standpoint of its entire global network,not merely within the local market onwhich their domestic joint venture partnerusually focuses. These differing objectivescan lead to a variety of disagreements,including the following:

• Export rights. Typically, the MNCwould prefer not to allow the joint ventureto export products, which may be of infe-rior quality (compared with those it manu-factures elsewhere), into markets alreadyserved by other manufacturing points in itsown system. It therefore favors insertion ofstrict export limitations into the agreement

in such situations. The developing countrypartner, however, often has quite differentideas, looking to the venture as a naturalvehicle for expanding into foreign markets.In most of the agreements we examined,exports were restricted in one way oranother (see Boxes 1 and 2).

• Tax issues. An MNC generally wishesto minimize its worldwide tax burden. Thisobjective can dramatically affect its rela-tions with a joint venture, especially whenthe latter either imports parts and compo-nents from the MNC or, as is usual, exportsproducts through the MNC parent. TheMNC may manipulate transfer prices—thatis, the prices charged by one part of theMNC when transferring them to anotherpart—to lower its taxes, a strategy that isnot necessarily in the interests of the localpartner—a problem frequently mentionedby local partners in our interviews withthem.

• Dividend and investment policies. TheMNC partner may have global investmentprograms that involve transferring of fundsfrom one region to another. It might, there-fore, prefer to receive dividends from thejoint venture instead of reinvesting earn-ings, a position not necessarily compatiblewith that of its domestic partner. The oppo-site situation—in which the MNC partner is content to delay dividends in favor offaster expansion, and the local partnerdemurs—also occurs on occasion.

• Differences in partner size. The localpartner is likely to be considerably smallerthan the MNC partner, a difference that canhave important consequences for operatingthe joint venture. MNC managers note, forexample, that early, rapid expansion of theventure can require substantial capital infusions that the developing country part-ner may not be able to provide. It is alsotrue, however, that the joint venture may befar more important to the smaller partnerthan to the MNC partner; several managerswe spoke with noted that the joint venturesthey were involved in seemed to be unim-portant to the MNC and to have receivedtoo little of its attention. The MNC mightassign managers to the venture on a rotat-ing basis, allowing too little time for themto become truly effective there.

Ownership and control problems.One problem that frequently arises in themanagement of joint ventures occurs whenan owner’s attitude changes. For example,the local partner might be a closely heldfamily corporation in which the drivingforce behind formation of the venture hascome from the family patriarch, often thefounder of the company. Not infrequently,the partner’s commitment to the venturechanges materially when the patriarch issucceeded by other family members whomay not share his original interest. Similarattitudinal shifts can occur in MNC part-ners when their management, or even theirownership, changes (see Box 2).

There may be other control problems: • Product line disputes. The interests of

the two partners diverge over time, withone desiring to extend the current productline while the other demurs.

• Material and component sourcing.Local, and possibly cheaper, sources ofcomponents can emerge, but the MNC part-ner, which has been supplying them,remains adamant about continuing the sup-ply relationship unchanged.

• Technology utilization. The MNC part-ner withholds some technologies, to theperceived detriment of the joint venture. Or new technology extensions developedwithin the venture are prevented frombeing used more widely by the MNC part-ner’s management.

• Cultural problems. Joint venture man-agements often are drawn from differentcultures, and misunderstandings can occurfor that reason alone. MNC executivesassigned to a joint venture can be seen bylocal nationals as “arrogant” or “narrow-minded” individuals who are not able orwilling to comprehend the nuances of theculture where the venture’s business is

Finance & Development / March 199728

Box 1

How joint ventures can adjust:Manufacturing consumer electronics products in India

One joint venture included in our study had brought together Indian and US partners to manu-facture a consumer electronics product. The joint venture was established with a clear divisionof responsibilities, and, at the beginning, its target market was India. Since the Indian partnerhad existing complementary products, it was agreed that this company would be responsiblefor marketing and distribution channel development, while the US side would supply productand process technologies. The joint venture has been enormously successful, manufacturinghigh-quality products throughout the country. Now the question of exporting these productshas arisen. The agreement specifies that exporting must be done through the US partner—amultinational company that distributes similar products, manufactured in plants in a variety ofcountries, through its worldwide network. The difficult question now arising is how the Indianjoint venture’s products can best be exported through the US company’s existing distributionstructure.

This evolving problem is one that has been confronted by countless other joint ventures,and, judging from their accumulated experience, the solution is likely to be an incremental one.First, exports will probably be shipped, through the US parent, to regions not now covered byits 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-tributed through its normal channels of distribution. As the joint venture’s volume increasesand the quality of its output improves, its costs could come down to those of other, now muchlarger, manufacturing plants in the MNC partner’s system. At that point, a decision would needto be made as to whether to include the joint venture as part of the US company’s global sourc-ing network.

being done. For their part, MNC managersmay dislike some business practices thatthey view as unacceptable and deeplyembedded corruption that local nationalsmight see as quite normal. At the root ofsuch problems is the fact that commonevents can be interpreted in different waysby individuals from different countries (orcompanies). This can be a particular prob-lem in transition economies, where the eco-nomic and political system may persist intransmitting ambiguous signals to individ-uals on what behavior is expected of them.

Changing relationships. Joint ven-tures involve dynamic relationships, and itis almost impossible to foresee at the timeof agreement just how underlying condi-tions might change. For example, learningtakes place, and it can modify how onepartner views the contributions of theother. A developing country partner oftenis seen at the outset as mainly contributingknowledge of local practices, and the per-ceived value of its contribution candecrease as the MNC partner learns moreabout the local setting.

Technological change also can lead tomodifications in the partners’ relationship.Unforeseen advancements in product orprocess technologies can obviate the origi-nal need for the joint venture from the per-spective of one or the other partner. Or newtechnology might require the venture toadopt much more capital-intensive produc-tion methods in order to maintain competi-

tive costs and quality. Such a change cannecessitate new and large capital infusionsthat might be acceptable to one partner butnot the other.

Obsolescing provisions of a joint ventureagreement are another cause of disputes.Disputes occur in instances where excessivedetail has been initially inserted into theagreement, and they are difficult to resolveonce the conditions that motivated the pro-visions change. An example of a problemprovision is one dictating that the MNCpartner will purchase a fixed proportion ofthe joint venture’s output, which may ulti-mately prove to be inappropriate for sale inthe MNC’s other markets. In general, toostrong a drive for legalistic purity inspelling out the precise joint venture rela-tionship in the partners’ initial agreementcreates rigidities that may require lengthyrenegotiations later on.

ConclusionsJoint venture relationships are often frag-

ile and both difficult to negotiate and, oncenegotiated, to hold together. Yet many dosucceed and, indeed, thrive. Some of thelessons learned in this study are as follows:

• Although no joint venture agreementcan serve as a substitute for the commit-ment of the partners, even deeply commit-ted partners can expect to have conflicts. Asuitable agreement, therefore, is a vitalcomponent of a successful relationship.Such an agreement does not have to be an

overly legalistic document to provide thebasis for overcoming these future conflictsin an orderly manner.

• The agreement is best considered as a“living” document, in the sense that amongits provisions should be procedures forchanging the agreement. Partners need torealize at the outset that their respectivecomparative advantages in the joint ven-ture can change over time. Such ventures,after all, necessarily entail power relation-ships. Wise partners make sure that theircompanies are vital to the venture’s successover the long run. It is not sufficient forfirms to depend on their intimate knowl-edge of government affairs or familiaritywith local financial markets if they wish tohave continuing relevance to the joint ven-ture, since the perceived value of these con-tributions is bound to erode over time; moresubstantive advantages—technology, dis-tribution channel control, export control,etc.—will be required.

• Technology transfer is one of the moresensitive and difficult issues confrontingjoint venture managements. Although the relevant provisions of the ventureagreement provisions are important inestablishing an operational framework,technology is one area where formal provi-sions cannot serve as an adequate substi-tute for good will and understandingbetween the partners.

• Agreements need to contain fairlydetailed provisions covering dispute resolu-tion and, in the event of failure to reconciledifferences, the exit mechanism to beemployed in terminating the joint venture.Negotiation of such provisions should notbe avoided because of an optimistic beliefthat good relations will be maintained overthe life of the venture, since trying toresolve disputes in an ad hoc fashion can behighly problematic.

29Finance & Development / March 1997

This article is based on the authors’International Joint Ventures in DevelopingCountries, IFC Discussion Paper No. 29(Washington: World Bank, 1996).

Reference:J. Peter Killing, “How to Make a Global Joint

Venture Work,” Harvard Business Review, Vol. 60 (May/June 1982), pp. 120–27.

Box 2

When joint venture partners disagreeThe need for care in negotiating and, when necessary, renegotiating joint venture agreementscan be illustrated by briefly describing cases from the International Finance Corporation (IFC)study in which serious disagreements arose between the partners. In one case, a large foreigncompany that had failed in an attempt to become established in India retreated by forming ajoint venture with a local company with roughly comparable products. All worked smoothlyuntil recently, when new management in the foreign partner called for a new strategy thatwould, once again, involve trying to establish the company on its own. The negotiated agree-ment between the joint venture partners prevents such an attempt, however, because it reservesto the joint venture any local product manufacturing and sales. No resolution to this dilemmahad been found at the time of the IFC’s study.

In a second case, a provision in the agreement setting up a joint venture in Turkey to manu-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 madeproducts carrying the foreign company’s well-known brand, originally made products for onlythe domestic market. As time went on, however, the venture’s products became internationallycompetitive, both in quality and in price, and there was perhaps a natural inclination to takeadvantage of this competitiveness by beginning exports to Europe. Unfortunately, the foreignpartner’s headquarters and main factories were in Europe, and it had little interest in displacingits own production with Turkish-made items, despite what appeared to be clear cost advan-tages. Time may change the foreign partner’s viewpoint and provide a stronger incentive formodification of the joint venture agreement, but in the meantime, the venture’s ability toexpand its sales beyond Turkey’s borders will remain tightly circumscribed.

F&D