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A study by Sharif As-Saber focuses on the role of six management control variables that contributed to the success of nine Indo-Australian joint ventures.
There are few better foreign investment vehicles for western firms operating in developing regions than the tried and tested international joint venture (IJV). After all, joint ventures need a lot less parental management control than say a wholly owned subsidiary, but probably more control than a licensing deal.
A study into the success of nine Indo-Australian IJVs was recently conducted with the aim of getting better understanding of the impact of various management control variables on their success.
Management control through a balanced sharing of decision-making is important to the success of any IJV and the IJV’s objectives should override individual objectives of the parent firms. In six of the nine IJVs in this study, major decisions are made/guided by both parents, whereas in the remaining three, decisions are made by IJVs with some policy guidelines from the parents. Decisions, therefore, are significantly shared between the parties. All interviewees acknowledged the importance of sharing decisions to the success of an IJV.
This deals with the extent of freedom given to the joint venture management by its parents and the management roles of each partner. Flexibility allows joint ventures to overcome problems and to adapt to necessary changes over time. Overall, the response-set agreed that giving management the flexibility it needs was very important to success. The success of flexible German firms in India suggests flexibility of foreign companies is a key success factor. A sample of 71 IJVs in India and Pakistan in 1970 found that a more relaxed attitude toward control delivered higher levels of profitability but that the parents must retain a clear recognition of the venture’s ongoing performance.
The level of equity participation can influence the level of management control. There are, however, contrasting views on the relationship between the probability of success and the level of equity participation. Consider the impact of ownership split on the IJV control: is a 50/50 split a better option than an asymmetric ownership structure such as 51/49 or 65/35? A multinational company will obviously maintain an effective control over an IJV if it owns a majority of the venture’s equity.
Overall, the importance for management control of the level of equity participation got a mixed response, with most of the IJVs and their Australian partners not considering it that important while most of the Indian hosts saying it was. When asked about such an outcome, one of the Australian parents said: ‘We believe in consensus and team spirit rather than competing for control over the equity issue. We know our strengths and those of our partners. We consider mutual understanding and trust more important than taking advantage of owning majority share.’
This remark is consistent with the observation that any attempt made by a partner to manipulate the decision-making process based on relative ownership of the joint venture can adversely affect the relationship with the venture and ultimately its success. Minority ownership does not mean sacrificing control and one can have control without ownership. Equity ownership may provide only an illusion of control, whereas actual control can come through other avenues such as the composition of the joint venture board, contractual veto rights, possession of the core technology, and so on. Many firms seek majority ownership because they intend to achieve substantial management control. Majority ownership might allow decisions to be made rapidly in response to market or product developments and thus avoid costly compromises or decision-making deadlocks. Equity level is perceived to have an impact on IJV management control, which, in turn, is likely to affect its success.
Please note: Actual names not used to protect privacy
Notes:
¹ Level of importance shown is on the basis of respondents’ views. Numerals used denote the numbers of firms falling within respective categories.
² The number of host companies is 10 because of two host partners for Tel-Comm IJV.
Notes:
¹ Level of importance shown is on the basis of respondents’ views. Numerals used denote the numbers of firms falling within respective categories.
² The number of host companies is 10 because of two host partners for Tel-Comm IJV.
The level of technology contribution can be critical. This is particularly so with licensing agreements where the joint venture cannot operate effectively without a license and where the license can be terminated by the international company.
This makes the significance of the license for control obvious. All our interviewees supported the proposition that the level of technology contribution influences IJV success and most of the respondents felt this was an issue with the IJVs slightly more positive than the Australian firms and their Indian counterparts. A possible explanation may be that the extent of control from the technology contribution is likely to affect the IJVs directly because they implement the licensing agreement and follow instructions from the contributors with respect to the possible implementation mechanisms.
One of the mechanisms to obtain management control in an IJV is through a majority representation on the board of directors. However, because of the tendency for making major IJV decisions by consensus, majority representation in the IJV board may be relatively unimportant. Results from a study of nearly 20 joint ventures in 1976 showed that the majority equity shareholders are likely to have managerial control in a joint venture since they have the right to dominate the board of directors.
Most of the respondents indicated that the IJV board structure influences success with a little more support coming from Indian companies. The majority of the IJV boards surveyed were evenly split.
Control through staffing and staff loyalty is another important issue with key positions such as General Manager playing an important role. A study in 1998 found many foreign companies exercise control over Indian IJVs through the selection and recruitment of personnel, thus making IJV decisions a critical control factor. Despite the perceived importance of control through staffing, most of the respondents in this latest survey considered control through sharing IJV personnel had no impact on success.
MBR subscribers: to view full academic paper, email mbr@buseco.monash.edu.au
Public access: www.mbr.monash.edu/full-papers.php (six month embargo applies).
Dr Sharif As-Saber is Senior Lecturer in International Business at Monash University.
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URL: http://www.austlii.edu.au/au/journals/MonashBusRw/2007/40.html