Transcript jv and alliances

Joint Ventures and
Alliances
Mode of entry
greenfield acquisition
shared
Greenfield Partial
acquisition
EJV
full
Greenfield Full
WOS
acquisition
ownership
Why Joint Ventures?
• Joint ventures imposed by
governments
• Joint ventures as a first best
strategy
A firm which does not have all
the capabilities it needs can
• Internalize
• Obtain access
Equity Joint Ventures vs.
Contracts (Alliances)
Contracts:
• Licensing
• Technical cooperation
• Distribution
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
Advantages of Equity Joint
Ventures
• Reduces incentives for
opportunism in the supply of inputs
• Reduces negotiation and
renegotiation costs
Equity Joint Ventures vs.
Contracts
• Joint ventures have stronger
incentives (more stable)
• Joint ventures are more flexible
• Joint ventures have higher fixed
costs
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
Complementary Assets
• Similar (scale joint venture)
• Dissimilar (link joint
venture)
Hard to sell assets
• Materials and components
• Know-how
– technological
– marketing
– country-specific
• Distribution services
• Capital
Link joint venture
Obtain complementary resources
• Distribution and Country Specific
Knowledge (Market Entry JV)
• Complementary know-how (CFM= GE +
SNECMA)
• Capital (Ebara-Cryodynamics)
Scale joint venture
• Obtain scale economies in manufacturing,
research, distribution
• Aramco
• Power PC (Apple + Motorola + IBM)
• Francaise de Mecanique (Renault +
Peugeot)
• Toyota-PSA Kolin
Bauxite
Alumina
Aluminum
Scale joint venture
Reynolds . . . . . . .
Aluminum Oxide . . . . . . . .
Reynolds
Stade
Reynolds 50%
VAW
..........
VAW 50%
. . . . . . . . . . VAW
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
Licensing or Integration?
Assets held by the MNE
hard to
sell/acquire
Hard to
assets Sell/
acquire
held
by
a local
firm
easy
to sell/
acquire
Equity Joint
Venture between
MNE
and local
firm
Whollyowned
subsidiary of
MNE
easy to
sell/acquire
MNE licenses/
franchises
Local firm
Marketing/
countryIntermediate
specific
Tacit
Capital knowledge technology Distribution Nationality inputs
A
B
C
D
E
F
1. Capital
2. Country
knowledge
3. Tacit
‘Sugar- ‘Market R&D scale
technology daddy’ entry’ R&D link
4. Distribution
5. Nationality
6. Intermediate
inputs
Distribution
scale and link
Tripartite Japanese
Nationalitybased
Downstream
Downstream
vertical
vertical
raw
materials
scale
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
Ratio of majority acquisitions to joint ventures
(aversion ratio), European Community, 1983-92
National Aversion Ratio
Community Aversion Ratio
International Aversion Ratio
8
7
Aversion Ratio
6
5
4
3
2
1
0
83-84
84-85
85-86
86-87
87-88
Time Period
88-89
89-90
90-91
91-92
Joint ventures less stable than
wholly-owned affiliates
• Raw data
• Hennart, Kim and Zeng (1998)
Instability of partial and full Japanese stakes in
US manufacturing 1980 to 2000
source: Hennart database
Stake at entry Survived Exited Total
0-49%
35
74
50%
15
10
51-94
31
17
95-100
109
47
All
190
148
% Exit
109
25
48
156
338
68
40
35
30
44
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
• Alliance partners seek “collaborative
specialization”
• but collaborative specialization
exposes parties to opportunism
• protection against opportunism
requires appropriate conditions
• defective conditions cause learning
races
Alliance partners seek
“collaborative specialization”
Trade and specialization
-exchange of capabilities
-joint asset building
Causes of Instability
• Poor structure
•
•
•
•
•
goal conflicts
holdup
spillovers
parent interference
gridlock
• Poor process
• values and goals
• communication
• interface
Solutions
• Structure
• structural design
• legal safeguards
• partner selection
• Process
• structural design
• partner selection
Goal Conflicts/Free riding
• Partners have different goals
• Free-riding
Goal conflicts/free riding
Global vs. local
• Reinvestments
• Advertising
• Exports
• Transfer pricing
Solutions to goal conflict/free
riding
• Have potential partners spell out goals
ex ante
• Give partner control over performance
aspects vulnerable to free-riding
Holdup
When dependence becomes
asymmetric, party less
dependent can exploit the other
– Anamartic&Fujitsu
Solutions to holdup
• Specify market price transfers
• Symmetrical structure
• Set up mutual hostages
– (Pernod-Ricard & Heublein)
• Co-specialized assets
– (Oris & Syncor)
ASYMMETRIC
Firm 1
Firm 2
SYMMETRIC
Firm 1
Firm 2
Spillovers
Parties divert their partner’s
contributions to the alliance to
activities outside the alliance
(Wahaha and Danone)
100%
50% 50%
100%
Parent 1
Non JV
operations
JV
Parent 2
Non JV
operations
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)
Change the rules of the game
• Extend the shadow of the future
• Make unilateral commitments
Relationship with EJV parents
• Parent interference
• Pricing of parent contributions
• Gridlock
Strategic Gridlock
Air Canada
Lufthansa
Canadian
Airlines
Int’l
United
American
Process
• Different culture
• Communication and interface
Managing Alliances
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