International Joint Venture Mismanagement: A Fatal Mistake of International Business
What factors affect the success or failure of an International Joint Venture (IJV)?
As companies grow and begin to reach maturity in their domestic market, a common growth strategy is to cross national borders. As they venture into foreign countries, one aspect of this corporate strategy is to cooperate with a local company in establishing an international joint venture (IJV). In fact, IJVs are now the most widespread form of American investment abroad. In contrast to wholly owned subsidiaries, IJVs allow a company to access a new market without having to allocate the significant time and resources needed to manage the business on its own.
As attractive as IJVs may appear, they don’t come without great risk. In fact, research has consistently shown that roughly 50% of all IJVs fail to deliver desired results. Why is this? Some degree of failure is inherent in any business venture, but why do as much as half of all IJVs fail?
Unfortunately, there is no clear recipe for success due to many factors that come into play. However, most IJV failures are rooted in one of five common causes. These five common causes include:
This white paper will illustrate how these common root causes can affect the outcome of your international partnership, provide lessons learned from the failures of other companies, and outline practical steps to set your IJV up for success.
Common Causes, Examples, and Solutions
Culture, Culture, and Trust
When a joint venture is formed, it is an attempt at blending two or more cultures in the hope of leveraging on the strength of each party. Lack of understanding of the cultures of the individual parties poses a problem if not addressed. Analysts agree that gaps in corporate cultures arising from a wide variance in national business cultures is the main culprit of IJV failures.
The DaimlerChrysler-Mitsubishi alliance in 2000 is a prime illustration of how ignoring cultural differences leads to disaster. In this case Daimler, a German company, failed to acknowledge the local practices and principles of Mitsubishi’s Japanese business culture. Japanese culture values personal relationships more than facts, which differs greatly from the German pragmatic, data-driven approach to decision making. Nevertheless, Daimler appointed German managers to the IJV that did not hold trust and attention to others’ feelings in the same regard as their Japanese subordinates.
Not recognizing each other’s distinct goal orientation also hindered their ability to come to agreements on financial decisions. DaimlerChrysler, like many Western businesses, was more short-term goal oriented, while Mitsubishi strove for long-term goals. As a result, the financial difficulties which the Mitsubishi Motors JV experienced were perceived quite differently by the by two companies involved. Mitsubishi viewed their financial difficulties as an obstacle to overcome, whereas DaimlerChrysler refused to make any further investments when they did not realize their desired short-term profits. At this point the little trust that remained deteriorated, and the partnership soon dismantled. In summary, their inability to establish proper communication, build trust, and recognize each other’s goals played a significant role in the end of the partnership.
Cultural differences, rather than being reactive after-thoughts, need to be addressed early and often. Trust and communication are the foundation of any successful partnership. Clearly recognizing and respecting cultural differences will help to establish this foundation and can ultimately lead to a successful IJV.