CHAPTER ONE
INTRODUCTION:
WHY INTERNATIONAL JOINT VENTURES ARE SO POPULAR. AND SO HARD

'A great marriage is not when the "perfect couple" comes together. It is when an imperfect couple learns to enjoy their differences.'

- David Meuer

There are many reasons for considering an international joint venture (IJV). Sometimes IJVs are the only legal way for a foreign investor to operate in a jurisdiction. In other cases, an IJV is likely practically the only way to operate in a sensitive sector. However, most Western partners enter into IJVs for commercial, not legal reasons. In most cases, the IJV is seen as a means to lower risk (i.e. benefit from the local partner's knowledge, resources, network, sales channels, etc.) or in some cases to share the risk (i.e. sharing large capital investment costs to realize a major project such as a new mine) or there is a strong business case to team up (i.e. special opportunity, access to a unique asset, strengthen control over an essential part of a supply chain, etc.).

Once you determine that the IJV is the way forward, then the next logical step is to consider the partners. Most problems in IJVs stem from the partners. Most Western partners do not realize that they are often the problem. Accordingly, before stress-proofing the local partner it makes sense to self-reflect. Ask yourself whether you would be a good IJV partner - and what changes may be required to make you a good partner (including availability of people, attention at HQ, governance/operational considerations, etc.).

The most common analogy for a joint venture (JV) is a marriage - albeit a corporate marriage. In this vein an IJV can be viewed as a cross cultural, corporate marriage. However, with corporates, there is no marrying for love. Everything is a marriage of (in)convenience. If that sounds depressing, it is because it is. However, joint ventures are wonderful structures. With a single stroke of a pen, so many intractable problems appear to get solved. If the joint venture is properly structured, with the right partner, and a lot of work, it can certainly help solve some intractable problems.

Joint ventures are rarely an organization's 'go to' solution.

In the past, the joint venture option was only considered because the organization is stuck and no other solution is available/visible internally. They are losing market share; they want to enter a new geography but lack the resources/ability; they need a license or lack some other market requirement; they need money; they wish to share the risk; or another reason leads them to conclude that a joint venture is better than struggling on their own. A further complexity is that even after they convinced themselves, they will still need to find the right counterparty who also thinks it is a good idea to do a joint venture!

As geopolitics become more complex and globalization is being reshaped, IJVs are increasingly seen as a potential solution to a host of new challenges. IJVs can allow a company to (i) exploit a technology in a sensitive or highly restricted market; (ii) build resilience in key parts of its global supply chain; (iii) meet market demands (i.e. IJV between two medium-sized players to build a market challenger with economies of scale); or (iv) plan a strategic semi-retreat - rather than fully exiting from a challenging jurisdiction it may be better to sell down to a trusted local partner (and ideally, pocket some money while keeping a foot or in some cases, a toe hold in the market).

As we explore the themes related to JV/IJVs, all common marriage themes will appear, such as trust, money, governance, contracts, motivations, common objectives, termination, etc. So, while the marriage analogy is imperfect, it helps contextualize the issues.

1.1 MARRIAGE ANALOGY

Given the marriage analogy's use throughout the book, let us build out the basic comparison. The idea is not to deconstruct the inner workings of a marriage (that is a different book!) - but to use a common construct that most readers will recognize, for better or for worse. In a marriage, two people come together via a contract (the marriage agreement). It could be argued that formation is the dating stage heading toward marriage which is represented by a signed contract. Over time, the partners will likely have a child.1 With the arrival of the child, the partners need to align on how to raise them, which involves a lot of communication and decisions. If the partners are from a mixed-cultural background, it could be argued that the marriage is an international one. To tie this to the joint venturing structure, the partners are the two (or more) companies that come together to do a joint venture through a joint venture contract (JVC); this contract is analogous to the marriage contract. The child is the joint venture company. In an IJV, the partner companies will usually be from different countries/cultural backgrounds. The simplest structure is shown in Figure 1.1, but there are no limitations. The joint venture company could be multiple companies; the joint venture could be a subsidiary of one of the partner companies or even one of the partner companies could be the JV company; there could be more than two partner companies, etc. Like a modern family, the permutations are limited only by negotiators' imagination.

Figure 1.1 Simple joint venture structure overview.

Joint ventures involve partners (companies) who typically have access to interesting resources (and sometimes, money, too). The newly formed joint venture companies (children?) they create together tend to be resilient and survive (this is at odds with the common perception that IJVs have high failure rates) at least for a number of years. However, by their nature IJVs are very rarely forever.

Text Box 1.1 Definitions

Before we progress, some clear definitions are needed. In particular, we need to clearly define what is a joint venture versus an IJV. We should also formalize what is meant by formation. It would also helps to contrast with M&A (mergers and acquisitions) and partnerships, too.

An IJV is 'an equity (versus non-equity, research, or contractual2) alliance created by two or more companies (i.e. partners) that are headquartered in different countries and formed to conduct some business as outlined in the joint venture contract usually by combining a portion of their resources to form a separate, jointly owned organization.' This definition is based on authors' previous research, and especially Inkpen and Li (1999).

For a joint venture (JV), the definition is basically the same as an IJV, except that it is between two domestic partners (so, the headquarters for each partner is in the same country). While JVs do not have the complexity of cross-cultural exchanges, the issues of different legal jurisdictions or concerns about geopolitical risks, the rest of the formation process is very similar to IJVs.

For M&A, when the transaction is completed, there is only one company left (merger) or one company has acquired (acquisition) the other either in its entirety or a part of it, such as a division (typically by buying the equity, but buying the assets is also possible).

A partnership or alliance is similar to a JV or an IJV, except there is no formal exchange of equity. Frequently, these types of structures are used to achieve a mutual goal or objective. They are often cost centers rather than fully stand-alone companies. Common examples include resource exploration, R&D projects, or collaborations to compete (such as the airline alliances).

The joint venture contract (JVC) is the contractual document that governs the collaboration.

For formation, the formal definition in the book is: 'The discussions, processes, negotiations, and agreements that occur regarding the establishment and operation of a possible joint venture, including selection of a partner, preferably that is interested, and including internal negotiation preparation discussions, excluding internal strategic pre-discussions to initiate a joint venture partner search, and concluding with the signing of a JVC, or termination of discussions, whichever occurs first.' This definition suggests that partner selection (i.e. initiation of discussions and exploring a JV as a possibility) is part of the formation stage. However, the most preferred partners might not be interested in pursuing a JV, such rejection, sadly, is just a part of the reality of the formation phase. The old Brothers Grimm saying 'You have to kiss a lot of frogs before you find your handsome prince' is not the whole story with IJVs, though. Many kiss many frogs only to be out of pocket and still not end up with a prince. Arguably, these companies are still far better off than those kissing frogs and ending up with a toad for a partner.

1.2 WHY DO COMPANIES FORM IJVs?

There are many reasons why companies decide to take the plunge and set up an IJV rather than going it alone. Some of the more common motivations we see are set out below:

1.2.1 Reason 1: Legally Required

The reason for the IJV may be prescriptive. Some jurisdictions legally require that foreign investment in certain sectors can only be by way of an IJV.

Most jurisdictions have screening systems in respect of foreign investment. These normally trend to liberalization as the...