International Joint Ventures

International Joint Ventures

Trent Prather

AIU

INTERNATIONAL JOINT VENTURES

Considering their vast knowledge in this field, Barboza & Kanter (2007), define IJV’s as the scenario where two or more businesses come together and form an agreement to work together or rather make a partnership in a case where the two businesses are based in two different countries. Hence this forms an international trade between two countries in terms business partnership. This helps in formation of a joint venture that in turn minimizes the risks that may face an outright acquisition of a business.

It is thus an important and strategic alliance of diverse companies in different countries hence creating a room for access of each other’s resources, markets, labor, technology and capital. This creates a competitive ground which is advantageous. On the other hand, IJVs form a ground and mechanism in international transfer of ideal business and technological knowledge from one country to another (Shenkar, 1990).

ADVANTAGES FOR ENTERING IN AN IJV WITH CHINA

China has become one of the world’s leading economy building country with amazing economic growth rate due to her advancement in technology and large ideal population that is labor intensive and ready technological advancement in all fields. This country has formed a very good base for formation of IJV’s due to its economic advancement that has become a benchmark for many other countries who are developing or those who are already developed like the U.S.A.

One of the considerations that the United States may have considered before forming IJVs with China is the fact that there is a great potential for large market access for its exports and home made products in China. The large population in china forms a very ideal base in providing a great deal of market access which goes the same way for china.

The united states deals with high capital intensive industries and thus this creates a good platform in spreading the risks involved with an economically potential country in terms of formation of IJV’s. Risks such as high production costs can thus be shared between the two countries.

In consideration of his opinion, Shenkar, O., (1990), says that when it comes to pulling and amassing resources so as to balance the economies of scale, then formation of IJV’s between the two countries is ideal. The two countries have immense resources that when put in a common pool can lead to a great business improvement. This will thus balance the scale ideally at fifty to fifty hence smoothening the running of major companies.

Considering the technological advancement between the two countries, it is thus an ideal partner to share technological advancement in both industrial and technology sector. When the two countries exchange these advancements, this creates a big platform for bigger businesses to be established in either countries hence increasing the rate of production, (Burgers et al. 2009).

In their extensive research, Barboza & Kanter (2007), say that there are many businesses in China but due to geographical constraints, they have become retarded due to cultural differences and hence the need to form partnership with the local companies there to be able to access the local market with ease since the locals understand both the language and the Chinese culture more easily.

The other factor comes as a business strategy for company to company acquisition but the process may be hard due to geographical, legal, or even cost barriers. Formation of IJVs with the local companies in China has made such a process much smoother and cost effective. At the same time this forms a plat form for market enlargement (Barboza & Kanter, 2007).

In his view, Shenkar (1990), political stability between the two countries is also highly enhanced due to the fact that the two countries share an international partnership that binds them. This makes all the other forms of trade between the two countries more effective and hence investment is encouraged since there is peace between the two countries.

CONCIDERATIONS FOR IJV’s IN CHINA

One of the major challenges facing the establishment of International Joint Ventures in China is Guanxi. This is a form of informal relationships that influence the economy of a certain class of people obligated to each other by certain ties and it is believed to hold the society together. Hence this creates a difficult challenge in establishing which Guanxi society to connect with so as to form a successful partnership since these societies work in trust codes and obligations, (Luo, 2002).

Political considerations or rather challenges have been a great deal in china whereby the capitalists face a difficult time in trying to form business mergers and partnerships in China. The government forms a lot of political barriers as well as legal barriers in establishment of these businesses and partnerships to discourage capitalism since they are Marxists. Government interference has been a major consideration (Burgers et al. 2009).

In regard to the opinion shared by Barboza & Kanter (2007), the unfair macro-business environment is another major challenge to consider whereby impending factors such as currency risks, political intrusion to evict the operation of a business to allow room for another, acquisition of assets void of another partner’s knowledge and unclear stipulated rules in adherence to regulations that get misinterpreted to discourage foreign businesses are some of the business environment risks to watch out for. For example, the McDonalds were evicted from thre business premises even after signing a twenty year deal with the local government but they still lost the suite to the local government through a legal process.

Another major challenge is the monetary compatibility of the dollar to the Chinese currency. This creates a barrier in the market since the dollar losses some of its market value in the country as a result of inflation. The realized profits may differ when put in Chinese currency unlike in dollar.

Taxation is another major problem that faces multinational companies that form partnerships in china since the tax rates are really high and hence creating an interest rate conflict. Partners may also tend to differ on the tax rates offered and payments at a transactional level depending on the percentage each partner owns (Luo, 2002).

CONCLUSION

International joint ventures are having a global advantage in both the business and technological sector. There are a number of great advantages as well as disadvantages facing this sector and as a result various countries should work hand in hand and encourage this profitable practice.

REFERENCES

Burgers, Willem, Padgett and Dan (2009); Management International Review

Barboza, D., Kanter J., (2007), International Herald Tribune.

Luo, Y., (2002), Perspectives from Chinese Firms, Journal of Business Research.

Shenkar, O., (1990), International Joint Ventures’ Problems in China: Risks and Remedies, Long Range Planning.

Reus, T., Ritchie III, W., (1994), Environmental Factors Influencing the Operation of International Joint Ventures.