Failure rate in international joint ventures

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Failure rate in international joint ventures

Guido Schmidt Joint ventures are domestic or international enterprises involving two or more companies joining temporarily to undertake a particular project. They have grown in popularity in recent years—joint ventures between U.

Certainly, not all of them will be successful; estimates of the failure rate of joint ventures reaches as high as 70 percent. Nonetheless, companies persist in initiating them for a variety of reasons. International joint ventures in particular are becoming more popular, especially in capital-intensive industries such as oil and gas exploration, mineral extraction, and metals processing.

The basic reason is simple: For example, just to start a mining operation in the United States ina company would have had to spend one to two billion dollars.

Few companies then or now could finance such an expenditure on their own, so joint ventures became more attractive as a way to share risks and costs and create scale economies. Another factor that contributed to the expansion in joint ventures in the past few decades was the cost involved for capital-intensive industries to continue their operations.

Companies in these industries depend heavily on advances in technology to reduce costs. By pooling their money and personnel, companies enhanced their chances of developing advanced technological methods that would reduce exploration and production costs and increase profit margins.

Joint ventures became a favored method of doing business for such industries. Joint ventures between American and international companies are increasingly common.

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Estimates suggest that approximately one-quarter of American companies' direct investments, i. Ideally, the partners contribute approximately equal amounts of resources and capital into each business.

The word "approximately" is important in foreign joint ventures, since some countries, such as China, will not allow outside companies to own the majority of a domestic business although they do encourage joint ventures. In some countries, joint ventures are the only way companies can engage in foreign business.

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For instance, Mexico requires that all foreign firms investing there have Mexican joint venture partners. In addition to government regulations, other reasons for multinational joint ventures include cutting the costs of doing business, sharing risks, and acquiring technological information and management expertise from other companies.

International joint ventures have also been fostered by international financial institutions such as the International Monetary Fund, the World Bank, and the World Trade Organization, who have instituted policies to eliminate trade barriers and deregulate foreign ownership restrictions and the international flow of capital.

These policies have helped create a business climate in which international investment and partnerships are an increasingly attractive, and often necessary, means by which companies seek to expand profit margins and market share.

Joint ventures are extraordinarily helpful to some companies in gaining access to foreign markets.

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Neither party may really be interested in the primary project, but they participate simply to gain access to the new market. Such projects generally represent a direct investment, which is sometimes limited by laws in the country in which the operation takes place.

One of the aims of a partner in a joint venture is to have a majority interest in it; that way, it maintains control over a project. This explains why some countries do not permit foreign companies to hold majority interests in their domestic business ventures.

Companies seeking to cut the costs of doing business see joint ventures as a way to save money. In effect, they are sharing the risks should a particular project fail. For example, if two oil companies wish to produce a new drilling platform to search for oil in swamps or ocean areas, and neither one can finance the project on its own, they might join forces.

That way, they are sharing the costs of the projects and reducing their individual risk should they find no oil.

Failure rate in international joint ventures

That is a decided advantage to many business people. There are also non-equity joint ventures, also known as cooperative agreements, in which the parties seek technical service arrangements, franchise and brand use agreements, management contracts or rental agreements, or one-time contracts, e.

Quite often, non-equity joint ventures are used simply to provide access for the participants into foreign markets. Equity type arrangements involve two sides: Since there is money involved, there are also inherent risks, particularly with equity ventures launched in less developed countries.

The biggest risk is that the business will fail and the money invested will be lost. There is also the risk that some foreign governments will nationalize certain industries in order to protect their own domestic interests. For example, the Chilean government nationalized its copper industry in the s to prevent foreign companies from gaining control over the ore.Joint ventures have grown in popularity in recent years, despite the relatively high failure rate of such efforts for one reason or another.

Creative small business owners have been able to use this business strategy to good advantage over the years, although the practice remains one primarily associated with larger corporations. Poor or unclear leaders is another top reason of joint venture failure.

Failure rate in international joint ventures

Too often, joint venture partners insist on sharing a project leadership role. When the parties disagree, a standoff occurs. International Joint Ventures Page 4 Definition of Failure There is a confusing collection of repeated failure statistics for International Joint Ventures (IJVs), reasons for such variance can be explained by the fact we rarely see .

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Construct a review of literature on how to manage international joint venture successfully. International joint venture is one of the preferred international market entry mode.

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