Literature Review
Business in the 21st century is increasingly conducted with shifting borders. International partnerships will become standard practice as the product life cycles shorten and immediate distribution become imperative. As business is increasing its globalization, alliances among multinational firms are becoming more popular. Cooperation between international firms can take many forms such as, cross-licensing of proprietary technology, sharing of production facilities, co-funding of research projects, and marketing of each other's products using existing distribution networks (Griffin and Pustay, 2005). Such forms of cooperation are known as strategic alliances, business arrangements whereby two or more firms choose to cooperate for their mutual benefit. A joint venture is a specific and more formal type of strategic alliance.
Mitsubishi Sale
2.1 Defining International Joint Venture (IJV)
The Situation of Indian Joint Venture With Japan Associate in Construction Business
An international joint venture (IJV) is a special type of strategic alliance in which two or more companies from different countries join together to create a new business entity that is legally separate and distinct from its parents. Joint ventures are normally established as corporations and are owned by the founding parents in whatever proportions they negotiate. Although unequal ownership is common, many are owned equally by the founding firms (Berger, 1999).
Here is also a definition adapted from Shenkar and Zeira (1987):
1 it is a separate legal organisational entity, and belongs entirely to neither/none of its parent;
2 it is jointly controlled by its parent;
3 these parents are legally independent of each other;
4 the headquarters of at least one parent is located outside the country in which the IJV operates.
As stated some IJVs are formed on an equity basis, more flexible arrangements may depend on contract cooperation without involving the legal commitments of equity. Some IJVs may have more than two parents. In general, the more parents the greater the administrative complexities and the greater the problem of managing the project. Sometimes, both (or all) parents are located outside the IJV country. For example, Coca Cola (Vietnam) was started as an IJV between Coca Cola (USA) and a Singaporean bottler; originally it did not employ any Vietnamese managers, as a result the company needed to deal with cultural difference (Beamish, 1985).
In terms of the construction industry, joint venture has been seen as a tool for improving the performance of the construction process and emphasizes the way it helps to create synergy and maximize the effectiveness of each participant's resources (Barlow et al., 1997).
The Construction Industry Institute defines joint ventures as a long-term commitment between two or more organisations for the purpose of achieving specific business objectives by maximizing the effectiveness of each participant's resources. This requires changing traditional relationships to a shared culture without regard to organisational boundaries. The relationship is based upon trust, dedication to common goals, and an understanding of each other's individual expectations and values (Barlow et al. 1997). To date, joint venture is understood as a set of collaborative processes, which emphasizes the importance of common goals. The base of joint venture is a high level of interorganisational trust and the presence of mutually beneficial goals. Joint venture means a management process that helps the strategic planning to improve the efficiency of the enterprises, and forms a team with common objectives (Barlow et al. 1997). Participants of a project can improve performance in terms of cost, time, quality, build ability, fitness-to-purpose, and a whole of range of other criteria, if they adopt more collaborative ways of working (Bresnen and Marshall 2000). Barlow et al. (1997) mentions six successful factors of joint venture: building trust, teambuilding, the need for top level commitment, the importance of individuals, the strategic movement of key personnel, and the need for open and flexible communications. The same authors quote as common benefits in a joint venture relation: reduced costs, shortened delivery time, improvement in construction quality, better working atmosphere, and organisational learning. Joint venture classifications focus on the duration of cooperation between partners. This dissertation will be used as a case study to explore the extent and native of these benefits in practice.
Two main types of joint venture are found in literature: project joint venture and strategic joint venture or long-term joint venture. Project joint venture is a cooperative relationship between organisations for the duration of a specific project (Barlow et al. 1997). At the end of the project, the relationship is terminated and another joint venture may commence on the next project (Kumaraswamy and Matthews 2000). Welling and Kamann (2001) state that if these firms do not meet again in another project, the learning effect reached on the particular project will be eliminated. Strategic joint venture is a relationship with a high level of cooperation between partners (Barlow et al. 1997), which takes place when two or more firms use joint venture on a long term basis to undertake more than one construction project, or some continuing activity (Kumaraswamy and Matthews 2000). In this kind of joint venture, the learning achieved in a specific project is more likely to be used in future projects. In the context of a strategic joint venture, it becomes a management philosophy that is expected to work continuously for each and every project and there are more expectations from team members than for a project joint venture (Cheng and Li 2001). The type of TNC JV is the strategic joint venture where Thai and Japanese Partner are focusing on the long term goal.
2.2 Seeing Joint Ventures as a Foreign Market Entry and Development Strategy
Joint ventures are sometimes viewed as a second (or even third) best option for supplying a foreign market-being used only when government regulations (e.g. ownership and export controls, restrictions on royalty payments, etc.) prevent the establishment of wholly owned subsidiaries, exports, or licensing. Indeed, there are major problems that arise in the planning, negotiation, and management of international joint ventures. Despite such difficulties, it is widely recognised in the literature that there are important strategic and competitive advantages that may be derived from successful joint venture agreements, and such collaboration may be a first option in certain circumstances (Kenichi Ohmae, 1985). Connolly (1984), for example, argued that the assets of developed-country multinational enterprises (capital, foreign exchange, technology, management, and marketing skills, etc.) and developing-country firms (lower costs, greater familiarity with local markets, etc.) are complementary, and that the combination of these assets in a joint venture results in mutual benefits. This can be seen in the case of TNC. Similarly, Contractor (1984) argued that the loss of control and the sharing of profits inherent in equity joint ventures is more than compensated for by the expertise and capital contribution of the local partner; contacts with government officials; faster entry into the market; and risk reduction. Harrigan (1984, 1985) argued that joint ventures should not be seen as a hiding place or a sign of weakness. Rather, if organized properly, joint ventures would be a source of competitive advantage, a means of defending existing strategic positions against forces too strong for one firm to withstand itself or as a means of implementing changes in strategic postures (e.g. diversification access to technology). Joint ventures allow each partner to concentrate their resources in areas of expertise, while enabling diversification into attractive but unfamiliar business areas. Overall, Harrigan (1984, 1985) concludes that joint ventures are important strategic weapon in responding to the challenges of global competition.
2.3 Reasons for forming the IJV
The partners (Thai and Japanese) may have shared interests in forming an IJV which give both opportunities to
5 create greater market power by combining resources;(Bell, 1996)
6 reduce risk by sharing costs (costs of investment and production are shared);
7 reap economies of scale;
8 cooperate and avoid competition , which might incur greater costs than those incurred by agreeing to the IJV (the IJV is an alliance that restricts your own capacity for independent action, but also restricts that of your partner); (Contractor & Lorange, 1988).
In general, though, most IJVs offer parents different opportunities which arise from their different environments. A project might offer the foreign parent access to a local market, and the local parent access to the international market. According to (thailandoutlook.com), in 1997 two securities companies, the Premier Group of Thailand and SBC Warburg, formed a joint venture designed to provide Warburg with local expertise and Premier with international access.
Furthermore, the foreign parent needs to meet the host government's requirements for doing business in the country (in this case the Thai Government). For instance, a foreign company is only permitted to operate in the country if ownership is shared with a local company. The IJV offers the foreign parent opportunities to learn about local marketing conditions and to gain access to local resources, including production facilities, labour, and materials. For the local parent these are opportunities to generate upstream and downstream industries. For instance, the development of an IJV pulp mill encourages local entrepreneurs to increase logging facilities and to invest in paper manufacture. The local government benefits by opportunities to encourage foreign investment. Also, the foreign parent may be allowed to take only minority ownership, and must fulfil conditions regarding local employment, technology transfer, purchase of local materials, etc (Chowdhury, 1992).
2.4 Factors influencing IJV success and failure
The more that the company depends upon the strategic alliance in order to achieve its strategic goal, the more it invests in the success of the alliance. In the case of TNCJV this means investing to find the ideal partner. Finding the ideal partner takes time and effort, and the greater the importance that the firm gives to this selection process, the greater the chances of success (Geringer 1991).
Hung's (1992) study of Canadian companies operating in South-East Asia found that "the most often mentioned difficulty is to get the right partner company, one which has compatible objectives and is trustworthy". Therefore, trust is one of the most important parts of forming the IJV. Trust factors then will be reviewed:
2.4.1 Trust between the parents
The project is more likely to succeed when each parent trusts that the other is genuinely committed to the project and will do its best to abide by all agreements between them (Demirbag & Mirza, 2000).
When more partners trust each other, the easier they find it to reach agreement on internal arrangements:
1 applying the same strategic priorities to planning;
2 management style, and systems;
3 systems for communicating between the parents, the IJV, and parents; within the IJV; and with the environment
4 factors associated with business interests, goals, impact of size, timescale
5 assessments of IJV success and failure: project evaluation, both ongoing and upon termination.
(Demirbag & Mirza, 2000)
2.4.2 Mistrust between parents, and the environment
Mistrust arises from
13 inadequate planning;
14 communication problems between parents (Thai and Japanese in this case)
15 wide differences in the national and organisational cultures of the parents;
16 one parent changing its attitude to the project in response to its own internal changes - e.g., a new strategy, a new CEO;
17 one parent changing its attitude to the project in response to changes in its business environment.
To take the final point: both parents operate in their own volatile business environment. Their local markets and competition differ. They are subject to different local political, social, and economic pressures. These environmental differences make any alliance inherently unstable (Geringer, 1988).
According to Mikio Kunisawa Representative Director of Nishimatsu Construction (HQ in Japan), TNC had a full order book including a heavy work load and the prospect of many new projects during year 2005-2006 period. However, the situation at year-end is somewhat different from his expectation, particularly for Nishimatsu's Bangkok Office, and TNC now faces a challenge to maintain the business levels of the previous years (2006). The primary factor affecting business confidence is the continuing general political instability in Thailand, including an inconclusive general election and the resulting postponement of government decisions regarding infrastructure and development projects (thailandoutlook.com). In the light of this uncertain situation, the forecast indicator for economic growth in Thailand has been revised downward. A further effect has been a downturn in business confidence within the private sector, reducing planned investments in the industrial and real estate sectors (thainishimatsu.com). This situation could then establish uncertainty between the parent company and the environment they face.
These factors of environmental uncertainty might be the reason for focusing only on short-term alliances with highly specific goals. The partners might use an initial limited alliance in order to test the possibilities for a greater commitment and to build trust (Harrigan, 1985). This also has implications for communication. Each partner needs to communicate information about its own environment and to develop knowledge of the other's.
2.4.3 Trust within the project
A project succeeds when project staff trusts each other and when persons posted from the two parents develop a synergetic relationship. Before project operations start, a shared project culture is fostered by mixing staff from the parents in groups, where they work together on project planning. They exchange non-critical technological and business data (Harrigan, 1985).
A lack of trust arises when
18 staff join the project ignorant of the needs and interests of their colleagues from the other parent;
19 local staff feel threatened by a stronger foreign parent;
20 conflict arise from human resource and technology transfer policies (one parent cannot supply the skills to which it is committed);
21 cultural differences are exploited.
2.4.4 Trust between the project staff and their parent
A project succeeds when staff posted to it feels confident of the support of their headquarters. Mistrust arises when promised support fails to materialize, or staff feel that their long-term career prospects with the company are in jeopardy. A project is also undermined when top management fails to communicate its goal effectively within the organisation. Subordinate levels perceive it as a drain on their resources, and give it a minimum of attention (Kachara & Hebert, 1999).
2.4.5 Similar business interests
The potential partners are more likely to work together effectively when they have related interests. The parents of successful IJVs have similar interests and belong to similar or complementary sectors. When both contribute and learn from the other, fruitful cooperation is possible. Companies in the same industry form alliances when they hope to benefit from discrepancies in technology, systems, and markets (Kogut, 1988). By 1993, joint ventures parented by the Swiss food firm, Nestle, included alliances with Coca Cola (canned coffee and tea drinks), General mills (cereals), and two companies in the people's Republic of China (a coffee and creamer plant, an infant formula and milk powder plant).
2.4.6 Compatibility in size
Incompatibility in the size of the parents is important when one uses its greater resources to dominate the project in its own interests alone. However, the development of business by Internet and other electronic media means the business can expand (and contract) in a very short time, and the size of staffing complements and physical resources is no longer an accurate guide to a firm's financial and knowledge power (Kachra & Hebert, 1999).
The research of a foreign direct investment in Japan discovered that the attitude taken by the Japanese bureaucracy was influenced by such factors as the investor's care for its relationship with the government, the profitability of the IJV, the foreign parent's commitment, timing and location, and technology transfer issues. However, "the size of the investor does not seem to matter much" (Thawley, 1996).
2.4.7 Compatibility in timescale
The parents need to share a timescale. Suppose that Parents A and B are both prepared to invest in five years' development costs. The project is set fair. But contradictions arise when Parent A aims at reinvesting profits made during the initial period whereas Parent B wants a quick return from its investments (Li, 1995).
2.5 Culture influencing IJV success and failure
2.5.1 Cultural dimensions by Hofstede
Cultural distance between partners and its impact on IJV performance has so far been the most commonly reviewed variable. The distance has usually been expressed multi-dimensionally (based on Hofstedé (1980) four cultural dimensions and an index developed by Kogut and Singh (1988)). Cultural similarity decreases problems caused by cultural issues (e.g. different norms of behaviour and productivity, measurement and goals related to performance) and should facilitate trust and cooperation between partners. Barkema and Vermeulen (1997) tried to analyse in more detail the impact of culture on IJV performance. Using the five different cultural dimensions by Hofstede - power distance, uncertainty avoidance, individualism, masculinity, and long term orientation - the authors expected that there would be differences in the impact of various dimensions. Differences in uncertainty avoidance are difficult to cope with because they imply differences in how people perceive opportunities and threats in their environment and how they act upon them (Schneider & Meyer, 1991). In high uncertainty avoidance countries organisations tend to respond to uncertainty by building up a system of high formalization and hierarchy. In low uncertainty avoidance countries people are more attracted to flexible, ad hoc structures that leave more room for improvisation and negotiation. Differences in uncertainty avoidance lead to differences in how partners perceive and respond to events in the environment of the IJV, which will likely breed disagreement and disputes between the partners, and have a detrimental impact on the IJVs performance. Power distance and individualism directly bear on issues of internal integration and influence relationships with personnel, such as the choice of control forms, reward systems. Management of personnel is usually one of the first activities to be left to the local partner. There is also evidence that MNCs do not transfer cultural values related to power distance and individualism to their foreign subsidiaries (Soeters & Schreuder, 1988). Thus tensions between the partners with differences along these dimensions may be avoided. Shenkar and Zeira (1992) suggest that having partners from both "feminine" and "masculine" cultures may even benefit the IJV. The aggressive attitude of one partner and the relationship orientation of the other may complement each other rather than collide. The above discussion suggests that differences in uncertainty avoidance would be more important than the other three dimensions. The empirical results by Barkema and Vermeulen (1997) supported the expectations: uncertainty avoidance and long-term orientation had greater differential negative impact on IJV survival than masculinity, while the two other dimensions (individualism and power distance) had no impact. What concerns the Asian context it can be said that all potential Asian cultures have rather similar cultural profile. This profile includes rather few layers of decision-making, more risk taking, greater group emphasis, and higher concern for relationships (Swierczek & Hirsch, 1994). This can be applied to TNC where Thai and Japanese culture share some similarities.
One culture can influence how willing one is to trust a possible joint venture partner. In terms of culture, the Japanese tend to be somewhat introverted in their ways. They generally are not receptive to outsiders. When conducting business with Japanese, it is important to note that relationships and loyalty to the group is critical for success.
(http://www.geert-hofstede.com/hofstede_japan.shtml)
According to Hofsted Cultural Dimension Scores, the score of Japan is dramatically different from other Asian Countries. Masculinity in Japan is the highest characteristic. The lowest ranking factor is Individualism, which coincides with their high ranking in Uncertainty Avoidance. Japan is a more collectivist culture that avoids risks and shows little value for personal freedom.
(http://www.geert-hofstede.com/hofstede_thailand.shtml)
In contrast, Thailand's lowest Dimension is Individualism (IDV). A low score, as Thailand has, indicates the society is Collectivist as compared to Individualist which this score is even lower than Japanese. It can be said that this is manifest in a close long-term commitment to the member 'group', is that a family, extended family, or extended relationships. Furthermore, the main different category compared to Japanese Dimension is Masculinity which ranks the lowest among the Asian Countries. This lower level is indicative of a society with less assertiveness and competitiveness, as compared to one where these values are considered more important and significant. This situation also reinforces more traditional male and female roles within the population.
2.5.2 Compatibility between national cultures
Ones culture also influences ones perception of the environmental factors discussed above; whether your business interests are similar (or in conflict), whether your goals are complementary, whether differences in size are important, what timescale should apply. In theory, partners are more likely to agree on these points when cultures are compatible. That is, joint ventures formed by parents of similar cultures stands a greater chance of succeeding than those based on between dissimilar cultures (Wille, 1988).
2.5.3 Different organisational cultures
If the organisational cultures of the two parents vary widely, a successful alliance might not be possible. However, this is not always the case. In the situation of TNC, the organisational culture of parent can be advantagous because the understanding of National Culture also affects the performance.
When talks designed to lead to strategic alliance between Mitsubishi of Japan and Daimler-Benz of Germany broke down, the following report was made:
"Analysts say the match has been strained from the beginning because the companies have fundamentally different structures. Daimler-Benz, a much smaller company than Mitsubishi, has traditionally had a close knit management structure that has tended to set out clear strategic goals and forge ahead. Mitsubishi, an amorphous conglomerate of several large companies, has moved much more cautiously with internal factions often disagreeing over broader policy." (Yamawaki, 1995).
The companies were unable to overcome differences in their strategies, structures, and organisational cultures.
Staff posted to the project from the two parents is more likely to work well together when their organisational cultures are similar. This does not mean that they should be identical - an impossible condition. Rather, there must be a sense of comfort about how the other does the business, a willingness to work together and learn, and needs for shared solutions (Fedor & Werther, 1997).
2.5.4 How the IJV affects the parent organisational cultures
Parenting an IJV project can influence the culture of the parent headquarters by creating new spirit of "internationalism." This is ADVANTAGOUS when headquarters staff benefit from an influx of new ideas and technologies, and develop new knowledge of the opportunities offered I the environment.
It is DISADVANTAGOUS when the outflow of staff to the IJV (and inflow of replacements) impairs internal cohesion. A positive culture is weakened when staff feels pressured by responsibilities for which they have no training and experience. Supporters of the project are isolated. Planning and operating the IJV influences the organisational culture of the parent headquarters. In order to respond to problems and opportunities arising from parenting the project, headquarters streamlines and reorganizes its structures (Siddall et al., 1992).
2.6 Motivational Perspectives between Thai and Japanese
One's motives are major determinants of one's behaviour. If the company can understand the employee's motives, they can influence their employee's behaviour. To motivate others is one of the most important management tasks. It comprises the abilities to understand what drives people, to communicate, to involve, to challenge, to encourage, to set an example, to develop and coach, to obtain feedback, and to provide a just reward. According to (Find Ref), "Motivation is about cultivating your human capital. The challenge lies not it the work itself, but in you, the person who creates and manages the work environment." However, to motivate people in different culture might be difficult if the level of motivation is not the same. Ref describes how different culture might be perceived differently. Scandinavian cultures (Sweden, Norway, Finland, and Denmark) place a high value on quality of life and social needs. European and Anglo-American cultures place a high value on productivity, efficiency, and individual self-actualisation. Chinese culture values collectivism and community activity higher than individualism (Same Ref).
According to Maslow's hierarchy of needs, he theorised that people have successive layers of needs, and that as each lower layer is satisfied, then the person moves on to the next layer up. The following diagram will explain how the model works:
(Maslow's hierarchy of needs model from Maslow, 1943)
The lowest layer is that of physiological needs. It is the need to eat, sleep, stay warm, use the bathroom, etc. The second layer is safety (the need to have physical and psychological security, such as wanting the presence of law and keeping a job). The third layer is that of love and belonging (being the need to be part of a family, group, or gang). Some would say that this third layer is very much a Japanese domain, where belonging to a group seems to take priority over the achievement of higher layers. According to (Japanese Ref), he raises the question that "How many times have you seen very capable people like Japanese deny themselves a fuller career due to their desire to stay with some smaller company on the basis that it is their 'family?'" The Japanese always put the top priority to their company. The fourth layer is that of self esteem and status. This is where high-achievers dwell, and are able to distinguish themselves commercially and professionally. The fifth layer is "Actualization." According to Wikipedia.com, it gives the following description (extract): "Self actualized people embrace the facts and realities of the world rather than denying or avoiding them. They are spontaneous in their ideas and actions. They are creative. They are interested in solving problems, which often includes the problems of others."
The interesting point to make here is whether Thai and Japanese have the same level in Maslow's hierarchy of needs. At TNC, different level of needs might bring the conflict in interactive situations, for example, between Japanese employer and Thai employee, the model may need to be adopted in its applications among differing cultures. Even though the culture of Thailand and Japan might be similar, it does not mean that they would have the same desire or expectation.
Based on the literature review, the definition of IJV, and reasons for forming the JV have been illustrated. Factors including cultural differences between Thai and Japanese, and different motivational perspectives were explained. However, it is essential and vital to discover how these factors affect TNC employees based on their perception. In Chapter 4, findings and analysis from the interview will be examined.
The Situation of Indian Joint Venture With Japan Associate in Construction Business
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