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Over the past twenty years, there has been a surge of interest of companies coming together, many of which were reflected in the popular management press and the academic journals of corporate links being formed. Many organisation now uses strategic relationship rather than competition among themselves to grow their business. These are formed for a variety of reasons, which include new technology development, expansion to new domestic market, reducing manufacturing cost, new product development, ability to increase profit margin, financial support and sharing of economics risk, overcome legal and trade barriers and many more. These are some of the reasons why collaboration sometimes called partnering, alliances or joint venture among many terms are formed. Joint venture is one of the most popular forms of strategic relationship and it utilises separate business entities like cooperation, limited liability company or partnership, this entity makes the involved parties to limit the liabilities involved. In recent years global challenges has fostered many companies from many countries to go into international joint venture more stronger than in the past, manufacturing companies, oil and gas companies, construction companies, banking sectors, automobile companies and many more are forming the international joint ventures.

Objectives

As partner selection is considered to be very important to have a successful collaboration, this module will be focusing on selecting the right partner in forming an international joint ventures. The answers will be focusing on the literature on how to select a good and successful partner when forming a joint venture. Also the following factors will be considered in forming a successful collaboration:

The main characteristics to look for in a good collaborative partner, selection criteria and the strategic, political and tactical implications.

The factors that’s determines the good partners match in collaboration.

And what the two companies going into collaboration can do to create good partnership condition.

Literature review

introduction

As it was started in the objectives in the previous chapter, this report will be discussing various factors that are needed to be highly considered in selecting a partner when forming international joint venture, but before going further below are the definitions of some common terms of collaboration.

Some Basic Definitions

Collaboration

Different companies go into collaboration with different reasons, and the reason why many companies go into collaboration is to try and gain competitive advantage, entering new market and many more. Collaboration accomplish shared vision, achieve positive outcomes for the audience involved and it also build interdependent system to address issues and opportunities. It is a world in which almost anything, in principle, is possible since you are not limited by your own resources and expertise only but by tapping into resources and expertise of others. ( Huxham and Vangen, 2005). Members of the collaborations needs to be ready and willing to share their vision, mission, power, goals and resources to achieve success.

Also Collaboration is the act of working together to create or produce something for mutual benefit. (Oxford Advanced Learner Dictionary, 2001).

http://ayanthianandagoda.files.wordpress.com/2009/07/collaboration.jpg

Fig 1 collaboration

Source : http://ayanthianandagoda.files.wordpress.com/2009/07/collaboration.jpg

Joint ventures

There are many different definition for joint ventures, as experts opinions differ significantly.

A joint venture is a strategic alliance formed by two or more parties usually in businesses, partner together to share markets, assets, intellectual property, knowledge and profit. (Valerie, 2006).

Stephen et al.(1993) consider joint venture as a form of collaboration. He later defined it as a distinct business entirely created and jointly owned by two or more parent organisations.

Robert L .Wallace ( 2004,) defined joint venture as the coming together of two or more independent businesses in which both of them have sole purpose of achieving a specific outcome that might be difficult for each of them to achieve individually.

http://www.internationaltradelaw.org/images/partnership.jpg

Fig 2 joint venture

. Source : http://www.internationaltradelaw.org/images/partnership.jpg

International joint ventures

When joint ventures crosses across the border, it becomes international joint ventures. International joint venture is defined as the joint ventures that involve firms coming together from different countries cooperating across national and cultural boundaries. ( Aimin and Yadong, 2001). At times, international joint ventures are formed by two companies in the same country but located in a country other than their parent countries. (Geringer and Hebert 1989).

Though majority involve two parent firms, one from foreign and the second one a local company. Also it may involve partners with complex nationality and cultural background. For example, Xerox Shenzhen company formed from Xerox (china) and fuji Xerox (US-Japanese joint venture in Japan.).

International Joint Venture

Fig 3. International joint venture

Source : http://t3.gstatic.com/images?q=tbn:shC_GkI4UDgeCM:http://farm4.static.flickr.com/3504/3841640658_367ae3ab0d.jpg

Merger and Acquisition

There is a big difference between merger and acquisition, they should not be mistaken to be the same. Merger is when two companies come together to form a new company while acquisition is when one company purchase another company.

Fig 4 merger and acquisition

source : class module

Motives of collaboration

According to Ian Hewitt (2005), A company should not just go into collaboration just because other companies does, in fact different companies go into collaboration for different reasons. Below are few of the reasons why many companies does

Increasing competitive pressure : competitors or rivalries in the market is one of the major reasons that force some companies into joint venture.

Sharing cost and risk : one of the main reasons for joint venture is cost saving and risk sharing. It helps to achieve synergy through rationalizing of employment and other fixed cost, and it also research and development project like pharmaceutical, electronics, aero-engine, telecommunication and so on. Joint ventures are frequently used in capital intensive project like power stations or infrastructural projects

Entering new markets : partnering with another company already established in a particular market also helps in entering new and emergence market effectively and it also helps in marketing an existing products and service to new customers.

Total-quality-management. Do more with less : it brings about a quality management into business and help in achieving the companies objectives in less time.

Access to new technology, technology know how and customers : joint venture helps to gain access to and to learn from partner’s technology , experience and skills as there is a rapid change in technology advancement day by day.

Improve access to financial resources : coming together of the two companies improves the financial resources.

Expand customer base : international joint venture also help to expand customer base in by making use of partner’s strength in different geographical area and both develop a wide network.

Developing new products : a company can go into joint venture to provide new products or service to their current customers or new customer. Since it is joint venture, the companies can develop a new products to sell to their customers.

In this new wave of technology, you cannot do it all yourself, you have to form alliances. Carlos Slim Helu.

The Benefits and Risks

Having considered few of the reasons why companies go into collaboration, it may sound interesting that collaboration is everything but an extreme care need to be taken when choosing the collaboration partner. Collaboration is good (when the right partner is selected) and it is bad (wrong partner). Before going into details of selection criteria in choosing a partner, below are the types, benefit and Risks associated with collaboration.

Benefits

Increased financial resources and stability : it allows the partners to contribute financially to the project in an appropriate ways to the joint operation and it increases the financial stability of the business.

Improve buying power and economies of scale : it gives cost advantages and better purchasing power to increase the volume of business.

Expansion to new market : forming joint ventures can help in capturing a new market.

Share R & D, engineering, production costs : joint venture helps when a company is trying to enter a new field of business, by forming joint venture with a company already established in the business, it makes it easier to enter into the market. Examples include research institute and national government level.

Shorten lead time : collaboration shorten lead times and it makes it possible to achieve more in less time.

Risks

Loose overall control or desire for control : if it is not well managed, the stronger partner becomes a dominant and this can undermine the interest of the other partner and it may eventually leads to termination.

Cultural issue : the partners must understand each other’s culture very well by doing an intensive research. Competent team that can negotiate in with people of different culture should be assigned to manage.

Foreign exchange risk : in joint venture, high volatility in the foreign exchange market, the movements of Dollars, Yen, Pounds, Rupee, Franc and many more cannot be predicted, and even due to this in the oil transaction, it is generally accepted in the western world to trade in US dollars.

Communication and translation problems : multinational project can become more complex if there is communication problem, and it is even better to have a translator or even two translators.

Loose identity : individual company can lose their identity and they may end up in forming a new name and old customers loyalty may be lost, though if the partnership is well managed it will create new customer loyalty.

Partner’s failure : if the partner failed to deliver, this mat cause a serious consequence or termination to the contract while the objectives have not been meant.

Types of collaboration

There are many ways in which collaboration can be formed, depending on the common objectives of the companies involved. Collaboration can be grouped into two namely : those defining the structure of the relationship and those defining the technical or commercial purpose of the relationship. Below are few types of collaboration that can be formed.

Purpose

Research Collaboration : which is most effective in scientific research and high technology new products.

Joint Design and Development : involves two or more companies coming together to share the risk of developing a new product and this often leads to joint or parallel production.

Joint Production : when two companies agree to produce separate sub-assemblies of the final product and this can leads to joint venture company.

Parallel Production : when same and similar product is manufacture in two or more countries and one partner leads the development of manufacturing facilities.

Licensing : formal agreement between two companies where primary company allow to use it design or know-how, or to manufacture a product and it involves payment of royalty fees. It may be of two types namely ;licensing in and licensing out, or both .

Franchising : this involves third party to market proprietary products or services under the original supplier’s brand name e.g. stores and supermarkets, fast food outlets, petrol stations, etc.

Structure

Informal and Gentleman’s Agreements : this can be word of mouth agreement usually between partners of common interest and trust is essential. It can be a starting point for formal arrangement.

Strategic Alliances : Michael and Srinivasa 1995) said it can be defined by simultaneously possessing the following three necessary characteristics;

Two or more firm that unite to pursue a set of goals already agreed upon

Partner firms share the benefits of the alliance and control over the performance of the assigned task

Both contributes on a continuous basis in one or more strategic areas, e.g technology and product.

It has no legal form, it is a relationship formed between two or more companies that share (proprietary), participate in joint investments, and develop link and processes to improve their performance of their companies. (http://www.apics.org/.). It can lead to creation of joint venture company.

Strategic partnership : is a form of strategic alliance in which the partners are linked by a non-controlling level of shareholding, either bilateral or unilateral. (W.J.Bacchus 2005)

Joint venture companies : this is an independent business entity, it involves ownership, operational responsibility and financial risk and reward.

As it was started in the objectives in the previous chapter, this report will be focusing on joint venture companies.

How to select a compatible Partner

Companies that are more thorough and comparative in selecting international joint venture partners are more likely to be successful. When there is a need for joint venture, choosing the right partner is another important factor. Only few companies today believe they can achieve their goals and objectives on their own but by seeking partnership with another company to stay ahead in today’s global economy, So due to this, there has been an high increase in the numbers of companies coming together around the globe .

When a company is going into a joint venture, collaboration strategy need to be established. Furthermore in this report, it should be noted that a company in question will be represented by Company A and other companies that are available to choose from will be represented by Potential partner A,B,C……

The company A planning and operational stages can be established as :

1st stage 2nd stage 3rd stage

Fig 5. Planning stages

Company strategic planning

For any company going into collaboration, internal check is the first thing to consider. Internal check allows company A to analyse its performance so far in the competitive market, the knowledge and skills, financial stability and status, government policy, benefit and risks associated with joint venture, and most importantly their objectives of going into collaboration.

To properly analyse these factors, S.W.O.T analysis can be used as follow