International Joint Ventures and Alliances

International Joint Ventures and Alliances

Building Strategic Advantages Using International Joint Ventures and Alliances:

Assessing the Potential and Risk for Chinese Firms

Firms in emerging markets face several significant challenges in growing their businesses beyond their regional and national borders. The learning curve that Chinese firms face in penetrating global markets is steep, as is the investment in branding, marketing, research and development (R&D) and services strategies Many turn to International Joint Ventures (IJV) to gain a foothold in global markets, acquire expertise and knowledge through the joint ventures. In the study Dual-edged tools of trade: How international joint ventures help and hinder capability building of Chinese firms (Li, Zhou, 2008) the researchers have completed a longitudinal study of 474 industry sectors active in China, for the years 1998 to 2002 to determine the risks and rewards to indigenous Chinese firms' participation in IJVs. Looking to refute the misconception that IJVs only deliver positive results, complete a quantification of factors that contribute to positive and negative outcomes for indigenous Chinese firms participating in IJVs, and determine if technology gaps between Chinese firms and their IJV partners made a difference in long-term innovation were all analyzed. Using data from the Chinese government over 5 years that encompassed 474 industries, a series of correlation analyses and data regressions where used to determine the industry, indigenous Chinese firms and IJV attributes. fixed- and random-effect research design ensured orthogonality of the industries and eliminated the potential for autocorrelation and statistical sampling errors. Variables included in the study included the following: absorptive capacity (or capacity to innovate) of an industry; dependency of the industry on Foreign Direct Investment (FDI); level of present IJV activity by industry; technology gap of industry to IJV partners; relative levels of dominance financially and from an FDI perspective of multi-national-based IJV alliance partners; presence of wholly owned subsidiaries (WOSs) of foreign firms; capital labor intensity; firm size; and labor quality.

Examples of indigenous firms in emerging markets including China losing the intensity to be innovative in their core markets include First Auto Works, who despite having a IJV with Volkswagen for over a decade, has yet to produce their own vehicle.

Contrary to these examples are those of Chinese auto manufacturers Chery and Geely who rarely engage in IJVs and alliances yet have continually launched new vehicle models ever year and as of 2011, Chery is recruiting American auto industry executives to launch their dealer channel in North America.

Indigenous firms to China that are selective about what aspects of an IJV they participate in show greater capability to rely on the alliance to compensate just for their weaknesses, not becoming entirely dependent. The longitudinal analysis of five years of 474 industries show that the more dominant the IJV is on the emerging firms' nation, the higher the potential for firms to rely too much on the alliance and not challenge themselves more to innovate and gain their own market position. The lower the dominance of the IJV in the given region or nation, the greater the potential exists for a more egalitarian relationship between the nascent or emerging firms and the often multinationally-based IJV partners.

The study also found that there is an inflexion point of IJV shared performance in industries that have initially large technology gaps. As emerging firms approach greater parity of technology use, closing the gap with their peers and the IJV partner, the greater the reliance and dependence on the IJV partner becomes. The two hypotheses of the study theorize that there is an inverted U-shaped curve of influence between IJV partners and nascent firms, meaning the greater the dominance of the IJV partner and depth of technology, the less likely an emerging firm will stay autonomous. The first hypothesis stated that a U-shaped curve of influence indicates both a negative and positive contribution to indigenous firm's innovation and autonomy. Maintaining an equilibrium of influence by industry mitigates the negative aspects of IJV influence while ensuring indigenous firms get just enough support without making them too dependent.

The second hypothesis is that IJVs will be more effective in ensuring emerging firms' autonomy in low technology gap industries vs. high technology gap ones. The greater the technology gap in an industry and the farther behind an indigenous Chinese firm is from industry norms of market performance, the greater the reduction in innovation and risk taking. IJVs in low technology gap industries have a higher elasticity of effect on innovativeness in indigenous Chinese firms. Conversely, IJVs that exist in high technology gap industries show a lower elasticity of effect on innovativeness; there is a greater risk of becoming very dependent on an IJV partner in rapidly changing, turbulent high technology industries. Too much reliance on IJV alliances in high technology industries invariably leads to a lack of innovation and R&D in product design, branding, messaging and taking risks building new, often foreign, distribution channels. The second hypothesis a definite elasticity of influence around the U-shaped curve, with greater elasticity in low growth industries relative to high growth ones. The impact of global IJV partners in low-gap industries is more immediate and direct given the high level of influence elasticity.