Joint ventures are becoming more common for North American companies wanting to do business in China or other Asian countries. What accounts for their popularity?

A Joint Venture (JV) can be an excellent vehicle for doing business in a foreign market, while sharing the start-up and operating risks — and profits — with a partner there. A JV can be just as profitable and successful as a wholly-owned subsidiary. There are still some managers and business leaders who believe that a JV, by its very nature, is not as profitable or easy to manage. They also believe that they may lose their proprietary technology and intellectual capital, especially if the JV fails. But research and the experience of many companies have proven these concerns can be managed.

What sort of due diligence should a firm do to determine if a JV is the best way to establish an international footprint?

Mostly it involves testing the strategic logic underlying your decision. You need to ask a series of questions that, if answered satisfactorily, will lead you on to discuss the fit, shape and design of the partnership. First, you need to ask yourself why you are discussing working together. There must be a solid underlying rationale that tells you that an equity JV makes more sense than any other type of partnership or investment, and that it will provide the required returns. Second, the two partners must be convinced that they will be able to resolve the sticky but predictable issues that may develop in a JV. These include such things as each partner’s role in managing the JV, in which country the profits will be booked, how additional funding needs will be provided, etc… Adequate planning and capitalization will go a long way towards laying the proper groundwork for a successful JV.

How can they determine if a potential partner is a good fit?

You’ll need to determine if the measures that you and your partner will use to measure performance are congruent. These have to be looked at from multiple perspectives. The first is the foreign partner’s point of view. For example, this partner may want to use the JV to maximize local sales and exploit peripheral or mature technology. In contrast, the local partner might see the JV as an opportunity to begin or boost exports and to obtain the newest technology. Obviously, if congruity between the two partners’ does not exist, major efforts must be made to adjust or eliminate conflicting goals. (Otherwise, don’t use a JV.) Then you have a third perspective, namely the JV’s General Manager, who must hold the interest and performance of the JV itself above those of either partner. Those charged with leading a joint venture must be allowed by both partners the actual freedom to lead it.

How can you evaluate a potential partner?

You need to group your questions under three very broad questions: Does the partner have the skills and resources I need? Will I get access? Will we be compatible?

The best joint ventures, i.e., those in which the partners work toward ensuring the long-term viability of the business, are those formed by companies that recognize their specific long-term needs and recruit partners to fill those needs. They also recognize the needs of their local partner and how they will fill those needs.

It’s also important to distinguish between the skills a partner possesses and what the JV needs to succeed. They may not be the same thing. You also need to make sure that your proposed partner has been reinvesting and upgrading its skills, and not just coasting.

As far as getting access, it follows that if you don’t understand each other, you won’t have access to the skills your partner has. If your managers who will be working in China, for example, don’t speak Chinese, you won’t be able to easily communicate with the Chinese managers about local market opportunities.

Finally, you’re going to have to “live with” your JV partner, so you want to be sure that you’ll be compatible. Visit them in their own milieu and see how they behave. Determine if their organizational climate is the same as or at least similar to your own. This will make you feel more – or less – comfortable. Solicit opinions from their other partners and suppliers. Try to work together on a small project that will allow you to get to know each other before making a big investment in a JV.

How do you build commitment? How do you increase the likelihood of everyone associated with the JV pulling in the same direction?

Five ways. The first starts with you. How exactly do you think performance should be measured, and why? It’s worth the time to list the performance measures considered and why you do, or don’t, propose to use them.

Second, ask your colleagues to do the same thing. Often times the subsequent discussion leads to an internal debate. This is healthy. It is not reasonable to ask any partner to try to respond to mixed corporate messages depending on who in your own company they happen to meet with on any given day.

Third, ask your partners to consider following a similar process. Most will appreciate and value the care you are taking to get this right.

Fourth, if it is an already-established joint venture, don’t forget the general manager. This is the person who lives with the business every day.

Finally, keep asking. Technologies change. Competitive environments change. Senior managers change. Consequently, desired performance measures can evolve.

Drawing up a legal document can be tricky. How do you make sure that it is as comprehensive as it needs to be?

First, make sure that the points that are most important to you are covered in the document. For example, the agreement should define the geographic reach of the JV, be it a single market or multiple countries. As well, clarify whether it applies to a single function or a complete value chain. Specify, where possible, who is going to manage what, how disagreements will be resolved and how the board will be composed. Keep in mind that while the soft side of the JV is very important, i.e. whether you can have a good relationship, the hard side, which covers things such as contracts, should not be minimized.

The division of management control between joint venture partners has been a contentious issue for a long time. What is the most effective way to manage the JV?

There are four ways the partners can divide control in international joint ventures.

The first is split-control management, in which each partner controls the specific advantage it brings to the JV. Essentially you control or manage only those activities you are contributing to the JV. The logic here is that you will be able to much better manage these than your partner.

In a second arrangement, both partners share control over all major decisions in the JV. It is a vehicle for combining the country-specific advantages of a local partner with the firm-specific advantages of the foreign MNE. The rationale for taking a shared-management approach is that the now-combined contributions require dual control. While consensus decision-making can definitely lead to faster implementation, the potential downside is that the process of getting to any decision may be slower.

In the two other ways of dividing control, either the foreign or local partner is dominant. Here, one partner assumes dominant control over all major decisions. This arrangement addresses the commonly held opinion that a shared-management JV is just too tricky to manage. The one-partner-dominant JV, on the other hand, is much easier to manage. Yet it begs the question: why have a joint venture at all, if one partner is going to run everything?

We found that joint ventures that follow a split-management arrangement perform better than the others, at least in emerging markets. To be even more explicit, the partner who has the skills or the resources needed to perform particular value-creation activities of the JV should control those activities in the JV.

Regardless of the type of management arrangement, conflicts always occur. What is the best way of resolving conflict in a JV?

First, a small amount of conflict may be healthy for a JV, since it may force management to evaluate its decisions more carefully. For example, managers may find, after some thought, that the other party’s plan is superior. This is constructive conflict. The book discusses nine strategies for dealing with conflict in a JV. Two of the most effective are making sure that both partners’ goals are aligned or congruent, and ensuring that there is adequate communication between the two parties. Communicating leads to understanding, and understanding each other’s thinking is an important first step in resolving conflict. The other seven strategies are developing standard procedures for resolving conflict; considering the gains of all involved parties, not just yours; showing that you understand the other party’s view; empowering local foreign managers to make most decisions; developing a high tolerance for and an understanding of different national cultures; ensuring that all parties are committed to the JV, and discussing ways to avoid future conflict.

Is there an ideal number of partners for a JV and is there a relationship between that number and the success of a JV?

A large percentage of JVs have more than two partners, though in some cases the partners are effectively “silent partners.” There are two schools of thought on whether having more than two partners is good or bad. In the latter case, the argument says that having more partners increases the complexity and levels of management in the JV, and hence the possibilities for disagreements and the increased costs of monitoring. But, it’s also thought that multi-partner JVs should earn greater returns than two-partner JVs. The underlying reason is that, all else equal, multiple partners provide resource diversity, and that this diversity, in time, will add value to the JV. But the hard fact is that neither a two-part nor a multi-part JV will guarantee a clearly superior performance.