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Joint-Venture Road Map for the Little(r) Guy

Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

 

Bottom Line: International partnerships can put parties at odds, but there are ways for smaller firms to avoid common conflicts and stick up for themselves.

International joint ventures (IJVs) have become a staple of the global economy. They enable firms to apply both their own and their partner’s core capabilities to projects in markets that each might otherwise not be able to access effectively. For small- and medium-sized companies, in particular, IJVs provide a way to operate in new or foreign countries while sharing responsibility and resources, whereas larger firms can benefit by gaining access to a smaller partner’s niche expertise, access to scare resources, or foothold in a specific market.

But for all the win-win talk, IJVs rarely endure over the long term. They can break down for a host of reasons: culture clashes, operational inefficiencies, and differences in strategic goals. Conflicts between collaborators have been recognized as the main explanation for why IJVs come to an unscheduled end, especially when the balance of power is unequal. And that’s often the case. Because of their limited resources, smaller firms typically have to cast their lot with larger partners in order to launch an IJV.

Not much research exists on the roots of conflict in IJVs, presumably because of the sensitive nature of fall-outs in international business and the difficulty of obtaining data on complex cross-border initiatives. The few studies that do exist tend to focus on larger firms’ experiences. But the authors of a new study set out to shed light on the minority partners’ perspective, reasoning that this lesser-heard viewpoint could hold valuable lessons for both large and small companies looking to profit from IJVs.

The authors conducted a case study of a Swedish high-tech firm that joined with a larger Eastern European company to build and operate a factory in the majority partner’s home country. The proposed arrangement was that the minority (Swedish) owner would contribute its expertise on selling the finished product, whereas the majority (Eastern European) partner would provide the raw materials to make it.

Over time, conflicts began to emerge. The majority owner thought sales should have been more robust, and the minority partner didn’t appreciate that its collaborator shifted responsibility for manufacturing to its parent company. Long, protracted disputes resulted, sucking up valuable money, time, and other resources in fruitless attempts to end the conflicts. Eventually the IJV folded.

The authors read all email communications between the partners during the IJV’s lifespan from 2005–14, as well as all emails sent between the minority partner and its lawyers. They were given access to the contracts, statutes, and other documents governing the IJV. In addition, they conducted interviews with the key managers at the minority firm. The authors performed a textual analysis to reveal the most common and important themes that emerged, which formed the basis of the following recommendations for managers of minority partners in IJVs.

Thoroughly vet potential collaborators. Beyond the obvious steps — scrutinizing the financial background of prospective partners, analyzing the success or failure of their previous partnerships, and confirming that their ethics and values jibe with your own — it’s crucial to have your legal representatives dig deeply into any of their past litigation or partner dissolutions. What do your possible partner’s partners have to say?

Although everything seems rosy at the outset of an IJV, managers should always be thinking of worst-case scenarios.

In addition, carefully consider the culture and language of the country where the IJV will operate — do you have in-house knowledge of the legal and regulatory framework there, or will you be relying on a third-party consultant or the majority partner to provide that? Think, too, about geography; if your majority partner is physically closer to where the IJV operates, you may need to work harder and monitor proceedings more closely to ensure your collaborator doesn’t exert an undue influence owing to their proximity.

Ensure you have enough representatives in key positions. One way to secure authority and ensure transparency in an IJV is to appoint the right personnel to the supervisory or management boards overseeing the project, and fighting for your right to do so in the fine print. In the case analyzed for this study, the minority owner seemed to have a fair amount of power — it could appoint a vice president to the management board and two members to the supervisory committee — but in reality, its larger partner held all the cards. The majority firm had the right to choose the president of the management board, who had a ruling vote, as well as three members of the supervisory committee. As a result, it was almost impossible for the minority partner to influence the IJV through the governance channels, even though ownership of the project differed by only two percentage points between the partners (51 percent to 49 percent).

Build a stable foundation. It all starts with clear and concise contracts, which not only govern the collaboration, they also provide dispassionate guidance in case disputes arise. When drawing up the contracts, managers might want to bring in outside opinions apart from the attorneys working on the project to ensure the utmost clarity and specificity. Most importantly, contracts must be obligatory, and each firm should retain the right to perform its own audits. Although everything seems rosy at the outset of an IJV, managers should always be thinking of worst-case scenarios that might crop up — and that means crafting bulletproof exit clauses.

Seek a true balance of power. Even though a minority partner holds less sway, it’s important that it retains input on big decisions. If a junior partner at least has veto power over the appointment and dismissal of the president of a management board or chairman of a supervisory committee, a majority owner can’t just act with impunity. It’s also important for both parties to reserve the right to revoke powers of attorney, which typically govern an IJV’s day-to-day operations. Writing these rules into the contracts is an important first step toward a fair and balanced power-sharing arrangement, the authors write. 

Source: “Partner Conflicts in International Joint Ventures: A Minority Owner Perspective,” by Christoffer Westman and Sara Thorgren (Luleå University of Technology), Journal of International Management, June 2016, vol. 22, no. 2

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Joint-Venture Road Map for the Little(r) Guy