Globalisation's Impact on World Economy

1. Introduction and Background Information

Globalisation means conducting trade across the globe and has led to a growth in the production of services and goods as well as an increase in transnational or multinational organisations (Jean, Martin, and Sapir, 2018). Because of the growth in globalisation, there has also been an increase in internal trade, firm operating in several countries, free movement of services, goods, brand awareness and capital thus resulting into a world economy where these things move freely across the globe. Globalisation is helping people and developing states to create wealth and is also closing the gap which has existed for so long between the richest and the most impoverished countries in the world. The increase in globalisation has occurred mainly because of the freedom to trade as well as the removal of trade barriers which has been promoted by the World Trade Organisations (Jean, Martin, and Sapir, 2018). This increase in globalisation has also been because of better transportation that has come about as a result of improved infrastructure that has allowed the movement of goods and people quicker and easier (Staníčková, Vahalík, and Fojtíková, 2018). Furthermore, the growth in globalisation has been due to economies of scale where larger ships of cargo have reduced the transportation costs of goods thereby reducing the costs of single items. Communication through mobile technology and the World Wide Web has increased connectivity between countries and people. Today, the costs of labour are much lower in countries such as India, where the level of skills that people have is high. Therefore, firms have moved and are still moving their businesses with much lower overhead costs. There has also been a decrease in legal restrictions for acquiring labour in developing countries which has led to a decrease in the costs of production for sectors such as the clothing industry thus prompting organisations to move to such states. Some firms have entered the international scene through joint ventures (Staníčková, Vahalík, and Fojtíková, 2018).

1.1 What is a Joint Venture?

A joint venture represents a cooperative business which is established by at least two companies (Bamford, 2002). Before starting its operations, the partners in a joint venture often allocate resources and consign potential risks and rewards, delegate responsibilities of operation to every member while maintaining autonomy. However, there is no one single definition of the term “joint venture” and can only be best defined through the existence of various certain characteristics, arrangements, and understandings. An international joint venture gets described as joining together two or more firm partners from their separate jurisdictions to allow them to share risks and resources as well as divide rewards from their joint enterprise. Often, but not all the time, a single partner gets physically located in the joint venture’s jurisdiction. An international joint venture (IJV) usually has a partnership element. However, it is commonly created for a specified project or defined purpose. Therefore, the IJV has often limited duration, scope, and purpose (Bamford, 2002).

The IJV partner’s contribution usually varies as well as tend to be particular based on each partner’s capacity and the nature of the joint venture. Even though legal agreements are needed to develop and sustain an IJV, for them to survive and prosper still need the venture to have evolving relationships, to be living and practical. Continued dialogue and positive interaction between the decision-makers in the business after the merger is also critical for the IJV’s continued prosperity (BenDaniel, Rosenbloom, and Hanks, 1998). Because circumstances change, the management of the IJV must have the ability to evolve with the change. Upon the project’s completion, the IJV is often disbanded. It can also be a long lasting relationship where the IJV maintains long-term production. An international joint venture allows firms to have a manufacturing or marketing presence abroad with the help of local partners from foreign states. Those partners can provide them with knowledge about the government regulations, workings, internal markets as well as the distribution know-how. The knowledge may be valuable for the venture especially in unfamiliar markets (BenDaniel, Rosenbloom, and Hanks, 1998).

1.2 Research Question

What benefits and risks are associated with a joint venture entering an international market?

1.3 Aim of this project

To determine the risks and benefits of a joint venture entering an international market

1.4 Objective of this project

i. To explain why organisations might choose to enter international markets as a joint venture.

ii. To elaborate on the legal attributes and structure of a joint venture.

iii. To explain the benefits and risks of entering international markets as a joint venture.

iv. To show the mistakes which joint ventures make that expose them to the risks.

v. To provide which joint ventures can use to avoid as well as overcome the mistakes and thus any possible risks that may emerge in the international scene and provide them with success.

2. Why Enter an International Market as a Joint Venture?

According to Cespedes (1988), the normative decision theory proposes that the decision or choice of an entry mode into a foreign market need to rely upon trade-offs between returns and risks. An organisation is thus expected to decide on the entry mode which offers them the highest return that is risk-adjusted, on investment. But, behavioural evidence shows that an organisation’s choice can be determined by their need to have control as well as the availability of resources (Cespede, 1988). Availability of resources here means a firm’s managerial and financial capacity to operate in a particular or specific foreign market. Meanwhile, control means the need for a firm to influence methods, decisions, and systems in that particular foreign market. For an organisation, control is needed to have a competitive edge and give them the ability to maximise returns on their skills and assets (Anderson and Gatignon, 1986). Higher control of operation comes from having higher ownership in the international joint venture. However, there is the likelihood of risks to be higher because of the assumption of duties particularly in decision-making as well as a higher resource commitment. The choice of an entry mode is usually a compromise where the mode of exporting is a low investment (resource) and as a result a low return/risk alternative. The joint venture mode provides an organisation operational control but does not provide them with marketing control which may be important for a firm that seeks a market. The joint venture entry mode comprises relatively smaller investment and thus provides return and risk as well as control commensurate to the level of equity involvement of the investing organisation (Dunning, 2015). Lastly, the licencing mode is often a low return/risk alternative, low investment that offers the least control to the involved licensing firm. Through including market-specific and firm-specific factors which influence resources, risk, return and control, Dunning (2015) created a framework that explains choice among joint venture, licensing, sole venture and exporting modes.

As the internationalisation of the global market remains unabated, many businesses and companies seek to develop and explore capabilities or abilities to internationally distribute or source goods, intellectual property, and services (Fagre, and Wells, 1982). Many firms are now taking advantage of various strategic opportunities by creating international alliances. However, even some of the largest organisations do not have the management strength, the experience, the resources or the infrastructure to enter a global market de-novo. Therefore, alliances of different types make it possible for firms to enter the world marketplace more effectively and economically. Regulatory and legal, currency, language, and cultural differences make an international joint venture an appealing form of partnering. Furthermore, IJV remains an effective method of entering quickly into a foreign market. However, sharing risks, partnering with, as well as taking advantage of the foreign firm’s expertise and local resources can be a tricky endeavour without proper understanding and planning (Fagre, and Wells, 1982).

2.1 The Attributes and Legal Structure of a Joint Venture

International joint ventures can take the form of a contractual plan between at least two partners where the government terms or the understanding basis are put down in a written agreement (Contractor, and Lorange, 1988). Today, it is common for partners to form an equity venture through developing an entity which is owned in proportions by the parties or subsidiaries that are specially funded or through buying equity in existing entities. The developed entity can assume the limited liability company form or a corporation among many other entity forms that the local, state or national law can allow. The type of IJV chosen, whether equity or contractual, commonly denotes the extent or intensity the parties are after the IJV. The equity IJV is generally applied for long-term and closer collaborations where the investment level is higher. Equity IJV may be challenging to wind up as in addition to dissolving their contractual agreement, the involved parties usually decide to liquidate assets which the entity held and this type of liquidation can take a lot of time (Contractor, and Lorange, 1988). Regardless of whether the joint venture is one based on a contract or equity, the relationship between their parties must always be controlled by a written agreement that contains important terms which govern their overall relationship. In addition to the agreement, which must be definitive, the parties can enter an ancillary contract agreement which addresses certain components that are specific to the venture. For example, the IJV can enter a distribution agreement with one of the partners who is located in the foreign market. They may also enter a licence agreement with the IJV partner to allow them access rights of intellectual property which are important for the joint venture (Datta, 1988.).

3. Risks and Benefits

3.1 Benefits

International joint ventures make it possible for less costly and quicker access to the international market or foreign market as compared to buying an existing firm within the jurisdiction or beginning a new business (Kogut, 1988). International joint ventures offer organisations faster access to distribution channels, as well as they, offer access for a non-resident partner to know-how and knowledge about the local foreign marketplace that significantly improves the chance of the venture’s success. The local or resident partner usually has established relationships with customers and suppliers and is often proficient in the country’s customs and language. The advantages can be particularly important for medium or small sized firms who do not have sufficient resources, expertise or capital necessary to go after the opportunity. The only option that remains feasible for such businesses is sharing costs and risks through partnerships like international joint ventures. International joint ventures make it possible for the partners to effectively move quickly and cost-efficient, with credibility which the resident partner’s reputation provides in the foreign market (Kogut, 1988). The parties that have formed the international joint venture can also benefit from the complementary business lines and synergies which can exist between the organisations. International joint ventures thus remain among the core methods for multinational firms to enter into foreign markets (Llaneza, and Garcia-Canal, 1998). This claim is supported by one of the PricewaterCoopers Survey which found that by 2016, at least 1,409 international CEOs in about 83 states (49%) had planned to engage in new strategic alliances or joint ventures (Coopers, 2009). This was because the CEOs knew that such strategic alliances would provide them with local knowledge, risk sharing, political connections and immediate access to infrastructure which is built-out, brand recognition and a market share. Another reason is that through the strategic alliances and joint ventures, CEOs believed it would pool positive attributes of every party to produce long-term monetary gains for the parties involved.

3.2 Risks

International joint ventures have some of their disadvantages, challenges or risks. An IJV can cause a lot of frustration and an ultimate failure particularly when it lacks sufficient strategy and planning (Meirovich, 2010). Factors like technology issues, marketplace development, economic downturns, and regulatory uncertainties can be problematic to anticipate or predict and can cause debilitating effects on an IJV. It is the nature, similar to partnerships, that profits that come from an IJV to be diluted and shared. As a result, issues of management can emerge despite there being enough mechanisms to resolve conflicts because of varying management philosophies between partners. The partners can also find out that all of them do not have common expectations and lack sufficient flexibility to accommodate and change the evolving business needs. It is usually difficult for joint ventures to capitalise as a single entity especially concerning debts as they are definite in their lifespan and lack permanence (Meirovich, 2010). Unless an international joint venture s capitalised adequately, the merger’s debt financing, if any, must be guaranteed, in part or whole, by the partners in the IJV which can further increase their risk level within the venture (Parkhe, 1996). Furthermore, another possible risk of an IJV is the likelihood of creating a potential competitor or a competitor in the form of one’s partner in the joint venture. This issue can, however, be addressed through confidentiality provisions, non-solicitations, and non-competition within the joint venture’s definitive agreement. Many joint ventures also fail because their partners are the wrong-fit for one another. The partners can have varying visions of their roles and purpose. An international partner usually visions themselves as an active major decision maker and an important strategist. On the other hand, a local partner might be unwilling to let go of management and control, and they expect the foreigner to be a passive partner investor. An additional pitfall is the absence of shared vision concerning the exit plan from their investment. This issue becomes problematic when a partner who is a private equity fund wants to monetise their investment medium to long-term (Parkhe, 1996).

The desire to exit as well as monetise can be opposed to local partners who may have long-term views of the particular venture where the outcome is litigation or a deadlock (Swartz, 2010). Another risk comes as a result of cultural differences which can severely undermine the joint efforts in an IJV. In other situations, sophisticated regulations that surround foreign investment threaten the enforceability and functionality of the venture. Therefore, the international parties, as well as the local partners, respond by devising structures that keep control within their grasp to comply with the regulation. These structures are also designed to shift the economics or control to international partners appropriately. However, this makes foreign partners very vulnerable especially when there is a breach. In some worse circumstances, local partners use joint ventures to efficiently lock in their foreign partner by exclusivity provisions within the contract or stealing the property rights of the international partner through siphoning off the IJV’s business using affiliates (Swartz, 2010). While the return rates from an IJV can be high and appealing thus attracting prospective partners, about 50% of joint ventures do not succeed (Vaidya, 2009). The possibility of early challenges is high; a substantial number of IJVs have significant operational and financial problems in the first year of partnering. Therefore, their continued survival and success experiencing challenges need long-term support and flexibility. Evolution and flexibility are important for those IJVs that have achieved success. It is argued that up to half of all IJV eventually modify their business’ scope through expanding their proposed business or by entering other new businesses not thought off during the formation or the first agreement of the joint venture. Another critical issue is management autonomy because an IJV whose management is controlled by one party concerning operational issues is likely to fail (Vaidya, 2009).

3.3 Other mistakes Made by Joint Ventures

One of the main mistakes seen in joint ventures that have failed is cutting oneself a deal that is too good where partners forget the joint venture is like any other partnership which only requires proper functions and the participants to be rewarded using a win-win structure (Osland and Cavusgil, 1996). Therefore, partners need to focus on making money jointly from their customers rather than from one another which can cause a one-sided or unbalanced venture. Another typically seen mistake in IJVs is the absence of an exit plan where even though it is a challenge to plan for the end of the partnership during its inception, planning an exit plan is critical in the sense that the venture’s nature is usually temporary with a finite duration. Parties usually cite the lack of enough planning as one of the main causes of IJVs failure. In the rush and excitement to see the project running or gain out of a market opportunity, a very small number of IJVs contemplate about the challenges and adopt a tactical or strategic business plan. Even in cases where such a plan is developed, attention needs to be given to the plan because most business opportunities evolve. Therefore, the business plan must be flexible because an IJV not only develops but also encounters challenges at the market (Osland and Cavusgil, 1996). Another mistake that puts IJV at the risk of failure is negotiating from a high position. It is important for the parties engaged in the structuring and negotiation of the IJV to communicate with operational and line managers as well as the technicians that will work with the decisions daily in structuring the venture (Beamish and Lupton, 2016). The reason is that these people can provide essential input earlier enough thus saving the venture from any possible failure or significant cost once underway. Another reason is that these individuals know some things which even the partners do not know. Evidence shows that when a joint venture moves too quickly, they risk sacrificing quality (Beamish and Lupton, 2016).

In IJV, it has been demonstrated that it can be helpful to have selected preliminary management. It is critical to have experienced management for both sides in ensuring that essential business issues are dealt with in the documentation and negotiation of the IJV agreement (Choi and Contractor, 2016). The most serious mistake made by joint venture partners during negotiations for the formation of IJVs is not avoiding a bad deal. Like in all business transactions, there must be a level beyond which a partner in a joint venture should not exceed concerning legal and critical business issues. It has also been demonstrated that a partner cannot negotiate and have a good deal unless they can avoid unacceptable ones. Lastly, it is critical to walk away from the hazardous triangle of wrong reasons, wrong partners and wrong deals. Avoiding this fatal triangle can be achieved by researching and doing due diligence. It is important for those attempting to create an IJV to know whether it is going to be the right approach to entering a foreign marketplace. Moreover, one should find the right partner and negotiate and document as they negotiate a deal which will be profitable for both. A comprehensive and finite agreement which leads to a business architecture where the management can create as well as implement good decisions should be developed and entered. This finite agreement should also allow for flexibility for the entity to evolve with the changing marketplace (Choi and Contractor, 2016).

3.4 How to Avoid the Mistakes and hence avoid Risks

To evade some of the common pitfalls and mistakes which I have described above, certain principal issues should be solved, and any prospective international joint venture should follow some preliminary steps. First, they must commence with a term sheet which is a memorandum of understanding or an agreement principle. Any of the documents act as a structure for guaranteeing that all legal and salient business issues are analysed and agreed upon by all parties before any definitive agreement is established (Wilmerding and Staff, 2006). They force the partners to evaluate the primary components of any agreement concerning risk allocation, profit sharing and management responsibilities to make sure every party is on the same page (Dasí-Rodríguez and Pardo-del-Val, 2015). Such documents also function as estoppel agreements while in definitive agreements, the following core issues must be comprehensively dealt with: The first one is management as it is important to choose senior management earlier to allow them to be independent and have clear authority and charter as well as reporting lines. Another issue is governance particularly the board of directors’ structure of the international joint venture (or the committee which will offer management oversight under the circumstance of a non-corporate entity or contract joint-ventures) which must be specified and evaluated carefully. The number of directors in the board should also be odd unless impasses are dealt with or contemplated differently in their agreement. It is typical for two partners in a joint venture to agree on the odd number of directors (Dasí-Rodríguez and Pardo-del-Val, 2015). Each partner’s relative contribution should be described in the agreement in sufficient detail, both intangible and tangible contributions (Deresky, 2017). About tax considerations, it might be essential to specify values for the contribution of each party. Allocation of rewards and risks should be delineated in enough details concerning how, when, where and who gets what. The distribution of dividend, loss allocation and capital call including allocation of a special tax (where permissible) must be covered. Additionally, the provisions for deadlocks and alternative conflict resolution must be defined as few if any joint ventures will risk litigation of their forums. Therefore, a detailed procedure and provisions for arbitration or mediation must be set. Moreover, impasses provisions short of arbitration or mediation must be considered as the method of resolving conflicts or deadlocks which are not fatal to the IJV. Furthermore, all regulatory matters that affect the IJV must be solved, and the firm needs to set forth apparently those which are condition precedent (Deresky, 2017).

Those matters include import and export controls, compliance issues or corrupt foreign activities, companies’ acts and compliance to anti-trust/competition law (Gardner, 2015). In some jurisdictions, the IJV must address currency repatriation. Concerning the governing law, the law in the jurisdiction where the IJV will be located is typically selected to govern. It is common to have a law choice in the form of a jurisdiction which is neutral. Usually, the venue chosen is a neutral area that is convenient to the parties involved in the joint venture. Concerning ownership transfer, an equity venture must establish the restrictions which outline transferability of the ventures. The parties can agree on various arrangements of transfer including first offer rights, rights of tag along and drag-along or refusal. The termination provisions should also be detailed and need to be inserted concerning how and when the joint venture will terminate. If the involved parties have the chance to purchase the other party’s interests, the mechanism should be set forth and properly thought-out in detail (Gardner, 2015). The governing language appears to be obvious, but there is a need for an IJV to have a written agreement on two languages to be used (Yan and Luo, 2016). Either of the language versions must be designated to be maintained in case of an inconsistency between the written documents and the translations. Provisions for non-solicitation, non-disparagement, non-disclosure, and non-competition are appropriate whether the joint venture ends or is dissolved by either of the party buying the other party’s interests. Additionally, parties usually seek non-solicitation of the covenants of an employee, confidentiality, and non-disparagement. Concerning intellectual property rights, there should be provisions through IJV agreements or different documents attached which delineate all the rights, software and technology. Moreover, a relevant agreement or license must be executed regarding any knowledge items. The international joint venture agreement must also delineate ownership of any intellectual property on termination or dissolving of the venture (Yan and Luo, 2016).

4. Conclusion of Findings

This work has introduced us to globalisation and what a joint venture entails. We have seen that a cost-effective and efficient way of venturing across the border and which allows organisations to share costs and risks as well as exploit synergies and eventually progressively drive a firm to an international audience is through a joint venture. International joint ventures offer access to various business opportunities and unique geographic markets which may be absent to medium and small-sized businesses. Firms considering entering international joint ventures need to know the risks and limitations that underlie the endeavour and must take advantage of the experience they have gathered over time. International joint ventures provide businesses great opportunities but they must be careful planners and must create thoughtful structures as well as they need to be willing to stay flexible during the entities life as doing so will increase the possibility of success.

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