WK#10, DQ2 Element 1: Under what conditions might a company prefer establishing a joint venture to a wholly owned subsidiary in a foreign country? In Element 3, present an example of a company with a wholly-owned subsidiary and a joint venture in two different foreign markets. Explain why the management team of this corporation chose each of the investment models. According to Ball et al. (2009), joint venture is defined as “A cooperative effort among two or more organizations that share a common interest in a business…” (p. 52). Joint venture allows companies to strategically become partners to help each other in terms of investment, competitions, business plans and more. Besides these benefits, businesses prefer joint venture under following conditions: * “Strong Nationalism” (p. 453) – When consumers believe that a foreign company produces “superior” products or when they only believe in their own country’s products. * Credibility – To establish credibility with potential customers, especially when brand is unfamiliar locally. Tax Benefits – When special taxes benefits exist upon becoming partners with local businesses * Avoid Risk – When local businesses have expertise in law, policies and business plans. * Law – When government of host country requires companies to have local partnership in order to enter the market * Union and Labor – 1. When labor policies differ dramatically. 2. When workforce of the entering market are unionized. 3. When workforces prefers to be managed only by the local or foreign company. Element 2 For example, in order for foreign companies to wholly owned subsidiary complex criteria must be met.
The criteria are: * Only a “holding” operation is involved and all subsequent / downstream investments need prior approval of the Government. * Where proprietary technology needs to be protected or sophisticated technology is to be introduced. * At least 50 percent of the production is to be exported. * Proposals for consultancy. * Proposals for infrastructure like roads, industrial model towns, industrial parks etc. Whereas when becoming a Joint venture foreign companies can gain advantages such as: * Already established distribution / marketing set up of the Indian partner. Available financial resources of the Indian partner. * Already established contacts of the Indian partners that help. Differences such as these could change company preferences. Please check http://www. akmglobal. com/joint-venture. html for details. Element 3 “LG/IBM PC was formed in 1996 with a 49 percent investment from LG, one of South Korea’s largest electronics companies, and a 51 percent investment from IBM”. This joint venture Between LG and IBM in allowed IBM to create sales channel and supply chain in Korea.
In 1996, Koreans were not very acceptable of foreign companies entering the local markets. Many restrictions in government policies and hostile attitudes of consumers were seen as major threat for foreign companies. The joint venture allowed IBM to safely enter the Korean market introducing their quality products. As a result, after years of success in Korean market, LG and IBM have dissolved their joint venture deal becoming two separate companies: IBM Korea and LG- PC. (http://news. cnet. com/IBM,-LG-winding-down-joint-venture/2100-1044_3-5331822. html)