The Case of Thai Joint Venture With Japanese Partner in Construction Business

Literature Review

Business in the 21st century is increasingly conducted with shifting borders. International partnerships will become standard practice as the product life cycles shorten and immediate distribution become imperative. As business is increasing its globalization, alliances among multinational firms are becoming more popular. Cooperation between international firms can take many forms such as, cross-licensing of proprietary technology, sharing of production facilities, co-funding of research projects, and marketing of each other's products using existing distribution networks (Griffin and Pustay, 2005). Such forms of cooperation are known as strategic alliances, business arrangements whereby two or more firms choose to cooperate for their mutual benefit. A joint venture is a specific and more formal type of strategic alliance.

2.1 Defining International Joint Venture (IJV)

An international joint venture (IJV) is a special type of strategic alliance in which two or more companies from different countries join together to create a new business entity that is legally separate and distinct from its parents. Joint ventures are normally established as corporations and are owned by the founding parents in whatever proportions they negotiate. Although unequal ownership is common, many are owned equally by the founding firms (Berger, 1999).

Here is also a definition adapted from Shenkar and Zeira (1987):

1 it is a separate legal organisational entity, and belongs entirely to neither/none of its parent;
2 it is jointly controlled by its parent;
3 these parents are legally independent of each other;
4 the headquarters of at least one parent is located outside the country in which the IJV operates.

As stated some IJVs are formed on an equity basis, more flexible arrangements may depend on contract cooperation without involving the legal commitments of equity. Some IJVs may have more than two parents. In general, the more parents the greater the administrative complexities and the greater the problem of managing the project. Sometimes, both (or all) parents are located outside the IJV country. For example, Coca Cola (Vietnam) was started as an IJV between Coca Cola (USA) and a Singaporean bottler; originally it did not employ any Vietnamese managers, as a result the company needed to deal with cultural difference (Beamish, 1985).

In terms of the construction industry, joint venture has been seen as a tool for improving the performance of the construction process and emphasizes the way it helps to create synergy and maximize the effectiveness of each participant's resources (Barlow et al., 1997).

The Construction Industry Institute defines joint ventures as a long-term commitment between two or more organisations for the purpose of achieving specific business objectives by maximizing the effectiveness of each participant's resources. This requires changing traditional relationships to a shared culture without regard to organisational boundaries. The relationship is based upon trust, dedication to common goals, and an understanding of each other's individual expectations and values (Barlow et al. 1997). To date, joint venture is understood as a set of collaborative processes, which emphasizes the importance of common goals. The base of joint venture is a high level of interorganisational trust and the presence of mutually beneficial goals. Joint venture means a management process that helps the strategic planning to improve the efficiency of the enterprises, and forms a team with common objectives (Barlow et al. 1997). Participants of a project can improve performance in terms of cost, time, quality, build ability, fitness-to-purpose, and a whole of range of other criteria, if they adopt more collaborative ways of working (Bresnen and Marshall 2000). Barlow et al. (1997) mentions six successful factors of joint venture: building trust, teambuilding, the need for top level commitment, the importance of individuals, the strategic movement of key personnel, and the need for open and flexible communications. The same authors quote as common benefits in a joint venture relation: reduced costs, shortened delivery time, improvement in construction quality, better working atmosphere, and organisational learning. Joint venture classifications focus on the duration of cooperation between partners. This dissertation will be used as a case study to explore the extent and native of these benefits in practice.

Two main types of joint venture are found in literature: project joint venture and strategic joint venture or long-term joint venture. Project joint venture is a cooperative relationship between organisations for the duration of a specific project (Barlow et al. 1997). At the end of the project, the relationship is terminated and another joint venture may commence on the next project (Kumaraswamy and Matthews 2000). Welling and Kamann (2001) state that if these firms do not meet again in another project, the learning effect reached on the particular project will be eliminated. Strategic joint venture is a relationship with a high level of cooperation between partners (Barlow et al. 1997), which takes place when two or more firms use joint venture on a long term basis to undertake more than one construction project, or some continuing activity (Kumaraswamy and Matthews 2000). In this kind of joint venture, the learning achieved in a specific project is more likely to be used in future projects. In the context of a strategic joint venture, it becomes a management philosophy that is expected to work continuously for each and every project and there are more expectations from team members than for a project joint venture (Cheng and Li 2001). The type of TNC JV is the strategic joint venture where Thai and Japanese Partner are focusing on the long term goal.

2.2 Seeing Joint Ventures as a Foreign Market Entry and Development Strategy

Joint ventures are sometimes viewed as a second (or even third) best option for supplying a foreign market-being used only when government regulations (e.g. ownership and export controls, restrictions on royalty payments, etc.) prevent the establishment of wholly owned subsidiaries, exports, or licensing. Indeed, there are major problems that arise in the planning, negotiation, and management of international joint ventures. Despite such difficulties, it is widely recognised in the literature that there are important strategic and competitive advantages that may be derived from successful joint venture agreements, and such collaboration may be a first option in certain circumstances (Kenichi Ohmae, 1985). Connolly (1984), for example, argued that the assets of developed-country multinational enterprises (capital, foreign exchange, technology, management, and marketing skills, etc.) and developing-country firms (lower costs, greater familiarity with local markets, etc.) are complementary, and that the combination of these assets in a joint venture results in mutual benefits. This can be seen in the case of TNC. Similarly, Contractor (1984) argued that the loss of control and the sharing of profits inherent in equity joint ventures is more than compensated for by the expertise and capital contribution of the local partner; contacts with government officials; faster entry into the market; and risk reduction. Harrigan (1984, 1985) argued that joint ventures should not be seen as a hiding place or a sign of weakness. Rather, if organized properly, joint ventures would be a source of competitive advantage, a means of defending existing strategic positions against forces too strong for one firm to withstand itself or as a means of implementing changes in strategic postures (e.g. diversification access to technology). Joint ventures allow each partner to concentrate their resources in areas of expertise, while enabling diversification into attractive but unfamiliar business areas. Overall, Harrigan (1984, 1985) concludes that joint ventures are important strategic weapon in responding to the challenges of global competition.

2.3 Reasons for forming the IJV

The partners (Thai and Japanese) may have shared interests in forming an IJV which give both opportunities to

5 create greater market power by combining resources;(Bell, 1996)
6 reduce risk by sharing costs (costs of investment and production are shared);
7 reap economies of scale;
8 cooperate and avoid competition , which might incur greater costs than those incurred by agreeing to the IJV (the IJV is an alliance that restricts your own capacity for independent action, but also restricts that of your partner); (Contractor & Lorange, 1988).

In general, though, most IJVs offer parents different opportunities which arise from their different environments. A project might offer the foreign parent access to a local market, and the local parent access to the international market. According to (thailandoutlook.com), in 1997 two securities companies, the Premier Group of Thailand and SBC Warburg, formed a joint venture designed to provide Warburg with local expertise and Premier with international access.

Furthermore, the foreign parent needs to meet the host government's requirements for doing business in the country (in this case the Thai Government). For instance, a foreign company is only permitted to operate in the country if ownership is shared with a local company. The IJV offers the foreign parent opportunities to learn about local marketing conditions and to gain access to local resources, including production facilities, labour, and materials. For the local parent these are opportunities to generate upstream and downstream industries. For instance, the development of an IJV pulp mill encourages local entrepreneurs to increase logging facilities and to invest in paper manufacture. The local government benefits by opportunities to encourage foreign investment. Also, the foreign parent may be allowed to take only minority ownership, and must fulfil conditions regarding local employment, technology transfer, purchase of local materials, etc (Chowdhury, 1992).

2.4 Factors influencing IJV success and failure

The more that the company depends upon the strategic alliance in order to achieve its strategic goal, the more it invests in the success of the alliance. In the case of TNCJV this means investing to find the ideal partner. Finding the ideal partner takes time and effort, and the greater the importance that the firm gives to this selection process, the greater the chances of success (Geringer 1991).

Hung's (1992) study of Canadian companies operating in South-East Asia found that "the most often mentioned difficulty is to get the right partner company, one which has compatible objectives and is trustworthy". Therefore, trust is one of the most important parts of forming the IJV. Trust factors then will be reviewed:

2.4.1 Trust between the parents

The project is more likely to succeed when each parent trusts that the other is genuinely committed to the project and will do its best to abide by all agreements between them (Demirbag & Mirza, 2000).

When more partners trust each other, the easier they find it to reach agreement on internal arrangements:

1 applying the same strategic priorities to planning;
2 management style, and systems;
3 systems for communicating between the parents, the IJV, and parents; within the IJV; and with the environment
4 factors associated with business interests, goals, impact of size, timescale
5 assessments of IJV success and failure: project evaluation, both ongoing and upon termination.

(Demirbag & Mirza, 2000)

2.4.2 Mistrust between parents, and the environment

Mistrust arises from

13 inadequate planning;
14 communication problems between parents (Thai and Japanese in this case)
15 wide differences in the national and organisational cultures of the parents;
16 one parent changing its attitude to the project in response to its own internal changes - e.g., a new strategy, a new CEO;
17 one parent changing its attitude to the project in response to changes in its business environment.

To take the final point: both parents operate in their own volatile business environment. Their local markets and competition differ. They are subject to different local political, social, and economic pressures. These environmental differences make any alliance inherently unstable (Geringer, 1988).

According to Mikio Kunisawa Representative Director of Nishimatsu Construction (HQ in Japan), TNC had a full order book including a heavy work load and the prospect of many new projects during year 2005-2006 period. However, the situation at year-end is somewhat different from his expectation, particularly for Nishimatsu's Bangkok Office, and TNC now faces a challenge to maintain the business levels of the previous years (2006). The primary factor affecting business confidence is the continuing general political instability in Thailand, including an inconclusive general election and the resulting postponement of government decisions regarding infrastructure and development projects (thailandoutlook.com). In the light of this uncertain situation, the forecast indicator for economic growth in Thailand has been revised downward. A further effect has been a downturn in business confidence within the private sector, reducing planned investments in the industrial and real estate sectors (thainishimatsu.com). This situation could then establish uncertainty between the parent company and the environment they face.

These factors of environmental uncertainty might be the reason for focusing only on short-term alliances with highly specific goals. The partners might use an initial limited alliance in order to test the possibilities for a greater commitment and to build trust (Harrigan, 1985). This also has implications for communication. Each partner needs to communicate information about its own environment and to develop knowledge of the other's.

2.4.3 Trust within the project

A project succeeds when project staff trusts each other and when persons posted from the two parents develop a synergetic relationship. Before project operations start, a shared project culture is fostered by mixing staff from the parents in groups, where they work together on project planning. They exchange non-critical technological and business data (Harrigan, 1985).

A lack of trust arises when

18 staff join the project ignorant of the needs and interests of their colleagues from the other parent;
19 local staff feel threatened by a stronger foreign parent;
20 conflict arise from human resource and technology transfer policies (one parent cannot supply the skills to which it is committed);
21 cultural differences are exploited.
2.4.4 Trust between the project staff and their parent

A project succeeds when staff posted to it feels confident of the support of their headquarters. Mistrust arises when promised support fails to materialize, or staff feel that their long-term career prospects with the company are in jeopardy. A project is also undermined when top management fails to communicate its goal effectively within the organisation. Subordinate levels perceive it as a drain on their resources, and give it a minimum of attention (Kachara & Hebert, 1999).

2.4.5 Similar business interests
The potential partners are more likely to work together effectively when they have related interests. The parents of successful IJVs have similar interests and belong to similar or complementary sectors. When both contribute and learn from the other, fruitful cooperation is possible. Companies in the same industry form alliances when they hope to benefit from discrepancies in technology, systems, and markets (Kogut, 1988). By 1993, joint ventures parented by the Swiss food firm, Nestle, included alliances with Coca Cola (canned coffee and tea drinks), General mills (cereals), and two companies in the people's Republic of China (a coffee and creamer plant, an infant formula and milk powder plant).

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