Discuss the Relative Advantages and Disadvantages of the JVC versus the Wholly-Owned Subsidiary as a Means of Market Entry

Discuss the Relative Advantages and Disadvantages of the JVC versus the Wholly-Owned Subsidiary as a Means of Market Entry

Introduction

International Joint Business Ventures (IJV) arise when two firms from different countries come together to form a partnership. Most of such companies come together to evade the responsibilities involved as a result of cross-border transactions. Carbaugh (2011, 321) cited that joint ventures combine their skill and assets and work together as one firm. When such a partnership occurs, the firm restricts the risks arising from their activities. Sanbar (2007, 83) cited that venture capitalists are risk-takers who gamble that a gain will be achieved for setting up the business. In addition, the firms are in a position to competently and strategically gain competitive benefit. Joint Venture Companies are advantaged in that they share the ventures, administration, as well as the risks that may be incurred in the process of transactions. Contrary, wholly owned subsidiaries have to ensure that they attain the best by making sound decisions and in choosing an optimal entry mode. The partners first begin by strategizing on simple sales alongside cheap marketing operations (Luo, Y. 2010, 251). This is done in a bid to reduce the risks that may be involved in running the business as well as maximizing on the benefits accruing from the business operations. According to Wolf, and Wolf (2011, 2) the only effective way for any business that wishes to do business in the economic blocks that exist today is by forming a joint venture with the company from the targeted member country.

Joint business ventures

Shared investment and management characterize some businesses. In addition, they business has its total risks shared and the options of the firm are equally shared across the partners. Morschett, Schramm-Klein, and Zentes (2010, 286) argued that Joint Business Venture is a business organization that is owned by two or more independent firms.

 The joint venture businesses are believed to take advantage of an already developed marketing network. The fact that the establishment of a joint venture business is dependent on local enterprises makes them easily adopted by the hosting country. Campbell and Netzer (2009, 27) cited that the decision to establish a joint venture is arrived at, after a complex and elaborative process. This process involves assessing the economic and technical conditions that may affect the functioning of the business. This is properly done as the business involves risks and is easily likely to face substandard eventualities. Killing (2013, 77) asserted that that 50-50 type of decision making in joint venture can be confusing. The process of decision making need therefore be left to the managing body.

Wholly-Owned Subsidiaries

This refers to enterprises that are directly used to invest in host countries by establishing branches in other countries. They fluctuate depending on the forms used. These forms include patented technologies, trademarks, brands as well as other investment strategies. Examples of wholly-owned subsidiaries are the financial, tourism and manufacturing businesses set in Australia by American and Japanese companies. Before such firms are established, the parent firms need to first assess all the factors that affect its operations. The company should then take advantage of the conducive prevailing conditions to establish the wholly-owned subsidiary. Martineau (2000, 28) cited that by establishing its own foreign branch, the business retains exclusive control of its activities. Such activities include marketing, pricing, production decisions and retain greater control of its technological assets. This in turn leads to 100 percent profit entitlement.

Entry Mode

Before entering into the global market, the partner businesses should ensure they select an appropriate entry mode. This is done after analyzing factors that affect the functioning of the international businesses. This is because entry into the global market means that the business develops in technology, capital, products, services and policies. According to Mcdonal et al. (2002, 235), traditional joint ventures seek to exploit their existing viability. These should be done in such a way that the already existing market strength is not lost. Each type of entry mode selected has its disadvantages and advantages. The choice of the entry mode adopted affects the success of the business (Hitt, Ireland and Hoskisson 2012 p.239).

Reasons for Wholly-Owned Subsidiaries

High differences in products

The firms coming together bear differences in the nature of the products or services delivered.  This is initially important as it gives the firms competitive advantage over their competitors. To avoid such competition, they therefore come together and combine their technology as well as assets to be able to beat their competitors. This is because the firm is allowed to tap outside resources vital for building competitive potency at extensively reduced prices. This is because the costs involved are shared among the partners, lowering the production cost.

Symbiotic Cooperative Advantage

Joint ventures may be formed in a bid to pull resources together by the partners pursuing a common interest. For example, by sharing financial resources that each firm could hardly get, the two smaller firms achieve economies of scale similar to those enjoyed by bigger firms. The joint venture can also cooperate to benefit from the pooled non-financial resources. Joint ventures are able to use complementary resources, competencies and skills possessed differently by the partners to achieve synergistic effects.

Low Supply of Products in the Target Market

Wholly-owned subsidiaries are formed by firms whose produce have a low supply in the target countries. These products are characterized by legal acceptability and a certain extent of demand once they enter in those countries.  The wholly owned subsidiaries are better positioned than the International Joint Venture Companies. According to Burnett and Bath (2009, 424), a firm may want to expand or move to a new region and need the additional resources provided by another enterprise. They will trigger the formation of a joint venture to increase the resources required as well as the output levels.

Access to Overseas Markets

Joint ventures have been formed after a firm gains access to oversea markets. This has been applicable to multinational and the local partner firms. This allows the foreign firm to rely on the local market for its operations. In this way, both firm benefits the local market gains access to the international market while the multinational firm access the local market. At each level, the partner understands the market well, a factor that gives them an upper hand in the operations.

Risk Sharing

Joint venture may be formed in cases where the investment project partners are working, on requires large sums of money or is too risky for one firm to handle. An example of such projects is in the commercial aircraft manufacturing; a business that is too risky for one firm and may call for collaborations. In other cases, a host country may be unfriendly to foreign investors risking their ventures in that country. Beamish (2013 p. 12) cited that multinational may be formed for government related reasons. A multinational company may then opt to structure a joint scheme with a local firm to be able to penetrate such a market. This helps in dissolving any political risks involved and diffuses the foreigner market concept.

Advantages of the JVC vs. the wholly-owned subsidiary

The right to manage

The mother company takes part in the decision-making process as well as management. This is in line with the Article of Association as the stakeholders in the wholly owned subsidiaries.  All the companies benefit from the decision-making framework. These decisions especially determine the market feasibility.  The parent company has the sole responsibility of selecting the leaders who run the firm. In addition, they assess, reward and punish the leaders who run the affairs of the company. In addition, the parent firm regulates the development blueprint, the course of the investments. On its part, the wholly-owned firm revises and formulates its developmental strategies in line with the mother company. To ensure that the firm gets the best, the mother company keeps tract of the operating environment and tract the quality of its assets. Ensuring that its products have high quality, which is vital and leads to secure, value-added and profitization of the company assets.  To ensure a cohesive running of both firms, the wholly-owned firms give an account of their financial conditions ensuring authentic and accurate information of the products, leadership and fiscal operations.

JVC do not primarily control the functioning of the firm since they are in a minority equity position. This majorly happens when the firm accepts a common control of an entry mode of the joint ventures. JVC in this case do not control the administration and the function but are to some extent allowed to control the sales and any thing that deals with the infringement of copyright as well as patent. The right to control impacts the way resources in the firm are used. For example, if a firm has limited resources, these resources cannot be rationally be use d due to the control right. Low levels of resources may arise from scattered resources and any new disagreements for resources may result in a vicious cycle. This may negatively impact the functioning of the firm leading to its loss of competitiveness. This leads to the closure of the JVC.

Protections of commercial secrets

Wholly-owned bear the entire control right. This puts it in a position to control the overall management, sales, and manufacturing and promotion activities of the firm. Therefore, the firm easily disposes its profits and easily protects its technological issues as well as commercial coverts. JVC are characterized by the local knowledge and the foreign partners ‘contribution. The locals include the firm’s sales team, the market share, the clientele groups and local government. On the contrary, the foreign partner’s contributions include technology, international support and the management. These create a scenario where the secrets are lost in between the parties involved.

Increased returns

The mother company has among its long-term objectives the desire to maximize its share in the foreign market. This is done by hastening the rate at which they venture into the market coupled with the effective control of the wholly-owned subsidiaries. Most wholly-owned subsidiaries earn high rewards as the global experiences, proper utilization of the firm abilities and the cultivation of the global competitive advantage.  It takes the benefit of conducive economic conditions for a firm to enjoy an increased industry demand. The introduction of an advanced technology and other facilities along with effective administration tactics lead to the production of competitive products.

 To ensure that the firm obtains escalated benefits, the mother firm adjusts the companies’ strategies in line with the business’ activities. The laws that govern the state which the firms are situated are use to govern the activities carried out by the company. This is important in that it protects the legitimate rights and welfare of the alien investors.  The legitimate benefits and other lawful incomes are repatriated to the mother country. Wholly-owned subsidiaries benefit from tax-reduction or exemption partisan handling in harmony with the requirements of the host tax proceeds. On their part, they get minimal control rights and returns as they usually put lower investment. JVC are usually in a win-win relationship. The benefits acquired are evenly shared amid the partners. This makes each of them to work hard to succeed in the subsequent projects. Weak strategic plans may lead to the failure of the JVC. Ensuing failure may lead to an automatic dissolution of the business.

Disadvantages of the JVC vs. the wholly-owned subsidiary

Cultural disparities

Different countries in the world have differences cultural practices and beliefs. Cultural disparities may arise from linguistic differences, ideals as well as occupation prototypes. These differences at times fortify the values of the products and firms involved. In cases where the disparities exist between the target market and the firm, efforts are needed to ensure that the two effective adapt. In cases where the firm and the market share a common culture, the clients quickly adapt to using the new product as the management ensure that the products meet the interests and requirements in the market.  This is boosted by the fact that they share similar cultural surroundings as well as management philosophies.

According to Yun and Luo (2001, 21), cooperation between partners from radically different cultures is a major challenge. They further give an example of the individualistic American culture in contrast with that of the Japanese’s; whose cultural direction is collective and group oriented.  The business may be threatened, as one partner may want to incorporate their cultural values and norms into the affairs of the business while ignoring those of the partner.

At some extremes, the two may exhibit similar thinking traits or behavior patterns. Strategically incorporating the firm’s objectives and the clients’ interests is important when the firm is making long-term decisions. In most cases, JVCs are characterized by staffs from different cultures as well as varied attitudes, which may affect the functioning of the business.  At times, avoiding conflict that may arise as they work is difficult. 

High opportunity costs

To develop the new business, the host country has put a lot of efforts to achieve a certain level in strategic wholly-owned subsidiaries.  A higher opportunity cost may be involved as JVC have minimal opportunity costs. This is because they can easily acquire an understanding of the local market. This helps in understanding their competitors as well as the administrative policies of the stakeholders (Aswathappa, K. 2010, 29).  Firms develop a set of connections with its clientele and the suppliers previously belonging to the local business partners through a process characterized by mutual commitments and learning. The JVC also stand at an advantage of an already developed marketing network system, distinct branding, economic associations, political status, as well as customer preferences. This benefits the partners as the products are easily accepted into the market.

For wholly-owned firms to benefit from the partnership, they need to acquire knowledge of the host country, strategize on the sales channels and ensure a consistent advertising is effective done in the host country.  This can be facilitated by getting competent advertisers. This requires time and finances since the advertising agents are manufacturers of goods and services and may prioritize the returns they get from such an advert rather than serving the JVC.

Operational risks

Wholly-owned subsidiaries are characterized by increased operational risks compared to JVC due to its unpredictable factors in operation. The problems that arise from managing wholly-owned subsidiaries include faulty authority structure, poor organizational arrangement as well as inapt personal selection. These predicaments lead to incorrect collusions and low efficiency. Some activities in the firm may cause a failure in the investment and worse still cause to litigation or loss of the firm assets.  Inaccurate information and leadership tactics lead to high risks on the part of the investors.  These risks may be legal actions against the firm or dissolution. This highly impacts the firm. One partner may hurt the wellbeing of the joint venture, which may cause damage to the company. To avoid operational risks, a team of directors should be put in place to ensure that co-operation is maintained. Co-operation aids the firms as it ensure that the partners have the same interests; which upon maximization leads to the success of the organization.

Disadvantage of exit

The mother company is mandated to bear all the costs. These costs include the costs involved in acquiring resources, technical support, sales system developments and the costs that may be involved in carrying advertisements. The host company suffers a great deal when incoming firm decides to exit. This can occur in cases where factors like political temperatures in the host countries have drastically changed, thus the wholly owned firms are unable to maintain the costs involved in running the business. The parent firm may opt to exit. At some instances, the parent firm may do so before they even recover the profits or the investment costs incurred. In addition, JVC are forced with the risk of agreement termination when the market conditions, or even the business, has changed. This can be done at lower prices or cots than previous planned.

Licensing risks

When a business becomes a joint venture, it risks losing its sole ownership rights to its partners. These sole privileges may include brand, technology as well as trademark. Hill, Jones and Schilling (2014, 272) gave an example of a proposed venture in 2002 between Boeing and the Mitsubishi Heavy industries. The aim of the joint venture was to assemble a new wide-body jet (787). This raised fears as the Boeing felt that it could possibly give its commercial airline technology to the Japanese.

Large political risk

Joint venture companies get a lost of support from the host governments. These governments benefit from the high values added product, as well as technologies by the firms. At the local levels, the host firms provide local administration relations, market share, clients’ teams and sales boosts. This guarantees that they do not lose their rights of control and equity. However, some political regimes can impose hefty taxes and preferential policies.

Starting a wholly-owned company can mean strict requirements for the host administrative environment as well as the political immovability. It is important for the mother company to look into the political affairs of a country before venturing into business with it. Setting up business in a politically stable nation that is characterized by friendly investment policies, a sound legal framework as well as stable exchange rates favors the business. This is because the legitimate privileges and interests of the foreign investors are normally protected by the laws governing the host country. The business may incur high losses in situations where the hosting nation has political instability or unfavorable investment policies. In addition, it is important that the parent government investigates the stability of the investment laws in the prospective host country as changes in the investment environment may lead to the dissolution of the business.

High input costs and escalated risks

Most host countries encourage wholly-owned subsidiaries because of the advantage that the foreign investors come with their own capital. In addition, wholly-owned businesses are believed to increase tax revenues with minimal business risks. Unlike in Joint ventures companies who have smaller capital as well as lower human capital investments, venturing into the international market involves so many risks.  The joint ventures therefore partner with local firm to reduce the risks that characterize international trade.

At the time of establishing the business, the mother company faces so many challenges. These challenges are evident in strategic planning, marketing stratagem, organizational design and the way the resources are allocated.  Challenges in resource allocation are highly witnessed in the financial allocations and the way the firm is internally managed. The fact that the parent company caters for all the financial and resource burden of the new business means that the parent company faces a very high risk.  The business is vulnerable due to environmental risks and other uncertainties that may face the new firm.

The capital invested results to complex alterations in the capital, which may in turn shrink the costs of the assets. This may further interfere with the strategic flexibility of the business and increase the risks that threaten the investment. When the investment is a large-scale investment, the costs involved may be extremely high costs. This consequently translates into a more magnified risk. This is because the greater the right to control, the greater the capital devoted and the higher the magnitude of the risk that may be involved.

Lack of exclusive control

When the parent company enters into a joint business venture, its ability to exclusive control the operations and all the activities of the company is affected. The control right might be on the subsidiaries with the objective of realizing the occurrence curve or the position economies. In addition, the parent company may lack any control on foreign subsidiary vital for coordinating counter-attacks against its competitors. . This because the management is hared between the parent, the host company, and the operations may be limited to the laws governing the mother company. Miramontes and Rice (2005, 11) cited that companies should be willing to freely give up some control if a joint venture is to be attempted. They further warn that the parties involved should be in a position to protect them against any loss of control by ensuring that they use clear and well defined contractual terms.

Incompatibility of ventures

Any partners who plan to enter in a joint venture should be willing to compromise. Incompatibility of partners leads to major break-ups, restructurings as well as failures. To avoid such occurrences, a well-written and detailed agreement should be drafted before the firm begins its operations. The agreement should indicate who the sponsor of the venture is. The sponsor is highly accountable to the running of the daily activities in the firm. This should be toppled with proper communication.  The venture agreement should give a chattered committee which should be meeting frequently to discuss matters of the firm. To ensure that both parties are satisfied, both partners should have members in the committee.

Conclusion

According to Mathew (1999, 10), the emerging markets in the world today provide a fertile ground for business opportunities. By choosing to enter in the global market, an organization chooses to take part in the worldwide market competition. This involves a lot of capital, development of quality products, costs involved in up-to-date technology as well as stringent policies that govern the operations in the market. The host countries should choose a good entry mode. This mode should clearly give an effective strategy in the international market and have a set of clearly set objectives on what is to e achieved in the long and short-term periods. The selected entry mode should outline the consequences that characterize joining the international market. This should be on thee issues on market demand shifts to the expected market equilibrium alterations. The entry mode chosen affects the right to controlling the market. This therefore calls for a proper understanding and knowledge on the factors that may affect the businesses’ share of the market. These factors include market secrets, unified strategic behaviors, the size of the market, international familiarity and the right to control among other factors. Li (2007, 140) cited that multinationals realize a matching material control right as well as monopolized proceeds right attained through the strategy of conspired losses.

On joining the foreign market, the mother company has strategized on maximizing their total value. This encourages them to push and accelerate entry into the market. In addition, it hastens the control in a bid to effectively maximize on the business put in the global image. It is worth noting that the local joint businesses rely on the local understanding of the market, traditions and the knowledge of the trade and industry as it affects the local people. The foreign partners are on the other expected to contribute to providing technology related support, management as well as international maintenance. Joint venture companies should be properly managed to reduce the opportunity costs involved together with the switching costs. This will aids in establishing a transparent business thus promote the objectives of the business. In turn, the business ends up winning a great deal of the market share. Conversely, there is not a defined optimal entry mode for anyone who wants to join the global market. This is because the opinionated and financial environments vary depending on the countries involved. It is the mandate of each parent firm to strategize and choose the entry mode to adopt depending on available resources as well as the objectives and the policies of the company.

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