Lecture 7 Flashcards
Why joint ventures?
- Joint ventures imposed by governments
- Joint ventures as a first best strategy
Equity joint ventures vs contracts (alliences)
- Contracts: Pay specified ex ante
- Equity joint ventures: parties get paid for their contribution ex post from the revenues of the venture
Advantages of equity joint ventures
- Reduces incentives for opportunism in the supply of inputs
- Reduces negotiation and renegotiation costs
- Joint ventures have stronger incentives (more stable)
- Joint ventures are more flexible
Disadvantage:
- Joint ventures have higher fixed costs
When are Equity joint ventures efficient?
- Wyen two or more parties hold complementary assets
- When these assets are hard to evaluate and price ex ante
- when replication and acquisition more expensive
Complementary assets
Similar (scale joint venture)
Dissimilar (link joint venture)
Link joint venture
Obtain complementary resources
Link joint venture is a joint venture in which the position of the parties is not symmetrical, and the objectives of the partners may diverge.
- Distribution and country specific knowledge (Market entry JV)
- Complementary know-how (CFM = GE + SNECMA)
- Capital (Ebara-Cryodynamics)
Scale joint venture
Obtain scale economies in manufacturing, research, distribution
Scale joint venture is a joint venture in which the partners collaborate at a single point in the value chain to gain economies of scale in production or distribution. This type of joint venture can be a good vehicle for developing new products or services.
Why instability?
Joint ventures are less stable than wholly-owned affiliates
- Are EJVs learning races?
- Some EJVs are short-lived by design
- JVs are not intended to be learning races, but may degenerate into learning races
- Allience partners seek ‘collaborative specialization’
- But collaborative specialization exposes parties to opportunism
- Protection against opportunism requires appropriate conditions
- Defective conditions cause learning races
Causes of instability
- Poor structure
- Goal conflicts
- holdup
- spillovers
- parent interference
- gridlock
- Poor process
- values and goals
- communication
- interface
Dealing with JV issues?
solutions
- Structure
- structural design
- legal safeguards
- partner selection
- Process
- Structural design
- Partner selection
- Assesment
Goal conflicts/free-riding
and solutions
- Partners have different goals
- Have potential partners spell out goals ex ante
- Freeriding
- Give partner control over performance aspects vulnerable to free-riding
Holdup and its solutions
When dependence becomes asymmetric, party less dependent can exploit the other
Solution:
- Specify market price transfers
- Symmetrical structure
- Set up mutual hostages
- Co-specialized assets
Spillovers and its solutions
Parties divert ther partner’s contributions to the alliance to activites outside the alliance
Solutions:
- Choose right partner
- Change the scope of the alliance
- expand
- segment
- Blackbox know how
- Legal prtetctions (patents, trademarks)
Managing joint ventures
