Introduction

• Partners to an alliance are investors in it

  • Govern to:

    • Minimize risk

    • Maximize likelihood of good return

• IJV = International Joint Venture

  • What are the risks of investing in an IJV?

    • Financial

    • Resource

    • Market requirements

  • What are the sources of the risks?

    • Institutional and economic

    • Special condition of multiple agency that pertains in JV’s

• Alliance control seen as significant to performance

• Alliance governance particularly important when structured in corporate form such as EJV (Equity Joint Venture)

• JV’s neglected in corporate governance

• JV’s have a relatively high failure rate

  • Usually due to breakdown in relations between owning partners (Singh and Mitchell 1996)

  • Cultural differences cause problems in IJV’s

• “IJV’s can promote economic development through knowledge transfer to local partners”

• Broad definition of corporate governance:

  • Process of control over and within the firm

  • Aims to reduce risks to owners

  • Ensure the firms activities bring a stream of acceptable returns to those owners in the long term

• Some management accounting experts focus more on structural and external aspects of governance – (Monks and Minow 2001)

Risks

• Institutional and economic source of risk to a foreign IJV partner:

  • Known as ‘contextual risks’

  • Involve relationships between the venture and the local environment and are linked to ‘locational’ features – (Dunning 1998)

  • Institutional:

    • Limited to majority control

    • Minority owner protection

    • Poor contract enforcement

    • Poor accounting standards

    • Inadequate intellectual property protection

    • Underdeveloped intermediate institutions (business support services)

    • Restrictions on business, land use and other licences

    • Informal local protectionism

  • Economic:

    • Inadequate working capital and liquidity

    • Lack of capital

    • Inadequate managerial and technical expertise

Low rate of growth and GNP per capita

• Instability of economy

• Special condition of multiple agency risk

  • Known as ‘agency risks’

  • Stem from intrinsic relationships

  • Agency (Partners as agents):

    • Partner engages in fraudulent or other opportunistic behaviour

    • Exploitation of minority interests

    • Deficiencies in partner’s capabilities and resources

    • Loyalty of managers and staff from the partner is limited

    • Partner cannot or will not deliver access to domestic market

• “Effectiveness of the host location’s legal system and the attitude of regulatory authorities are crucial” – (Child et al. 2005)

• Level of protection for corporate investors varies significantly between countries – (La Porta et al. 1998)

  • E.g. accounting standards, risk of expropriation of...

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