Unlocking International Joint Ventures - Alan MacCharles - E-Book

Unlocking International Joint Ventures E-Book

Alan MacCharles

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Beschreibung

Comprehensive guide to forming successful international joint ventures

Written by Dr. Alan MacCharles, partner at Deloitte Consulting and Mark Schaub, senior partner at King & Wood Mallesons, the largest global law firm in Asia. Alan and Mark are both active commentators on joint venturing, geopolitics and industry-specific topics who have been cited or published in the Financial Times, NY Times, BBC, Bloomberg, and other media outlets.

Unlocking International Joint Ventures is a complete guide to understanding and successfully executing this powerful and highly complex business formation, with detailed information on how international joint ventures work, how to successfully form them, and key contributory factors that lead to success or failure.

This book is backed by research and professional case studies to show how concepts relate to real-world deals. In this book, you'll find information on:

  • Similarities and differences of joint ventures compared to M&A, and why joint ventures are frequently significantly more complex
  • The complexity of international joint ventures in different countries, such as China, with its large, state-owned enterprise (SOE) system, language barriers, cultural distance, different legal system, geo-political tensions, and rapidly changing operating environment
  • Crucial laws, rules, and ways of doing business that affect international joint ventures across different industries and sectors
  • A full set of tools and templates (with examples), methodologies and best practices developed over decades of experience working across multiple international joint venture formations covering the entire formation process from partner identification, negotiation and joint venture agreement signing
  • Pointers as to how to select the right joint venture partner
  • In-depth discussion on key negotiation issues that recur in almost every international joint venture including accounting consolidation, legal entity structuring, governance solutions, exit provisions, the role of trust, etc.
  • Access to leading academic research distilled into actionable insights

Unlocking International Joint Ventures is an essential reference for executives, board members, consultants, and legal teams seeking to create successful deals by building on what's proven to work rather than trying to reinvent the wheel.

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Table of Contents

Cover

Table of Contents

Title Page

Copyright

PREFACE

LIST OF ABBREVIATIONS

SECTION I: WHY A JOINT VENTURE?

CHAPTER ONE: INTRODUCTION:WHY INTERNATIONAL JOINT VENTURES ARE SO POPULAR… AND SO HARD

1.1 MARRIAGE ANALOGY

1.2 WHY DO COMPANIES FORM IJVs?

1.3 INTERNATIONAL JOINT VENTURE FAILURE RATES

1.4 CLOTHES WASHING – EXPECT A LOT OF BACK AND FORTH

1.5 TRUST

1.6 IMPROVING THE CHANCES OF SUCCESS

1.7 CONCLUSION

Notes

CHAPTER TWO: THE WASHING MACHINE:HOW THE JV FORMATION PROCESS ACTUALLY WORKS

2.1 STAGE 1: PROBLEM OR IDENTIFIED OPPORTUNITY

2.2 STAGE 2: POSSIBLE PARTNERS AND INITIAL APPROACH

2.3 STAGE 3: NEGOTIATIONS

2.4 STAGE 4: JVC DOCUMENTATION

2.5 STAGE 5: APPROVAL

2.6 CONCLUSION

Notes

CHAPTER THREE: CREATE A PROCESS:BE QUICK, BE INVOLVED AND BE PRAGMATIC

3.1 GOVERNANCE AND CONTROL

3.2 SIX LEVELS OF GOVERNANCE

3.3 PROCESS ALIGNMENT

3.4 IJV FORMATION PROGRESSION CHECKLIST

3.5 PROGRESSION CHECKLIST QUESTION RATIONALE

3.6 PROGRESSION CHECKLIST SUMMARY

3.7 CONCLUSION

Notes

CHAPTER FOUR: SECURING INTERNAL ALIGNMENT:HOW TO AVOID DAMAGING ‘OWN GOALS’

4.1 ALIGNMENT

4.2 EIGHT PRINCIPLE FRAMEWORK

4.3 CONCLUSION

Notes

SECTION II: PREPARING A JV

CHAPTER FIVE: GOOD PROCESS ATTRIBUTES:WHAT INDICATES A NEGOTIATION IS LIKELY TO CONCLUDE SUCCESSFULLY?

5.1 SUCCESS ATTRIBUTE 1: PARTIES SHARE A COMPELLING PROPOSITION

5.2 SUCCESS ATTRIBUTE 2: INTERNATIONAL PARTNER LEADS THE PROJECT

5.3 SUCCESS ATTRIBUTE 3: DISCIPLINED AND EFFICIENT PROCESS

5.4 SUCCESS ATTRIBUTE 4: DEDICATED PROJECT MANAGEMENT

5.5 SUCCESS ATTRIBUTE 5: SHARED SUNK COSTS

5.6 SUCCESS ATTRIBUTE 6: SHARED CORPORATE CULTURE

5.7 SUCCESS ATTRIBUTE 7: BE AWARE

5.8 SUCCESS ATTRIBUTE 8: BE CREATIVE

5.9 CONCLUSION

CHAPTER SIX: OPTIONS:SMALL TOWN VERSUS BIG TOWN MARRIAGES (OR, IT MAKES SENSE TO LIMIT PARTNER OPTIONS)

6.1 CORPORATE DATING

6.2 FEW ALTERNATIVE PARTNERS

Notes

CHAPTER SEVEN: KNOW YOURSELF AND YOUR PROPOSED PARTNER

7.1 KNOWING YOURSELF IS AS IMPORTANT AS KNOWING YOUR PARTNER

7.2 SIX QUESTIONS TO ASK YOURSELF BEFORE EMBARKING ON A PARTNERSHIP (PREMARITAL QUESTIONS ANY FIRM SHOULD BE ASKING ITSELF BEFORE TYING THE KNOT)

7.3 FINDING YOUR IJV PARTNER

7.4 WHAT DOES YOUR IJV PARTNER WANT?

7.5 HOW TO BUILD A RELATIONSHIP WITH YOUR PARTNER

7.6 HOW CROSS-CULTURAL ISSUES IMPACT IJV PARTNER SELECTION AND DISCUSSIONS

7.7 COMMUNICATION DIFFICULTIES

7.8 HOW DO LOCAL PARTNERS PREPARE FOR NEGOTIATIONS?

7.9 UNDERSTANDING THE LOCAL PARTNER’S DECISION-MAKING AND APPROVAL PROCESS

7.10 OPERATIONAL CONSTRAINTS

7.11 SUMMARY

CHAPTER EIGHT: NEGOTIATION TEAM: HOW TO ASSEMBLE A WINNING TEAM AND SELECT THE RIGHT LEAD NEGOTIATOR

8.1 THE TEAM CONFIGURATION

8.2 THE LEAD NEGOTIATOR

8.3 THE SUPPORT TEAM

8.4 NEGOTIATION TEAMS IN ACTION

8.5 CONCLUSION

CHAPTER NINE: PICKING AN ADVISOR

9.1 WHICH ADVISORS ARE TYPICALLY INVOLVED?

9.2 THE IJV CONSULTANT

9.3 THE IJV LAWYER

9.4 CHOOSING YOUR ADVISORS

9.5 HOW TO USE ADVISORS

9.6 HOW TO MEASURE VALUE

9.7 CONCLUSION

Notes

SECTION III: NEGOTIATION AND AFTERMATH

CHAPTER TEN: WHAT ARE THE MAJOR COMMERCIAL NEGOTIATION POINTS IN AN IJV?

10.1 COMMON ISSUES

10.2 IJV SCOPE, PARTNER CONTRIBUTIONS AND EXCLUSIVITY

10.3 MEASURE OF SUCCESS

10.4 EQUITY SPLIT, CONTROL AND GOVERNANCE

10.5 ACCOUNTING CONSOLIDATION

10.6 VALUATION AND (ACCOUNTING) GOODWILL

10.7 ENTITY STRUCTURE DESIGN (CORPORATE TREE)

10.8 DISPUTE MECHANISM AND EXIT PROVISIONS

10.9 IP AND KNOW-HOW, INCLUDING ITS TRANSFER AND RETAINING CONTROL OVER IT

10.10 CONNECTED TRANSACTIONS BETWEEN THE IJV AND PARTNERS (I.E. RELATED PARTY TRANSACTIONS)

10.11 REGULATORY ISSUES

10.12 GOVERNING LAW AND ENFORCEMENT

10.13 CONCLUSION

Notes

CHAPTER ELEVEN: THE JOINT VENTURE CONTRACT:NEGOTIATING AN INTERNATIONAL JOINT VENTURE CONTRACT

11.1 PART 1: WHY IS THE JVC IMPORTANT?

11.2 PART 2: WHAT IS THE PURPOSE OF A JVC?

11.3 PART 3: DRAFTING THE JVC

11.4 PART 4: THE MOST IMPORTANT JOINT VENTURE CONTRACT CLAUSES

11.5 PART 5: TYPICAL CHALLENGES IN NEGOTIATING JVCs

11.6 CONCLUSION

CHAPTER TWELVE: JV END STAGES – SUCCESSFUL EXIT, MANAGEABLE DE-COUPLING OR TOXIC DISPUTE

12.1 SECTION 1: WHY DO IJVs END?

12.2 SECTION 2: PARTING WAYS

12.3 CONCLUSION

Notes

APPENDIX A: GENERIC BUSINESS PLAN TABLE OF CONTENTS

APPENDIX B: TASK- AND PARTNER-RELATED CRITERIA ACROSS STUDIES

APPENDIX C: ILLUSTRATIVE PRINCIPLES DEVELOPED PRIOR TO FIRST NEGOTIATION MEETING

APPENDIX D: RESEARCH FINDINGS SUMMARY

REFERENCES

CHAPTER 1

CHAPTER 2

CHAPTER 3

CHAPTER 4

CHAPTER 6

CHAPTER 7

CHAPTER 10

CHAPTER 12

APPENDIX B

ABOUT THE AUTHORS

ACKNOWLEDGMENTS

Index

End User License Agreement

List of Tables

Chapter 2

Table 2.1 Illustrative workstream template for business plan task assignment...

Chapter 3

Table 3.1 Documentation and tracking illustrative example.

Table 3.2 IJV formation progression checklist.

Chapter 10

Table 10.1 Negotiation points by theme and typical importance.

List of Illustrations

Chapter 1

Figure 1.1 Simple joint venture structure overview.

Figure 1.2 Making an IJV decision.

Figure 1.3 IJVs in operation by non-Chinese Fortune 500 companies in China....

Chapter 2

Figure 2.1 Combined academic, legal and consultant view of JV process.

Figure 2.2 The ‘washing machine’ cycle of joint venture formation (MacCharle...

Chapter 3

Figure 3.1 Value and cash flow map (illustrative; recycling industry).

Figure 3.2 Documentation and tracking overview.

Figure 3.3 Six levels of governance overview.

Figure 3.4 Illustrative, high-level approval matrix.

Figure 3.5 Issues register example.

Chapter 4

Figure 4.1 Negotiation positions template.

Figure 4.2 Eight key principles.

Figure 4.3 Decision gates and timeline.

Chapter 5

Figure 5.1 SOE versus Western company cash loss risk tolerance (illustrative...

Figure 5.2 Generic ‘Operating Company – Property Company’ model....

Chapter 6

Figure 6.1 Partner search process overview.

Figure 6.2 Statistical summary data.

Chapter 8

Figure 8.1 Negotiation team configuration.

Chapter 9

Figure 9.1 Advisors, when to use and indicative costs.

Chapter 10

Figure 10.1 Generic IJV entity structures.

Chapter 11

Figure 11.1 Legal steps in JVC process.

Guide

Cover

Table of Contents

Series Page

Title Page

Copyright

PREFACE

LIST OF ABBREVIATIONS

Begin Reading

APPENDIX A GENERIC BUSINESS PLAN TABLE OF CONTENTS

APPENDIX B TASK- AND PARTNER-RELATED CRITERIA ACROSS STUDIES

APPENDIX C ILLUSTRATIVE PRINCIPLES DEVELOPED PRIOR TO FIRST NEGOTIATION MEETING

APPENDIX D RESEARCH FINDINGS SUMMARY

REFERENCES

ABOUT THE AUTHORS

ACKNOWLEDGMENTS

Index

END USER LICENSE AGREEMENT

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“The difference between joint venturing and M&A is significant – each uniquely complex. In the first dedicated book on international joint ventures, MacCharles and Schaub bring the process to life, provide process and tools, and give case studies with a touch of humor.”

—Mark Sirower, author of The Synergy Trap and co-author of The Synergy Solution

“In my time as a diplomat serving British companies, this is the type of book I wish I had. Overdue and incredibly helpful.”

—David Percival MBE, Chair of the Manchester China Forum, former senior diplomat and international business leader

“In the emerging world order, cross-border JVs are becoming unavoidable options for business growth and competitiveness. This clear, practical, experience-based playbook should be on the desk of every C-suite executive who seeks to steer clear of missteps that are avoidable.”

—Kenneth DeWoskin, Professor Emeritus, Ross School of Business, University of Michigan, former Partner, PWC, former Senior Advisor, Deloitte

“It has been years since a really practical guide to international joint ventures has been written. This truly readable effort by MacCharles and Schaub is succinct, well organized, and insightful. It does more than unlock international joint ventures, it tells newcomers exactly where to start and old-timers the latest thinking on key deal points.

“Clear, practical, and packed with key strategies for setting up, implementing, and navigating cross-border partnerships: a must-read for international business leaders.”

—John McLean OBE, Chair, China UK Business Development Centre, Chair, Institute of Directors for the City of London, United Kingdom

“In my business I work with many international companies seeking to break into new markets. As a result, I see joint ventures as being increasingly relevant. This book provides a practical and readable guide as to how to really succeed in such ventures. I will be giving a copy to all my team members.”

—Mette Knudsen, Founder & CEO, Knudsen & CRC

“International joint ventures are complex. It is not easy navigating the diverse business and cultural differences. This book comes from hard-earned experience, and it provides invaluable insights that are practical, insightful, and at times humorous.”

—Peter Arkell, Managing Director Carrington Day, Chairman of Global Mining Association of China, Australia and China

“This book is both informative and personally engaging. The authors’ real-world examples, experiences, and case studies bring the topic to life providing an invaluable resource.”

—Scott Cairns, Managing Director, Creation Business Consultants, UAE and Saudi Arabia

UNLOCKING INTERNATIONAL JOINT VENTURES

 

KEYS TO FORMATION SUCCESS THROUGH CULTURAL, COMMERCIAL, AND LEGAL DECISION-MAKING

 

ALAN MacCHARLES

MARK SCHAUB

 

 

 

 

 

Copyright © 2025 by John Wiley & Sons, Inc. All rights reserved, including rights for text and data mining and training of artificial technologies or similar technologies.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

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PREFACE

In developing this book, we identified three main types of users – an experienced IJV manager/negotiator/advisor looking for confirmation or exposure to additional insights and skills, a novice IJV lead negotiator or negotiation team member who has been recently tasked with negotiating an IJV and, last but not least, in a classroom environment. While the book is not designed to be a textbook, it is sufficiently complete that it could comfortably sit in an MBA curriculum.

As you will see, IJVs are complicated as they have many moving parts and many different stakeholders all of whom have different interests. However, in order to succeed, these moving parts need to be managed in a process and most crucially the different interests (especially of the IJV partners) will need to be aligned so that there is a compelling proposition to proceed.

In order to assist with these complicated topics, the book has chapters in which key concepts are self-contained but also references to overarching discussions throughout the book – this allows for dipping in and dipping out (like you might do if in a negotiation). This also shows that IJV concepts such as alignment, trust, process and many more do pop up in several contexts. This creates a little bit of repetition, but hopefully, this is helpful for the reader as it makes it easier to comprehend how these strands come together.

For the professional user, a scan of the table of contents and focusing on the key topic areas of interest is probably the most effective way to use the book. The later chapters on negotiation points (commercial and contractual) along with a few of the tools, if not already being used, are likely to provide the most insight.

The newly tasked IJV manager/negotiator should find the lists, tools and guidance particularly useful. For this type of reader, the most straightforward way to use the book is to read it through (sorry!) and then return to specific chapters as they become relevant for the current stage of your project.

In a classroom environment, the first two major sections of the book provide a mix of a grounding in the main issues as well as how-to guidance to illustrate how deals really get done. The specific negotiation chapters in the back of the book may be a little too specific, unless running a negotiation simulation is part of the course.

There may well be other readers beyond the three groups outlined above. Such readers may include those working in IJVs who want to understand how their organization is meant to function or could be improved or who are puzzled why there are so many ‘bizarre’ governance or other processes in their IJVs. Understanding the general formation process should provide insights into the ‘why’ and the struggles the negotiation teams faced in creating the IJV as well as sympathy for the deals struck.

LIST OF ABBREVIATIONS

AML

Anti-Money Laundering

BOD

Board of Directors

BP

Business Plan

CAPEX

Capital Expenditure

CEO

Chief Executive Officer

ESG

Environmental, Social and Governance

EU

European Union

FDI

Foreign Direct Investment

FIN

Finance Department

FCPA

Foreign Corrupt Practices Act

GM

General Manager

HQ

Headquarters

HR

Human Resources

IJV

International Joint Venture

IPR

Intellectual Property Rights

JV

Joint Venture

JVC

Joint Venture Contract

LOI

Letter of Intention

MAD

Mutually Assured Destruction

M&A

Mergers and Acquisitions

MOU

Memorandum of Understanding

NDA

Non-Disclosure Agreement

OFAC

Office of Foreign Assets Control of the US Department of Treasury

SDN

Specially Designated Nationals and Blocked Persons List

SOE

State-Owned Enterprises

SPA

Sale and Purchase Agreement

SPV

Special Purpose Vehicle

SVP

Senior Vice President

USD

United States Dollar

VIE

Variable Interest Entity

SECTION IWHY A JOINT VENTURE?

 

CHAPTER ONEINTRODUCTION:WHY INTERNATIONAL JOINT VENTURES ARE SO POPULAR… AND SO HARD

‘A great marriage is not when the “perfect couple” comes together. It is when an imperfect couple learns to enjoy their differences.’

– David Meuer

There are many reasons for considering an international joint venture (IJV). Sometimes IJVs are the only legal way for a foreign investor to operate in a jurisdiction. In other cases, an IJV is likely practically the only way to operate in a sensitive sector. However, most Western partners enter into IJVs for commercial, not legal reasons. In most cases, the IJV is seen as a means to lower risk (i.e. benefit from the local partner’s knowledge, resources, network, sales channels, etc.) or in some cases to share the risk (i.e. sharing large capital investment costs to realize a major project such as a new mine) or there is a strong business case to team up (i.e. special opportunity, access to a unique asset, strengthen control over an essential part of a supply chain, etc.).

Once you determine that the IJV is the way forward, then the next logical step is to consider the partners. Most problems in IJVs stem from the partners. Most Western partners do not realize that they are often the problem. Accordingly, before stress-proofing the local partner it makes sense to self-reflect. Ask yourself whether you would be a good IJV partner – and what changes may be required to make you a good partner (including availability of people, attention at HQ, governance/operational considerations, etc.).

The most common analogy for a joint venture (JV) is a marriage – albeit a corporate marriage. In this vein an IJV can be viewed as a cross cultural, corporate marriage. However, with corporates, there is no marrying for love. Everything is a marriage of (in)convenience. If that sounds depressing, it is because it is. However, joint ventures are wonderful structures. With a single stroke of a pen, so many intractable problems appear to get solved. If the joint venture is properly structured, with the right partner, and a lot of work, it can certainly help solve some intractable problems.

Joint ventures are rarely an organization’s ‘go to’ solution.

In the past, the joint venture option was only considered because the organization is stuck and no other solution is available/visible internally. They are losing market share; they want to enter a new geography but lack the resources/ability; they need a license or lack some other market requirement; they need money; they wish to share the risk; or another reason leads them to conclude that a joint venture is better than struggling on their own. A further complexity is that even after they convinced themselves, they will still need to find the right counterparty who also thinks it is a good idea to do a joint venture!

As geopolitics become more complex and globalization is being reshaped, IJVs are increasingly seen as a potential solution to a host of new challenges. IJVs can allow a company to (i) exploit a technology in a sensitive or highly restricted market; (ii) build resilience in key parts of its global supply chain; (iii) meet market demands (i.e. IJV between two medium-sized players to build a market challenger with economies of scale); or (iv) plan a strategic semi-retreat – rather than fully exiting from a challenging jurisdiction it may be better to sell down to a trusted local partner (and ideally, pocket some money while keeping a foot or in some cases, a toe hold in the market).

As we explore the themes related to JV/IJVs, all common marriage themes will appear, such as trust, money, governance, contracts, motivations, common objectives, termination, etc. So, while the marriage analogy is imperfect, it helps contextualize the issues.

1.1 MARRIAGE ANALOGY

Given the marriage analogy’s use throughout the book, let us build out the basic comparison. The idea is not to deconstruct the inner workings of a marriage (that is a different book!) – but to use a common construct that most readers will recognize, for better or for worse. In a marriage, two people come together via a contract (the marriage agreement). It could be argued that formation is the dating stage heading toward marriage which is represented by a signed contract. Over time, the partners will likely have a child.1 With the arrival of the child, the partners need to align on how to raise them, which involves a lot of communication and decisions. If the partners are from a mixed-cultural background, it could be argued that the marriage is an international one. To tie this to the joint venturing structure, the partners are the two (or more) companies that come together to do a joint venture through a joint venture contract (JVC); this contract is analogous to the marriage contract. The child is the joint venture company. In an IJV, the partner companies will usually be from different countries/cultural backgrounds. The simplest structure is shown in Figure 1.1, but there are no limitations. The joint venture company could be multiple companies; the joint venture could be a subsidiary of one of the partner companies or even one of the partner companies could be the JV company; there could be more than two partner companies, etc. Like a modern family, the permutations are limited only by negotiators’ imagination.

Figure 1.1 Simple joint venture structure overview.

Joint ventures involve partners (companies) who typically have access to interesting resources (and sometimes, money, too). The newly formed joint venture companies (children?) they create together tend to be resilient and survive (this is at odds with the common perception that IJVs have high failure rates) at least for a number of years. However, by their nature IJVs are very rarely forever.

Text Box 1.1 Definitions

Before we progress, some clear definitions are needed. In particular, we need to clearly define what is a joint venture versus an IJV. We should also formalize what is meant by formation. It would also helps to contrast with M&A (mergers and acquisitions) and partnerships, too.

An IJV is ‘an equity (versus non-equity, research, or contractual2) alliance created by two or more companies (i.e. partners) that are headquartered in different countries and formed to conduct some business as outlined in the joint venture contract usually by combining a portion of their resources to form a separate, jointly owned organization.’ This definition is based on authors’ previous research, and especially Inkpen and Li (1999).

For a joint venture (JV), the definition is basically the same as an IJV, except that it is between two domestic partners (so, the headquarters for each partner is in the same country). While JVs do not have the complexity of cross-cultural exchanges, the issues of different legal jurisdictions or concerns about geopolitical risks, the rest of the formation process is very similar to IJVs.

For M&A, when the transaction is completed, there is only one company left (merger) or one company has acquired (acquisition) the other either in its entirety or a part of it, such as a division (typically by buying the equity, but buying the assets is also possible).

A partnership or alliance is similar to a JV or an IJV, except there is no formal exchange of equity. Frequently, these types of structures are used to achieve a mutual goal or objective. They are often cost centers rather than fully stand-alone companies. Common examples include resource exploration, R&D projects, or collaborations to compete (such as the airline alliances).

The joint venture contract (JVC) is the contractual document that governs the collaboration.

For formation, the formal definition in the book is: ‘The discussions, processes, negotiations, and agreements that occur regarding the establishment and operation of a possible joint venture, including selection of a partner, preferably that is interested, and including internal negotiation preparation discussions, excluding internal strategic pre-discussions to initiate a joint venture partner search, and concluding with the signing of a JVC, or termination of discussions, whichever occurs first.’ This definition suggests that partner selection (i.e. initiation of discussions and exploring a JV as a possibility) is part of the formation stage. However, the most preferred partners might not be interested in pursuing a JV, such rejection, sadly, is just a part of the reality of the formation phase. The old Brothers Grimm saying ‘You have to kiss a lot of frogs before you find your handsome prince’ is not the whole story with IJVs, though. Many kiss many frogs only to be out of pocket and still not end up with a prince. Arguably, these companies are still far better off than those kissing frogs and ending up with a toad for a partner.

1.2 WHY DO COMPANIES FORM IJVs?

There are many reasons why companies decide to take the plunge and set up an IJV rather than going it alone. Some of the more common motivations we see are set out below:

1.2.1 Reason 1: Legally Required

The reason for the IJV may be prescriptive. Some jurisdictions legally require that foreign investment in certain sectors can only be by way of an IJV.

Most jurisdictions have screening systems in respect of foreign investment. These normally trend to liberalization as the economy develops as it is widely recognized that foreign investment is good for an economy as it brings jobs, tax revenue and prosperity. For this reason, most jurisdictions have abandoned blanket requirements mandating a local partner for all foreign invested projects. Rather, foreign investment restrictions are usually found in sensitive sectors such as defense, media, telecoms, financial, education, food security or industries considered to be strategic. Additional mandates include protection of local business from international competition or to force tech transfers to support the development of their own strategic industries (i.e. exploitation of natural resources, creation of a pillar industry, forcing technology transfers, supporting a policy of localization or supply chain resilience, etc.). There can also be a social or political dimension such as requiring an IJV to potentially avoid destabilizing effects (i.e. social media platforms, media, education, telecoms, etc.) or to avoid treading on a powerful monopoly’s toes (i.e. tobacco, infrastructure, natural resources, etc.). Basically, the reasons for restrictions on foreign investment range from the economic or strategic to a whim of the authorities or a sensitivity. In many cases, the requirement may not even comply with the jurisdiction’s externally agreed trade treaties, but this is not a fight that you will want to take on yourself.

The bargain sought by developing countries is to trade market access against transfers of technology and production which create local champions that naturally leads to friction with the Western investor. The local partner will likely wish to have the IJV export finished goods and thereby compete with the Western partner, while having continued access to state of the art technology from the Western partner. Understandably, the Western partner will not be keen to provide such support as the IJV was likely seen as a means by which to increase market share in the local market and not to create a strategic competitor (or one that sells into the Western partner’s core markets).

In most cases, restrictions on foreign investment will just require the Western company to joint venture with a local partner. However, in more sensitive projects, the authorities may specify the type of partner (i.e. state owned or certain level of experience) or in some cases the level of shareholding (i.e. parity or the local party holding a majority).

To date these restrictions that require IJVs have largely been employed by developing countries to hobble or exploit Western companies. However, in the future Western governments may seek to compel Chinese or Indian companies to enter into IJVs and force technology transfers as the tech landscape changes. It is not implausible that by 2040 Germany may require Chinese battery makers to enter into local IJVs and allow German companies to access the latest in auto battery technology in order for Chinese companies to gain market access to the EU auto market.

Text Box 1.2 Trojan Horses and Variable Interest Entities

In some cases, Western companies faced with legal restrictions in specific sectors decide to circumvent such restrictions by creating a structure which splits ownership and control. Typically, this involves the Western company organizing trusted locals (at least trusted initially) who are not subject to foreign investment restrictions to establish a captive entity that is tied contractually to the Western company or more likely to an on-the-ground company it has established in the jurisdiction.

Although such structures are not risk free, many companies consider such arrangements to be less risky in practice than a shotgun marriage with an unknown partner. In some jurisdictions, this de facto controller approach is referred to as variable interest entities (‘VIEs’). This name is apt as few people understand the structure and therefore having a confusing name is comforting.

Under a VIE structure, the ‘controlled’ domestic company obtains the requisite licenses to operate the restricted business. The contractual arrangements typically include exclusive service agreements which allow the finances of both entities to be consolidated under GAAP3 accounting rules.

From the standpoint of the Western company, the key concern in a VIE structure is the enforceability of the contractual arrangements – these are core. Indeed, almost all issues relating to VIEs have been that the nominee ‘trusted’ shareholder of the VIE entity behaves badly rather than action instigated by an authority. Typically, the Western company will pick as its nominee shareholders someone connected to their business (e.g. local management, distributor, etc.). Although this is understandable, it is probably the highest risk approach. It is better to select someone dependable and (crucially) independent of your business as your nominee shareholder. Such a person is less likely and less able to leverage their position against you. Western companies can find it frustrating to negotiate with their employee who owns the operational licenses upon which the business depends.

As Western companies search for opportunities and developing jurisdictions seek to protect segments of their economy, we expect ever more Western companies to be drawn to ‘clever’ VIE models. ‘Clever’ requires the Western company to consider whether it is practically feasible for it to operate in a challenging jurisdiction by way of a VIE; whether it can find the right nominee shareholder and if it can craft the bespoke contractual arrangements and operational controls to mitigate the risk. If yes, this may be a quicker and better way to enter a restricted market.

1.2.2 Reason 2: Practically Required

Closely aligned to Reason 1 are circumstances where the published law allows for a wholly foreign owned subsidiary to be established in a sensitive sector, but in practice it is not able to operate.

Most commonly the barrier is policy driven and the restrictions will not bite at the foreign investment level but operationally. Commonly, telecom companies will require a variety of licenses issued by telecom author-ities to operate. This can mean that even if a company is established with the correct business scope it may not obtain an operational license. This is the most insidious of situations as the company is in a no man’s land of being established but not being able to do anything. In many cases, an influential local partner can ease obtaining such licenses and for this reason is a persuasive reason to have an IJV.

1.2.3 Reason 3: Business Imperative

In practice, it is far more common that international companies enter into an IJV with a local partner as a means by which to speed market entry or there may be a compelling business ground (i.e. local partner has access to a specific customer or distribution channel or access to a specific asset or resources). In some cases, the Western partner is mindful of the importance of appearing to be a local. As economies develop this is also often accompanied by a spike in national pride. It can be important that even if the contents or technology is Western that it appears local ‘on the box’.

There are numerous permutations possible when approaching the opportunity from a business perspective. One new wrinkle is that many developing countries are becoming increasingly attractive, sophisticated and highly competitive markets in their own right and also have a stable of highly successful local companies.

We have recently observed several Western tech companies see an opportunity to expand their business into such markets by way of an IJV. Technologies vary, cultures vary, strategies vary, but the one constant for successful tech companies is that they are always busy. They are busy innovating, busy expanding in their home markets, busy expanding in other Western markets. Newly developing markets pique interest, but most tech companies are mindful of the challenges, human resource bottlenecks and risks associated with management distraction. In addition, many US and European high-tech companies find developing markets particularly challenging as not only do they need to contend with regulatory and cultural differences but also serious concerns about intellectual property rights and compliance as well as the cost of building a distribution platform or other infrastructure in a new geography without a guarantee of success.

Many of these Western tech companies feel capable and comfortable in establishing a business in Europe or North America but feel other regions – in Asia, Africa or South America – as being too far away and too much out of their comfort zone to take on by themselves.

In such a case, finding the right IJV partner can be a godsend.

These tech firms eye entering an IJV with a solid and reliable local partner, typically in adjacent parts of the business or with a strong distribution channel that can launch their business in a meaningful way. Unlike typical industrial IJVs these tech companies are often willing to hold a minority share and the local partner will be able to adjust the technology for local requirements and utilize their local infrastructure and networks.

In some cases, the Western tech company looks to benefit from a future local IPO or a strategic sale. In a world of complicated trade and tech blocks there may be opportunities for IJVs to exploit market niches or have valuable stakes in listed companies in rapidly growing regions of the world. These IJVs may have technologies with a common ancestor, but they may evolve in different ways to meet local market demands.

1.2.4 Reason 4: De-risking an Entry

Many developing markets are becoming increasingly sophisticated and the competition or learning curve might be considered too steep if the Western party enters alone. The Western partner will often feel that a local partner will de-risk a market entry. In a broad sector such as automotive, new entrants believe teaming up with a minority local partner will provide local knowledge, contacts and an ability to tap into an existing distribution channel. In these cases, the primary driver for the Western partner is that the IJV relationship should obtain sales that a stand-alone operation may never achieve, or which may take many years to achieve.

Unfortunately, many Western partners seeking a short cut via a local partner will often find to their chagrin that managing an IJV is much more time intensive than managing your own business. It is also common that the local partner is unable to deliver the relationships, distribution channels or sales promised.

Despite some pushback on globalization, there are projects where it just makes sense for companies to pool resources, pool their demand and thereby increase the likelihood of success or at least share the downside.

De-risking also opens up the possibility that both companies are not local. It is possible that a French and American company team up to tackle an opportunity in China. We are now seeing combinations that are rem-iniscent of world wrestling tag team competitions. One interesting recent IJV saw Germany’s Volkswagen building an electric vehicle (EV) battery ecosystem in Indonesia together with Brazilian mining giant Vale, USA’s Ford and China’s battery minerals producer Huayou Cobalt.

The authors expect to see ever more IJVs where giants combine resources to collaborate in mega projects. This may be when international giants are coerced into IJVs with local champions (often state owned) to develop a new pillar of industry. For developing markets with a sizeable population, foreign investment is often seen as a means by which to grow employment opportunities for citizens. Industries such as the auto sector are strategic as production is not limited to the car manufacturing, but also suck in the supply chain. Currently, Saudi Arabia’s Vision 2030 is leading to huge numbers of IJVs as Saudi Arabia seeks to industrialize its economic base by providing economic incentives to overseas manufacturers to settle in the energy rich kingdom and create jobs.

In other cases, partners see an IJV as a logical means by which to de-risk a bold initiative such as the exploitation of natural resources requiring massive investment. In some cases, the partner not only de-risks by sharing investment, but also by providing a guaranteed customer for the offtake.

1.2.5 Reason 5: De-risking an Exit

There are many more wholly owned subsidiaries than IJVs globally. In times past when the IJV partners fell out it was common for the Western partner to buy out the local partner in the IJV and convert the company into a subsidiary.

Interestingly, there are now also increasing examples of Western companies turning their overseas subsidiaries into IJVs. Such an approach is typically aimed at allowing the Western partner to partially exit or de-risk a specific market. In addition, it can address operational issues. In many dynamic markets it is inefficient to wait for instructions from headquarters, but headquarters have legitimate concerns of ceding too much control to local management.

Companies finding themselves in such a quandary will find the solution to be selling a majority stake to a local partner (normally the existing management). This allows local management to take the lead in managing operations and for the Western company to still maintain a foothold in the market and secure its supply chain (see next point in relation to how IJVs can build resilience in a company’s global supply chain) but reduce its risk profile and management distraction.

These IJVs are relatively quick to agree upon as the parties will be starting from a high position of trust and putting together the alignment model should be relatively straightforward.

1.2.6 Reason 6: IJV to Secure Your Supply Chain

Geopolitical concerns, especially between the USA and China, are leading many companies to de-risk or add resilience to their supply chain by strengthening rather than loosening the bonds with key offshore suppliers. Traditionally, this had meant an international company would increase their level of influence and visibility over a supplier by taking a stake in the company.

However, in some cases Western (predominately US) companies are actively diversifying their global supply chains away from … let us face it … China. It is not difficult to foresee that at least for some products, such as advanced semiconductors, it is likely to be at least an informal walling off between some jurisdictions. Many companies find such pivoting as being not as easy to pull off as politicians may pretend.

Wholesale moving of supply chains away from China can be very complicated and therefore risky – China is just too big and after 40 years too entrenched from which to blithely and rapidly move away. Many international companies rely on China and other Asian manufacturing power to keep their operations going. China has continued to climb up the value chain and therefore is no longer limited to manufacturing simple products but also building complete and integrated products. Indeed, many simpler products such as textiles have long migrated to cheaper shores, years before geopolitical tensions peaked.

The supplier–customer relationship is not static. Initially, the customer is king and the supplier seems as eager as a Labrador puppy. However, over time, as the supplier becomes more crucial and enmeshed in your supply chain, they also become far more difficult to easily dislodge – what was once a puppy can grow into something as menacing as a Cerberus.

Even in such cases, dependency is often two way. You may well be the biggest customer for your main supplier in Asia and pulling the plug on them may well bankrupt them but equally this act may also totally disrupt your global supply chain. Even large companies trying to diversify their global supply chain have been confronted with damaging disruptions. New suppliers will often need time to meet exacting quality standards. As a result, a new type of cooperation is an IJV between the US customer and Chinese supplier in a third country – typically Mexico or Vietnam. Such joint ventures are de-risking the supply chain as it brings production know-how and expertise to a new manufacturing site which is not subject to geopolitical risk.

If the IJV is structured properly, the impact of a shareholder being added to the SDN4 or similar list can be mitigated or at least the parties can consider in advance agreed contingency plans.

We have sought to summarize the logic flow that can be used by companies to determine if a joint venture is the right solution for them as a flow chart in Figure 1.2.

1.3 INTERNATIONAL JOINT VENTURE FAILURE RATES

Before we get drawn too deeply into the book’s themes, let us address the perception that IJVs have a high failure rate. This is easy to believe – the horror stories of IJVs gone wrong abound. For some, being asked to negotiate an IJV sounds like career suicide and often is (of course, if you follow the advice in this book, your career may well survive or even prosper!).

Figure 1.2 Making an IJV decision.

Figure 1.3 IJVs in operation by non-Chinese Fortune 500 companies in China.

Source: China Company Registration Platform. July 2020.

Good data on IJV formation is hard to find, but the anecdotal and limited available data suggests they are widespread. To make the point, we looked at IJV formation by the Fortune 500 in China (pre-Covid) shown in Figure 1.3. The evidence suggests, once you remove the Chinese companies in the Fortune 500, that about 8% of this group of companies form a new IJV in China every YEAR. If we scale this to include India, Japan, Saudi Arabia, Brazil, Indonesia and other large IJV countries, the number of IJVs is material. If we open the aperture further to include all companies, then literally thousands of IJVs formed annually. If we add to this attempted and failed formations (IJV formations where the companies involved got to the stage of involving a lawyer or a consultant), then the number will, based on the authors’ experience, grow by somewhere between 3 and 10×. If you are in a management role at a company looking at international expansion, it is highly likely that you will at some stage be engaged with an IJV – either one that is already operational or in an attempt to create a new one.

Despite their apparent popularity, as foreshadowed above, we also know that JVs/IJVs have a poor reputation. The common perception from academic research is that these entities have high failure rates (once formed). If this was the whole story, why do we see emerging economies requiring joint ventures as a condition of entry? Why would smart business executives (from both companies) seek to pursue new IJV formations? Why would so many be formed? If failure was almost guaranteed, why would so many managers risk their reputations (and careers) by being involved in an IJV?

As you would expect, the answer is far more nuanced than the headline figures suggest. If you ask Google, ‘Joint Venture Failure Rate,’ it comes back with ‘It’s estimated that at least 40%, and up to 70%, of joint ventures fail,’5 2 Sep 2014.6 The rest of the Google search page offers plenty of confirmatory evidence.

In the academic literature, there are a few studies. Unfortunately, most academics seem to accept that the failure rate is high, and do not really probe into the data. The headline that these companies fail is more attention grabbing than talking about their successes (and success is often relative to the initial objectives which are, for the most part, unobservable). The messaging is similar from the consultants and legal websites, too. However, let us examine this negativity – and understand for whom these joint ventures are failing.

The most recent academic study we identified on IJV survival rates is a study on Brazilian IJVs (Meschi and Riccio 2008) published in 2008. The pair looked at 234 IJVs formed between 1973 and 2006 with a contract value exceeding USD 20 million. They found that 120 of the 234 IJVs had been terminated. On its face, this is a failure rate of more than 50%. Fortunately, they provided additional data in respect of the terminations and a more nuanced picture emerged. Of the 120 that had been termin-ated only 28 had been dissolved (of which 5 had been classified as having achieved their objectives). The other 92 had been sold to one of the partners (76) or to a third party (16). Accordingly, although 92 of these companies ceased to be IJVs they did not cease their operations, or they had been integrated into another company. For this reason, part of the failure rate perception is definitional.

The key definitional issue with IJVs is that they are defined by the shareholding structure. When these companies are studied, they need to remain IJVs. This implies the same shareholders with little or minimal change to the corporate structure. This is an artificially high bar but also potentially a misleading one. Let us use some examples. If you founded a company today and it does well, and in a couple of years, to expand, you bring in an outside investor; would you consider this a failure? Let us say you intended to exploit your technology in a new geography and your new company succeeds so well you list it on a stock exchange. Is this a failure? Hardly seems likely but the definition of an IJV, where a change in the ownership structure occurs, then both happy events (i.e. the introduction of an outside investor or the public listing) would count as being a termination of the IJV.

Equally, it could be argued that being bought out by one of the partners is not a failure either – having sat through a lot of negotiations, it is often a desired outcome and in some cases it was always the planned outcome! Companies have lifecycles and a rigid definition of success is partly to blame for the poor reputation of IJVs.

That is not to say that IJVs are easy. Or that there is not some justification for having a reputation as being difficult. But is a marriage that ends after 50 years due to the death of one of the spouses a failure? More provocatively, is a marriage that ends after 10 years having produced two children a failure? If so, for whom? The stakeholders, such as the children who would not otherwise exist, or the government desperate for a higher birth rate (employment, taxes in IJV example) may not agree. Even the two spouses might agree it was a worthwhile venture, but that their interests, needs or objectives had naturally grown apart.

1.4 CLOTHES WASHING – EXPECT A LOT OF BACK AND FORTH

When IJV formation is discussed, the usual format is to present a linear set of steps that move from one stage to the next. Unfortunately, the reality seems to be more like the washing stage of your household clothes washing machine where the participants get thrashed back and forth through the stages until finally arriving at JVC signing (possibly having been at the approval stage multiple times before being thrashed back through the process). In Chapter 2 we show both frameworks and drill into the stages.

1.5 TRUST

Trust is an elusive concept. Stating the obvious, trust is important to any IJV. Trust permeates the entire IJV deal (and any marriage that is likely to survive) and accordingly, text boxes will provide input as to how trust impacts a specific issue or dynamic. It is clear when not present, but not easy to identify when present. Despite this, trust is seldom discussed in IJV negotiations – except when it is absent. If you are having discussions about trust in your working teams, it should be a warning sign. We have experienced the challenges of working in a low trust environment on deals and know the importance of building trust when it is not present or building mechanisms (governance and controls) to deal with situations where trust is not expected to emerge (although, best to avoid these situations, if possible).

Equally, discussing how to build trust across cultures, languages and organizational types, while working on complicated deal structures (IJV) is difficult. When we turned to academic literature, it is also abstract and for IJV formation, extremely limited. Despite this, IJVs are often mentioned in articles discussing trust. A list of recommending reading is provided.7 Do not let the older dates put you off – issues of trust predate the Romans!

Text Box 1.3 Building Trust

Building trust in an IJV is crucial for success. How the approach is made also matters for creating initial trust. Initial trust can often be established through strategic outreach methods, leveraging connections to create a foundation of credibility and openness. Sometimes, a cold outreach is needed – if you are working for Apple or Volkswagen, your company name will bring a level of trust and possibly excitement. However, for the rest of us, it is generally better to identify a connection that can open the door and upon which we can leverage an initial level of trust.

The investment of time, especially senior management time, at this early stage is always challenging. While the investment always pays dividends and helps to smoothen the process that follows, but only if the senior management time is spent with the company that ultimately progresses into more formal negotiations. At this early stage, there will be many companies met but only a handful will progress to a more formal discussion.

Where the initial construct is not fully formed, brainstorming is a popular way to get the deal more aligned to each party’s abilities and interests. If doing an IJV between an American company and another English-speaking country, this approach will likely work well. However, if doing an IJV in Japan or China where the language skills are not as robust (and the hierarchal business structure means few people will speak up), it tends not to be effective nor does it create trust. It will suggest to your potential partner that you do not really know what you are doing or what you want. This will be emphasized if you make many changes on a whiteboard in a brainstorming session – proceed with caution if you wish to brainstorm on the fly with an unfamiliar party – at best they will think you do not know what you want or, more likely, what you are doing.

At this point, unless the counterparty is well known to the negotiation team, relationship building exercises will be in order. We will discuss banquets and drinking in Chapter 7 – and in many cultures these work. In other deals, where the personalities were not right for heavy drinking, we have used other approaches, such as a cooking class. In this activity, there is a lot of discussion, people get to know each other, and there is a clear result (dinner!) that demonstrates the two parties can work together. The time together also allows you to understand the other side’s situation and determines if the person and organization with whom you are proposing to discuss an IJV can be open – and if they have the right mindset for an IJV or if M&A is a better approach.

During negotiations, there are many ways in which trust can be easily undermined. These threats to trust may manifest in how people behave during the negotiations, outrageously one-sided first draft JVCs, overly pointed feedback on JVC texts, whether commitments made are indeed completed, and even whether the people around the table actually ‘like’ each other.

It can be high-risk to take positive, trust building actions which may involve offering a concession or being the first to propose a solution to a particular issue (especially if it is your proposed partner’s issue).

Another way to erode trust is through laziness. This manifests itself in causing additional work for your proposed partner through repetitive or misguided information requests, failure to understand your own organization, seeking redundant due diligence in a never-ending search for some perceived, yet elusive, truth, etc.

Joint venture negotiations tend to have a lot of people involved – from the core negotiators, functional expertise participants and advisors. Outside of the room, there are CEOs (or other sponsors if the deal is smaller), boards, governments, unions, finance, tax and other functional teams who all wish to weigh in and all of whom will have an opinion – often several opinions. Most of these stakeholders will only provide obstacles, not help. The same challenges will be true for the counterparty.

Given the elusiveness of trust as a concept, it is easier to provide examples of when trust breaks down or is not there. While trust may not be easily described, people can see when it goes wrong.

1.6 IMPROVING THE CHANCES OF SUCCESS

As we progress into the subsequent chapters, we will share stories from practice which include all kinds of undesirable behavior, fighting, economic damage, court cases and other non-optimal outcomes.

Many of these sub-optimal outcomes could have been avoided with a better formation process, tighter objective alignment, improved communication and more realistic expectations. That said, how many new business ventures, after one year of operation, have a 95% survival rate, as was the case in the Brazilian IJV study?

We will discuss in Chapter 4 the importance of having a clear defin-ition of success – which is important for evaluating the IJV, whether it is achieving what the partner(s) sought, and how it is perceived in the careers of those who created the IJV.

In an IJV, the primary stakeholders are the two partner organizations, but there are also a host of other stakeholders, too. Managers, employees, government (who want jobs, taxes, technology transfer, etc.), capital providers, suppliers, etc. The creation of a new company with a high survivorship rate is generally a good thing. Sitting in the negotiation room, many of these ventures are designed from the outset to achieve specific objectives – and being an IJV indefinitely is seldom one of these objectives.

We will also unpack the research that underpins this book. To summarize the findings quickly: (i) there is a need for a Compelling IJV Proposition for both parties. This is more than a business case. We will look at the Compelling Proposition in Chapter 2 when looking at how the negotiation team comes together, (ii) the selection of lead negotiator, and the constructs of their motivations (i.e. are they motivated by more than just being a professional manager?), this greatly influences whether the IJV formation process will conclude with a signed JVC. It is just like dating – there needs to be some passion! (and a shared commitment to the success of the endeavor). When we examine the availability of partners, (iii) IJV formation appears to have a higher probability of completion when there are none-to-few alternative partners. In a rather bizarre twist to business orthodoxy, (iv) ensuring that both sides are incurring sunk costs. These costs need to be more than management time opportunity costs, and include monetary costs (such as travel, advisors, etc.). However, they seem to be an indicator of possible success (even though we are all trained to ignore sunk costs in a decision). Finally, there is a key point about having (v) an efficient, quick moving process. This increases the likelihood that an IJV will be formed. A common success factor is that the IJV is negotiated and established within one year.