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Selecting a foreign partner for technology transfer
Long Kange Planning, Vol. Printed in Great Britain
17, No. 6, pp. 43 to 49, 1984
0024-6301/84/$3.00+ .OO Pergamon Press Ltd.
Selecting a Foreign Partner Technology Transfer Philippe
Lasseve,
IN.SEAD-Euro-Asian
This article proposes a method for evaluating the strategy and resources of local and foreign partners in technology transfer based on normal sound management practice. The author has had considerable experience of the process in business ventures in the ASEAN region and has found that not enough time, effort and research is invested in the initial negotiations. He suggests that a year or more should be allowed for the foreign staff to become familiar with the country and the business practices of local companies.
Introduction Joint-venture and licensing agreement between a multinational company and a local entrepreneur is an increasingly predominant mode of entry into growing markets of the developing world. Some multinational companies are more reluctant than others to enter in joint-ventures (Stopford and Wells, 1972), h owever national policies as well as the increasing complexity of local market and industrial environment push toward this form of entry. This is not without creating some tensions within the organizational. setting of the multinational companics (Franko, 1971), especially for the companies which have adopted a worldwide integration strategy for manufacturing and R & D and arc therefore reluctant to share decisions with local partners on key strategic issues. There are two major reasons for an active participation of local partners. First, local partners can make a significant contribution to the strategy of a local subsidiary through their knowledge of the economic and socio-political environment, their distribution network or through a privileged access to local resources (raw materials, labour manage-
Professor Boulevard
Philippe Lasserre is at the Euro-Asian de Constance, 77305 Fontainebleau,
Centre Cedex,
at INSEAD, France.
Centre, Fontainbleau,
43
for France
ment, contacts, . . .). Second, entrepreneurs in the third world are very keen to develop their businesses and considerjoint-venture with a foreign partner as a method to implement their own corporate strategy. Studies have shown (Tomlinson, 1970), that in most cases the process of partner selection is not carried through thoroughly. The first candidate, generally discovered through contacts established by mail or arranged by a banker or a business colleague already established in the country, is often the one with whom the company is undertaking the discussion for partnership. Little or no screening is done for comparing alternatives, nor is there an indepth investigation of the motives and capabilities of the candidate. Generally a feasibility study of some sort done primarily on the basis of a market study and on evaluation of general considerations (e.g. business climate, financial analysis, etc.) but nothing really serious is done to analyse the local partner and vice versa. In more favourable cases where investing firms are already engaged in some sort of business in the country, the selected partner is generally the agent who is already working for the company and the distributionship is transformed into an industrial joint-venture. For the multinational company there is the advantage ofentering into an agreement with someone who is already familiar with the company’s products and who has entcrtaincd commercial relationships with the mother company. However, the fact that a local company proved to be a decent distributor does not guarantee that it will be as good in a joint-venture involving manufacturing activities. In order to illustrate the issues involved in future selection two cases involving European companies in the Far East are briefly presented.
44
Long Range
Planning
Case One: A French-Thai Venture
Vol. 17
December
Joint-
The French-Thai Chcmitex Co (FTCC)” is a jointventure company established in 1972 between the French Zeta Group* and Mr Yipsoon” a local entrepreneur. The purpose of the company is to produce and sell synthetic fibres for the textile industry. The investment amounts to U.S.A60m in fixed assets plus an additional U.S.L20m in working capital requirement.
The Zeta Group is a large chemical group, diversified in eight sectors and active in 40 countries, with only selling activities in South East Asia. ln the early 197Os, the textile division was plagued with recession in Europe, due to increasing competition from developing countries. The official policy of the group was not to invest internationally in this sector but rather to license technologies. In 1971, a French bank established in Bangkok presented a market survey showing tremendous sales opportunities and introduced Mr Yipsoon to the group as a prospectivejoint-venture partner and also as the main customer for the output of the projected plant. Mr Yipsoon, a local entrepreneur of Chinese origin controlled about 50 per cent of the spinning and weaving industry in Thailand through a dozen of wholly owned subsidiaries or joint-venture companies. In Thailand only one company, controlled by a Japanese Group was producing synthetic fibre and Mr Yipsoon wanted to find another source of supply. The management style of Mr Yipsoon was very personalistic and members of his family were at the head of his various companies.
The joint-venture company FFCC started its operations in 1976 after more than 18 months delays in construction of the plants due to conflictual relationships between the partners. The operations of the company started at a time of world recession and increase in cost of raw materials. During the first 3 years, the company operated at loss. Relationships between partners degenerated into an open conflict which attracted the attention of the local press. A leading Thai bank was obliged to arbitrate and finally after four profitable years the Zeta group sold its capital to the local partner. In their comments about this experience Zeta executives mentioned that one of the major mistakes they made was to have embarked in a joint-venture with a local industrialist who was also the major customer of the joint-venture and also not to have spent enough time to investigate Mr Yipsoon’s track record and reputation.
“Names
are disguised.
1984
Case Two: Gamma Pharma: A Joint Venture German-Indonesian Gamma Pharma” is an Indonesian registered company; 70 per cent of the capital is held by the Lambda group of Germany and 30 per cent by P.T. a family owned local pharmaceutical TIGA”, producer and distributor. The Lambda Group is a second generation family firm based in Europe specializing in herbs and related products. It invested in Indonesia as a response to Government pressure rather than in pursuit of a conscious strategy. Elsewhere in S.E. Asia (Thailand, the Philippines) it manufactures by subcontracting. Lambda having traded in the area and for a number of years imported herbs from Indonesia, was pushed into local manufacture by the government’s new regulations. This brought the firm to see Indonesia as its production base for regional exports. For the rest of the world the company aims to export out of Europe. The company was prompted by government regulations to hand over 30 per cent of its shares. It did, to its distributor P.T. TIGA. P.T. TIGA is a family owned local company, which started in the mid-1960s as distributor of imported drugs and soon developed a small laboratory which became a manufacturing company in the early 1970s. It took advantage of the requirements of the Indonesian government to have manufacturing of drugs done locally in order to develop a strategy of joint venture and licensing agreements with fore@ laboratories having a good name and technology m their respective fields. P.T. TIGA started a joint venture with Lambda. The operation started in 1972 and commercially developed well until 1975; the relationship deteriorated after an international crisis and P.T. TIGA led the foreign partner to try to cancel this distribution agreement. P.T. TIGA overexpanded and was unable to pay for his shares which Lambda had to finance at a heavy cost to its operations. Worse, he could no longer pay for his supplies and had to be replaced as a distributor, but not as a shareholder. As a Lambda’s executive puts it: ‘We took the easy way, now we pay for it’. Those two cases indicate that most of the problems originate from a lack of deep prior understanding of the intentions of the local partner, its capabilities and its management style. In the case of the French Zeta group a careful analysis would have indicated that the local partner strategy was to benefit from a second source of raw material and his own vested
‘Names
are disguised.
Selecting
a Foreign
A Method
investor should investigate concerning its potential local partner are indicated and discussed in the following sections.
During the first phase each party tries to assess whether the strategy of the partner with regard to the project under study is compatible with its own. The project strategy depends upon the overall corporate strategy of the company and the particular attractiveness of the project with respect to marketing, political, financial and technological
(a) Stvatf@c V.ision. The purpose is first to determine whether the project is really part of an overall strategy or simply 311 opportunistic move, and second, whether this project is a diversification Local Partner A
Investor
\
/
\ Past Performance
Past /
Company’s Corporate Strategy
_ Posture Environment/
Country Analysis
Company - Project Ct.“+,,.. JLiaLr;yy
J
/ Strategy
Market 2
/Prospects Project Attractiveness
\T
stop Yes
--
\---\
Resources
Resources
Needed Company Resource 3 Profile
t
Company / Resource Profile \
Needed Company’s Resources
Yes Human
I Others
Previous Experience
Experience Negotiation
Figure
1. Strategic
analysis
Alternatives
Feasibility
AlterAatives
\
-Environment
.
RiskjH’LrBC1’
Feasibilitv
for a foreign
45
The Point of View of the Foreign Investor In Table 1 the major questions that a foreign
The process of assessing partnership is described in Figure 1. It consists of two phases: an analysis of the strategic fit, and an analysis of the resource fit.
Foreign
Transfer
During the second phase, each partner seeks to determine whether given its own resource and given the resources needed to carry the project in good condition, the resources of the other party are adequate to complement its own. We will respectively describe the point of view of the foreign investor and of the local company in carrying those analysis.
In both cases as in many others studied by the 1983) a lack of rigorous author (Lasscrre, partnership planning is at the origin of disillusions and conflicts. A possible method for analysis of partnership and partners is proposed in the remaining part of this article.
Assessment:
for Technology
characteristics. The important thing at this stage is to analyze not only its own project’s strategy but also to assess the project’s strategy of the other party. This requires an accumulation of data with regard to the competitive posture of the partner, its corporate objectives and its portfolio of activities which go far beyond the traditional investigation usually done in such cases (if any).
interest was not really compatible with the joint venture company profit objectives, not to mention the huge difference in management style and practices between the partners. In the second case, the German Lambda group tried to solve an admini’strative problem by bringing in a distributor as a shareholder without realizing that the strategy of the local company was to increase as fast as possible its product portfolio without really focusing on any of them.
Partnership
Partner
investment
with a local partner
OtAers
46
Long Range
Planning
Vol. 17
December
Table 1. Questions to raise for the evaluation a local partner by a foreign investor
of
Strategic fit (a) Strategic vision b Is the proposed venture part of a global strategy or simply an opportunistic move? e Is the proposed venture part of a deliberate attempt to strengthen the company position or to diversify in other lines of business? (b)
Strategic importance of the project * What would be the effect of failure of the venture on the reputation of the company? on its profitability? its competitive position? e How vital for the future of this firm is the success of this project?
(c)
Pressures =& What choices are open to this company? * Is there any strong political, financial (or pressure to enter the venture?
I I. Resource fit (a) Previous experience in joint;ventures -& Has this company already been involved with others? How successful? * Has this company already been involved with others in a similar technology? (b)
(c)
other)
in ventures in ventures
Resources Technology and managerial: fi Is the company already operating in similar activities? e Quantity and quality of technical expertise available? * Is the organization and management system conducive to industrial activities? Finance: * Is the company in sound financial position? Commitment e Is top management
move or in the company.
main
really
line
committed?
of activities
of the
At first, it may seem less problematic to organize a joint-venture with a strategically ‘weak’ partner who will be more willing to accept the rules of the foreign investor. However, the long-term success of the venture will be less important for a local partner who invests for opportunistic reasons, as he may take advantage of any other ‘opportunity’ and leave the foreign investor coping with the development of the business. Similarly, the local entrepreneur whose main purpose is to diversify may become a burden or a deadweight in the future. Frequently in developing countries, entrepreneurs build business empires by agglomerating activities of various natures without real strategic links except the one inspired by the short-term profitability of a ‘good opportunity’. This is especially true in import substitution economies where quasi monopolies are built under the umbrella of tariff protection. The end result of this dispersion is the lack of managerial control and the unclear pattern of resource allocation among businesses: the foreign joint-venture may be trapped in a cash squeeze due to a financial crisis in another business of the entrepreneurial conglomerate. Hence it is better for
1984
the foreign investor to do business with a local partner who knows what he wants but also who wants what he knows. He may be a tough partner but a reliable one. (b) Stratqic Importunce of the Prqject. Not only is it important to check the strategic vision of the local partner but also to assess how much the particular venture ‘weights’ in his basket of activities and projects. One rough measure is to compare the capital, turnover and profitability of the venture with regard to the overall financial commitment, turnover and profit of the local company (or group of companies) as a whole. If the weight is too small with regard to other activities, the local partner will be ‘less’ committed to the success of the venture and will devote less management attention to it. In addition to this quantitative assessment, it is also useful to assess how vital the success of this project is for the future of the local firm. Some projects with small financial commitment and future profitability may well be extremely important for the local firm because it brings an access to a crucial recource, or because the local government pays particular attention to the development of the activity involved in the venture. (c) Pressures. In some cases, the local partner has very little choice for selecting a foreign partner. The reason may be due to the fact that the project is included in an intergovernmental agreement and therefore there is no international competition. Sometimes the technology involved is so particular that the choice of the partner is also very limited. Contracting with a highly ‘pressured’ partner may be perceived as a good thing by the foreign investor since he will be in a strong negotiating position. However; this can prove to become an uncomfortable position in the long term if the partner keeps a ‘passive’ profile and does not contribute fully to the venture because it has been imposed on him.
These three questions allow the foreign investor to evaluate the extent to which the strategic position of the potential partner fits his own. There is no clear-cut answer nor method to determine the ‘right’ strategic combinatibn; it is a matter of managerial judgment. However, it is possible to suggest some rules of thumb: A newcomer in a country should avoid contracting with a local company whose only strategic objective is to add a good opportunity to its line of business. Avoid outside pressures (political or other) force a local partner to do a joint-venture. Give preference company.
to
a
less
diversified
to
local
(d) Previous Experience in Joint-Ventures. In a study of European companies in ASEAN (Lasserrc and Boisot, 1980), it appeared that a large number of
Selecting problematic cases involved local partners who had previous experiences of ‘unsuccessful’ jointventures with other foreign investors. A thorough investigation of the past record of the potential partner may prove to be a sound investment ifit can prevent a company from duplicating a bad experience. The fact that a local company experienced a good relationship with its foreign partner is not enough: one has to know whether the previous joint-ventures were related to a technology similar to the one involved in the planned For example, a French mechanical project. company organized a venture with a Filipino group for the manufacture of casted parts. This project was not a success, partly due to a lack of managerial control on the part of the local company, whose primary activity was to manufacture beer and soft drinks! (e) Assessment of Technical and Managerial Resources. To ask questions about the technical and managerial capabilities of a potential partner seems self evident and do not descrvc too many comments. However, the empirical evidence given earlier shows that enough attention is still not given to the basic technical and managerial capabilities of the local companies. Foreign companies behave on the basis that they will be able to of the assumption effectively handle the technical matters and transfer the necessary knowledge through the implementation of training programmes. The difficulty with this approach is that technology cannot be transferred unless there are two effectively prerequisites : (1) there
is a sufficient critical mass of engineering and technical culture in the company; and
(2) the managerial structure and conducive to industrial activities.
systems
are
If these conditions are not fulfilled, as is the case in companies which have a strong trading orientation, there is a big danger that the manufacturing activities will be plagued with operational difficulties in terms of inventory, product quality, maintenance and cost. In practice those problems cannot be solved by training only, one is likely to meet the classical post-training ‘problems’. When the trainees come back from a training period, they try to adopt the techniques and behaviour they have learnt but they are rapidly discouraged to do so because the whole organization still contiues to operate in the old idiosyncratic manner; e.g. the reward system does encourage quick return, the information does not allow analytical costing or inventory control, etc. . . . In this respect, an evaluation of the resources of the local partner is not so easy in the sense that one needs to look beyond the ‘official’ picture represented by the management.
a Foreign
Partner
for Technology
Transfer
47
A large number of companies in developing countries try to convince their potential foreign partner that they possess the skills and methods to absorb the technology and are very keen to show their organizational charts, operating manuals and job definitions to demonstrate their level of managerial and technological capabilities. This is not sufficient and one needs to check whether those ‘systems’ are more than ‘gimmicks’. One good indicator of the level of the local partner is the extent to which engineers and technical personnel have a good ‘status’ and career potential in the company, at least as good as a sales or finance manager. This is power of the engineers, if any, who participate in the preliminary discussions. Several visits and private conversations with the technical people should be made prior to any commitment for the assessment of such capabilities. (f) Commitmentjom Top Management. The final key question is to know whether the top management of the local company is strongly committed to the venture. The strategic analysis should already provide enough data to answer such questions, specifically, one needs to know whether the local partner will not finalize an agreement in order to ‘freeze’ the development of a product line which otherwise could be in competition with a similar one that the local company is already commercializing, or planning to commercialize either directly or indirectly. In such a case the legal protection, classically included in all contracts, is not sufficient. Another item to consider is the variety and number of businesses of which the top management of the local companies are in charge. As already mentioned, developing economies offer a lot of opportunities to local entrepreneurs who generally show a strong appetite to spread their domain of activity. It is very frequent for a foreign company engaged in ajoint-venture to contract an agreement with a talented entrepreneur just to discover after a ‘honeymoon’ period that all top managers are unavilable for decision-making given these multiple other commitments. The Point
of View
of the Local
Partner
The methodology exposed so far concerns the evaluation of a local partner by a foreign investor. For his part the local partner must evaluate the foreign investor following the same line of reasoning schematized in Figure 1. The type of questions to raise in this case are summarized in Table 2. Most of the questions are similar to the one already mentioned. However, there are additional ones which should allow the local partner to verify how important it is for the foreign company to develop the venture and how well equipped and willing they are to do so. (a) Long-term
Commitment.
Investing
in a foreign
48
Long Range
Planning
Vol. 17
December
Table 2. Questions to raise for the evaluation a foreign investor by a local partner
of
I. Strategic fit (a) Strategic
vision =& Is the venture part of global strategy or simply an opportunistic move? :Cf Is the venture a defensive move or part of a deliberate attempt to capitalize on a distinctive competitive advantage? ~~7, committed for the long term in Yy Is the company establishing links in the country?
(b)
Strategic importance & How vital for the transferor is the success of the venture? + What would be the effect of a failure on the reputation of the company? on its profitability? on its competitive position?
(c)
Side effects ~2 Might this particular transfer have side effects on other businesses? 7:~ How important is it for the company to keep full control over the technology transferred in the venture?
(d)
(e)
Competitive position b How competitive ticular technology
is this organization vis-a-vis others?
Pressures c;^; Is there any strong effectively transfer
political or financial the technology?
I I. Resources fit (a) Amount of experience with technology & Has this organization transferred other countries? + Has this organization transferred technology? (b)
(c)
(d)
(e)
Technological :> How long technology
in this
this
Commitment from + How committed venture?
top
top is the
to
the
to
particular
mastered
Financial resources -& Does this organization have the financial sustain such an operation? have
pressure
transfer technology
resources has this organization in its own country?
Human resources -& Does this organization back-up?
par-
this
back-up
to
organizational
management
to
the
country, and especially in a developing one, is a relatively recent phenomena for the vast majority of medium-sized companies of the developed world. The increasing importance of growing markets in the third world, as well as the opportunities to have access to cheap sources led a large number of U.S., European and Japanese companies to invest in these countries. However, many of them consider these investments only from the point of view of quick financial return and profitability. For the local entreprcncur, such foreign partners should be avoided. (b) The Technology.
117Iportance of Keeping
A potential
source
Full
Control
of the
of conflict
is the
1984
willingness of the f*oreign investor to keep full control over the technology involved in the venture. There may be good reason for that: fear of losing competitive advantage, fear of seeing leakage for the benefit of other competitors, etc. Although such an attitude on the part ofthc foreign investor is perfectly understandable, it could create future friction with the local partner who on his part wants to take advantage of thejoint-vcnturc to develop his own technological capabilities. This factor has to be taken explicitly into consideration to measure the strategic fit between the two companics: a local partner who wants to master a technological process very rapidly should avoid a joint-venture with a foreign investor for whom it is strategically important to keep such a control. (c) c om p err‘t’fur P osition. : A foreign investor who in his home country or in other parts of the world, is not in a strong competitive position presents a dilemma for the local counterpart. On the one hand he may be willing to gain a strong position on the local market to compensate for his weaknesses on the other markets. On the other hand, he may not be in a position to give full support to his local venture due to resources he needs to defend his position in the other markets. No clear answer can b-t given in advance to this; some techniques such as the strategic portfolio analysis of the Boston Consulting Group can give insight into the overall strategic position of a company and its potential long-term capabilities, and could be used in such cases. (d) Amount of Experience with 7echnology Transfer. Technology transfer is a process which implies the transfer of a lot of ‘unlearning’ and ‘learning’ (de Bettignies, 1980), especially in cultural and social behaviour. An enterprise which has already been exposed to several projects is likely to have adopted the internal mechanism and developed the personncl and organizational culture which makes the transfer of technology transmissible to other countries. The local partner needs to be aware of the amount of experience accumulated by his potential partner and know to what extent the technical and managerial expatriate in charge of thejoint-venture has lkarnt from these past projects.
Conclusion The method proposed here concerning the evaluation of the strategy and resources of local and foreign partners seems to be normal sound management practice. However, the experience of the author, mainly acquired through frequent contacts with business ventures in the ASEAN region, show that the ‘obvious’ is very far from being implemented. The main reason lies in the fact that answering these questions requires time, effort and investment in data gathering. This cannot be
Selecting achieved by hasty travel missions, luncheons or negotiations at the roundtable. At a minimum, a period of 1-2 years of prior contacts and long-term missions carried out by engineers are needed by the foreign company to familiarize itself with the country, the culture and the business practices ofthe local companies.
a Foreign
Partner
L. G. Franko, Joint-venture Colombia
Journal
49
in the multinational company, VI (3). June (1971).
of World Business,
(1980).
P. Lasserre, Strategic assessment of international partnership in ASEAN countries, Asia Pacific Journal of Management, 1 (1). 72-78 (1983).
Enterprises,
H.-C. de Bettignies, The transfer of management know-how in Asia: An unlearning process, Breaking Down Barriers-Practice and Priorities for International Management Education, pp. 293-310, Eds B. Carrat and J. Stopford, Gower Press, London (1980).
divorce
Transfer
P. Lasserre and M. Boisot, Transfer of technology from European to ASEANenterprises-Strategies and practices in the chemical and pharmaceutical sector, Euro-Asia Centre Research Paper, No. 2
J. M. Stopford
References
for Technology
and L. T. Wells Jr., Managing Basic Books, New York (1972).
D. J. Teece, The Multinational international
Technology
J. W. C. Tomlinson, Business;
the
Multinational
Corporation and the Resource Cost of Transfer, Ballinger, New York (1976).
The Joint-Venture Process in International India and Pakistan, MIT Press, Cambridge, Mass. (1970).
17, No. 6, pp. 43 to 49, 1984
0024-6301/84/$3.00+ .OO Pergamon Press Ltd.
Selecting a Foreign Partner Technology Transfer Philippe
Lasseve,
IN.SEAD-Euro-Asian
This article proposes a method for evaluating the strategy and resources of local and foreign partners in technology transfer based on normal sound management practice. The author has had considerable experience of the process in business ventures in the ASEAN region and has found that not enough time, effort and research is invested in the initial negotiations. He suggests that a year or more should be allowed for the foreign staff to become familiar with the country and the business practices of local companies.
Introduction Joint-venture and licensing agreement between a multinational company and a local entrepreneur is an increasingly predominant mode of entry into growing markets of the developing world. Some multinational companies are more reluctant than others to enter in joint-ventures (Stopford and Wells, 1972), h owever national policies as well as the increasing complexity of local market and industrial environment push toward this form of entry. This is not without creating some tensions within the organizational. setting of the multinational companics (Franko, 1971), especially for the companies which have adopted a worldwide integration strategy for manufacturing and R & D and arc therefore reluctant to share decisions with local partners on key strategic issues. There are two major reasons for an active participation of local partners. First, local partners can make a significant contribution to the strategy of a local subsidiary through their knowledge of the economic and socio-political environment, their distribution network or through a privileged access to local resources (raw materials, labour manage-
Professor Boulevard
Philippe Lasserre is at the Euro-Asian de Constance, 77305 Fontainebleau,
Centre Cedex,
at INSEAD, France.
Centre, Fontainbleau,
43
for France
ment, contacts, . . .). Second, entrepreneurs in the third world are very keen to develop their businesses and considerjoint-venture with a foreign partner as a method to implement their own corporate strategy. Studies have shown (Tomlinson, 1970), that in most cases the process of partner selection is not carried through thoroughly. The first candidate, generally discovered through contacts established by mail or arranged by a banker or a business colleague already established in the country, is often the one with whom the company is undertaking the discussion for partnership. Little or no screening is done for comparing alternatives, nor is there an indepth investigation of the motives and capabilities of the candidate. Generally a feasibility study of some sort done primarily on the basis of a market study and on evaluation of general considerations (e.g. business climate, financial analysis, etc.) but nothing really serious is done to analyse the local partner and vice versa. In more favourable cases where investing firms are already engaged in some sort of business in the country, the selected partner is generally the agent who is already working for the company and the distributionship is transformed into an industrial joint-venture. For the multinational company there is the advantage ofentering into an agreement with someone who is already familiar with the company’s products and who has entcrtaincd commercial relationships with the mother company. However, the fact that a local company proved to be a decent distributor does not guarantee that it will be as good in a joint-venture involving manufacturing activities. In order to illustrate the issues involved in future selection two cases involving European companies in the Far East are briefly presented.
44
Long Range
Planning
Case One: A French-Thai Venture
Vol. 17
December
Joint-
The French-Thai Chcmitex Co (FTCC)” is a jointventure company established in 1972 between the French Zeta Group* and Mr Yipsoon” a local entrepreneur. The purpose of the company is to produce and sell synthetic fibres for the textile industry. The investment amounts to U.S.A60m in fixed assets plus an additional U.S.L20m in working capital requirement.
The Zeta Group is a large chemical group, diversified in eight sectors and active in 40 countries, with only selling activities in South East Asia. ln the early 197Os, the textile division was plagued with recession in Europe, due to increasing competition from developing countries. The official policy of the group was not to invest internationally in this sector but rather to license technologies. In 1971, a French bank established in Bangkok presented a market survey showing tremendous sales opportunities and introduced Mr Yipsoon to the group as a prospectivejoint-venture partner and also as the main customer for the output of the projected plant. Mr Yipsoon, a local entrepreneur of Chinese origin controlled about 50 per cent of the spinning and weaving industry in Thailand through a dozen of wholly owned subsidiaries or joint-venture companies. In Thailand only one company, controlled by a Japanese Group was producing synthetic fibre and Mr Yipsoon wanted to find another source of supply. The management style of Mr Yipsoon was very personalistic and members of his family were at the head of his various companies.
The joint-venture company FFCC started its operations in 1976 after more than 18 months delays in construction of the plants due to conflictual relationships between the partners. The operations of the company started at a time of world recession and increase in cost of raw materials. During the first 3 years, the company operated at loss. Relationships between partners degenerated into an open conflict which attracted the attention of the local press. A leading Thai bank was obliged to arbitrate and finally after four profitable years the Zeta group sold its capital to the local partner. In their comments about this experience Zeta executives mentioned that one of the major mistakes they made was to have embarked in a joint-venture with a local industrialist who was also the major customer of the joint-venture and also not to have spent enough time to investigate Mr Yipsoon’s track record and reputation.
“Names
are disguised.
1984
Case Two: Gamma Pharma: A Joint Venture German-Indonesian Gamma Pharma” is an Indonesian registered company; 70 per cent of the capital is held by the Lambda group of Germany and 30 per cent by P.T. a family owned local pharmaceutical TIGA”, producer and distributor. The Lambda Group is a second generation family firm based in Europe specializing in herbs and related products. It invested in Indonesia as a response to Government pressure rather than in pursuit of a conscious strategy. Elsewhere in S.E. Asia (Thailand, the Philippines) it manufactures by subcontracting. Lambda having traded in the area and for a number of years imported herbs from Indonesia, was pushed into local manufacture by the government’s new regulations. This brought the firm to see Indonesia as its production base for regional exports. For the rest of the world the company aims to export out of Europe. The company was prompted by government regulations to hand over 30 per cent of its shares. It did, to its distributor P.T. TIGA. P.T. TIGA is a family owned local company, which started in the mid-1960s as distributor of imported drugs and soon developed a small laboratory which became a manufacturing company in the early 1970s. It took advantage of the requirements of the Indonesian government to have manufacturing of drugs done locally in order to develop a strategy of joint venture and licensing agreements with fore@ laboratories having a good name and technology m their respective fields. P.T. TIGA started a joint venture with Lambda. The operation started in 1972 and commercially developed well until 1975; the relationship deteriorated after an international crisis and P.T. TIGA led the foreign partner to try to cancel this distribution agreement. P.T. TIGA overexpanded and was unable to pay for his shares which Lambda had to finance at a heavy cost to its operations. Worse, he could no longer pay for his supplies and had to be replaced as a distributor, but not as a shareholder. As a Lambda’s executive puts it: ‘We took the easy way, now we pay for it’. Those two cases indicate that most of the problems originate from a lack of deep prior understanding of the intentions of the local partner, its capabilities and its management style. In the case of the French Zeta group a careful analysis would have indicated that the local partner strategy was to benefit from a second source of raw material and his own vested
‘Names
are disguised.
Selecting
a Foreign
A Method
investor should investigate concerning its potential local partner are indicated and discussed in the following sections.
During the first phase each party tries to assess whether the strategy of the partner with regard to the project under study is compatible with its own. The project strategy depends upon the overall corporate strategy of the company and the particular attractiveness of the project with respect to marketing, political, financial and technological
(a) Stvatf@c V.ision. The purpose is first to determine whether the project is really part of an overall strategy or simply 311 opportunistic move, and second, whether this project is a diversification Local Partner A
Investor
\
/
\ Past Performance
Past /
Company’s Corporate Strategy
_ Posture Environment/
Country Analysis
Company - Project Ct.“+,,.. JLiaLr;yy
J
/ Strategy
Market 2
/Prospects Project Attractiveness
\T
stop Yes
--
\---\
Resources
Resources
Needed Company Resource 3 Profile
t
Company / Resource Profile \
Needed Company’s Resources
Yes Human
I Others
Previous Experience
Experience Negotiation
Figure
1. Strategic
analysis
Alternatives
Feasibility
AlterAatives
\
-Environment
.
RiskjH’LrBC1’
Feasibilitv
for a foreign
45
The Point of View of the Foreign Investor In Table 1 the major questions that a foreign
The process of assessing partnership is described in Figure 1. It consists of two phases: an analysis of the strategic fit, and an analysis of the resource fit.
Foreign
Transfer
During the second phase, each partner seeks to determine whether given its own resource and given the resources needed to carry the project in good condition, the resources of the other party are adequate to complement its own. We will respectively describe the point of view of the foreign investor and of the local company in carrying those analysis.
In both cases as in many others studied by the 1983) a lack of rigorous author (Lasscrre, partnership planning is at the origin of disillusions and conflicts. A possible method for analysis of partnership and partners is proposed in the remaining part of this article.
Assessment:
for Technology
characteristics. The important thing at this stage is to analyze not only its own project’s strategy but also to assess the project’s strategy of the other party. This requires an accumulation of data with regard to the competitive posture of the partner, its corporate objectives and its portfolio of activities which go far beyond the traditional investigation usually done in such cases (if any).
interest was not really compatible with the joint venture company profit objectives, not to mention the huge difference in management style and practices between the partners. In the second case, the German Lambda group tried to solve an admini’strative problem by bringing in a distributor as a shareholder without realizing that the strategy of the local company was to increase as fast as possible its product portfolio without really focusing on any of them.
Partnership
Partner
investment
with a local partner
OtAers
46
Long Range
Planning
Vol. 17
December
Table 1. Questions to raise for the evaluation a local partner by a foreign investor
of
Strategic fit (a) Strategic vision b Is the proposed venture part of a global strategy or simply an opportunistic move? e Is the proposed venture part of a deliberate attempt to strengthen the company position or to diversify in other lines of business? (b)
Strategic importance of the project * What would be the effect of failure of the venture on the reputation of the company? on its profitability? its competitive position? e How vital for the future of this firm is the success of this project?
(c)
Pressures =& What choices are open to this company? * Is there any strong political, financial (or pressure to enter the venture?
I I. Resource fit (a) Previous experience in joint;ventures -& Has this company already been involved with others? How successful? * Has this company already been involved with others in a similar technology? (b)
(c)
other)
in ventures in ventures
Resources Technology and managerial: fi Is the company already operating in similar activities? e Quantity and quality of technical expertise available? * Is the organization and management system conducive to industrial activities? Finance: * Is the company in sound financial position? Commitment e Is top management
move or in the company.
main
really
line
committed?
of activities
of the
At first, it may seem less problematic to organize a joint-venture with a strategically ‘weak’ partner who will be more willing to accept the rules of the foreign investor. However, the long-term success of the venture will be less important for a local partner who invests for opportunistic reasons, as he may take advantage of any other ‘opportunity’ and leave the foreign investor coping with the development of the business. Similarly, the local entrepreneur whose main purpose is to diversify may become a burden or a deadweight in the future. Frequently in developing countries, entrepreneurs build business empires by agglomerating activities of various natures without real strategic links except the one inspired by the short-term profitability of a ‘good opportunity’. This is especially true in import substitution economies where quasi monopolies are built under the umbrella of tariff protection. The end result of this dispersion is the lack of managerial control and the unclear pattern of resource allocation among businesses: the foreign joint-venture may be trapped in a cash squeeze due to a financial crisis in another business of the entrepreneurial conglomerate. Hence it is better for
1984
the foreign investor to do business with a local partner who knows what he wants but also who wants what he knows. He may be a tough partner but a reliable one. (b) Stratqic Importunce of the Prqject. Not only is it important to check the strategic vision of the local partner but also to assess how much the particular venture ‘weights’ in his basket of activities and projects. One rough measure is to compare the capital, turnover and profitability of the venture with regard to the overall financial commitment, turnover and profit of the local company (or group of companies) as a whole. If the weight is too small with regard to other activities, the local partner will be ‘less’ committed to the success of the venture and will devote less management attention to it. In addition to this quantitative assessment, it is also useful to assess how vital the success of this project is for the future of the local firm. Some projects with small financial commitment and future profitability may well be extremely important for the local firm because it brings an access to a crucial recource, or because the local government pays particular attention to the development of the activity involved in the venture. (c) Pressures. In some cases, the local partner has very little choice for selecting a foreign partner. The reason may be due to the fact that the project is included in an intergovernmental agreement and therefore there is no international competition. Sometimes the technology involved is so particular that the choice of the partner is also very limited. Contracting with a highly ‘pressured’ partner may be perceived as a good thing by the foreign investor since he will be in a strong negotiating position. However; this can prove to become an uncomfortable position in the long term if the partner keeps a ‘passive’ profile and does not contribute fully to the venture because it has been imposed on him.
These three questions allow the foreign investor to evaluate the extent to which the strategic position of the potential partner fits his own. There is no clear-cut answer nor method to determine the ‘right’ strategic combinatibn; it is a matter of managerial judgment. However, it is possible to suggest some rules of thumb: A newcomer in a country should avoid contracting with a local company whose only strategic objective is to add a good opportunity to its line of business. Avoid outside pressures (political or other) force a local partner to do a joint-venture. Give preference company.
to
a
less
diversified
to
local
(d) Previous Experience in Joint-Ventures. In a study of European companies in ASEAN (Lasserrc and Boisot, 1980), it appeared that a large number of
Selecting problematic cases involved local partners who had previous experiences of ‘unsuccessful’ jointventures with other foreign investors. A thorough investigation of the past record of the potential partner may prove to be a sound investment ifit can prevent a company from duplicating a bad experience. The fact that a local company experienced a good relationship with its foreign partner is not enough: one has to know whether the previous joint-ventures were related to a technology similar to the one involved in the planned For example, a French mechanical project. company organized a venture with a Filipino group for the manufacture of casted parts. This project was not a success, partly due to a lack of managerial control on the part of the local company, whose primary activity was to manufacture beer and soft drinks! (e) Assessment of Technical and Managerial Resources. To ask questions about the technical and managerial capabilities of a potential partner seems self evident and do not descrvc too many comments. However, the empirical evidence given earlier shows that enough attention is still not given to the basic technical and managerial capabilities of the local companies. Foreign companies behave on the basis that they will be able to of the assumption effectively handle the technical matters and transfer the necessary knowledge through the implementation of training programmes. The difficulty with this approach is that technology cannot be transferred unless there are two effectively prerequisites : (1) there
is a sufficient critical mass of engineering and technical culture in the company; and
(2) the managerial structure and conducive to industrial activities.
systems
are
If these conditions are not fulfilled, as is the case in companies which have a strong trading orientation, there is a big danger that the manufacturing activities will be plagued with operational difficulties in terms of inventory, product quality, maintenance and cost. In practice those problems cannot be solved by training only, one is likely to meet the classical post-training ‘problems’. When the trainees come back from a training period, they try to adopt the techniques and behaviour they have learnt but they are rapidly discouraged to do so because the whole organization still contiues to operate in the old idiosyncratic manner; e.g. the reward system does encourage quick return, the information does not allow analytical costing or inventory control, etc. . . . In this respect, an evaluation of the resources of the local partner is not so easy in the sense that one needs to look beyond the ‘official’ picture represented by the management.
a Foreign
Partner
for Technology
Transfer
47
A large number of companies in developing countries try to convince their potential foreign partner that they possess the skills and methods to absorb the technology and are very keen to show their organizational charts, operating manuals and job definitions to demonstrate their level of managerial and technological capabilities. This is not sufficient and one needs to check whether those ‘systems’ are more than ‘gimmicks’. One good indicator of the level of the local partner is the extent to which engineers and technical personnel have a good ‘status’ and career potential in the company, at least as good as a sales or finance manager. This is power of the engineers, if any, who participate in the preliminary discussions. Several visits and private conversations with the technical people should be made prior to any commitment for the assessment of such capabilities. (f) Commitmentjom Top Management. The final key question is to know whether the top management of the local company is strongly committed to the venture. The strategic analysis should already provide enough data to answer such questions, specifically, one needs to know whether the local partner will not finalize an agreement in order to ‘freeze’ the development of a product line which otherwise could be in competition with a similar one that the local company is already commercializing, or planning to commercialize either directly or indirectly. In such a case the legal protection, classically included in all contracts, is not sufficient. Another item to consider is the variety and number of businesses of which the top management of the local companies are in charge. As already mentioned, developing economies offer a lot of opportunities to local entrepreneurs who generally show a strong appetite to spread their domain of activity. It is very frequent for a foreign company engaged in ajoint-venture to contract an agreement with a talented entrepreneur just to discover after a ‘honeymoon’ period that all top managers are unavilable for decision-making given these multiple other commitments. The Point
of View
of the Local
Partner
The methodology exposed so far concerns the evaluation of a local partner by a foreign investor. For his part the local partner must evaluate the foreign investor following the same line of reasoning schematized in Figure 1. The type of questions to raise in this case are summarized in Table 2. Most of the questions are similar to the one already mentioned. However, there are additional ones which should allow the local partner to verify how important it is for the foreign company to develop the venture and how well equipped and willing they are to do so. (a) Long-term
Commitment.
Investing
in a foreign
48
Long Range
Planning
Vol. 17
December
Table 2. Questions to raise for the evaluation a foreign investor by a local partner
of
I. Strategic fit (a) Strategic
vision =& Is the venture part of global strategy or simply an opportunistic move? :Cf Is the venture a defensive move or part of a deliberate attempt to capitalize on a distinctive competitive advantage? ~~7, committed for the long term in Yy Is the company establishing links in the country?
(b)
Strategic importance & How vital for the transferor is the success of the venture? + What would be the effect of a failure on the reputation of the company? on its profitability? on its competitive position?
(c)
Side effects ~2 Might this particular transfer have side effects on other businesses? 7:~ How important is it for the company to keep full control over the technology transferred in the venture?
(d)
(e)
Competitive position b How competitive ticular technology
is this organization vis-a-vis others?
Pressures c;^; Is there any strong effectively transfer
political or financial the technology?
I I. Resources fit (a) Amount of experience with technology & Has this organization transferred other countries? + Has this organization transferred technology? (b)
(c)
(d)
(e)
Technological :> How long technology
in this
this
Commitment from + How committed venture?
top
top is the
to
the
to
particular
mastered
Financial resources -& Does this organization have the financial sustain such an operation? have
pressure
transfer technology
resources has this organization in its own country?
Human resources -& Does this organization back-up?
par-
this
back-up
to
organizational
management
to
the
country, and especially in a developing one, is a relatively recent phenomena for the vast majority of medium-sized companies of the developed world. The increasing importance of growing markets in the third world, as well as the opportunities to have access to cheap sources led a large number of U.S., European and Japanese companies to invest in these countries. However, many of them consider these investments only from the point of view of quick financial return and profitability. For the local entreprcncur, such foreign partners should be avoided. (b) The Technology.
117Iportance of Keeping
A potential
source
Full
Control
of the
of conflict
is the
1984
willingness of the f*oreign investor to keep full control over the technology involved in the venture. There may be good reason for that: fear of losing competitive advantage, fear of seeing leakage for the benefit of other competitors, etc. Although such an attitude on the part ofthc foreign investor is perfectly understandable, it could create future friction with the local partner who on his part wants to take advantage of thejoint-vcnturc to develop his own technological capabilities. This factor has to be taken explicitly into consideration to measure the strategic fit between the two companics: a local partner who wants to master a technological process very rapidly should avoid a joint-venture with a foreign investor for whom it is strategically important to keep such a control. (c) c om p err‘t’fur P osition. : A foreign investor who in his home country or in other parts of the world, is not in a strong competitive position presents a dilemma for the local counterpart. On the one hand he may be willing to gain a strong position on the local market to compensate for his weaknesses on the other markets. On the other hand, he may not be in a position to give full support to his local venture due to resources he needs to defend his position in the other markets. No clear answer can b-t given in advance to this; some techniques such as the strategic portfolio analysis of the Boston Consulting Group can give insight into the overall strategic position of a company and its potential long-term capabilities, and could be used in such cases. (d) Amount of Experience with 7echnology Transfer. Technology transfer is a process which implies the transfer of a lot of ‘unlearning’ and ‘learning’ (de Bettignies, 1980), especially in cultural and social behaviour. An enterprise which has already been exposed to several projects is likely to have adopted the internal mechanism and developed the personncl and organizational culture which makes the transfer of technology transmissible to other countries. The local partner needs to be aware of the amount of experience accumulated by his potential partner and know to what extent the technical and managerial expatriate in charge of thejoint-venture has lkarnt from these past projects.
Conclusion The method proposed here concerning the evaluation of the strategy and resources of local and foreign partners seems to be normal sound management practice. However, the experience of the author, mainly acquired through frequent contacts with business ventures in the ASEAN region, show that the ‘obvious’ is very far from being implemented. The main reason lies in the fact that answering these questions requires time, effort and investment in data gathering. This cannot be
Selecting achieved by hasty travel missions, luncheons or negotiations at the roundtable. At a minimum, a period of 1-2 years of prior contacts and long-term missions carried out by engineers are needed by the foreign company to familiarize itself with the country, the culture and the business practices ofthe local companies.
a Foreign
Partner
L. G. Franko, Joint-venture Colombia
Journal
49
in the multinational company, VI (3). June (1971).
of World Business,
(1980).
P. Lasserre, Strategic assessment of international partnership in ASEAN countries, Asia Pacific Journal of Management, 1 (1). 72-78 (1983).
Enterprises,
H.-C. de Bettignies, The transfer of management know-how in Asia: An unlearning process, Breaking Down Barriers-Practice and Priorities for International Management Education, pp. 293-310, Eds B. Carrat and J. Stopford, Gower Press, London (1980).
divorce
Transfer
P. Lasserre and M. Boisot, Transfer of technology from European to ASEANenterprises-Strategies and practices in the chemical and pharmaceutical sector, Euro-Asia Centre Research Paper, No. 2
J. M. Stopford
References
for Technology
and L. T. Wells Jr., Managing Basic Books, New York (1972).
D. J. Teece, The Multinational international
Technology
J. W. C. Tomlinson, Business;
the
Multinational
Corporation and the Resource Cost of Transfer, Ballinger, New York (1976).
The Joint-Venture Process in International India and Pakistan, MIT Press, Cambridge, Mass. (1970).