Dutch SMEs engaging in International Joint Ventures in developing
countries: A multiple case study comparing failed and successful
projects through the scope of trust and control.
Student: Mark Brasser Student nr.: 10118454 Date: 31-08-2015
Program: MSc in Business Administration – International Management Track Supervisor: Suzana Rodrigues
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Statement of originality
This document is written by Student Mark Brasser who declares to take full responsibility for the contents of this document.I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
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Table of contents
1. Abstract ... 3
2. Introduction ... 5
3. Literature review ... 7
3.1 SMEs and internationalization. ... 7
3.2 The role of trust in International Joint Ventures... 8
3.3 Governance Structure ... 9 3.4 Ownership ... 10 3.5 Commitment of resources... 12 3.6 Partner selection ... 13 3.7 Management control. ... 14 3.8 Termination of alliances. ... 15
4. Data and Method ... 17
4.1 Research Scope ... 17 4.2 Research design ... 17 4.3 Data collection ... 18 5. Results ... 19 5.1 Successful partnerships ... 19 5.1.1 Trust... 19 5.1.2 Governance structure ... 21 5.1.3 Ownership ... 22 5.1.4 Partner Selection ... 24 5.1.5 Commitment of resources ... 25 5.1.6 Management control ... 27 5.1.7 Termination ... 28 5.2 Interrupted partnerships ... 30 5.2.1 Trust... 30 5.2.2 Governance structure ... 31 5.2.3 Ownership ... 32 5.2.4 Partner selection ... 33 5.2.5 Commitment of resources... 35 5.2.6 Management control ... 36 5.2.7 Termination ... 37 6. Discussion ... 39 7. Conclusion ... 42 8. References. ... 43
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1. Abstract
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In this paper Dutch small and medium sized enterprises (SMEs) which are engaged in an International Joint Venture (IJV) with partners from a developing economy in Africa are investigated. These SME IJV share the common characteristic of being a part of the Dutch governmental PSI projects to stimulate social outcomes in the host region, while offering an opportunity for Dutch SMEs. Both successful and interrupted cases were compared in a qualitative multi-case study through the scope of trust and control, trying to find evidence for whether a SME IJV in a developing economy succeeds or not. The research was conducted in the form of a qualitative multiple case-study. Results implicated that the perception of cultural difference was a shared characteristic amongst successful cases. Across both successful and failed cases the importance of communication and partner selection was found. Particular events impacted the failed projects greatly in terms of longevity and chances of termination, making it therefore hard to compare successful cases with failed cases.
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2. Introduction
The behavior of SME firms can be considered important since they contribute greatly to economies and for developing countries they can be seen as drivers for growth, job opportunity and financial stability (Abor & Quartey, 2010). There is consensus that performance of small- and medium sized enterprises is very important for both economic and social development of developing countries. Economically speaking they can be seen as the engine for the growth objectives of developing countries and are an important source for employment and income stability in these developing countries.
According to Beck & Cull (2014) the majority of firms worldwide can be categorized as SME. In lower and middle income countries the employment generated by companies with 100 employees or less provides for more than 50 percent of total employment. Therefore SMEs are a very important component to the developing world. These figures and the notion that SMEs are this important for developing countries show that SME and its impact on developing economies are a noteworthy topic for investigation.
There has been extensive research on the behavior of firms engaging in international business, but this has largely been focused on MNEs and SMEs cannot be treated as such since these organizations are largely heterogeneous and cannot be easily compared to the large firms especially when you consider their entry mode decisions ( Brouthers & Nakos, 2004; Lu & Beamish, 2006). SMEs engaging in international endeavors are not as well investigated as one would expect considering it is very common for SMEs to do so. (Lopez-Perez & Rodrigues-Ariza, 2013)
Entry mode theory explains that there is a hierarchy of entry modes based on the degree of risk and control ( Pan & Tse, 2000). The simplest form of international engagement is exporting in which minimal risk is taken since no actual foreign direct investments (FDI) are made and
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SMEs mostly tend to engage in this form of internationalization (Lu & Beamish, 2006). When you look at internationalization according to Pan & Tse (2000), international joint ventures (IJV) can be considered as a more risky endeavor since there is an actual financial involvement through (partial) ownership in the IJV. SMEs often do not have the means for this approach and are seeking for ways to minimize risk in their ways of doing international business. Next to the risk averse attitude of SME towards internationalization, there is the issue of SME being very important to developing economies (Beck & Cull, 2014).
These companies have growth opportunities and could benefit from more ‘developed’ knowledge such as Dutch firms have. For this purpose the Dutch government has started the Private Sector Investment Programme (PSI). In this programme, Dutch SMEs are offered funds to engage in IJVs in developing countries and with this they can share risk and are more able to engage in more extensive entry modes than they would have done without this support.
However, by now the PSI program has been suspended and there are reports of failed projects. Groot & Merchant (2004) found that the risk of a partner behaving opportunistically can lead to low levels of trust which in itself can lead to risk of terminating a strategic alliance ( Making et. al., 2009). In academic literature there is little information to be found on how specifically Dutch firms cope with challenges in developing economies.
Within strategic alliances, management control influences performance of an alliance and has its effect on trust between partners (Yan & Gray, 2001) leading to the following research question:
Are there differences between failed and successful Dutch SME IJVs in terms of trust and control in a developing economy?
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3. Literature review
3.1 SMEs and internationalization.
According to the European Union definition an organization can be considered a SME when the headcount of the staff does not exceed 250 and has an annual turnover lower than €50 million (European Union, 2005).
As already stated in the introduction SMEs tend to behave differently than large MNEs with respect to their entry mode decisions ( Brouthers & Nakos, 2004; Lu & Beamish, 2006). This can be explained by the different means they have to exploit opportunities: often they simply do not have enough funds to establish wholly owned subsidiaries and are forced to cooperate with local organizations or do not even enter an international market further than just exporting (Lu & Beamish, 2006). An important reason for SMEs to engage in a JV is the way in which the partner brings new resources into the venture which can make up for deficiencies in resources faced by the SME ( Lu & Beamish, 2006). This can open ways for a SME towards internationalization.
An international joint venture (IJV) is defined as a venture controlled by two or more independent parent companies with, of course, one of the parent companies located in a different country than the others (Baek et al. 2006). Reasons for an organization to establish itself through an IJV in developing countries are often market development and power, partner synergies and production efficiencies (Boateng & Glaister, 2004).
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3.2 The role of trust in International Joint Ventures.
Even though strategic alliances are considered to be a source of competitive advantage, evidence of high failure rates is growing (Gerwin, 2004). Risk of failure is associated with strategic alliances being an external activity compared to activities conducted ‘in-house’. The difference in partner’s goals and the possibility of the partner behaving opportunistically within the relationship is causing this risk of failure (Groot & Merchant, 2004). Appropriate use of management control systems, governance structures and trust is associated with decreasing this risk of failure of strategic alliances (Langfield-Smith, 2008). According to Langfield-Smith (2008), within a strategic alliance, ‘competence trust’ and goodwill have shown to be particularly relevant to strategic collaborations. Competence trust is associated with believing the partner is capable of delivering on its practical commitments. Goodwill in context of trust is defined as the partner’s willingness and intention to perform. Goodwill trust is generally linked to integrity, dependability and responsibility (Das & Teng, 2001). This type of trust is believed to negatively influence the possibility of a partner behaving opportunistically.
Joint ventures need to be properly started as they are never easy. Misunderstanding and distrust can be overcome when reasonable expectations are established early on ( Xin & Haije, 2011). With trust in place, the factor to which pre-specifying future details, agreements and outcomes is needed diminishes greatly. This in itself enlarges the chance of reaching certain levels of satisfaction within the alliance. Especially SME’s tend to attribute great importance to levels of trust in assessing whether networks could be beneficial (Brunetto & Farr- Wharton, 2007).
According to Pansiri (2007) trust has a major impact to whether strategic alliances succeed or not. This research associated integrity, honesty about arising problems, not making
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false claims or promises and counting on the partner to do what is right with trust, being influencing factors.
Forming successful strategic alliances is relevant to develop competitive advantage over other firms in different regions to the own market. (Porter, 2000). To develop an economic relationship it is important to have good interpersonal communication between firms (Olkkonen, Tikkanen & Alajoutsijarvi, 2000).
Networks rich of trust are needed when participants of the network are seeking cooperative behavior. The importance of trust is stressed by Inkpen & Currall (2004), stating that trust creates the climate for the way partners interact.
3.3 Governance Structure
The governance structure of an IJV in a SME context is not easily comparable to regular governance research. Within these constructions, different roles within the organization could overlap (board, management, ownership). This could influence which governance structure is implemented creating a highly relevant topic of research since governance structure can be critical to performance and success (Lopez-Perez & Rodrigues-Ariza, 2013). According to La Porta et. al. (2000) emerging economies have weak legal structures, forcing organizations to arrange their governance structure in such a way that the interest of the partners are defended. Cultural differences (trust and relationship), trade agreements between countries or geographical proximity can influence the governance structure (La Porta et. al., 2000).
Continuous interactions among partners are required by joint ventures, in which disagreements will occur. Differences between partners can cause conflicts, at which point Lopez-Perez & Rodrigues-Ariza (2013) argue that implementing a separate board can be necessary, in order to ensure that the goals of both or all the owners can be achieved. In their
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research it is noticed that the higher the level of trust, the lower the chance of having a board controlling the IJV. This effectively means that when a firm has a positive expectance of the other partner, chances are there will be agreements made on having a board.
Lado et. al. (2008) found an interesting paradox in how trust relates to governance structures. In cases of both low trust levels and low levels of opportunism in a collaborative relationship, positive results in performance and relationship were found. In the opposite cases where the relationship consisted of high levels of trust and high levels of opportunism, the results on performance and relationship were also positive, where one might expect that the opportunism levels should indicate negative collaborative influences.
The most important finding in this research was to avoid confusion, which arises when there are moderate levels of trust and moderate levels of opportunism. This situation creates suspicion and confusion regarding the collaborative relationship. Managers involved in these cases must find governance structure which either raise the trust levels or lower the risk of opportunism. This relates back to the research of Lopez-Perez & Rodrigues-Ariza (2013) where was stated that implementing a board could help in achieving all the partners’ objectives.
3.4 Ownership
For the last decades scholar have investigated instability of international joint ventures by assessing equity ownership with mixed results over time. Killing (1983) argued that a majority stake in a JV was the best way to ensure stability. Later Beamish & Banks (1987) found this to be equally divided ownership and Blodgett (1992) did not found evidence for significant influence of ownership arrangements on stability.
Equity is often seen as a measure of control within an IJV implicating that the more equity one partner has invested in the IJV, the less potential for possible conflicts as these can
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easily be avoided by the majority partner. (Dhanaraj & Beamish, 2004). It is argued though, that this is usually not true as it is possible to control IJV even when you find yourself in a minority-partner position. There are limitations to this statement: Dhanaraj & Beamish (2004) found that with very low equity rates (below 20%) the chance of dissolution of the IJV is very high. They state that the organizational dynamics of owning 5 percent of a JV differ greatly from owning 40 percent. Following the same logic, they state that owning 95 percent of an entity would have the almost the same organizational dynamics as owning 100 percent of the IJV.
The Financial Accountings Standards Board defined guidelines on organizational influence within joint ventures (FASB, 1999). In these guidelines three level of ownership are defined which are based on a cumulative experience of practitioners in this field:
Investments below 20 percent: The partner does not have significant influence.
Investments between 20 and 50 percent: The partner has significant influence on the entity.
Investments greater than 50 percent: The partner has legal control and has therefore significant influence.
Dhanaraj & Beamish (2004) take these guidelines and state that both having invested very little as very much in a JV are not associated with the desirable organizational dynamics for running an effective JV. Having low influence on the entity (less than 20 percent) is associated with exploratory goals of the partner, whereas having a large share of >80 percent is associated with mainly short-term goals.
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Inter firm cooperation is subject to multiple constructs which influences its performance. One of these constructs is asset specificity. Asset specificity is defined by Williamson (1985) as durable investments that are made to support or create particular transactions. Partners cooperating in an organization or venture invest in assets specific to the partnership to establish goodwill or to complete certain tasks. Asset specificity is considered to be a commitment that has not that much value outside the partnership or transaction. Therefore deciding what to invest in the relationship can be viewed as a management decision influencing the performance of the collaboration.
Lui et. al. (2009) divide asset specificity into two different interpretations: Transaction cost economics or TCE and relational exchange theory or RET. Within TCE it is argued that the investments of specific assets is positively related to risks of opportunism and therefore transaction costs. This means that the more a partner invests in a joint venture, the higher the risk that this partner will behave opportunistically towards the joint venture. Based on this level of investment, partners usually try to find an appropriate organizational structure for reducing the hazard of the other partner behaving opportunistically (Ghosh & John, 2005).
Relational exchange theory (RET) suggests a comparable approach being relation specific assets. RET captures investment in assets, procedures of partnership and people on the long-term. RET focuses on cooperative behavior as the connecting construct between assets specificity and performance of a JV (Lui et. al., 2009). It can be argued that RET is an extension or embedded within TCE. This implies that mutual solidarity norms and the relationship of partners moderates conflicting views on asset specificity within a partnership (Rokkan et. al., 2003). Specific investments in a partnership exposes a partner to the risk of the other partner’s opportunistic behavior. On the other hand these investments are required to achieve any gains
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from the collaboration. The study of Lui et.al. (2009) suggests that trust an cooperative behavior should be fostered with well-chosen investments to improve the performance of the partnership.
3.6 Partner selection
Collaborating with partners enables firms to reduce costs, to share risk, to strengthen their market position and to access valuable resources. Unfortunately, high rates of failure with these collaborations are reported amongst scholars caused by high risk (Ding et. al., 2013). This risk is to be divided in relational risk and performance risk. Relational risk results from bad cooperation or the sheer lack of cooperation amongst partners.
Performance risk is the risk associated with failure of the collaboration despite full cooperation between partners. (Blumberg, 2001). The process of partner selection is deemed critical for managing interfirm partnerships effectively. Reducing opportunistic behavior and failure of meeting one’s commitments are the main reasons why an organization should look for a partner very critically. Dekker & van den Abbeele (2010) found that comparable information for potential partners is very valuable to the process of choosing a specific partner and affects the way control mechanisms are designed. The goals set within a collaboration are also dependent on this comparison information implying that different goals could be set if an organization gets to compare multiple partners.
Blumberg (2001) showed that the prior relationships with a partner reduced the extent in which an organization will look for a new partner, building up mutual trust as they go along. In this research it is argued that organizations knowing a partner beforehand will have lower ‘search costs’, whereas not knowing the partner should imply high ‘search costs’ and efforts. Blumberg (2001) takes it even a step further by stating that the search for a partner is not something that occurs randomly, but is a well-planned management activity.
14 3.7 Management control.
Management control is associated with the process through which an organization is able to influence its subunits to meet its goals or achieve its objectives. Within an IJV, control is defined as the extent to which parent exercise decision power in the IJV’s operations. (Yan & Gray, 2001). In this research it is argued that only defining control in terms of daily operations might be too narrow. Within the concept of control 3 categories were found: Strategic decision-making, managing and organizing the IJV’s routine operations and finally designing the IJV’s corporate structures as well as the procedures for operating the business. Management control can therefore be used as a proactive tool for IJV partners to avoid uncertainty and for achieving their own strategic interests. Since IJVs generally do not have a clear hierarchical structure, which is the case with wholly owned subsidiaries, partners can never entirely rule out any form of selfish behavior (Hennart, 1988).
Especially relevant to IJVs operating over a fast distance (both spatially as mentally) , which is the case with the IJVs within the PSI project, is the research of Chi (1996). In this research it is argued that when the commitment of a partner cannot be precisely verified or monitored, the partner will unfortunately have an incentive to behave opportunistically by pursuing own interest that could be at the expense of the other partner or at the expense of the IJV.
Another factor influences the extent of control is whether the partners of the IJV have someone working on their behalf within the IJV. This can be referred to as agency theory (Yan & Gray 2001; Eisenhardt, 1989). Agency theory involves the risk of the ‘agent’ not having exactly the same interest as the parent of the IJV, thus creating a problem for achieving the venture’s goals. Yan & Gray (2001) state explicitly that this is particularly the case with IJV
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between partners from developed and developing countries. Both partners have interests and objectives that might not be as important to the other partner, but both still need to rely on the partner to achieve those very goals.
Next to specifically stationing personnel to act on behalf of the partner, also the partner’s management personnel in the IJV can be seen as ‘hypothetical’ agents. As becomes clear, the management control structure appears to be very important for achieving goals. As Yan & Gray (2001) argue, the degree to which an IJV partner exercises management control positively influences the extent to which this partner will achieve its own strategic objectives.
3.8 Termination of alliances.
Makino et. al. (2007) investigated whether IJV were terminated intentionally or unintentionally and the factors influencing such an event. They qualify terminated IJVs as the suspension of the IJV structure, referring to a change from a shared ownership construction to an alternative organizational mode, as well as leaving the business domain as a whole. This is being referred to as ‘complete termination’.
The terminated IJVs are to be separated into intended and unintended termination. Intended termination occurs the collaborative formation had initial purposes or goals which have been achieved or is a situation in which those goals disappeared. Unintended termination refers to situations in which the collaborative partnership was ended by unanticipated events which occurred after the formation of the IJV (Makino et. al., 2009)
The longevity of an IJV was influenced by the cultural distance between partners. This was shown by Makino et. al., (2009) as well as argued by Zaheer (1995). Liability of foreignness (LOF) is seen as the risk (or liability) a firm encounters when operating in overseas or culturally remote markets. An organization with little experience in markets not similar to
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their own is more likely to face these liabilities of foreignness. Cultural distance in terms of trust and institutional conditions also negatively influence the longevity of an IJV.
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4. Data and Method
4.1 Research Scope
The research scope of this paper are small and medium sized enterprises which are engaged in international joint ventures with a partner in a developing economy. The organizations which met these requirements were found and collected from the PSI program: The Private Sector Investment Programme. The information of the PSI programme was to a large extent classified to the main public and had to be accessed through the clearance of Suzana Rodrigues, acting as advisor and researcher within this programme.
4.2 Research design
The research is attempting to find differences between failed and successful alliances in terms of trust and control. Organizational goals, processes in organizations and linkages formulated in control and trust can be best researched in a qualitative research (Marshall & Rossman, 1995). The use of semi-structured interviews was adopted, since this allows the researcher to follow the flow of the conversation while trying to find data on organizational settings (Saunders et. al., 1997)
A multiple case study method is chosen as type of qualitative method. Case studies are widely used when it comes to investigating so called ‘why and how’ questions (Yin, 2003). To be able to make a comparison between the interrupted and successful alliances it is necessary to investigate more than one single case study. Using multiple case studies will also yield a higher reliability (Yin, 2003).
For contacting the organizations which met the requirements the contact-details of the organizations were shared by the PSI – programme. Interviews were scheduled with 8
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the same sample, answering different questions. Of these 8 projects 5 were considered successful and 3 as failed or interrupted projects.
4.3 Data collection
In the interviews questions were asked related to each subtheme described in theory. The interviews were conducted either by phone or personally and were recorded. Following on the actual interview the interviews were carefully and precisely transcribed to prepare them to be analyzed. The reason for recording and transcribing the interviews was in order to create as much transparency as possible about the data. In this paper the names of the companies are not shared as the interviewees were promised that their information would be handled with discretion. On request the names of the organizations and interviewees can be shared by the author of this paper, subject to the author’s assessment if this is suitable or not.
The following sample was interviewed.
Country Industry Status
Ghana Information technology Failed
Ghana Road safety Failed
Zambia Banana plantation / cooling equipment
Failed
Ghana Transport Success
South Africa Agriculture Success
Ethiopia Flower industry Success
Namibia Agriculture Success
Kenya Flower industry Success
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5. Results
The data gathered with conducting the interviews, has to be analyzed. Since qualitative data can be difficult to present objectively without providing full-length interview transcripts in this report itself, there is opted for a structure similar to how the literature section was constructed. The interviews conducted are analyzed in a way to find quotes for each subject derived from the literature review. This is done two times: for both successful and interrupted projects.
5.1 Successful partnerships
5 out of the 8 interviewed companies were successfully executed and the projects were either intentionally terminated or the partner still have a continuing relationship.
5.1.1 Trust
Within the successful partnerships, there appeared to be some level of trust or at least trust was at a sufficient level to completely carry out the projects. Interestingly though, the comments made in relation to trust itself do not seem positive: if anything they are negative.
Trust within strategic alliances is dependent on trusting the fact that the other partner will work and put in effort they achieve both their own as their partners’ goals. When a partner willingly fails to do so, or in other words the partner chooses to obtain its personal goals, the partner behaves opportunistically. In the interviews there was found signals of the Dutch partners not trusting the partner from the developing country to fully work for the mutual benefit.
“They had debtors in South-Africa and they thought this was a valid reason to pay us later as well. They try to put their own problems and issues on your desk and make them your responsibility.” – Successful project 2, South Africa
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According to theory, integrity is highly associated with the concept of trust. Cultural differences arise when it comes to integrity as is stated in the following quote. For this company it was hard to find an appropriate way to act upon the differences in views on integrity. In the end a practical approach was adopted: dependence on both partners work for achieving their goals. The chance of behaving opportunistically was therefore lowered since both partners’ input to the project mattered greatly to the other partner.
“As I just said, they find it easier to tell lies than we do. The partner company is a father with his son. The father is an old grumpy man who doesn’t care of telling lies when it is in his favor. The son is highly educated and has more the same attitudes and mindset as us. But the son always gets overruled by his father. This can be difficult for us. We know he is lying and when we say something about his behavior and his lies he gets agitated and defensive. He opted a couple of times they needed to find another partner because they think we don’t trust them. But we know that is not going to happen. We need him just as much as he needs us despite the fact he owns 95% of the venture. They run the whole business but without our breeding materials and genetics they can’t produce anything. You need to find a balance in each other’s interests but that goes for every kind of business I guess” – Successful project 2, South Africa
The last example clearly demonstrates that trust was not at such a level one could speak of ‘goodwill’ (Das & Teng, 2001). The willingness or intention to perform seems to be lacking and was frustrating to the Dutch partner.
“Of course differences between us and the partner exist. For example, if we agree on something, 9 out of 10 times the agreements will be kept. In Namibia this isn’t the same, agreements will get delayed. It’s frustrating when you experience that the people you are
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working with cannot or will not do whatever you ask them or they promise to do” Successful project 4, Namibia.
5.1.2 Governance structure
The governance structure found in the cases which are still going on or have been completed successfully, was mostly based on the local partner being responsible for the operational matters of the IJV. This does not comply with the theory found which stated that when you cannot entirely trust the other partner to not behave opportunistically and you are not able to control this process very well, you should consider to implement a board (Lopez-Perez & Rodrigues-Ariza, 2013).
In the next quote from one of the interviews, was explained how their governance structure did not satisfy the need of the Dutch partner to be in control. In this case it is very clear that there was room for the local partner to behave opportunistically. The solution for the Dutch partner was demanding a bigger share in the IJV. This will be further analyzed in the ‘ownership’ section.
“We are the technical partner of the venture. But the operational part and daily management was completely their task. This distribution relies a lot on trust. We get paid by royalties. We deliver the breeding chickens (partner animals) to them and for every chicken produced (the child animals) by these breeding chickens we get paid. But we have to trust the numbers they present us about the numbers of the hatched animals. If they want they can cheat with these numbers. At the end of this month were visiting the local partner and we want to discuss the option for a bigger share in the ownership so we can monitor the administration of produced chickens better” Successful project 2, South-Africa.
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Within all the successful cases, the partners met only a few times per year, ranging from 1 to 5 times a year. La Porta et. al. (2000) found that continuously meeting with the partner is required for performance within a strategic alliance. Considering that the Dutch partners had difficulties finding a right method for controlling the IJV and for receiving meaningful and correct information, it is interesting to see that the companies still did not opt for a board or more regular meetings. The importance of meaningful communication is stressed though:
“For these kind of issues it is really important you have regular meetings with your partner. Most of the times it aren’t real big issues but if you keep ignoring them it can ruin your relationship with and the trust in your partner. Communication is crucial for a business. It is the key to solution of problems. If you don’t communicate with your partner, customer, employees etc. you can never establish a flourishing business.” – Successful project 2, South Africa
5.1.3 Ownership
Ownership is perceived to be an important instrument in gaining control. It is even argued that having a share in a collaboration of lower than 20% results in almost no influence (FASB, 1999). Dhanaraj & Beamish (2004) found that with having a share of less than 20% in the venture, the chance of dissolution is likely, meaning that a 80/20 division would be far from optimal in achieving goals established by the IJV. So, how do the Dutch partners view their position in terms of ownership?
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Project: Division of ownership
Successful project 1, Ghana 50/50 division of ownership. Successful project 2, South Africa
The Dutch partner now has a 5% share. Started with 10% Successful project 3, Ethiopia 50/50 division of ownership. Successful project 4, Namibia
The Dutch partner was the majority partner by owning 65% of the venture.
Successful project 5, Kenya
50% / 50% division of ownership.
Figure 2: Division of ownership: Successful projects.
Interestingly enough, the owners did not automatically link the division in ownership with the level of control, while theory clearly find that having a minority share or a majority share could influence the strategic alliance greatly. While the division in some cases was 50/50, this did not automatically mean an equal distribution in terms of governance.
“The ownership was divided 50/50. But from experience I know that when you give the local partner a piece of the management tasks it will go wrong.”– Successful project 1, Ghana.
It seems that in the eyes of the Dutch partners ownership division has mainly to do with the initial investment and the way profits are shared. Then for governance they rely mostly on a management and execution relationship.
“The operational side of the organization is his (the partner’s) task, that’s the reason why he is working over there. The financial and strategic functions were filled by our people.” - Successful project 4, Namibia
In one case there was the realization that increasing ownership could somewhat enhance the position of control by the Dutch partner. Realizing this raises the question why this Dutch
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partner agreed on having such a low (5%) share of ownership in the first place. Operationally they were dependent on each other, but to exercise more tangible control such as legal control, the 5% always was a low starting point.
“This distribution relies a lot on trust […] At the end of this month were visiting the local partner and we want to discuss the option for a bigger share in the ownership so we can monitor the administration of produced chickens better. “ – Successful project 2, South Africa.
5.1.4 Partner Selection
Within partner selection it is very important to have information at hand about potential partners and how they can contribute to the goals of the other partner. Investing in partnerships in terms of meetings and proper communications appeared to be vital within the group of successful projects.
“Every partner in every country has his own cultural background, character and personality. So every time you are doing business with a new partner you need to get aware of his characteristics and personality. You need to invest a lot of time and energy in a trustworthy relationship with every partner. You need to be patient and able to adapt to every partner and every situation. But this is the reason why I enjoy doing business with people all over the world.” - Successful project 2, South Africa
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Knowing the partner beforehand and thus knowing a lot about the way the partner will interact and behave towards a collaboration was vital to the relationship between partners within the group of successful projects.
“Yes it has been a business partner for us in the past. He lived in the Netherlands for a couple of years. So he was both familiar with the home and the host country of the joint venture. I have only been involved in the initial stage of the joint venture. With the actual implementation I haven’t been involved.” - Successful project 1, Ghana
“No, We met about 10 years ago. Then we started calling and he visited the Netherlands for acquaintance. When we found out we connected well to each other we decided to partner up. For our business it was really important to find a partner which technically educated and reliable. Nowadays we still work together with this partner. So it turned out to be a good partnership between them and us.”-Succesful project 2, South Africa
5.1.5 Commitment of resources
Resources can be committed to a project in both tangible assets as well as investments in terms of employees and knowledge. Especially interesting to this investigation is the way partner invested through the scope of relational exchange theory or RET. This RET involves investment in procedures and people and if the assumptions for transaction cost economics hold up, the investment are positively related to opportunistic behavior Lui et. al. (2009). In the projects which were successful, the resource investment in people from the local partner was higher than those of the Dutch partners. The local partners committed actual personnel ‘on the ground’ and this skewed division of employees did lead to opportunistic behavior as was predicted in theory:
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“A remarkable fact in African countries is that they all are laying in front of your door to get a job and as soon as you hire them they don’t do anything. The reason we started this project was to set up a self-fulfilling system in 2 years so these people could take care of themselves and each other without our help. But this didn’t work out. They have another mindset, they want to earn as much as possible by doing as less as possible”” - Successful project 4, Namibia.
“… the local partners always forget that that moment is just the beginning. At that moment they will lean back in their chair and put their legs on the desk because they think they have reached something. But we as Dutch partner know that on this moment the real job just get started” – Sucessful project 1, Ghana
The reason why the Dutch partner accepted the risk of opportunistic behavior of the other partner was the fact that the Dutch partners mainly committed resources in terms of management and knowledge. This exchange between management and execution was based on the assumption that by benefitting from the knowledge, the other partners would cooperate willingly.
“On each project was at least one expat [… ] The knowledge and skill are not available locally. You have to put it there.” –Successful project 5, Kenya
On actually finding the right people to work for the organization the Dutch partners were not very skeptical as they saw improvements in the way people are educated in the developing economies. They did argue that despite of this positive trend it was not always that easy to find the right person for the job.
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“The people in Ethiopia are getting higher educated, more and more people are getting an university degree, although the level of these degrees are not the same as we are used in the Netherlands. But it still is difficult to find qualified personnel. Most of our employees are trained by ourselves. But we also had some cases where we invested in a manager for training and education and once he was ready for higher jobs he left our company to work for another company or for himself” – Successful project 3, Ethiopia
“Yes that is really difficult in Africa. During the Apartheid the black people of South-Africa were kept uneducated and undeveloped by the white people and the government. The apartheid is over since 25 years but we experience its heritage every day. They don’t have the discipline and knowhow to work efficiently at our farm. The black people are getting educated and are catching up but this will take at least one more generation. We especially experience this on the technical and managerial level of the firm.” Successful project 2, South Africa
5.1.6 Management control
In this section control is understood as the extent to which a partner can monitor the other partners behavior, in order to ensure alliance goals can be met and the other partner would not act opportunistically (Yan & Gray, 2001). Next to that management control is the extent to which the partner is able to influence subunits in the organization and the JV.
At first the Dutch partners were focused on making binding contractual agreements, assuming these would be as effective as they are for instance in the Netherlands. Apparently they found that contracts were not infinitely binding to the local partners. The Dutch partners encountered a cultural difference on the view on institutional strength.
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“In the beginning we signed a lot of contracts like management contracts and supply contracts. This worked out well, they kept their appointments and we never had any problem. But after a couple of years they thought these contracts weren’t that important anymore and the tried to make their own rules” – Successful project 2 South Africa
“In Europe people will take their responsibilities. If you sign an employment contract you know you have to follow the rules of the organization. You have to be on time, you can’t leave before a specific time etc. In Africa it doesn’t work like that for these people. We experienced for example that on the day after payment 20 people didn’t show up. For us this was weird, but it also was a sign we had to deal with this in another way and have to manage it. For example paying every week” - Successful project 4, Namibia As shown in the analysis of the governance structures of the successful IJVs, the Dutch partners tended to literally keep the management control by only dealing with the local partners as operational partners.
“Yes, the managers are all originated from our own firm. That sounds quiet negative, but it is most of the time the best solution for the firm. We work a lot together with local people but that is always on lower levels. The management we keep practically entirely in our own hands. In the past we had some bad experiences with it” – Successful project 1, Ghana.
5.1.7 Termination
Makino et. al (2009) showed how the longevity of a strategic alliance can be influenced negatively by cultural differences. Also the chances of a strategic alliance to be terminated unintentionally
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was lowered by if an organization already has prior international experience, lowering the risk of liability of foreignness (Zaheer, 1995)
From the interviews conducted amongst the successful projects, there turned out to be a great amount of cultural differences. Partners from developing countries d
“The partner was very willing. And of course there are cultural differences. Kenya is full of corruption and distrust” – Successful project 5 , Kenya
“These are mostly about really simple things. We expect that everyone speaks and understands English but that isn’t the case in Namibia. In that country they speak 6 or 7 different languages and a lot of people are illiterate. There are also different tribes with which you have to deal.” – Successful project 4, Namibia.
Dutch partners in the successful projects had in some cases prior experience in developing countries, therefore lowering the liability of foreignness and thus reducing chances of the IJV to be terminated unintentionally:
“Besides this project in south-Africa we also have a project with a local partner in Burkina Faso. But this project is terribly delayed due to the riots in this country and the interim government. The country is very unstable at this moment. We want to wait until the government has put things in order before we continue. We also have a third project in eastern Congo. So the project in South-Africa wasn’t the first and only” - Successful project 2, South Africa
Cultural difference was viewed as an obstacle but it was considered a challenge and as something which is just the way it is. This coping mechanism enables the Dutch partners to find a way to engage in business abroad while facing the liability of foreignness.
The partner was very willing. And of course there are cultural differences. Kenya is full of corruption and distrust […] That is difficult, but you keep getting confronted by it. It
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is not the Netherlands. But also the Netherlands is not free of corruption .- Successful project 5, Kenya
5.2 Interrupted partnerships
Out of the 8 companies interview 3 were interrupted unintentionally. These projects were characterized by a lot of distrust and sometimes even major incidents which led to the termination of the projects.
5.2.1 Trust
For the projects which unfortunately have been interrupted, trust appeared to be a major factor in the relationship of the partners. As stated by Groot & Merchant (2004), the risks of the other partner behaving opportunistically can endanger the existence of the IJV. When asked about the trust relationship, the respondents were sometimes still frustrated about how the process turned out even when the project failed years ago.
“Today you install equipment and tomorrow it is gone. Stolen. We didn't want to take that risk. That was not our job.” - Interrupted project 2, Ghana
Trust is formed on the anticipation that the other partner is willing to act in such a way that the goals of both partners can be met through the IJV. In the interrupted cases, eventually the Dutch partners could not anticipate any more on the local partners’ intention work for performance of the IJV as a whole rather than behaving opportunistically.
“The people who came here, more or less experienced it as a trip. There was no real intention of doing business. Time was too valuable for that. I strongly object when government money is wasted” Interrupted project 2, Ghana.
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“Mainly a general feeling. It think it was a realistic feeling though. I had an advisor who warned me for waste of time several times, which led me to quit the project. Maybe in hindsight we could have done things differently. Getting things clearer. A little more fine tuning. Based on feelings we haven't done anything now. Maybe that was wrong, maybe not. I am relaxed because of the decision. I would want the project to go all wrong with chances of fights. When I work together with someone. I don't want to fight. When it doesn’t work it simply doesn't work” – Interrupted project 1, Ghana
5.2.2 Governance structure
When there a chances of the other partner to behave opportunistically, it could be beneficial to opt for installing a board to run the IJV. This board can act more objective to ensure both partners’ objectives can be met (Lopez-Perez & Rodrigues-Ariza, 2013).
“One of the government agencies had equipment provided by multiple parties. It didn’t work and then everyone is pointing at each other. So arriving at the scene you say: Guys, there has to be a project manager, we have to do this, we have to do that. And that's when you construct the entire team. Next you call for a meeting stating the problem and possible ways to address the problem. In the beginning they actually shout and talk a lot. Then you show that it is a problem to the client and that it has to be fixed. Everyone is part of the problem. People then get closer and that was very nice to see.– Interrupted project 1, Ghana.
Although the management skills of this particular project leader seem very good, in this project this was an ‘ad-hoc’ solution for a particular problem and a solution deduced from structural governance The manager was personally involved in the project for a great deal as he stayed in Ghana for a few months to start the operation. There was no intention of creating a shared board to enhance these kinds of processes the individual, in this case, addressed personally.
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In the second failed project the Dutch partner was supposed to be entirely responsible for running the project, while the daily operation was planned to do by local employees.
“In the end the ownership would go to us entirely and we would have gotten paid 100%. But, we were responsible for three years for the functioning of the process and this was a little too risky [...] We don't have offices in Ghana, but still through the JV we would have been responsible for something we were not able to control ourselves. ” – Interrupted project 2, Ghana.
In this example the interviewee admits that their system of controlling operations was not optimal, but still the company did not consider employing own personnel ‘on the ground’ in Africa. Also construction in between of the two companies was never considered an option.
5.2.3 Ownership
Project: Division of ownership:
Interrupted project 1, Ghana Minority share owned by the
Dutch partner of 30%
Interrupted project 2, Ghana 50/50 division of ownership at point of investment, growing towards full (100%) ownership
Interrupted project 3, Zambia
50/50 division of ownership
Figure 3: Division of ownership: Interrupted projects.
As found in theory, ownership can be important to how risk and control over processes develops (Dhanaraj & Beamish, 2004). Even though the Interrupted project 1 had 30 percent of ownership, implying influence to at least some extent according to theory, the majority- partner felt like he could make the decisions. For the Dutch partner this was an aspect which was critical to the failing project.
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“The partner had the majority of the JV. He had 70%, we had 30%. That was one of the reasons which could 'make or break' the JV. He didn't really see it as two parties working together, but more as an employer - employee relationship… He actually wanted to manage the company for 100%. That was no option. That is partly where the cooperation failed. He wanted all privileges and to do all the hiring of people. We had a certain goal and that didn't work. The whole management would be Indian and all the people on the floor Ghanese. The goal was a Ghanese organisation in which he and we were working together. He had difficulties with that” - Interrupted project 1, Ghana.
Even after receiving a 50 percent investment by the Dutch government after which the Dutch partner would proceed towards a full ownership, the company still felt too much risk was involved.
“In the end the ownership would go to us entirely and we would have gotten paid 100%. But, we were responsible for three years for the functioning of the process and this was a little too risky” Interrupted project 2, Ghana
Amongst the tree interrupted cases there are no clear comparable negative influences from the division of ownership. The company operating in Ghana operating with a minority share complaint about opportunistic tendencies from the other partner. The company operating on a 50/50 division was afraid of bearing the risks, whereas the company operating on a 50/50 division in Zambia did not feel any hesitations about the way ownership was divided. Therefore based on what is stated, there are no clear indications on how ownership has influenced these interrupted projects.
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Partner selection within the failed projects did not happen as is described in theory. All 3 firms did not know the partner at all: the partner was proposed by the Dutch government, introduced by a consultant of the PSI program and in the third case the partner was introduced within the network of the Dutch entity.
“No, the company was brought to us by the Ministry of Foreign Affairs, they came to me. We analyzed that and had meetings with those people. Only the execution of the project didn't go as we would have wanted, considering it is a different country, different culture. No for us it was a situation which was not workable” – Interrupted project 2, Ghana.
“The shortcoming was that I saw thinghs too lightly, too easy, without really checking the partner. But doing so isn't an easy thing in a developing country. To get information about a partner” – Interrupted project 3, Zambia
All three respondents were not specifically positive about the process of partner selection and not one of them had access to comparison information about other potential partners. From theory we learned that this is essential in selecting a partner for a strategic collaboration.
“That was one of the reasons that in the end we quit the program. A business relation in Ghana of mine introduced us to the partner. That worked and went well. But we encountered soon some things which were unfavorable to us.” – Interrupted project 1, Ghana
The selection of a partner has to be considered as an important and well-planned management activity. Interestingly enough, none of these projects seem to have had a well-planned approach towards selecting an appropriate partner.
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“I found out in a late stage, that a part of his business was financed. Because of that he had interest issues of 24%. The return on the company then had to be really high, only to pay the interest” Interrupted project 3, Zambia
The last quote exemplifies how hard it was for the Dutch partner to know whether the other partner was suitable or not.
5.2.5 Commitment of resources
Resources were allocated and committed in the interrupted projects. Investing in people by hiring the right people was not necessarily a problem for these companies. The company operating in Zambia even appeared to have been very flexible towards employing own staff in the local region, before on a later point in time handing this process over to the local partner.
“… it didn't seem as a problem to me because the local partner was able to find people for the sales activities. That was no problem since there is a high unemployment rate. For starting and building the project we wanted to use our own people. That also would not have been a problem” - Interrupted project 3, Zambia
Finding employees to work within the joint venture did not cause any problems for the Dutch partners:
“To us, it was no problem since our targets were about coaching the employees working at our clients. Either that or trying to buy away the employees and hire them back to the clients. So everything would be in cooperation with the organisation. That would turn out allright. We knew which people to look for. We would target people graduated from university” – Interrupted project 1, Ghana
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In the interrupted project there were differences in approaching how control would be exercised within the organization. The company in Ghana opted for physical presence in the form of an expatriate to exercise control in line with agency theory (Yan & Gray, 2001):
“Yes that was our intention. We as a company wanted to transfer knowledge so we wanted to supply all the technical assistence. You need physical presence for coaching and training. You need to see how it works in the country itself. What kind of people are there, who are the potential clients? So it was our intention to work closely together” Interrupted project 1, Ghana
Chi (1996) argued that when there is no possibility to monitor or verify the partner’s performance, chances are that that very partner will behave opportunistically, as did occur in Ghana where the local partner appeared to be more interested in selling validations for the road safety of a car, rather than actually checking whether a car was safe enough to be on the road in Ghana.
“Well, we only deliver equipment and assist with maintenance and calibration of this equipment. We are no operators that manage the entire process. We know how to do it, we see it with a lot of our clients, and we do advise, but we do not control these processes. Our possibilities to enforce certain aspects are in that way limited.” – Interrupted project 2, Ghana.
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According to Makino et. al. (2009) alliances can end unintentionally when event occur which were not anticipated for. These events can have roots in cultural differences, making it hard for partner to bring the whole project to completion.
In Ghana, the company of project 2 was faced with a very difficult situation in which the local partnerhad no intentions at all to behave in such a way that the goals of the IJ could be met. The goal of this partnership was to enhance road safety and the local partner behaved very opportunistically, by being open to corruption when handing out safety qualifications:
“In those countries people do test their cars, but that usually ends up in buying a certificate at the street corner without even looking at your car. So there are a lot of cars driving around which are not safe technically. At one point these people did want to have the modern equipment, but they still wanted the operational freedom to hand out a certificate when a car didn't meet the requirements. That is not how it works with our system. Our system is a automatic system with tracking, so we exactly know at what time what kind of car is being handled through our equipment. In that systmen we have certain parameters. If the cars do not meet those, then it is a fail, we don't give out a pass. We saw in advance that it would be nothing but trouble and then you will reach the point, as a decent company, to decide to let others have a go at it. We don't do this anymore” Interrupted project 2, Ghana.
The other project in Ghana did not report any actual accidents, there was rather a feeling that the local partner did not intend
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“The people who came here, more or less experienced it as a trip. There was no real intention of doing business. Time was too valuable for that. I strongly object when government money is wasted” Interrupted project 2, Ghana.
A shocking finding within this research is that the project in Zambia was terminated by fear for the local authorities. Fear not based on institutional boundaries or challenges, but actual personal, physical fear. This event occurred after which the project was terminated immediately. However horrifying, it is interesting to notice that when a unanticipated event like this occurs, the termination of the strategic alliance is imminent.
“There was a local governor who wanted to take over the banana plantation. He was not willing to pay for that. That ended up being a conflict. […] Well, when the local governor is already against you, you cannot expect them to help you. I didn't feel the need to get imprisoned myself as well […] ‘they’ beat up the partner and after that locked him away. It may be that he is still in jail. I don't know.” – Interrupted project 3, Zambia.
Upon asked how the Dutch partner viewed integrity in the country of Zambia he responded: “On a scale from 1-10 they are at a 9,5. I never experienced countries in which it was this intense” Interrupted project 3, Zambia.
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6. Discussion
This qualitative research provides insights in the difference between the successful and the interrupted projects. The research question was the following:
Are there differences between failed and successful Dutch SME IJVs in terms of trust and control in a developing economy?
To provide an answer to this question it is necessary to compare the data found in context to each subtheme provide in both literature review and the results section.
In terms of trust both successful and interrupted projects showed very low levels of trust towards the partner they were collaborating with. The only difference between the projects was the way successful projects coped with these trust issues. In these situations trust was considered as low, but it did not keep the Dutch partner from investing time and resources into the project.
The governance structure was in all the cases without a specific board of the IJV, which is interesting to notice since trust levels were low in all the cases. This is a very interesting finding considering that Lopez-Perez & Rodrigues-Ariza (2013) mentioned in their research that within strategic alliances with low levels of trust usually a board is installed to cope with the difficulties of opportunism within the alliance. While looking for difference between the successful and failed projects, a similarity arose: the importance of communication is crucial to establish a good relationship between partners. In the aspect of governance structures there were no mentionable differences found.
Ownership within the IJV was too diverse within each group to be able to state whether this was of any influence on the longevity of the projects. Both groups had 50/50 situations implying a great deal of influence, but with both success and failure as outcome. As already stated in the
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findings section, within the group of failed projects the Dutch partners did not seem to feel like that was important to the success of their operation.
For partner selection however their appears to be a difference. The successful projects in all the cases knew their partners beforehand, either through previous relations or by knowing the partner from the field. This resulted in situations in which the Dutch partners could easily assess whether the partner would be a potentially good venture-partner. Within failed projects however, the partners were all introduced by third parties, very close to the actual start of the collaboration. It was even stated that there was not done enough research prior to the collaboration since finding such information is hard in developing economies.
The commitment of resources across both groups and all the cases were quite similar. The local partner were operationally focused while the Dutch partners were mainly focused on managing the IJV. Finding employees however was interpreted differently between both groups. Where the failed projects assessed finding people as ‘easy’, the successful projects were a little more skeptical. They found that the people working for the IJVs quickly behave opportunistically and they found difficulties in finding employees with the right education due to cultural backgrounds. It seemed that these successful cases were a little more cautious towards investments in people.
Management control is an interesting subtheme as the shared characteristic amongst the successful cases was that the Dutch partners mainly got involved through management activities without using agents or boards to guide these processes. They started of mostly with contractual binding agreement, seeking for legal safety and security. The cases which failed, were not able to control their organizations very well, although this had three different reasons: Corruption, dangerous local authorities and a minority share of ownership.
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Whether the projects were terminated or have a high level of longevity is mostly dependent cultural differences and unanticipated events. The successful cases showed a good understanding of cultural differences and acceptance of its existence. Within the terminated cases, two projects showed signs of severe events or incidents (theft of equipment and dangerous situation caused by local authorities) which made it inevitable for the Dutch partners to stop with the project. The presence of such events make it very hard to compare the perceived cultural difference between the successful cases and the failed cases. It did however support the theory of Makino et. al. (2009) that unanticipated events can influence the longevity of a strategic alliance.
Overall, it has not appeared easy to point out major differences between the successful and failed projects. It is therefore very difficult to provide managerial implications since the failed projects were so highly affected by the mentioned events. It can be argued though that investing time and resources to find an appropriate partners is very important for an strategic alliance to succeed, as all the successful cases shown signs of good prior relations with the local partner, whereas the failed cases showed signs of poor partner investigation. Next to partner selection, it seems important to have a good understanding or coping-mechanism towards cultural differences. This characteristic was shared widely amongst partners within the successful projects.
For future research I suggest to support these qualitative findings with statistical data to found more evidence for the differences described above as Dutch SMEs operating in developing economies have been poorly investigated.
Drawbacks of this research were the following: The events which transpired within the group of failed projects make it very hard to assess what the main drivers are for performance and longevity of a strategic alliance. Also only the Dutch partners were interviewed which could
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have made the views on cultural differences biased. For the same reason, the findings on how local partners are perceived to be able to meet promises and requirements can be biased.
7. Conclusion
In this paper Dutch SME IJVs operating in developing economies have been investigated. Both successful and failed projects were investigated to find differences amongst them explaining why some projects fail and some do not. A qualitative research was conducted in order to find information rich data provided by people who were actually engaged in these projects rather than using pure statistics.
This paper contributes to the existing literature by showing how trust and control themes are experienced by organizations involved in these situations. The behavior of Dutch SMEs in a developing economy environment is poorly investigated in academic literature and this paper might be a tiny step in providing other SMEs the information they need to make the beautiful step toward internationalization.
