International joint ventures (IJVs), the second type of equity-based cross-border alliance dis- cussed in this chapter, have experienced tremendous growth during the last two decades and will continue to represent a major means of global expansion for MNEs.59 In emerging econ- omies such as China they represent the dominant operation mode for MNE market entry.60 According to a well-known definition by Shenkar and Zeira,61 an IJV is:
A separate legal organizational entity representing the partial holdings of two or more parent firms, in which the headquarters of at least one is located outside the country of operation of the joint venture.
This entity is subject to the joint control of its parent firms, each of which is economically and legally independent of the other.
An IJV can have two or more parent companies. Many IJVs, however, involve two parent companies. An increasing number of IJV partners leads to increasing complexity overall, including the international HR function and practices.62 For reasons of simplification we concentrate on a constellation of two partners in the following. As will be outlined later, problems will get even more complex with more than two partners. The equity division between the parent companies of the joint venture may differ. In some cases the ratio is 50:50, in others the dominance of one partner becomes more obvious with a ratio of 51:49 or through various other combinations. This, of course, has implications for the control of the IJV – an issue which will be discussed later in this chapter. Figure 4.5 depicts the formation of an IJV. In contrast to M&As, the parent companies of an IJV keep their legal identity and an additional new legal entity representing the IJV is established. Figure 4.5 also indicates the level of complexity that an IJV represents for the HRM function. For this reason, IJVs clearly represent an important field of research for IHRM scholars.63 The topics of research on IHRM in IJVs are very similar to those in M&As. In both cases, partners with different institutional, cultural, and national backgrounds come together and must balance their interests. However, in IJVs this challenge includes the following factors:
● HR must manage relations at the interfaces between IJV and the parent companies. The differ- ent partners that make up the IJV may possibly follow different sets of rules and this can lead to critical dualities64 within the HR function.
● The HR department must develop appropriate HRM practices and strategies for the IJV entity itself. HR has to recruit, develop, motivate, and retain HR at the IJV level.65
These two challenges have to be taken into consideration during the different phases of estab- lishing and managing the joint venture66 and will be described later in this chapter.
According to a literature analysis by Schuler, the main reasons for engaging in an IJV are as follows:67
● to gain knowledge and to transfer that knowledge
● host government insistence
● increased economies of scale
● to gain local knowledge
● to obtain vital raw materials
● to spread the risks (i.e. share financial risks)
● to improve competitive advantage in the face of increasing global competition
● to provide a cost-effective and efficient response required by the globalization of markets.
Special emphasis should be given to the knowledge transfer or learning objective.68 IJVs provide an excellent opportunity to learn from another company in two ways. First, each company has the chance to ‘learn the other partner’s skills’. This can include gaining know-how and process knowledge in specific functional areas such as R&D, or acquiring local knowledge about a spe- cific market or culture. Second, companies acquire working experience in co-operating with other firms. Thus, the IJV can be used as a medium for organizational learning processes as well.69
Unfortunately, there is evidence that many IJVs fail70 or do not produce the expected results.71 Some reasons for these failures can be traced back to the lack of interest in the HRM and cross-cultural management aspects of IJVs.72 These two issues will be addressed in the fol- lowing sections.
IJV development stages and HRM implications
Similar to the M&A processes discussed earlier, the development of IJVs can also be described in development stages. Schuler distinguishes four stages: the formation, in which the partnership
Parent firm A
Country A Parent firm C
Parent firm B Country B
Relational interfaces Possible additional relational interfaces
Interface HR challenge
International joint venture
Intra-IJV HR challenge
FIGURE 4.5 Formation of an international equity joint venture
between the parent companies is the center of interest, the development and implementation of the joint venture itself, and the advancement of the activities.73 It is important to note that HRM is involved in each of the IJV development stages,74 which are not independent from each other. Activities in the first stage have an impact on activities in the second stage and so on.
Furthermore, complexity can increase depending upon the number of parent companies75 and countries involved in the joint venture.76
The stages model shows that compatibility between the IJV partners is most important when it comes to mutual learning opportunities between the parent companies and the joint venture.
This aspect should be focused on from the beginning of a joint venture formation process.
As all learning processes include communication processes and are carried out by people, the management of the HR at this point is critical. This encompasses all activities of the HR func- tion including recruitment, selection, training and development, performance management, and compensation. A strategic approach requires not only a strong compatibility of the various HR activities and practices but also with the IJV strategy.77
Within the different stages of IJV formation, the HR manager may take on many roles in order to meet the challenges of interaction between the parent company and the IJV:
● In the partnership role, HR managers should take the needs of all stakeholders into account and demonstrate a thorough understanding of the business and the market.
● As a change facilitator and strategy implementer, HR managers should be able to conceptualize and implement new strategies involving trust-based communication and co-operation with rele- vant partners. This also requires the creation of a stable learning environment.78
● As an innovator, the HR manager should be able to identify talent for executing IJV strategies and adapting to changes in the IJV stages.
● As a collaborator, the HR manager’s strengths should lie in creating win-win situations character- ized by sharing rather than competing between the different entities engaged in the joint venture.79
The importance of cross-cultural management in IJVs
As outlined in the previous section on ‘the comparative approach of HR in M&As’, the national, institutional and cultural environments of a firm do indeed matter. Here we will focus on cultural issues which play an important role in IJVs.80 This information on comparative HRM as well as on cross-cultural HRM is relevant to both M&As and IJVs. In many studies, the implications of different cultural employee backgrounds coming together in an IJV have been the center of interest.
Such a case is described in the following IHRM in Action Case 4.2, which addresses the HR-related challenges of two different institutional and cultural environments working together in a common venture. This example illustrates how cultural differences matter in collaboration, decision-making, and loyalty in the German–Chinese Joint Venture of Beijing Lufthansa Center Co. Ltd.
The top management team and the role of expatriates in IJVs
As shown in IHRM in Action Case 4.2, the IJV’s top management team has a high impact on the performance of the joint venture. The team’s main task is to control the daily business operations of the IJV. The case described here is typical when the two parent firms of an IJV share equal equity division. Usually, both have the right to be equally represented in the management team, and control of the key management positions is a critical issue when negotiating an IJV contract.
Each firm tries to protect its own interests and to keep as much control as possible by staffing key positions with its own people.81 Kabst82 calls these IJV positions ‘functional gatekeepers’ – they try to protect their firm’s assets in specific functional areas such as R&D, production, or marketing.
IHRM in Action Case 4.2
Collaboration, decision-making, and loyalty in a German–Chinese joint venture: Beijing Lufthansa Center Co. Ltd.
The joint venture
In 1978 the People’s Republic of China opened its frontiers for foreign investors; the need for modern hotels, apartments and office space that could meet Western requirements became obvious. Deutsche Lufthansa AG, together with the government of the city of Beijing, decided to establish a multifunctional service center to provide a logistics base for international business travellers for whom China was an unknown territory at that time. The joint venture contract was signed in 1986 and in May 1992 the Beijing Lufthansa Center Co. Ltd. was opened as one of the largest Chinese–German ventures.
Requirements for the selection of the management team
According to the legal requirements for joint ventures in China, the management team of a joint venture was required to have equal representation of both parties. For the selection of the German members their technical abilities, industry experience, and management know-how were of major importance to ensure acceptance by their Chinese counterparts. Furthermore, an understanding of Chinese culture, combined with the ability to ac- cept and cope with Chinese decision-making structures and lifestyle were important in creating an environment of co-operation and learning. Learning opportunities were a major motivation for the Chinese decision to work in a joint venture.
Another important aspect was language. As many older Chinese were not able to speak English at that time, there was often a need for a translator. All documents had to be translated into either English or Chinese. For all important meetings there were translators. German managers took into account that this was time-consuming and not all information might have been transferred. Consequently, it would be useful for the co-operation and the atmosphere within the joint venture if the Germans also had some Chinese language capabilities.
The German management team members were told that if they were able to influence the selection of their Chinese counterparts they needed to understand that status and important contacts, as well as informal relation- ships within the administration and government played an important role in ensuring an important contribution to the joint venture’s success.
Collaboration
Although all parties should have a common interest in the success of a joint venture, different perspectives on specific topics can lead to conflict. This can have an impact on factors such as the choice of suppliers (foreign vs.
Chinese instead of quality considerations) or the use of company cars as important status symbols. The use of foreign consultants was favored by the Germans for quality reasons, while the Chinese voted for local consultants for cost reasons. The same was true for discussions concerning the need of expatriates. Chinese managers tried to avoid expensive expatriates while their German counterparts were convinced that they needed people with specific qualifications, which, according to them, could only be provided by expatriates. Again, the negotiations about these issues were very time-consuming.
With respect to decision-making, the joint venture contract stated that the general manager was responsible for daily business and would be supported by a Chinese deputy. These requirementss ensured that the Chinese legal and cultural environment was sufficiently respected in the decision-making processes. However, in practice this meant that the general manager could not decide anything without the support of the Chinese deputy, and decision processes became slow and complicated. This led to a change in the decision-making relationship (Continued)
Due to the fact that the parent companies compete for these key management positions, the top management team is usually composed of individuals from different cultural contexts. As in all mul- ticultural teams, diversity may provide opportunities, but the individuals may also have problems working effectively together. The critical challenge for a multicultural team heading an IJV is not only that it has to deal with different cultural expectations, but that it also has to balance the vari- ous management styles and strategic objectives of the different parent firms. Li et al.83 point out that identification with both the IJV and the parent firm can lead to significant role conflicts and divided loyalty for IJV managers. In the Beijing Lufthansa case study, an exaggerated identification with the parent firm could have influenced communication and decision-making processes in the multicul- tural team, leading to lower commitment and, consequently, to problems in decision-making and unsatisfactory results. To avoid intercultural conflicts, companies often recruit country experts from outside the company rather than repositioning internal technical experts.
To address these problems and to increase IJV performance, Li et al. suggest taking explicit measures for improving organizational identity and identification at the IJV level.84 In his study on the retention of experienced managers in IJVs in China, Li85 notes the involvement of these managers in strategic decision-making processes and intensive social integration measures as the most important measures for reducing turnover of high potentials in IJVs. However, the effectiveness of these measures decreased with an increase in shares of the foreign partner.
INTERNATIONAL SMEs86
SMEs: Strategic importance and barriers to internationalization
The role of SMEs is often not discussed in the international management literature. SMEs can be defined using headcount, annual turnover, or the annual balance sheet total. Table 4.1 out- lines the definition of a SME developed by the European Commission. It is important to note that there is no commonly accepted definition of a SME, and criteria and limits differ. The between the general manager and the deputy, which gave more power to the deputy and ensured that the general manager could only take a limited number of decisions without the deputy.
Loyalty
In many situations, strong loyalty to the parent company presented a problem because the managers did not put the common project at the center of interest. For example, it was reported that the Chinese managers didn’t want to take decisions without consulting their parent firm, which again led to very slow decision processes. Here, the high degree of power distance and uncertainty avoidance of the Chinese partners may have influenced this behavior. However, this approach endangers loyalty to the joint venture and discourages local employees and managers from both sides. Another issue which led to difficulties involved the way in which expatriate managers viewed their jobs in the joint venture. For them, their positions were often just another step in their careers which could possibly lead to a higher position after the assignment. In this case, loyalty to the parent company was higher than loyalty to the joint venture.
Source: Based on H. J. Probst ‘Human Resources in a German-Chinese Joint Venture – Experiences from the Beijing Lufthansa Center Co. Ltd’, published in German language as H. J. Probst ‘Human Resources in einem deutsch-chinesischen Joint Venture: Praxiserfahrungen am Beispiel der Beijing Lufthansa Center Co. Ltd.’, Duisburger Papiere zur Ostasienwirtschaft, Vol. 22 (1995), pp. 1–44. Reproduced with permission.
(Continued)
It is often forgotten that SMEs play an important role in the world economy, as shown by the following figures:
● In the European Economic Area (EEA) and Switzerland there are more than 16 million enterprises.
Less than 1 per cent are large enterprises; the rest are SMEs. Two-thirds of all jobs in this region are in SMEs, while one-third of all jobs are provided by large enterprises.88 In many countries the percentage of employees working for enterprises with fewer than 20 employees amounts to more than 80 per cent.89
● SMEs constitute the backbone of the Asia-Pacific region, accounting for 90 per cent of enter- prises, between 32 and 48 per cent of employment and between 80 and 60 per cent of gross domestic product in individual Asia-Pacific economies.90
● In the USA more than 80 per cent of total employment is with organizations with fewer than 20 employees.91
The strong position of SMEs in their national economies is not reflected to the same extent in the international business environment.92 When internationalizing their operations, SMEs experience different challenges than large organizations. They have less experience with environmental contexts in different countries, less power to withstand the demand of host governments, less reputation, and fewer financial resources, as well as fewer resources for managing international operations.93 The top ten barriers to access to international markets as identified by an Organisation for Economic Co-operation and Development (OECD) survey on 978 SMEs worldwide include the following:
1 shortage of working capital to finance exports 2 identifying foreign business opportunities 3 limited information to locate/analyze markets 4 inability to contact potential overseas customers 5 obtaining reliable foreign representation
6 lack of managerial time to deal with internationalization
7 inadequate quantity of and/or untrained personnel for internationalization 8 difficulty in managing competitor’s prices
9 lack of home government assistance/incentives 10 excessive transportation/insurance costs.94
In many countries such as Singapore, Korea, and South Africa, and in the European Union (EU), SME internationalization is promoted by policies of their home countries. As the World Investment Report95 suggests:
Policymakers need to support entrepreneurship and foster the creation of start-up MNes, especially
TABLE 4.1 SME definition
Enterprise category Headcount Annual turnover Annual balance sheet total Medium-sized < 250 < € 50 million < € 43 million
Small < 50 < € 10 million < € 10 million
Source: European Commission (ed.) The New SMe Definition. User Guide and Model Declaration (Brussels: European Commission, 2005), p. 14. Reproduced with permission.
of entrepreneurial talents and start-up candidates through the promotion of new industries and the creation of ‘seed companies‘. Spin-offs from public research institutes or from leading universities may also be encouraged, backed by relevant financial institutions.
IHRM features in SMEs
Much of our knowledge generated in the area of IHRM applies to large organizations.96 While there is evidence that some recruitment or compensation practices are applicable to small organizations as well, the management of people in small organizations often differs from practices and strategies of established large organizations.97 Although our understanding of IHRM in SMEs is still limited, there are some key points which we outline in this section of the chapter.
The importance of the founder/owner. Internationalization process theory, which is derived from the behavioral model of uncertainty avoidance,98 suggests that specific features of the owner or founder of an SME have an impact on the internationalization process of this particular enterprise.99 The ‘experiential market knowledge’ of the managers is assumed to have a direct impact on the choice of foreign markets and thus, the internationalization process of the SME. This theoretical approach predicts that managers start the internationalization pro- cess in geographically and culturally close markets and that with increasing experience they move towards more distant markets. Consequently, in a globalizing SME, the top managers responsible for internationalization decisions should have sufficient international background and experience to be able to take informed decisions.
Research on global start-ups or ‘born globals’,100 which are characterized by an emphasis on international orientation and growth from inception, has confirmed that:101 “the founders of international new ventures are more ‘alert’ to the possibilities of combining resources from different national markets because of the competencies they developed from their earlier activ- ities”.102 Manolova et al. report that person-related factors such as international experiences/
skills, international orientation, environmental perceptions and demographic factors such as age, education and tenure had systematic effects on the internationalization of small firms.
Summarizing the results of their own study they state:103
we expected that owners/founders who had international work experience, or established person- al networks and relationships abroad would possess the skills necessary to conduct international business arrangements. Consistent with this, owners/founders or managers who have more positive perceptions of the international environment will also be more likely to internationalize their own small businesses.
Recruitment, selection and retention. The above-mentioned barriers to SME interna- tionalization included a scarcity of qualified international managers. Small firms may have more difficulties than large firms in recruiting adequate international managers.104 It has been argued that many less-qualified employees are employed by SMEs because they do not meet the recruitment requirements of large organizations and are forced to work for SMEs as their second choice. As one interviewee in the study by MacMahon and Murphy105 stated:
“You get these big multinationals who cream off the top graduates and production opera- tives which leaves a small business very vulnerable in terms of the quality and availability of labor”. Indeed, recruitment, selection, and staffing have been shown to be problematic for SMEs because these firms are perceived to lack legitimacy as employers with a strong inter- national orientation.106
Kühlmann107 has analyzed the image of SMEs as employers in the external labor market in Germany. He found that image advantages of SMEs as compared to large organizations