The Decline of Emerging

Economy Joint Ventures:

THE CASE OF INDIA
Prashant Kale
Jaideep Anand
I
n the last few years, multinational corporations (MNCs) have become
increasingly interested in pursuing business opportunities in emerging
economies such as China, I ndia, Latin America, and Eastern and Central
Europe. This is hardly surprising, since these countries present a huge
potential market for their products and services. Further, the regulatory liberal-
ization of the business environment in many of these countries since the early
1990s has made it easier and even more attractive for MNCs to participate in
these economies.
Traditionally, MNCs have relied on joint ventures (JVs) with local com-
panies to enter emerging economies and exploit the opportunities they present.
Until the late 1990s, JVs accounted for over 60% of the foreign direct invest-
ment in these markets.^ However, there has recently been a marked reduction
in the formation of new JVs, while many existing JVs are being terminated with
increasing frequency." Further, several of these terminations have been rather
acrimonious, generating a lot of heated debate and publicity in the business
press. I f JVs have traditionally been an important means for conducting business
for both MNCs and local players in emerging economies, what explains their
changing role?
I ndia is one of the world's largest emerging economies, and it is soon
expected to grow into one of the largest economies in the world.-* I t is not only a
provider of low-cost, high-quality services in a variety of industries, hut it is also
a potentially large market for companies around the world. JVs have been an
The authors would like to thank the Mack Center for Technology and Innovation at the University of
Pennsylvania and the Center for International Business Education and Research at Ohio State Univer-
sity for providing research support.
62 CALIFORNIA MANAGEMENT REVIEW VOL48, NC"
^,..^., y joint Ventures: The Case of India
EXHI BI T I . Trends in JV Fornnation and Termination in India
Formation of New JVs
Break-Up of Existing JVs
200
180
160
140
120
100
80
60
40
20
0
\
992 1993 1994 1995 1996 1997 1998 1999 2000 200 1 2002
important part of the Indian business landscape and have witnessed many of
these new trends (see Exhibit 1).
In emerging economies, the regulatory environment plays a very impor-
tant role in infiuencing the formation, contintiation, or termination of JVs in
the country. Regulatory restrictions typically mandated JVs in most emerging
economies until the early to mid-1990s. However, subsequent regulatory liberal-
ization of the business environment in India, especially regarding the norms
guiding foreign entry and investment in the country, adversely affeaed the
survival of existing JVs as well as the formation of new ones.
Three factors also play an important role in influencing these JVs.
"Resource complementarity" between partners has been an important driver of
JVs. Meanwhile, both the "race to learn" between the MNC and local partner
and the MNC's increasing "returns to global integration" of its value chain can
have a potentially adverse impact on new or existing JVs.
Regulatory Restrictions and Liberalization
In emerging economies, the extent to which the regulatory business
environment is restricted or liberalized plays an important role in influencing
the formation, continuation, or survival of JVs. As in other emerging economies,
the regulatory environment in India has evolved over time. It is useful to under-
stand its evolution in terms of three periods: the "Pre-Liberalization" period
")L^8,NO.3 SPRING 2006 63
The Decline of Emerging Economy Joint Ventures:
(before mid-1991), the "Initial Liberalization" period (1991-1992 to 1996-1997),
and the "Ongoing Liberalization" period (1997 and onwar d) /
Regulatory Restrictions in the Pre-liberalization Period:
A Driver of JV Formation
Until the early 1990s, India, like many other emerging economies, placed
many regulatory restrictions on foreign companies' entry and investment. These
restrictions were politically or economically motivated. The colonial past of
emerging economies such as India or Indonesia led to a general suspicion of
foreign companies. In countries such as China or the Soviet Union, the commu-
nist regimes discouraged the entry of MNCs from the capitalist West. From an
economic standpoint, such regulations ostensibly protected the small or under-
developed companies in these countries from foreign competition. In many
cases, regulatory restrictions existed at the national level. Foreign entry was
prohibited almost completely in sensitive industries such as defense, airlines,
and telecommunications; whereas partial entry was allowed in sectors such as
consumer goods, industriai products, chemicals, and Pharmaceuticals. Foreign
firms could enter only through joint ventures with local companies and were
not allowed to have majority equity control in these ventures. Restrictions were
also placed on repatriation of profits and employment of expatriates.
This time of regulatory restrictions is generally referred to as the "pre-
liberalization" period. In India, this environment prevailed until mid-1991.
MNCs entering India during this period were mandated to form JVs with local
^ ^ ^ ^ -:-^ rr: players.^ Before 1991, large multinationals
Prashant Kale is an Assistant Professor of (such as Honda, Ford, GE, Honeywell, IBM,
Corporate Strategy and International Business at a^d Cummins Engine) entered the Indian
the Stephen M. Ross School of Business, i , r . - . , , ,
University of Michigan and a Faculty Associate at "^^^^^^ ^V for mmg j omt ve nt ur e s wi t h local
the W\\\\am Davidson Institute of the University of busi ness gr oups ( such as Tatas, Mahi ndr as ,
Michigan. Godrej , and Ki rl oskars). In s uch cases, local
Jaideep Anand is a an Associate Professor of partners provided two main benefits to
Corporate Strategy and International Business at MNCs. First and foremost, they helped
the Fisher College of Business, Ohio State , . . , . ^^ ,
University, and a Research Fellow and Faculty ^^eir MNC partner meet the regulatory
Associate at the William Davidson Institute, restrictions and they provided the relevant
University of Michigan. <anand.i8@osu.edu> regulatory know-how necessary to run a
business in India. Second, by partnering
with local players, MNCs also overcame the liability of their foreign presence
and image through their partners' skills in managing important bureaucratic
and governmental constituents. Through the use of JVs, MNCs were thus able
to establish a broader political legitimacy in emerging economies.
Initial Regulatory Liberalization:
A ''Mixed" Impact on JV Formation and Continuation
Since the late eighties and early nineties, many emerging economies
including Indiabegan liberalizing their business environment. The liberaliza-
tion process was driven not only by political and social changes in the world, but
64 UNIVERSITY OF CALIFORNIA, BERKELEY VOL 48,'
y Joint Ventures: The Case of India
also by economic imperatives and pressure from institutions such as the IMF and
World Bank. In many cases, liberalization was initiated rather suddenly or dis-
continuously, and then continued to evolve gradually thereafter. In India's case,
liberalization was initiated in mid-1991 and entailed the removal or dilution of
restrictions on foreign companies' entry, investment, and expansion in India's
markets. The period following the initiation of these reforms is termed the "post-
liberalization period."^
In emerging economies, liberalization in the business environment
mainly consists of emphasizing economic considerations over political ones.
However, given the evolving nature of the liberalization process, the effects are
not entirely straightforward. In India, regulatory restrictions on foreign entry
and ownership did not immediately disappear in the post-liberalization period.
In the initial years of liberalization, MNCs were permitted to enter a wider range
of industries and sectors than before. They could also have a majority stake in
their ventures in most sectors, but they were still required to have a local part-
ner. This had two implications for JVs.
First, there was a significant increase in the formation of new JVs
between MNCs and local companies. From the perspective of a local company,
liberalization meant greater competition from foreign and local players alike.
Thus many local players felt that JVs with MNCs not only bolstered their own
competitive position, but also enabled them to co-opt potential competition in
their market.
The JV between Procter & Gamble (P&G) and Godrej Soaps in India is a
good example of such an occurrence. Procter & Gamble formed a 51 %/49% JV
with Godrej Soaps in 1993 to enter the large soap and detergent market in India.
P&G was able to meet the regulatory norms of entering an attractive industry
through a joint venture that it controlled. For a local company like Godrej, the
JV was an opportunity to co-opt a global leader like P&G instead of competing
with it in the marketplace, as well as to pre-empt another Indian company from
forming a JV wilh P&G. Similar trends occurred in many other industries in
India.
For local firms, however, MNCs were now seen as striving to increase
their control over existing JVs, both in terms of their equity stake and presence
on JV Boards. Since MNCs generally contributed critical resources to the JV
(such as technology, global brands, or management know-how) and they had
larger financial resources than their local counterpart, they were in a strong
bargaining position to secure greater control over the JV. Clearly the local part-
ner was important, given that regulations still required their presence. However,
relaxation of foreign entry and ownership restrictions made it difficult for local
partners to retain equal or majority control.
Not surprisingly, many emerging-economy JVs formed in the pre-liberal-
ization period experienced major changes in governance and structure. In the
Kinetic-Honda JV, for example, the MNC partner increased its equity stake and
management control at the cost of its local partner. Our survey of other JVs
between MNCs and local Indian companies shows that such changes in control
OL 48. NO.3 SPRING 2006 65
The Decline of Emerging Economy Joint Ventures:
EXHI BI T 2. Nature of Changes in Existing JVs after Liberalization
Greater Involvement
of MNC Partnenn
Driving JV Strategy
Greater operational
control of the MNC
partner over the JV
Replacement of
Local CEO by
Expat CEO
Increase in Board
Representation of
the MNC Partner
Increase in Equity
Stake by the MNC
Partner
0% 10% 30% 40% 50% 60% 70% 80% 90% 100%
occurred in more than 70% of the ventures. Exhibit 2 highlights the proportion
of existing JVs that underwent change on a number of important dimensions
during the post-liberalization period. (The Appendix provides a brief description
of the survey-based study used to collect and analyze this information)
Ongoing ""Regulatory Liberalization'":
Adverse Impact on Emerging Economy JVs?
In many emerging economies, once regulatory liberalization gets initiated,
it continues with further relaxation of norms for foreign entry and ownership.
In India, as liberalization evolved, foreign companies were allowed to have fully
owned and controlled entities in an increasing number of industries from 1996
onward, and they were not required to have local companies as partners in their
ventures. Expectedly, this change in regulations has had an adverse impact on
the formation of new JVs. In situations where a local partner's main contribu-
tion traditionally had been to help MNCs meet regulatory restrictions on foreign
entry or ownership, MNCs now had little incentive to form JVs.
The implications of further liberalization of the regulatory environment
for existing JVs can be even more severe. MNCs may seek greater or even com-
plete control over their existing JVs, especially in situations where the local part-
ner's main contribution was limited to helping the MNC partner meet market
entry regulations. As a result, the local partner may concede control to the for-
eign partner and possibly even exit the JV. Alternately, the local partner may
refuse to concede control and the JV will experience a lot of instability and
66
UNIVERSITY OF CALIFORNIA. BERKELEY VOL 48, \ *'
emerging ccofiurny Joint Ventures: The Case of India
turbulence as the partners fight for control. In this case, the foreign partner may
either decide to exit the JV (instead of asking the local partner to do so) and
operate independently, or it can continue to remain in the JV and still operate
independently. Either way, the JV will suffer adverse consequences, since if the
foreign partner's independent operation will be in direct competition with the
venture, usually leading to the partners eventually dissolving their relationship.
In India, examples of these situations have been plentiful. Once regula-
tory restrictions on foreign ownership were eased, JVs such as Tata-IBM, Tata-
Timken, and Tata-Honeywell were terminated, with the local partner ceding full
control to the MNC player. In the case of P&G-Godrej, P&-G continued its exist-
ing JV with Godrej, but it also set up a separate, fully owned subsidiary to pur-
sue its future independent expansion in India in the soap and detergent
business. This eventually led to an acrimonious termination of the P&G-Godrej
JV, with P&-G acquiring full control of it. In yet another case, when local partners
in the motorcycle industry refused to cede greater control to Suzuki and Honda
in their respective JVs, both MNCs exited their ventures and set up fully owned
operations to compete with their earlier partners in the Indian market.
However, is termination of existing JVs undesirable? Not if both partners
have already met their initial JV objectives and have shared the costs and bene-
fits of terminating the JV in an equitable, if not necessarily equal manner.
Resource Complementarity:
A Rationale for JV Formation and Survival
Companies often lack all the necessary resources or capabilities for differ-
ent operations or activities across their business value chain. To remedy this,
they can form partnerships with other companies that possess the resources they
lack. When partners contribute distinct resources or capabilities, they are said to
exhibit resource complementarity. A typical example of this is when one com-
pany develops a product or technology and its partner provides the resources
or skills to market and sell that product or technology.
Resource complementarity has been one of the primary drivers for
alliances in general, including emerging economy JVs between MNCs and local
companies."^ Typically, an MNC has a wide range of resources (such as technol-
ogy, product know-how, and global brands) while local firms possess the down-
stream resources (such as sales or distribution channels, local manufacturing,
and local market knowledge) necessary to penetrate new markets. ^
The Indian joint venture between Tata Tea and NYK Shipping of Japan is
a good example of the link between regulatory liberalization and resource com-
plementarity. Tata Tea was mainly a producer and seller of bulk and packaged
tea in the country with hardly any business expertise or resources in the ship-
ping business in India or abroad. NYK Shipping partnered with them because
to do business in India they had to have a local partner. Tata Tea belonged to the
Tata Group, which was India's biggest and most respected local business group
OL 48. NO.3 SPRING 2006 67
The Decline of Eaierging Economy Joint Ventures:
with high legitimacy with the country's main business and political
organizations.
Following liberalization, the need for a local partner was clearly dimin-
ished from a pure regulatory standpoint. From a competitive standpoint, how-
ever, having a partner that provided complementary resources was still quite
useful.
A "Race to Learn":
Asymmetrical Consequences for JV Partners
Resource complementarity can become the genesis for tension and turbu-
lence between JV partners at a later stage. Each partner also has the opportunity
to "learn" the resources and skills that it lacks from its counterpart in the rela-
tionship. In essence, JVs can become de facto "learning opportunities" for compa-
nies not only to access, but also to acquire resources and capabilities of their
partner.^ The Kinetic-Honda JV in India afforded Honda an excellent opportu-
nity to access the local partner's distribution set-up in India and acquire the skills
and intricacies of various distribution-related activities in that country. Once
such learning takes place in the JV context, it reduces a company's resource-
dependence on its partner and, in turn, increases its likelihood of terminating
the relationship. When both partners view the JV as a learning opportunity, the
JV can simply degenerate into a ''race to learn" where each partner tries to out-
learn the other.
Some scholars feel that such race-to-learn alliances are similar to pris-
oner-dilemma game situations where there is a tendency for each partner to
behave opportunistically. However, there are other alliance situations where one
partner actually may have the incentive to cooperate (i.e., not act opportunisti-
cally) and make unilateral commitments to ensure the venture's continuation
and success.'*' A firm's unilateral move to commit or sacrifice something signals
its desire to not behave opportunistically, and is often reciprocated by coopera-
tion and non-opportunistic behavior by its counterpart. Ultimately, these actions
help both partners increase the size of their total and respective returns from the
alliance. It seems, however, that this latter model of alliances is more likely in
those situations where there is greater parity between partners in terms of their
relative size and contribution to the alliance. On the other hand, alliances with
one dominant partner that contributes much of the technology, brands, manu-
facturing prowess, and so forth will more likely be a prisoner-dilemma type situ-
ation. Most emerging-economy JVs between MNCs and local partners are likely
to be of this latter kind.
Our survey of 69 JVs reveals that MNCs have much greater learning capa-
bilities than their local counterparts. Exhibit 3 provides a summary comparison
of MNCs' and local partners' learning capabilities. To begin with, MNCs have
much greater intent to treat JVs as "learning opportunities." By virtue of their
extensive presence in several countries, MNCs have had much greater experi-
ence with JVs than typical local partners and, hence, better understand the
68 UNIVERSITY OF CALIFORNIA. BERKELEY VOL 48. N'
' " '6
Joint Ventures: The Case of India
E X H I B I T 3. Connparison of Learning Capability of MNC and Local Partners
MNC Partner Local Partner
Dimension of Learning Capability - Avg. Score - Avg. Score
Learning from the partner is one of the company's primary
objectives in the JV. 47 2.5
The company has clearly identified specific practices or capabilities
it wants to learn from the partner 4.3 2.1
The company has assigned specific roles and responsibilities with
respect to its learning goals.
Managers in the company are managerially and technically competent
or learn the targeted skills and know-how from the JV partner
The company regularly rotates its managers and employees between
the parent and the JV.
The company's managers assigned t o the JV regularly meet or interact
with other employees in its parent/sister company to share information
and know-how acquired from the JV or the JV partner
4.1
4.5
4.8
4.2
L7
2.8
3.1
2,4
learning opportunities that partnerships provide. By the same logic, MNCs also
are more likely to have implemented various processes that underlie learning
capability. For instance, several MNC companies we interviewed had a clear goal
to quickly acquire local sales and distribution know-how from their Indian part-
ner. To that effect, they ensured that at least someone from their parent com-
pany was assigned the learning responsibility, they had set up formal working
teams with their partners' managers and employees to learn useful know-how
and information through personal interaction, and they implemented a system
to rotate at least a few of their managers through relevant functions in the JV.
In most JVs, MNCs also actively sought operational involvement and con-
trol in the venture (even in situations where they did not have proportionate
equity or Board control) so they could implement learning mechanisms between
the JV and their parent. Further, MNCs were primarily interested in learning
about how to manage relevant value chain activities such as sales, distribution,
and marketing specifically in India. In contrast, most Indian partners fared quite
poorly on the learning dimension. First, during the pre-Iiberalization period or
even during the early years of the post-liberalization period, many Indian play-
ers seemed naive with respect to the learning opportunities JVs provided. Later,
even though some Indian partners began to understand and appreciate the
learning opportunities, they simply lacked the mind-set, resolve, or ability to
implement processes and systems for the learning to actually occur. In addition,
a large part of the MNCs knowledge is distributed across the MNCs vast global
network. For example, an Indian partner of Honda would find it difficult to
access Honda's world-renowned design and engineering skills. Such knowledge
and procedures most likely would reside in the company's Japanese headquar-
ters. The Indian subsidiary may only be involved in customizing some superficial
OL 48. NO.3 SPRING 2006 69
The Decline of Emerging Economy Joint Ventures: The
aspects of the design to the Indian market, which limits the learning potential
for the Indian partner.
Given this inherent asymmetry between MNCs and local firms, MNGs are
more likely to win the race to learn. When that happens, any resource comple-
mentarity that might have existed between the JV partners will gradually
become irrelevant, since the foreign partner will have learned and acquired most
of the critical skills or know-how contributed by its local partner. Asymmetrical
learning also will enhance the MNC partner's bargaining power in the JV to
either take greater control of the JV and/or choose to operate on its own in the
Indian market in the future. P&G-Godrej and Kinetic-Honda are examples of
such outcomes.
This bargaining power shifts toward the MNC partner seems opposed
to the obsolescing bargaining theory in traditional international business litera-
ture.' ' According to this theory, the bargaining power between developing host
countries (not companies) and MNCs in the context of FDI evolves over time
such that there is a steady shift in advantages from the MNC to that of the host
developing country. Although the developing country is initially keen to have
the MNC invest in its country given the MNCs strengths in such things as tech-
nology, managerial skills, and capital, the moment the MNC makes the invest-
ment, the agreement is rendered "obsolete" in the eyes of the host government.
This is because the MNCs invested capital becomes "sunk," a hostage and source
of host country bargaining strength. Further, through development and transfers
from foreign direct investment over time, the host country gains technological
and managerial skills that reduce the value of the MNC.
Several studies have shown, however, that the theory is applicable mainly
in extractive sectors such as mining and petroleum. Research shows that an
MNCs' bargaining power does not erode in a wide range of manufacturing
industries such as automobiles, Pharmaceuticals, and electronics. In industries
that are characterized by such things as intensive technology, skills, and the
need for global integration, changes in bargaining power are almost completely
out of the developing country's control. This is often because the technological
and managerial development in the host country is not strong enough to erode
the MNCs strengths. In fact, in such industries the relative power of the MNC
may even increase over time. This is the case India, where the bargaining power
has shifted more toward MNCs. The ongoing liberalization of the regulatory
environment obsolesces the bargaining power of the local partner in such JVs.
Returns to Global Integration:
Adverse Impact on New and Existing JVs
As MNCs have expanded their operations in numerous countries, they
have begun taking a more "global" perspective of their business. That is, rather
than allowing entities in each country to operate in an independent or loose
fashion, they are attempting to coordinate and configure them in a way that
can enhance the benefits of their global presence. As a result, these firms are
70 UNIVERSITY OF CALIFORNIA, BERKELEY VOL 48.
t , - ' b- - /Joint Ventures: The Case of India
breaking up their value chains, relocating various parts of their production and
business processes to different countries. They are increasingly becoming adept
at buying their raw materials and components for their entire business in coun-
tries where they are the cheapest and then making their products in countries
where assembly costs are the lowest and then selling them to consumers in yet
other countries. For example, P&G may locate the R&D for its detergent business
in the U.S., source the key ingredient for it from some country in Latin America,
and produce the detergent in China for sale and distribution in all of P&G's
international markets.
JVs can be an impediment to global strategy implementation by MNCs.
First, objections by the local JV partner about sourcing, selling, and financing
decisions can make it difficult for the MNC to structure production across coun-
tries in ways that minimize worldwide costs. Second, the local partner often has
a stake in the profitability of the JV; thus, it can hamper the MNC from setting
prices for inter-company transactions or from structuring finances in ways that
would reduce its global tax burden. Third, as MNCs globalize their business, they
may want to share intellectual property across their various international opera-
tions, but sharing intellectual property with JVs may expose it to the local
partner.
And as one recent study points out, at the same time that JVs are becom-
ing risky and expensive, globalizing companies have seen growing returns to
their transactions v\athin wholly owned subsidiaries in foreign locations because
of a fundamental shift in the cost/benefit equation.^- According to this study, the
proportion of MNCs' JVs has been steadily falling in recent years across all coun-
tries, and at the same time the proportion of imports and exports among MNCs'
wholly owned subsidiaries have increased substantially.
If the advantages of having globally integrated operations outweigh the
benefits of having a local partner, MNCs will enter these markets via wholly
owned subsidiaries and integrate these subsidiaries with their global operations.
In effect, the formation of new JVs as well as the survival of existing JVs can
decline in such an environment. In India's case, this will be particularly true in
the ongoing post-liberalization period when MNCs can have fully owned and
controlled operations in the country. In the initial part of the post-liberalization
period, MNCs were still required to have JVs with local players in most indus-
tries, although they could own a majority stake in them. This may have allowed
some MNCs comparatively greater control (and incentive) to achieve a greater
degree of coordination between their global operations and their Indian JV than
before, creating some tension with their local partner.
Summary Overview and Implications
Figure 1 provides an overview of the implications for new and existing
JVs between MNCs and local companies. Regulatory liberalization is clearly a
trigger for many of the important changes. By 1999, 27 of the 69 JVs we studied
were terminated, and all but two of these terminations occurred after 1996. In
:)L48,NO.3 SPRING 2006 71
The Decline of Emerging Economy Joint Ventures:
F I GURE I . Key Factors in the Decline of Emerging Markets JVs
Resource
Complementarity
Race-to-Learn
Returns to
Global Integration
Regulator)
+ ve
- ve
- ve
Liberalization
i
Joint Ven
Formatior
Continua
i
- ve
r
ture
1 and
tion
26 of these cases, at least one or both partners felt they had not met their objec-
tives in the joint venture; this was particularly true of local partners in the ven-
ture. Using standard survival analysis techniques, we found that JVs formed
during the pre-liberalization period were 87% more likely to be terminated than
JVs formed during the liberalization period, and JVs formed between 1991-96
were 32% more likely to be terminated than those formed after 1996. In other
words, regulatory liberalization clearly increased the termination hazard of JVs.
In terms of other factors, "learning differential between the MNC and local part-
ner" and the attempts of "global integration by the MNC partner" increased the
likelihood of JV termination by 41 % and 28%, respectively, whereas "resource
complementarity" reduced the likelihood of JV termination by 37%. The effect
of the first two factors also was more positive under conditions of greater liber-
alization, whereas the relevance of resource complementarity did not vary sig-
nificantly across different periods. All these effects were seen after taking into
account factors that might influence JV termination, such as partner nationality,
comparative partner size, and industry of the joint venture.
Implications for MNCs
Overall, regulatory liberalization enhances the position of MNCs vis-a-vis
the local players. For MNCs, liberalization has not only opened up more choices
for investments in emerging economies such as India, but has also reduced their
reliance on local firms. While MNCs now can enter new markets without having
to form JVs with local partners, they may still want to form them as a temporary
opportunity to learn and acquire the resources and skills of a partner firm.
However, MNCs must also recognize the implications of this approach.
Over time, many local firms have become aware of the "learning race dynamics"
72
UNIVERSITY OF CALIFORNIA. BERKELEY VOL 48. N"
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,iy Joint Ventures; The Case of India
in emerging-economy JVs and are responding in several ways. They have
become more hostile and wary of forming new JVs with MNCs. Also, some local
firms are seriously working on improving their learning capabilities.
Implications for Local Firms
In general, liberalization in India and other similar economies has thus far
been detrimental for local companies. These firms can learn from the experience
of JVs between U.S. MNCs and their Japanese and Korean partners during the
1980s. These partners won the learning race with MNCs in many instances.
Part of their success is related to their more aggressive international aspirations.
These companies were very keen to establish an international presence. They
often formed JVs with MNCs to explicitly learn from them and invested effort
in developing their learning capacities for this purpose and adopting an export-
oriented strategy. In contrast, at least until recently, local companies in many
current emerging economies seemed content on doing business within their
long-protected local markets without a sufficiently strong desire to build supe-
rior capabilities or operating efficiencies to compete extensively in international
markets. This in turn has influenced the development of their competencies and
their focus on building a strong capacity to learn from their foreign counterpart.
The case of TVS Motors provides a rare example of this in India. In its
JV with Suzuki, one of the global leaders in small cars and two-wheelers, this
Indian company took requisite steps to protect its capabilities from the foreign
partner. It recognized the learning opportunities from the JV and implemented
various actions to actually realize that learning. Eventually, when the TVS-
Suzuki JV was terminated because of Suzuki's desire to go it alone in the Indian
market, TVS Motors did not suffer. Not only did it buy out Suzuki from the JV,
but it also went on to introduce new, sophisticated products on its own in India
and neighboring Asian countries. This was possible because of the skills and
capabilities it had acquired from Suzuki. Since then, the company has managed
to hold its own against other local and foreign players in its markets quite
successfully.
Discussion and Conclusion
In emerging economy settings, local companies in JVs often differ in
terms of whether they are privately owned or they are state-owned.'^ While
MNCs are better positioned to win the "race to learn" with local firms or are
more inclined to terminate their JVs due to their global integration plans, they
are be more likely to exploit these opportunities in their JVs with private players
than with state-owned players. This is because MNCs would like to maintain a
positive image with respect to the government in these countries. To the extent
that terminating JVs with state-owned local players might adversely affect their
image, MNCs might proceed more slowly in terms of making changes. In the
long run, however, private players benefit more from this dynamic than state-
owned players. This is because local private players try harder to build their own
OL 48, NO.3 SPRING 2006 73
The Decline of Emerging Economy Joint Ventures: The'
learning capabilities vis-a-vis their foreign counterparts or to build their own
competencies to better withstand foreign competition in case their JVs are termi-
nated. This is because local private players have the culture and flexibility to
adapt more quickly to the changes taking place in their JVs than state-owned
local players, who are more bureaucratic in their approach.
There are also differences across industries. For instance, resource com-
plementarity usually creates a potential for a detrimental race to learn between
JV partners. In industries such as IT and healthcare, partners may bring comple-
mentary resources not only in terms of hard assets, but also in terms of "comple-
mentary know-how." As research shows, if the main resource contributions of
partners include know-how that is tacit or systemic in nature, it is difficult, chal-
lenging, or expensive for either partner to easily learn and internalize it from
its counterpart. Further, from a local company's standpoint, even if it is able to
learn some critical know-how from its MNC partner in the short run, it may
not have sufficient resources or ability to invest in developing or building that
know-how on its own in the future. In such situations, the costs or difficulties
of learning may be too high, and hence the partners simply accept the benefits
of continuing with the JV. Similarly, industries also differ in the extent to which
they provide companies benefits from global integration of their value chain. For
example, industries such as food are more "local" than "global" In orientation,
offering limited opportunities for a multinational to derive benefits through
global integration or scale. In such cases, MNC partners will be less likely to ter-
minate the JV.
Another inter-industry difference involves the speed and extent of liberal-
ization across industries. In India's case, for example, some industries (e.g., engi-
neering and consumer produas) experienced regulatory liberalization earlier
than others (e.g., financial services, energy, and airlines). Thus, the changes in
JV termination and continuation occurred earlier in some industries than in
others. Local players in industries that liberalized later can learn from the experi-
ences of local players in industries that liberalized earlier and hence better pre-
pare for these changes.
Finally, JVs also experience other challenges that are widely seen in most
alliances in general, whether they are in emerging or developed economies, such
as difficulties in managing organizational compatibility, coordinating tasks
between partners, and building relational capital between partners.''*
In spite of the tremendous popularity and relevance of JVs between
MNCs and local companies in emerging economies until the recent past, this
organizational form is clearly facing uncertainty. Regulatory liberalization is per-
haps the most important factor in this context because it has a direct influence
on JV continuation and survival over time. Going forward, managers can greatly
benefit from getting a deeper insight into these faaors and learning their impli-
cations for both MNCs and local emerging-economy companies involved in
such JVs.
74 UNIVERSITY OF CALIFORNIA. BERKELEY VOL. 48, NG
Joint Ventures: The Case of India
APPENDIX
This article reports on a survey-based study of 69 JVs between MNCs and
local companies conducted in India during 1998-1999. The JVs were from sev-
eral different industries, including chemicals, Pharmaceuticals, engineering,
information technology, and consumer goods. One senior executive from each
side (MNC and local company) who was closely involved with the joint venture
responded to the survey.
The data presented in Exhibit 2 highlight the proportion of JVs in our
sample that reported that the changes outlined in the exhibit actually
occurred in their particular venture.
The data and analysis presented in Exhibit 3 highlight the respective
learning capabilities of the MNC and local partner in the JVs in our study
sample. For each JV, one senior executive from each side (MNC and local
company) used a 5-point scale (l=strongly disagree, 5=strongly agree) to
rate his/her own company's learning capability on each of the dimensions
given in the table in Exhibit 3. The numbers presented in the table are an
average of these ratings for MNC and local partners respectively.
Seventeen of the JVs in our study sample were formed before 1991 (the
pre-liberalization period), 38 were formed between 1991 and 1996 (the
initial liberalization period), and the rest were formed during 1996-1998
(the ongoing liberalization period). Simple dummy variables were used to
identify the different phases of liberalization and JV termination or sur-
vival, respectively. Measures for other factors were based on ficldwork
and existing academic literature that has studied some of these issues in
alliances in general, even if not in emerging market contexts in particular.
We measured "learning capability differential," which reflects the inten-
sity of the race to learn by simply taking a difference in the two partners'
learning capability scores. To assess global strategy and integration, we
used a 5-point scale (l=very low, 5=very high) to assess the extent to
which the MNC partner took the lead in driving JV strategy, the extent
to which the JV strategy was closely aligned to the MNCs international
strategy, and the extent to which the JV relied on the MNC for manage-
ment inputs, technology, and brands. We measured resource comple-
mentarity by assessing the extent to which the MNC and local partner
contributed upstream resources (i.e., R&D, technology, product-process
know-how, and brand know-how) or downstream resources (sales, dis-
tribution, and market know-how). The scale ranged from "l=primary
contribution by MNC" to "5=primary contribution by the local partner."
Differences in the aggregate scores for upstream and downstream contri-
bution refiect resource complementarity, such that the higher the differ-
ence the higher the complementarity.
' 'OL 48, NO.3 SPRING 2006 75
The Decline of Emerging Economy Joint Ventures:
Notes
1. A. Adarkar, A. Adil, D. Emsl, and P. Vaish, "Emerging Economy Alliances: Must They Be
Wm-Lose?" McKinsey Quarterly, 4 (1998): 121-137; P. Beamish. A. Delios, and D.J. Lecraw,
Japanese Multinationals m the Global Economy (Basingstoke, UK: Edward Elgar, 1997).
2. M. Desai, F. Foley, and J. Hines, "International Joint Ventures and the Boundaries of the
firm," Harvard Business School Working Paper, 2002; P. Kale and J. Anand, "Stability and
Performance of Emerging Economy Joint Ventures," AOM Best Paper Proceedings, 2002.
3. "Dreaming with BRICs: The Path to 2050," Goldman Sachs, Global Economic Paper No. 99,
2003; R.K. Gupta, "Fulfilling India's Promise," McKinsey Quarterly. (2005 Special Edition),
pp. 4-5.
4. For an overview of the evolution of the liberalization process in India, see I.J. Ahluwalia
and I.M.D. Little, India's Economic Reforms and Development: Essays for Manmohan Singh (Delhi:
Oxford University Press, 1998).
5. B. Gomes-Casseres, "Firm Ownership Preferences and Host Government Restrictions,"
Journal of International Business Studies. 2 (Summer 1990): 1-23; L. Blodgett, "Partner Contri-
butions as Predictors of Equity Share in International Joint Ventures," Journal of Intemational
Business Studies, 22/1 (1991): 63-78.
6. For an overview of the regulatory restrictions that existed in India up to 1991 and the subse-
quent liberalization of regulated business environment, see Ahluwalia and Little, op. cit.
Also, for a brief discussion of ihe impact of liberalization on joint ventures in these markets,
see A. Mukherjee and A. Sengupta, "Joint Ventures versus Fully Owned Subsidiaries: Multi-
national Strategies in Liberalizing Economies," Review of International Economics, 9/1 (Febru-
ary 2001): 163.
7. See P. Beamish, "The Characteristics of Joint Ventures in Developed and Developing Coun-
tries," Columbia Journal of World Business. 20/3 (Fall 1985): 13-19; K.R. Harrigan, "Joint
Ventures and Competitive Strategies," Strategic Management Jouinal, 9 (1988): 141-159;
Blodgett, op. cit.
8. See Y. Pan, "Influences of Foreign Equity Ownership Level in Joint Ventures in China,"
Journal of International Business Studies, 27/1 (1996): 1-26.
9. The early work highlighting the role of learning opportunities in alliances and joint ventures
is Y. Doz, C. Prahalad, and G. Hamel, "Collaborate with Your Competitorsand Win," Har-
vard Business Review, 67/1 (January/February 1989): 133-139; G. HameL "Competition for
Competence and Inter-Partner Learning within International Strategic Alliances," Strategic
Management Journal. 12/4 (Summer 1991): 83-103. Since ihen, several other articles have
also examined the learning dynamics involved in alliances in general; but, as we note in this
article, prior work has not examined the learning dynamics that become salient in the con-
text of joint ventures between MNCs and local companies in emerging economies.
10. For an excellent discussion on this alternate perspective on alliances, see R. Gulati and T.
Khanna, "Unilateral Commitments and the Importance of Process in Alliances," Sloan Man-
agement Review, 35/3 (Spring 1994): 61-69. They also highlight conditions where this per-
spective is more applicable and outline steps that companies can take to follow it.
U. For a discussion of the traditional obsolescing bargaining theory, see Charles Kindleberger,
American Business Abroad: Six Lectures on Direct Investment (New Haven, CT: Yale University
Press, 1969). Later work by Kobrin examines the applicability (or non-applicability) of this
theory in various settings. SJ. Kobrin, "Diffusion as an Explanation of Oil Nationalization,"
Journal of Conflict Resolution, 29/1 (March 1985): 3-32; S.J. Kobrin, "Testing the Bargaining
Hypothesis in the Manufacturing Sector in Developing Countries," Intemational Organization,
41/4 (Autumn 1987): 609-638.
12. M. Desai, F. Foley, and J. Hines, "Venture Out Alone," Harvard Business Review, 82/3 (March
2004): 22.
13. H. Yashen and T Khanna, "Can India Overtake China," Foreign Poliq'. 137 (July/August
2003): 74-81; T. Khanna, K. Palepu, J. Sinha, A. Klump, N. Kaji, L. Sanchez, and M. Yacoub,
"Strategies that Fit Emerging Markets," Harvard Business Review. 83/6 (June 2005): 63-76.
14. Several scholars have highlighted the importance of these organizational difficulties in
alliances and JVs. For example see Y. Doz, "The Evolution of Cooperation in Strategic
Alliances: Initial Conditions or Learning Processes?" Strategic Management Journal, Mil
(Summer 1996): 55-83; F. Contractor and P. Lorange, eds.. Cooperative Strategies and Alliances
(Kidlington, UK: Elsevier Science Ltd., 2002), pp. 3-22.
76 UNIVERSITY OF CALIFORNIA, BERKELEY VOL 48. K