Corporate Governance of International Joint Ventures

Table of Content

ABSTRACT 1

1 INTRODUCTION 2

2 INTERNATIONAL JOINT VENTURES ORGANIZATIONAL STRUCTURE 3

2.1 PARENT FIRMS, IJV MANAGERS RELATION 3

2.2 PARENT FIRM’S RELATIONS 4

3 RIGHTS, FUNCTIONS OF BOD, PARENT FIRMS, IJV MANAGERS 6

3.1 PARENT FIRM’S RIGHTS, FUNCTIONS 7

3.2 BOD’S FUNCTIONS IN IJV 9

3.3 IJV MANAGER’S DUTIES 10

4 CONCLUSION 12

REFERENCES 13

Abstract

This paper figures out IJV structure and mechanisms such as principal agency problems and hold–up problem in International Joint Ventures. Thereby it is appropriated to examine the relationship between the parental firms, and how they can elaborate the operation of the Board of Directors and the Joint Venture managers. This refers to an organization of activities, which had to be done in a single company, and now has to assimilate of two distinct companies. Specifically, by designing contracts and control mechanisms of BOD and parent firms, IJV is less likely to encounter with agency and hold up problem.

Key Words

Agency problems, hold-up problem, formal control, behavior control, Board of Directors, parent firm, IJV managers, complete contract.

1 Introduction

Forming joint ventures become a common way to enter a new foreign market. However, it is not the easiest option to take, because it holds potential problems. The different cultural basis initiates misunderstandings in managing the new company, disagreements in the decision-making process or simply a different comprehension of commercial handling. Usually companies join a venture to expand to new geographical markets and develop new projects with novel technology.

Especially authorizations, duties, obligations and penalty clauses should be included in the contracts to set the structure for the prospective collaboration. Otherwise one of the partners could relapse to opportunistic behavior, and jeopardizes the other partner. For this reason, it is essential to examine weather a contract is complete or incomplete. Furthermore, a contract is characterized by the safeguarding function, which prevents opportunism, and supports the coordination function, while these constructs reduce risks and uncertainties. Precisely because a contract defines the structure of the Joint Venture, the duties and responsibilities of the elected Board of Directors and Joint Venture managers are mentioned as well. Consequently, managers of two firms have to combine their understandings of governing a company, and include the ideas of a parent firm. Agency Theory talks about the behavior of the managers concerning his own and the company’s behalf.

Thus, the parent firms are already required to use control clauses to guide their managers, and cultural differences might weaken or intensify the collaboration. Opportunistic behavior does not only occur at a single person, it appears at the whole parent firm. Especially, the hold-up mechanism can arise because of the parent’s opportunistic behaviour. Therefore, this paper includes several aspects, which try to examine the structure and the function of a Joint Venture contracts.

2 International Joint Ventures Organizational Structure

An international joint venture (IJV) is a business entity which is founded by two or more legally separate companies from different countries. The need of forming an international joint venture is triggered by the objectives of legally separate companies. For example a Chinese local company can take part in an IJV agreement with an American company to obtain the newest technology, know-how etc. In this context, in an IJV, both sides of the venture bring their complementary resources and skills to achieve a mutual goal of the both sides. To put these diversified skills and resources in an efficient way is the duty of parent firms, IJV managers and Board of Directors.

An IJV has a more complex, more interacting structure than a single owned company. The distinguishing feature of the joint venture form of organization is that activities that once occurred inside a single firm are now occurring between