Harvard Business Review Online | Venture Out Alone

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Venture Out Alone

If joint ventures are really so important to overseas

expansion, why are U.S. multinationals shunning them?

by Mihir A. Desai, C. Fritz Foley, and James R. Hines, Jr.

Mihir A. Desai (

[e-mail]

) is an associate professor at Harvard Business School in Boston. C. Fritz Foley

(

[e-mail]

) is an assistant professor and James R. Hines, Jr., (

[e-mail]

) is a professor at the

University of Michigan Business School in Ann Arbor.

Why would a U.S. company launch a business in, say, China or India without a local partner? Managers have

long assumed that the best way to capitalize on opportunities abroad is to ally with local companies. These

partners already know the market, are willing to share the investment expense, and can curry favor with local

governments. But in a study of more than 3,000 American transnational corporations, we found that these

companies are increasingly opting to go it alone. Between 1982 and 1997, the percentage of U.S. companies

with minority stakes in foreign affiliates fell from 17.9% to 10.6%, while the percentage of fully owned affiliates

rose from 72.3% to 80.4%.

That’s a surprising shift, given the popular rhetoric on the importance of alliances. But that rhetoric misses a key

point about the evolution of transnational corporations. As they’ve become more global, these companies have

broken up their value chains, relocating various parts of their production processes to different countries. They

are increasingly adept at buying in countries where raw materials and components are cheapest and then

making their products elsewhere, where assembly costs are lowest, for consumers in yet another market.

As global business changes, the potential for conflict with local partners—and the management burden of joint

ventures—increases in at least three areas. First, the objections of a local partner about sourcing, selling, and

financing decisions can make it difficult for the multinational to structure production across countries in ways

that minimize worldwide costs. Second, because the local partner has a stake in the profitability of the joint

venture, the transnational often can’t set prices for intercompany transactions or structure finances in a way

that would minimize its global tax burden. Third, with the growing traffic of intellectual property within global

companies, joint ventures heighten the risk of IP theft.

Meanwhile, as joint ventures have become more risky and expensive, globalizing companies have seen growing

returns on their transactions within fully owned subsidiaries. It all nets out to a fundamental shift in the

cost/benefit equation in favor of owning foreign affiliates outright. The percentage of multinationals’ affiliates

that are partially owned has steadily fallen since the early 1980s; at the same time, the scope of intrafirm

transactions—imports and exports between parent companies and fully owned subsidiaries—has increased.

In this shifting environment, we offer three recommendations for overseas business development: First, share

ownership of overseas joint ventures only when the focus of operations is strictly local. In these situations, local

partners can play an important role in building distribution networks or in securing inputs. Second, consider

contracting with local firms for specific services, rather than sharing ownership. Companies can often buy all the

advantages of having local partners without giving up equity stakes. Finally, examine how you motivate

overseas managers. Firms may unwittingly promote needless alliances by rewarding high local performance,

which many managers believe can only be achieved through joint ventures. Companies should reward managers

for developing business without JV partners and encourage them to focus on the company as a whole rather

than as the sum of stand-alone parts. These steps should help firms avoid costly breakups of ill-conceived

partnerships and maximize performance in the global marketplace.

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Harvard Business Review Online | Venture Out Alone

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