Performance and Problems of International Joint-Ventures in Malaysia.

 

 

By

Mohamed Sulaiman
Center for International Studies
Ohio University
Burson House, 56 E. Union Street
Athens, OH 45701, USA

Ph #: 740-593-2656
Fax #: 740-593-1837

sulaiman@oak.cats.ohiou.edu

mohamed_sulaiman@hotmail.com

 

&

Abdul Rahim A. Kechik
&
Syed Azizi Wafa
School of Management
Universiti Sains Malaysia
11800 Penang
Malaysia

Ph #: 604-657-7888
Fax #: 604-657-7448

sazizi@usm.my

 

 

 

Abstract

This research attempts to determine the factors that determine the performance of International Joint Ventures. The literature suggests that venture autonomy, transfer of technology, adaptiveness and flexibility, assistance from parents, decision making, influence and magnitude of problems are factors that impact performance in terms of achievement of objectives, effectiveness of activities and overall performance. A sample of 82 Malaysian joint venture firms was taken for this study. The results show that the most significant factors impacting performance are transfer of knowledge, assistance from parents and the magnitude of problems. Among the most important problems faced by joint ventures are obtaining high quality inputs, integrating the functional areas, and slow decision making.

Performance and Problems of International Joint-Ventures in Malaysia.

Introduction

International joint-ventures (IJVs) are established to take advantage of the economic, political and social conditions prevailing in a particular country. In Malaysia’s case, international firms came to its shores mainly because of its political stability, economic growth and a relatively low cost of labor and other resources. Government encouragement and incentives could also be considered a factor. However, with a population of only 21.7 million in 1997, Malaysia’s market is rather small.

In 1992, the Ministry of International Trade and Industry of Malaysia approved 225 manufacturing firms which were wholly-owned by Malaysians, 379 or 43% of which were joint-ventures between Malaysian and foreign partners, and 278 or 31.5% of which were wholly foreign-owned. Thus, foreign direct investment plays a major role in Malaysia’s industrialization program. Of the joint ventures 215 were majority-owned by Malaysians, 157 were majority owned by foreigners and the balance have equal equity participation.

The contribution of IJVs towards the success of industrialization programs of developing countries such as Malaysia cannot be underestimated. It is in the interest of the host country, the local partner and the foreign partner to make joint-ventures a success. However, IJVs because of their nature of multiple stakeholders are often fraught with problems and as a result their success (performance) becomes uncertain. This paper will attempt to address problems faced by IJVs in Malaysia, the level of performance and the factors contributing to the performance of IJVs.

The Literature

A joint-venture, as an organizational form is one in which two or more parent firms contribute resources, including equity, to a semi autonomous, legally separate entity that exists for more than a short duration (Geringer and Herbert, 1989).

Joint-ventures are characterized by power disparities, multiple stakeholders, inter-organizational exchanges and emerging goals and systems. These characteristics provide strengths as well as weaknesses to IJVs, depending on how they are managed and harnessed.

Researchers of IJVs seem to agree that longevity, profitability and sales growth are not always the appropriate measures of joint-venture performance (Hill and Hellriegel, 1994). Frequently joint-ventures are set up by parents not to show profits but to manufacture products for export, taking advantage of either material resources or low-cost labor.

Lyles, Mohamed Sulaiman and A. Rahim A. Kechik (1995) devised a framework to study factors influencing the performance of IJVs in Malaysia. This framework was based on the measures used by Killing (1983), Baird and Lyles (1993) and Parkhe (1991). The present research is an extension of the 1995 project.

The factors that have been found to facilitate overall effectiveness of IJVs are: the degree of autonomy, the degree of transferring knowledge and the assistance received from the foreign parents. Factors that inhibit performance include the influence of the foreign parents in decision-making and the extent to which IJV has had to deal with problems.

Research Model

Based on the literature, a research model was designed as in Figure 1. The figure shows the expected relationships of the performance of IJVs to the autonomy of IJV, the level of knowledge/ technology transfer, adaptiveness and flexibility, the assistance received from the parents, decision-making influence from parent firms and the magnitude of problems faced by the IJVs

Performance is measured in three ways. The first measure is the percentage of initial objectives that had been achieved. The second measure is the perceived effectiveness rating of various activities of the IJV. This is on a 5-point Likert scale. The third measure is the overall performance rating, also on 5-point Likert scale.

The performance of IJVs are expected to be influenced by venture autonomy, as autonomy would enable managers to take responsibility and be rewarded for their initiative (Lynch 1990). Harrigan (1986) argued that the venture needs autonomy from owners’ interference in order to cope with competitive environments. It has been found that autonomous ventures were more innovative than those that were tethered closely by the owners or parent firms (Edstrom 1975). Harrigan (1986) suggested that the venture be allowed to stand on its own- with its own assets, personnel, resources and information systems.

Joint-ventures provide strategic benefits through the exploitation of synergies, technology and other skills transfer, (Harrigan, 1985). They provide firms with access to the knowledge of other organizations. The transfer of knowledge and technology from parents to the IJV is expected to have a positive impact on IJV effectiveness and performance.

Adaptiveness and flexibility are the firms’ ability to respond to change in its rules, strategies and structures (Miles & Snow 1978). This is especially important for organizations facing rapidly changing environment. Malaysia has seen rapid changes in economic and social environments in the last ten years, requiring firms to be adaptive and flexible.

The extent to which foreign parents extend assistance to the IJV management is expected to influence the effectiveness of the IJV. This provision of assistance is related to trust in the IJV relationship, learning from the foreign parent, and certainty regarding the parent firm (Axelrod 1984, Kogut 1988, Parkhe 1993). In high or emerging technology ventures, assistance from the parents would be critical to the IJV success. Assistance may go beyond technological and financial support to include training, marketing and managerial support (Child and Markoczy 1993).

There is little consensus in the literature whether the influence of parents in IJV decision making helps or inhibit effectiveness. Beamish (1984) found that there is significant relationship between unsatisfactory performance and overall foreign dominant control. But Beamish and Banks (1987), Geringer and Herbert (1989) moved towards a "shared management" model for IJVs. Research by Artisien & Buckley 1985, showed that a significant correlation exists between shared decision making and IJV success. A high level of influence from the foreign parent in the decision making process will be viewed negatively.

The second inhibiting influence on the success of IJVs is the magnitude of problems faced by the IJVs. Several problems have been identified by researchers such as Harrigan (1985) and (1986), Parkhe (1991) and Lyles (1987, 1988). These problems include conflicts over the original agreement, conflicting goals, personality conflicts between the partners, cultural misunderstandings, difficulties in obtaining inputs and slow decision-making. These problems would dampen IJV effectiveness and performance.

Hypothesis

The following general hypotheses were formulated to facilitate the research.

H1: the achievement of objectives of IJV is positively related to the autonomy of the IJV, the domestic environment, transfer of knowledge, adaptiveness and flexibility and assistance from the foreign parent company.

H2: The achievement of objectives is negatively related to the magnitude of problems and the influence of parents in decision-making.

H3: The effectiveness of IJV activities is positively related to the autonomy of the IJV, the domestic environment, transfer of knowledge, adaptiveness and flexibility and assistance from the foreign parents.

H4: The effectiveness of IJV activities is negatively related to the magnitude of problems and the influence of parents.

H5: The overall performance of IJV is positively related to the autonomy of the IJV, the domestic environment, transfer of knowledge, adaptiveness and flexibility and assistance from the parent firm.

H6: The overall performance of the IJV is negatively related to the magnitude of problems and the influence of parents in decision-making.

Methodology

The sample for this survey research was drawn from a population of 4,404 manufacturing firms on the list (of December 1994) provided by the Malaysian Industrial Development Authority (MIDA) which is the approving authority for industrial ventures in Malaysia. Six hundred firms were identified as international joint-ventures fulfilling the criteria of being a manufacturing firm in operation for more than one year, possessing more than 100 employees and having at least one foreign partner. These were approached by sending letters to their General Managers requesting them to participate in the research.

A questionnaire was structured based on Lyles, Mohamed Sulaiman and A. Rahim (1995), which was pilot-tested and verified through interviews and modified for final implementation. The General Managers were asked to fill in the questionnaire and to agree to an interview with one of the researchers in order to understand the firm better. Eighty-two firms agreed to participate and returned useable questionnaires. The firms were later visited and interviews conducted in 1997 to verify the data and collect useful qualitative information, especially on problems faced by the IJVs.

 

Data

Table 1 shows the profile of the sample. The mean age of the firms was 20 years, 84% of firms have 2 or 3 partners. The average number of employees in 1996 was 336. The average sales in Malaysia was 51.2%. The average number of expatriates in the firm was 3, mainly the top executives. 38% of the General Managers were from the foreign parent company.

Table 2 shows the industries represented in the sample. Almost 50% of the firms could be classified as resource-based firms involved in food production, wood, chemical, petroleum, etc. The other half belong to non-resource-based industries like textile, fabricated metals, machinery, electrical, etc.

Table 2


 

Table 3 shows the average sales of the sample from 1993 to 1996. The average of the

annual sales grew from RM 96.76 million to RM137.03 million (a growth of 40%) reflecting the growth in the Malaysian economy during the period. Table 4 shows the average profit after tax of the sample. The mean of the profit after tax grew from RM 16.75 million in 1993 to RM 39.40 million in 1996, giving a growth of more than 143% during the period.

 

 

Reliability Test.

Cronbach alpha was used to test the reliability of the data. Table 5 shows the Cronbach alpha values between .95 (highest) and .77 (lowest) which are well within the acceptable limits (Nunnally, 1978).

 

Table 5

 


The Results

Tests of hypothesis on performance.

The first general hypothesis states that achievement of objectives of IJVs is positively related to autonomy, domestic environment, transfer of knowledge, adaptiveness and flexibility, and assistance from parent company. This hypothesis is tested using the Pearson correlation. Table 6 shows the results of the correlations. Two variables correlate significantly with objectives achievement, i.e transfer of knowledge r= 0.257, p<=0.05 and assistance from parents r= 0.742, p<=0.01. This suggests that achievement of objectives is significantly related to transfer of knowledge and assistance from parents.

The second general hypothesis states that achievement of objectives is negatively related to magnitude of problems and the influence of parents in decision-making. This hypothesis is also tested using the Pearson correlation, the results of

which are depicted in Table 6.

The results show that these two variables are significantly and negatively related to objectives achievement. The hypothesis is supported; influence of parents r=-0.283, p<=0.05, magnitude of problems r= -0.418, p<=0.01. As expected, meddling parents and the magnitude of problems faced by the IJVs seem to have negative impact on achievement of objectives.

The third hypothesis states that the effectiveness of IJV activities is positively related to the autonomy of IJV, domestic environment, transfer of knowledge, adaptiveness and flexibility and assistance from the foreign parents. The correlation results in Table 6 shows that transfer of knowledge, r=0.590, p<=0.01, adaptiveness and flexibility r= 0.281, p<=0.05, and assistance from parents, r=0.510, p<=0.01 are significantly related to activities effectiveness. This hypothesis is supported.

The forth hypothesis states that the effectiveness of IJV activities is negatively related to the influence of parent firms, and magnitude of problems faced by the IJVs. The table shows that the correlations coefficients are negatively related though not significantly.

The fifth hypothesis refers to the relationship between the overall performance of the IJV with the independent variables. The correlations show that the transfer of knowledge, r=0.427, p<=0.01, and assistance from parents r=0.455, p<=0.01 significantly contribute towards overall performance. To this extent the hypothesis is supported.

The sixth hypothesis states that overall performance is negatively related to the influence from parents and the magnitude of problems. The magnitude of problems faced by the IJV is significantly related to overall performance r=0.235, p<=0.05. Thus the hypothesis is partially supported.

Problems Faced by the IJVs

The second issue addressed in this paper is the problems faced by IJVs in Malaysia. In the survey, General Managers were asked to rate the magnitude of various problems faced by IJVs. Three stood out as major ones. Table 7 shows the means of the magnitude of problems with 1= very little, and 5= very much. The three major problems are: obtaining high quality inputs, integrating the functional areas, and slow decision-making. This paper will focus on these for detailed discussions based on interviews carries out in two companies.

The two companies selected to illustrate the problems faced by IJVs are Honda-Hicom Bhd. and NS Cement Bhd. Both companies were concerned about the issue of obtaining high quality inputs, such as raw materials, production facilities support and human resources.

Honda-Hicom is a three way partnership of Hicom Bhd (40%) a Malaysian Bumiputera company, Boon Siew Sdn, Bhd. (30%) the Honda franchise-holder in Malaysia and Honda Motors of Japan (30%). Its principal activity is to produce motorcycle engines for Honda motorcycles to be assembled by Boon Siew Sdn. Bhd.

The main components of the engine such as gear and shaft are imported from Japan. One of the Malaysian managers commented, "Our Japanese partner does not believe that the Malaysian vendors can produce these components". The Japanese Executive Director added "Since the financial crises last July, the costs of obtaining these components from Japan continue to increase. We have discussed the possibility of obtaining all the components locally, but the problem we are worried of is quality".

At the NS Cement, Dr. Kim Hong Ki, the General Manager (on loan from the Korean partner) said obtaining raw materials was not a problem. They have a resource of more than 1000 acres of high quality limestone, shale, sand and laterite. But they are worried about fuel cost. "Our cash flow will be negative if the price of fuel increases

by RM 22.00 per ton. The current offered price is RM 166.40 per ton". NS Cement is also 3-way partnership between NS Development Corporation (35%), Halla of Korea (30%) and CIMA Bhd. (35%) which is supposed to market the products. The Executive Chairman also mentioned that NS Cement employed contractors to supply laterite mainly to provide opportunities to local businesses. But the problem arises over how to control the quality of laterite supplied by the contractors. "We have to keep strict quality standards of cement. There is a small number of contractors to choose from and their experience are limited".

The second major problem faced by the IJVs is the problem of integrating the functional areas. At Honda-Hicom, the organization structure is as shown in Figure 2. The figure indicates there are boundaries of responsibility between operations and production, financial and purchasing and Human Resources. Difficulties emerge due to the different heads. Operation and production is responsible to the Factory Manager/ Executive Director, a Japanese, while the Finance and Purchasing is under the General Manager, a Malaysian. There appeared to be a lack of coordination between these functions. But regular consultations were held between the different functions to minimize misunderstandings. The Japanese Factory Manager said, "Even though there are problems of integrating the two major functions, they are always resolved amicably".

At the NS Cement, the issue of integrating the various parts of manufacturing, marketing, personnel and financial functions was rated as "little" or 2 out of 5. However, from observations, more problems might be emerging. In the IJV agreement the three parent companies (NS Development Corporation, Halla and CIMA have to play their roles in the JV management). NS Development Corporation was responsible for obtaining land, initial capital and relationships with regulatory authorities. Halla of Korea was responsible for the design, construction, operations and capital of the project. CIMA was responsible for marketing of the product and capital. The Executive Chairman said " We at NS Development Corporation do not have experience in cement industries. We have to rely on Halla and CIMA". CIMA has its own cement producing plant, there was concern whether CIMA would treat NS Cement subservient to products from its own plant. The organization chart for NS Cement in shown in Figure 3.

When asked how the problems are being resolved, the Executive Chairman replied, "First, we have many internal meetings of the sections. Any unresolved issues will be discussed and resolved. Second, we have recruited many full-time managers in all the divisions. All the expatriates (5 of them) are the "gurus" to the young local managers. Thirdly, we have decided that all the seconded managers from the parent companies will serve only three years. Thus in the long-run the problem of integrating the functional areas would be minimized".

 

 

The third major problem as viewed by the managers of IJV is the slow decision-making process of the IJVs and the parent companies. The Malaysian managers complained that decision-making on the part of the Japanese partner is painfully slow.

The example cited is the issue of implementing the localization program. "Although the decisions to increase the quality and value of local components have been made 10 years before, the actual implementation took place very slowly. The Japanese vendors continue to play the dominant role as suppliers to the company", said the Malaysian Financial and Purchasing Manager of Honda-Hicom.

The managers at NS Cement did not complain of slow decision-making as a problem. Although other problems are mentioned in Table 7, they are relatively minor

in nature (less than 2 on the scale of 1 to 5). Also during the interviews with the managers, no interesting incidences were related to the researchers.

Conclusions

This research sets out to determine the level of performance of IJVs in Malaysia, the factors contributing to the performance and the problems they faced. The performance level could be said to be satisfactory. On average the net profit to sales ratios between 1993 to 1996 were between 18% to 30%. In terms of sales growth in the four years, the IJVs showed an achievement of more than 40%. The external factors that perhaps contributed to this were Malaysia’s political stability and fast economic growth (prior to July 1997).

The second research question relates to the internal factors impacting on IJV performance. Six hypothesis were tested. Generally, it was found that performance in terms of objective achievement, effectiveness of activities and overall performance was related significantly to transfer of knowledge and assistance from parents. On the other hand, slowness in decision-making and the magnitude of problems faced by the IJVs significantly dampen IJV performance.

Interviews with two IJVs provided a better understanding of the problems faced by IJVs. The three most pressing problems mentioned were: the difficulties of obtaining high quality inputs, integrating the functional areas and slowness in decision-making. Problems of conflict over original agreement, personal conflicts and conflicting goals were mentioned, but they were minor compared to the first three.

 

 

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