Ib2 Grpb L3 Sino-singaporean Joint Venturesl - Brendon Chen

Control Mechanisms, key personnel appointment, control and performance of Sino-Singaporean Join Ventures Pien Wang, Chow Hou Wee, Peck Hiong Koh

Present by Brendon, Chen XiaoFeng

Introduction 

JV (Join-Ventures) Occurs when two or more firm pool a portion of their resources to invest in a common legal entity 

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Control of JVs Control Mechanisms  Focus of Control  Extent of Control 

Focus of this paper

A parents firm should excise selective control over dimensions which it perceived as critical, not all the activities  Parents firm can influence the JV by gaining right to appoint managers  EJV (Equity Joint Ventures) as most important entry mode to PRC 

Purpose 

Mechanisms used by Singapore Parent Firms in General to control the JV

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Control Mechanism used by Singapore Parent firms with majority, equal, and Minority stakes

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Singapore Parent firm’s right to appoint key personnel

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The impact of these appointments on their degree of control over JVs

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As well as their satisfaction level with the JV’s performance

Content  Part 1: The literature converning the control of JVs is reviewed 

Part 2: The methodology used to conduct this study is described

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Part 3: Finding and a discussion are presented

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Part 4: Conclusion

JV Control Mechanism 

4 ways to achieve controlling Majority Shareholding  Key Personnel Appointment  Setting up of policies and procedures  Holding of board meetings  Auditing 

JV Control Mechanism 

Majority Shareholding A majority equity position could ensure a certain degree of control over the venture (Stopford & Wells)  Control was not a strict and automatic consequence of owner-ship  JV Partners can gain management control which is not according to their level of ownership through the input of non-capital resources, e.g. technology, management expertise  The level of ownership is often the result of bargaining positions between partners (can be limited by host country government policies) 

JV Control Mechanism  Right to appoint personnel to key positions Right to appoint JV’s top management positions may represent a crucial strategic control mechanism  Knowledge is available to the parents firm if key personnel running the operation (e.g. Account & Finance function)  Facilitate communication between JV and parent firm  Complete information offers the more complete control  JV Employee are likely to act in the ways which acceptable by parent firm 

JV Control Mechanism  The pose of Chairman of the board can be important Well-connected Chinese Chairman can be invaluable to smooth relationship with local bureaucracy  Can be obstructive if he/she is more interested in exercise his/her power than working for JV’s success  Parent firms differ in their uses of the right to appoint the general manager of JV as a source of control (e.g. pg 354)  Foreign investor can strengthen their minority position or equal position by appointing GM or expatriates to other key position (e.g. Foreign firm send expats to take position of financial controller) 

JV Control Mechanism  Board Meetings To provide opportunities to keep significant matters under appropriate review  Keep all partners adequately informed  Maybe useful for minority partner to gain control (e.g. Chrysler, minority partner of a SINO-US JV. Pg 355) 

 Limited issue requiring the unanimous agreement of the board members 

Can be effective tools used by minority partners to protect themselves

JV Control Mechanism  Capital Budgeting and resource allocation By participating in the formulation of the capital appropriation request, parent firm can in influence JV’s decision on specific project  Feedback on request can educate JV manager about parent’s expectation and priorities 

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Policies and Procedures The behaviors of JV’s manager is influenced by the policies and reporting requirement design by the owners 

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Use of technology and management advantages Firm can gain control by replying on technical superiority and managerial skills 

JV Control Mechanism  JV Control-performance relationship 

Conflicting result due to complex nature of the issue

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And lack of consensus on the measure of JV performance (e.g. JVs between partners from developed countries)

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It is effective to divide up control along function lines in SinoUS JVs

Data Collection and Methodology  Mail Survey  Survey Instrument  Personal Interviews

Result  Performance In General, Singaporean partners were less moderately satisfied with their JVs on all the three performance 

 Control Overall, Singaporean parent firms perceived their level of control over their JVs to be more than moderate  Compare with operation more than 3 years, the JVs with fewer than 3 years of operation felt a sense of greater control over their JVs 

 Control Versus Ownership level The Majority partner usually has the right to appoint more member on the board and more officer in key positions  Partner in the equal position more likely deadlock , create high level of frustration  Firm with minority ownership, the expectation of control level usually more modest 

Result  Performance VS Control Singapore parent firms with greater control over their JVs also tended to feel more satisfied with the growth, profitability, and overall performance 

 Control mechanism 

The most important mechanism (across all samples) The right to appoint the GM  The right to appoint personnel to critical function area  The setting up of policies & procedures  Auditing  Majority shareholding  … (The rest refer to page 363) 

Result Control mechanism 

The most 3 important mechanism (Majority owners) The right to appoint the GM  Majority shareholding  The right to appoint personnel to critical function area 

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The most 3 important mechanism (Equal owners) The right to appoint the GM  The right to appoint functional manager  The setting up of policies & procedures 

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The most 3 important mechanism (Minority owners) Auditing  The right to appoint the GM  The setting up of policies & procedures 

Result  Right to appoint the general manager In charge of daily operation of JVs  is responsible for implementing the strategy decision of the board  given authority to appoint other key functional positions  some cases, GM was the pre-condition for them to enter the JV agreement 

 Right to appoint personnel to critical functional areas Send expats managers to manage the finance function to ensure Chinese employee would not spend lavishly 

 Setting up policies and procedures JVs more likely to run according to the expectation of parents company by charting out the policies and procedures 

Result  Auditing 

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The most important control mechanism for firms with minority

Majority Shareholding Majority owners usually had the right to appoint the chairman of the board of directors  Major shareholding was the precondition for many Singaporean firm to enter a JV agreement  “Truly Wholly owned ventures and false joint ventures”  A Few firms indicated that they did not insist on having majority ownership in the JVs (e.g. pg 365) 

 Using Monthly or Quarterly Reports Enable parent company to monitor the operations of JVs on a regular basis  Effectiveness of regular spending reports as a control mechanism depends on the type of business the JV is in. 

Result  Frequent Visit to JV Demonstrated the support of the parent company towards to the JV and this could raise the morale of JV members  Enable constant supervision of JV by parent company  Help the top management to understand the difficulties experienced by expatriate manager 

 Right to appoint personnel to key positions Generally. The majority partners has the right to appoint the chairman of JVs, and minority to appoint the deputy chairman, the same for GM position  For equal partnership, both parties take turns to appoint Chairman or GM position  Some Singaporean company have equal or minority shares also has the right to appoint GM / Chairman position to be part of the precondition to enter the JV agreement 

Result  Right to appoint personnel to key positions Position of Financial manager was considered very important in functional position  More and more firm start to hire local manager instead of sending expatriates (save cost, and familiar with local culture)  Common situation that PRC partner appoint chairman and deputy GM, and Singapore partner appoint GM (good & bad, pg 369) 

 Impact of the right to appoint personnel on control and performance 

GM Position (great sense of control over JV, because of) GM is in charge of daily management of the venture  GM is also the member in the board of directors  GM may have the authority to appoint other functional managers of JV, which indirectly control over other functions 

Result  Impact of the right to appoint personnel on control and performance 

Financial Controller (great sense of control over JV, because of) FC provide training in modern accounting and financial methods  FC act as policeman for parent firm 

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HR Position (more control over JV, because of if without) Difficult for parents firm to develop appropriate recruitment, dismissal and compensation policies  Motivation of the JV employees 

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Marketing Manager Control price of the JV product in INTL market  Parent firm can gain market information while directing local sales team  Armed with data can quickly introduce new product 

Result  Impact of the right to appoint personnel on control and performance 

Purchasing Manager 

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Minimize kickback problem

Production Manager To improve quality of product  Maintain the standard of existing product 

Conclusion  This paper reveals that depending on the equity stakes of the parent firms the ranking of the important of mechanism differed  This paper also attempted to empirically examine the focus of the control issue and the implication to JV control and performace. Majority of the Singapore parents firm had the right to appoint the GM, Chairman of the board and the finance manager  Company with the right to appoint above positions felt that the has greater control over JVs.  Parent firm will feel more satisfied with the performance of the JV if they have the right to appoint 

Production manager  Marketing manager  HR manager  Purchasing manager 

Conclusion  The best scenario to avoid conflicts between parent firm and JV employees as well as to improve performance of JV, is that the foreign partner has the right to appoint the GM  The next best scenario is that the foreign partners has the right to appoint three key positions: GM, Finance Manager and HR Manager  A parent firm might feel more satisfied with the performance of its JV when the other partner with better management and technical know-how exercise greater control over the JV  Foreign partner with superior management know-how had greater control over JVs, they were likely to feel more satisfied with the performance of JV 

Future research directions…