Work: Absorptive Capacity, Learning and Performance in International Joint Ventures
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Absorptive Capacity, Learning and Performance in International Joint Ventures
Introduction
The paper is relevant because there has been a significant increase in the number of international joint ventures (IJVs). Globalisation has led to firms being more interconnected with new firms being established in international markets. The learning that takes place within IJV’s is seen as important for the success of the firm and the achievement of the parent company’s aims. Therefore it is worthy of research.
Parent Companies aim to develop separate IJV organisations which are stable, long-term ventures. This should allow for trust and knowledge to be shared and developed. Often there are complexities in how to manage a joint venture between the two parent companies. This can inhibit the learning and performance of the joint venture. The discussion will examine learning or knowledge acquisition by the venture. Knowledge from the ‘parent’ companies helps the IJV to cope with the business environment effectively.
Knowledge Acquisition
Previous research suggested that the acquisition of knowledge, from ‘parent’ companies, to the joint venture led to better performance from the venture. However, the effect of learning, on performance appeared to decrease over time. The acquisition of new knowledge was not the only factor which determined performance. The strategy and organisation of the IJV was also relevant to performance.
Performance depends upon the organisation’s ‘absorptive capacity’. This is the ability to comprehend new knowledge, absorb it and apply it for the business’ purposes. The paper discusses how well an IJV can acquire knowledge from its ‘parent’. The holding company, which helped establish the IJV, is described as the ‘parent’. It was thought that trust between the ‘parents’ of the IJV and the venture itself is important. It allows knowledge to be easily transferred from the ‘parents’ to the venture. However, the paper argues that trust, from the overseas ‘parent’ companies, is linked to performance but does not necessarily help the IJV to learn.
Trust between the ‘Parent Companies’ of the International Joint Venture and its links with Performance
There needs to be trust between the ‘parents’ of IJV’s. The ‘parent companies’ have to avoid exploiting each other’s weaknesses such as over the disclosure of commercially sensitive information. Trust also means that the ‘parents’ have to contribute specialist knowledge to the venture.
Trust is relevant to the ‘absorptive capacity’ of the venture. The ‘parent’ should have a similar culture and ‘knowledge base’ to the venture. This is so that the venture can understand the ‘parent company’ like a student would a teacher. The paper argues that ‘absorptive capacity’ is important for a venture to be able to acquire and apply a ‘parent’ company’s knowledge. An IJV’s strategy and training competence are important for being able to turn parent company knowledge into business success.
Inter-organisational trust between the two parent companies is important for developing the absorptive capacity of the venture. The parent companies need to have mutual trust so that they are reliable and will fulfil their obligations to the venture. Trust has an important function in terms of reducing risk. Trust is relevant because it is the basis for the sharing of confidential information and tacit knowledge. Shared confidence, between the parent companies is an important part in shaping IJV learning. That an agreement is reached, between holding companies, suggests confidence and a willingness to enter into a venture and risk vulnerability.
The Ability for the International Joint Venture to Learn
The ability for an IJV to learn can depend upon transparency. This can govern how well learning takes place between different partners involved in the venture. A factor which can inhibit learning is when there are differences in nationality and culture of the parent companies. This can negatively influence the success of the establishment of an IJV. This is important when it comes to the parent companies needing to share knowledge for the benefit of the venture. Also, if the joint venture has learnt well from its parents, in the past, then it should learn well in the future.
Successful learning is based on the ability to adapt to cultural differences. Knowledge transfer is facilitated where there are alliances between culturally similar ‘parents’ compared with ‘parents who are working across national boundaries. The research appears to indicate that the transfer of knowledge from the parent company to the venture works better if the venture is from a similar culture. This is because misunderstandings can limit the sharing of information and restrict the learning of knowledge. The culture within the ‘parent companies’ needs to work. There needs to be compatibility for the IJV’s managers to understand the values implicit in the acquired knowledge. Top-down autocratic knowledge transfer from an overseas parent company appears not to work. There needs to be a high level of business relatedness between the IJV and the parent companies. This should mean that there is a positive control over specific activities, within the venture, which should translate into a higher level of performance.
It was argued that learning was facilitated in the joint venture, when members of the venture, have an understanding of the workings of the parent’s organisation. In practical terms, it is necessary for the joint venture to understand the business plans and division of labour, between the parent companies. This is useful so that venture can advise the parent companies on what useful knowledge can be transferred into the venture.
The Importance of Training and Differentiation
There needs to be active managerial involvement and training, from the parent companies, to transfer explicit or codified knowledge into the joint venture. Codified knowledge is knowledge which needs to be arranged into how the company wants to use it. The core issue here is about the transfer of soft knowledge which is related to market and product development. This is in contrast to harder, quantitative or scientific research which can be explicitly transferred. Also there needs to be a ‘socialisation of knowledge’ by parent management companies. In other words, the workers of the venture need to adopt the behaviour patterns of the parent companies culture.
The more that IJV’s can focus on differentiation then the greater their performance will be. Also, arguably, IJVs have got to be seen as local or nationally based to offer such differentiation to a local customer base.
Conclusion
Specialisation amongst the parent companies helps to facilitate knowledge transfer. However, trust, between the parent companies and the IJV, has a weak positive association with learning. Trust is linked to performance, as performance can lead to belief and confidence amongst the parent companies. Poor performance can lead to mistrust amongst the parent companies. The problems associated with mistrust and cultural incompatibility could be reduced by training from the foreign parents.
A factor which helped knowledge to be absorbed is cultural compatibility with the IJV. However, management support appears not to contribute to knowledge being absorbed. This may because support is no longer needed, once the IJV has become familiar with the parent’s management style. Training can be helpful. The absorption of prior, parent company, knowledge may require guidance so that the venture can understand it. The knowledge that the venture acquires, from the overseas parent, can influence the amount of learning that is gained; when this is combined with high levels of training by that parent.
The similarity, between the parent companies and the venture, is the most important factor for the recognition of new knowledge. Knowledge learned from foreign parents can influence IJV performance. However, it is of greater significance that the IJV adopts an appropriate business strategy. Finally, the IJV needs to be able to spread the knowledge amongst their employees. Managers at the IJV need to help their employees to understand the context of their parent companies tacit knowledge. This tacit knowledge has contributed strength to the holding companies.