Paper presented at the EMNet 2011,
December 1-3, 2011, Limassol, Cyprus
Prof. Victor Lankin (Russia), Dr. Jan de Jong (The Netherlands)
Issues of a joint venture organization and operation with the Russian partner participation.
In the present paper authors have tried to generalize and systematize the more than a ten years' experience of the Russian - Dutch joint venture operation, having pinpointed the basic problems and barriers on a way of its successful functioning. We believe that the same problems arise practically in all joint ventures with the Russian partners. In particular, authors considered:
· spheres of activity attractive for partnership;
· brief history of the company and its activity domain;
· the cross-cultural communications problem (mentality, psychology and national traditions, common and business communication language);
· information as a f systemic organization factor.
1. The activities domains attractive for a co-operation with Russian partners.
· Coproduction of foodstuffs using the Russian raw material (sugar, milk, fruit, etc)
· Export of agricultural technologies, maintaining coproduction, to Russia.
· Trading operations in a fields of: power resources, non-ferrous and ferrous metals, agricultural production of industrial purpose.
· Joint projects in the field of high-tech innovations (aerospace, aircraft construction, electronic medical equipment, optoelectronics, software development).
· IT and communication systems promotion and maintenance.
· Consulting and intermediary services.
· Higher education.
With whom and where to cooperate
1.1. Russian enterprises:
# / Enterprise type / Advantages / Disadvantages / Field of cooperation, Preferable JV location territory1 / Large industrial enterprises / Relative reliability, Availability of the lobby in regional and federal government. A cheap labor / Obsolete technologies. Stagnancy of management, Sluggishness/inertness / Export of raw material, semi-products and production of industrial purpose. Import of technologies
Russia (Rostselmash)
2 / Medium-sized industrial enterprises / Flexibility of management and production policy. Local authorities and proprietors support. / Financial weakness. Dependency on regional and municipal authorities. / A food industry based on a local and imported raw material.
Agricultural production.
Assembly production of electronics.
IT and communication technologies.
Trade.
Russia
3 / Small enterprises of non-productive type / Market-orientated, Flexibility of management. / Financial instability. Dependency on regional and municipal authorities. / Trade,
Agricultural production
Consulting and intermediary services.
Russia
4 / Small high-tech enterprises / High scientific and intellectual potential of employees. Significant demand on the Western market for production. Low cost of labor forces / Financial instability. / Joint projects in a field of high-tech innovations (electronic medical equipment, optoelectronics, software development)
Russia, Western countries
2. A brief history of the company and its activity domain.
Electromed International LTD (companies names here and further are altered for protection of commercial interests) was established in 1998 in Netherlands. The founder’s structure includes: the British citizen, the Dutch company and the Russian citizens. The general director – is the citizen of The Netherlands, owner of Dutch mediatory company.
The company establishment was preceded by three-year cooperation on promotion and sales of the unique medical devices Cenar developed and produced by Russian company “Ritmedic”. The device was designed back in the Soviet times within the framework of military-industrial complex (MIC) order for the needs of aerospace branch. Devices application is based on qualitatively new methods of the reflex therapy theory use, the Chinese acupuncture and, the systems approach regarding influence on human physiology developed in Russia. Therefore, sales of devices are tightly related with training and the subsequent support of professional physician’s activities, which involve the device use.
Originally the company has been created as a training centre for physicians and potential distributors of these devices in EU countries, warehouse of ready devices and necessary spare parts for sale and service. While evolution of business relations, activity of the company had extended. On a first stage the assembly of devices using the components delivered from Russia has been realized. After a while production of devices on Dutch enterprises was organized on the basis of the license agreement.
Fig. 1 Structural and functional diagram of JV ELECTROMED Int.
High-quality western electronic components, production and assembly automation have enabled to increase essentially quality and reliability of devices in general, and certify them to comply the regulations within the framework of the EU.
The cost price of devices essentially was not changed due to:
· Replacement of a hand work in Russia with process automation in Europe,
· Elimination of transportation cost (including transit time) between Russia and Europe,
· Elimination customs duties.
The certification of device to comply EU regulations has allowed to enter the world market and to increase essentially the European consumer’s confidence in Russian device.
The geography of cooperation of ELECTROMED and RITMEDIC includes all countries of Europe, America and Canada.
Types of activity:
· production, sales and service,
· clinical tests and development of medical techniques,
· building-up the Cenar-therapy medical centers network,
· organization of workshops and seminars for device users training, development and publication of the methodical literature in languages of countries of distribution,
· realization of regular international scientific - practical conferences.
The functional description of joint venture
"Contribution" of each partner to various types of joint activity (“Activity Share” -ASJVI) can be considered as one of the major characteristics of any kind of partnership. Such contributions (in percentage terms) of the partner companies into joint venture Electromed activity within three directions – (1) organization, (2) the production technology, (3) product are displayed on Fig.1, based on an expert evaluation. The expert evaluation can be based on time consumption, costs and other alternate methods.
Completeness of ASi evaluation is impossible without definition of "Significance" Si of i activity types on a general result.
Quantitatively, the significance of various activity types Si in the aggregate volume of the company activity can be evaluated using costs Cj, related to the gross income of the enterprise (I):
SO = (CA +CM + B) / I, %
ST = (CR + CD + CLP) / I, % (1)
SP = (CR&D + CO) / I, %,
where: SO, ST, SP, the significance of organization, technology and production accordingly;
CA costs on office and management personnel (OMP)
CM costs of marketing;
CR costs of raw material and goods;
CD depreciation charges;
CLP remuneration of labor of employees involved in production;
CR&D costs of research and development (R&D);
CQ costs of maintenance and improvement of quality of production;
B the gross profit.
The contribution of a parent company (ASK) on various activity types of joint venture (ASJVI) taking into account significances (SI) will be defined as:
ASKI = ASJVI * SI (2)
The partner – companies’ "contribution" evaluation (fig. 1) enables to make judgment regarding a degree of independence of joint venture in the strategic and operating problems solution.
Nowadays Electromed in cooperation with Ritmedic have developed the new European modification of electronic device meeting modern market standards and device users demands, and intended for the world market. Introduction of the new device will essentially change arrangement of forces between the Russian and Dutch parent companies and will demand new forms for interacting (fig. 1).
3. The cross-cultural communications issue (mentality, psychology and national traditions, common and business communication language).
Features of mentality and historical traditions of the nations are the defining factor of the values system formation for this or that nation and or state.
Success or failure of international business - communities in many respects if not in a whole, depends on compatibility of these values or, at least, in realized perception and the account of them while planning and realization of joint activities and interrelations. Value guiding lines, in this case, can be considered as a filter used for an administrative decision-making process. (Fig. 2):
Bio / physiological motivation / VALUEGUIDING LINES / Administrative decision-making
Social motivation
Social environment
Environment (habitat)
Fig.2 The value system and administrative decision-making.
Obviously, partner companies from countries with substantially different cultures and mentality (Asia - Europe, India - America, etc.) should know and take into account the value system of their business partners while designing business plans. It look obvious, that the citizen of a host country, where joint venture headquarter is located (in our case – The Netherlands) should be nominated as a director general (board of directors chairman) for this approach practical implementation. At the same time, the board of directors should include representatives of the partner company (Russia), one of which has a control authority, for example the chief financial executive or auditor. Such arrangement of forces allows balancing strategic interests and, simultaneously, to find the compromise in operating and tactical management, taking into account differences in a value guiding lines.
More than ten years Electromed Int. operation experience, as Russian European joint venture, have enabled to generalize and systematize some comparative professional and personal features of the European and Russian businessman (Tab.3):
Tab. 3.
Comparative business and personal qualities of the Russian and western businessmenof small and medium-sized companies (experience of years 2000 – 2010):
№ / Managerial capacity / Russian / score / Western / score1. / Professionalism: business,
Legal / High
Low / 3
1 / High
High / 3
3
2 / Enterprise / High / 3 / High / 3
3 / Responsibility / High / 3 / High / 3
4 / Obliging / Low / 1 / Average / 2
5 / Tendency to risk / Average / 2 / Low / 1
Final evaluation (scores) / 13 / 15
Personal qualities
7 / ambitious / High / 3 / High / 3
8 / openness / Average / 2 / Low / 1
9 / trustfulness / High / 3 / Low / 1
10 / loyalty / Average / 2 / Low / 1
11 / emotionality / High / 3 / Average / 2
Final evaluation (scores) / 13 / 8
The data, presented in Table 3, is not a quality evaluation of business characteristics of Russian and western businessmen. These characteristics in a various situations can play both positive and negative roles (for example, tendency to risk). It shows only our differences, basically psycho – emotional, the attention and adaptation to which are necessary for a joint business and partnership success.
4. The information as system-forming (backbone) factor.
Traditionally, information systems (IS) are developed and designed for the existing technical or organizational system for maintenance of its operation.
The other way the formulated objective of organization activity defines the information contents, volumes and sources, necessary for a defined objective realization. In this case, merge of information sources into the system, subject the given objective, generates the material system of mutual relations of an information exchange participants.
In case of the organizational system within economic activity, partner companies and individuals, involved in joint activity directly or indirectly, can act as information sources. Such information system is especially effective in a case of territorially separated partners.
Modern "on-line" information interchange means (“Skype”, the Internet conferences, a mobile communication within Internet) allow easily to realize this concept.
General information interchange principles:
1. System.
The information contents and volumes should be strictly limited in frames of a defined objective and are aimed to its realization - the superfluous information is as harmful as its lack.
2. Structural properties:
· The information flows in space and in time should conform to the hierarchy of the objectives and missions aimed for the general objective realization;
· The information should conform to certain discussed issue and decision making level.
3. Regularity.
The information interchange should occur regularly. The irregularity generates uncertainty, lack of obligatoriness and nonconfidence in partners’ relations.
4. Reciprocity and trustworthiness.
The reciprocity and trustworthiness in information interchange creates partnership, single-sided attitude leads to rigid centralism in management.
5. Completeness.
Each discussed issues should be resolved with concrete result, irrespective whether it is positive or negative. The decision has to be formulated as a general protocol or agreement.
6. Confidentiality.
Certain limitations are assumed regarding the contents of an information interchange on different levels of hierarchy of the responsibility:
· Between manufacturers,
· The Manufacturer the authorized distributor,
· The Network of distributors,
· Distributors commercial agents,
· Commercial agents consumers.
Algorithm of an information interchange organization in the partnership system
Design of the target information hierarchy
Discussion objective formation
Definition of discussion participants
Schedule harmonization
Discussion
Report and its approval
Information of other parties involved
Electromed Int. within one year has realized the program « One face to the world » (OFW), aimed to unite the partners acting on the world market, involved in production and distribution of Cenar device. It resulted in systematization and structuring of relations between partners and in substantial increase of community activity efficiency.
Fig.3 The target information hierarchy necessary for the OFW program realization
Fig. 4 Layout and interaction of Cenar device markets before OFW program introduction.
Fig. 5 Structure and interaction of Cenar device markets and producers after OFW program introduction. Dashed line shows informational and methodological communications.
Thus, the systematization and structuring of relations between partners and in substantial increase of community activity efficiency can be realize via information exchange system without the attracting of the administrative resources and initial investments.