SHARED OWNERSHIP
SHARED OWNERSHIP
When a firm does take an ownership in foreign operations, it may own the entire stock or it may share the ownership. There are various types of ownership sharing, just as there are several reasons for selecting an equity amount.
The Argument for 100 Percent Ownership
Most businesspeople would prefer to have a 100 percent interest in foreign operations in order to ensure control and to prevent the dilution of profits. As long as there are no other stockholders, corporate management has a greater freedom to enact measures that, although not in the best interest of the particular operations, are in the best interest of the company as a whole. With other stockholders, the parent firm has much less freedom of action, since even minority stockholders may become very vocal to their governments about practices that are not in the best interest of subsidiaries. In fact, most countries have legislation to protect minority stockholders. Freuhauf-France, for example, received export orders that, although in the best interest of that subsidiary, were not considered by its U.S. majority owners to be in the best interests of Freuhauf's worldwide operations. When Freuhauf-France did not fulfill the export orders, the minority stockholders contested the action in French courts. This left the majority stockholders with the options of either filling the export order or paying damages to the minority holders.39
Even when the majority owners act in what they consider to be the best interest of the local company, there may be conflicts with local stockholders because of different opinions as to what businesses should be doing. Some points of possible conflict are dividend pay-out versus the retention of earnings, the degree of public disclosure of activities, and the degree of cooperation with various governmental agencies.
The argument against diluting profits is simple: Many firms contend that if they own all the resources necessary for the successful foreign operation and are willing to contribute these resources, they should not have to share ownership.
Reasons for Shared-Ownership Arrangements
In spite of the advantages to owning 100 percent in a foreign facility, ownership sharing is popular.40 The reasons for this are undoubtedly a combination of outside pressures and internal willingness to take partial ownership abroad.
From an internal standpoint, there has been a need to bring outside resources into foreign operations. By sharing ownership in some existing foreign operations, many firms have been able to spread geographically at a faster rate. This has prevented competitors from gaining dominant market shares and also allowed maximum sales expansion, which helps to spread such relatively fixed costs as R&D to a larger sales base.
Externally, there have been increased pressures by many countries for ownership sharing with local shareholders, as countries feel this policy will enhance their economic or political objectives. In addition, many companies feel that by bringing local capital into the organization they take on a local character that decreases governmental and societal criticism (thus reducing the risk of nationalization or expropriation) and may bring captive sales to the participating shareholders. Some industries share ownership much more than others, especially those for which a high capital outlay is necessary for making the investment. The higher capital outlay in these large investments necessitates additional outside resources. Furthermore, local governments exert greater pressure for ownership sharing on those firms having the most significant impact on the economy.
A major reason for sharing ownership abroad is to gain more assured synergy among the assets held by two or more organizations in different countries. For example, Whirlpool has appliance technology and the Mexican firm Vitro has skills to manage a labor force, which the two companies put together for making washing machines in Mexico. Or they may combine certain resources to combat larger and more powerful competitors. For example, Volvo's 20 percent interest in Renault and Renault's 25 percent interest in Volvo's car subsidiary enhance their joint development and production of technically advanced components at low cost so that they can better compete against larger auto firms, such as General Motors and Volkswagen.41 Almost
any type of asset can be combined. For instance, one firm has manufacturing capabilities; another has distribution. The two may have research capabilities that complement each other. But why share in ownership instead of setting nonequity contract arrangements? Simply, a shared ownership of even a minority amount adds some assurance of say-so over the operation. For example, SAS acquired a 9.9 percent interest in Texas Air, Continental's parent. There are considerable synergies between SAS and Continental that Texas Air cannot easily nullify because SAS has a board seat on Texas Air.42
Equity as a Control Mechanism
The problem of deciding how much equity is necessary for control is cumbersome. With a few exceptions, the larger the percentage of equity held, the more likely it is that the owner of this equity will control the decisions and policies of the enterprise. Many firms are willing to share ownership but usually will specify whether the sharing is to be with or without control. If, for example, a firm takes only a minority holding in its foreign operations, ordinarily it can still control policies and decisions if the remaining ownership is widely fragmented. After the 1973 Mexicanization law discussed in the Grupo Industrial Alfa case, many foreign firms sought to maintain management control in spite of minority equity positions by selling 51 percent of their shares to a broad ownership market through the Mexican stock exchange. BASF, a German chemical company, maintained management control by transferring a majority interest in its pharmaceutical company to Bancomer, a big Mexican bank. The bank was simply interested in diversifying its investment holdings and had no desire to manage.43 Another possibility is to divide profits on the basis of shares but to give voting rights only to one class of shareholders. Still another is to stipulate that your own directors will appoint management and key officers.44
When no one company has control, the operation may lack a significant direction. In discussing the problems of a company that was jointly owned by a U.S. and a Japanese firm, a Sterling Drug spokesman said, "You must decide right off the bat whether you'll control it or will put confidence in the Japanese organization."45 This opinion is supported by studies showing that when two or more partners attempt to share in the management of an operation, there is a much higher incidence of failure than when one parent dominates.46
Joint Ventures
A type of ownership sharing very popular among international companies is the joint venture, which occurs when a company is owned by more than one organization. Although it is formed usually for the achievement of a limited objective, it may continue to operate indefinitely as the objective is redefined. Joint ventures are sometimes thought of as fifty-fifty companies, but often
more than two organizations participate in the ownership. Furthermore, one organization may frequently control more than 50 percent of the venture. The type of legal organization may be a partnership, corporation, or some other form of organization permitted in the country of operation. When more than two organizations participate, the resultant joint venture is sometimes referred to as a consortium.
Almost every conceivable combination of partners may exist in joint ventures. They may include, for example, two firms from the same country joining together in a foreign market, such as Standard Oil-California and International Minerals and Chemicals in India. They may involve a foreign company joining with a local company, such as Sears Roebuck and Simpsons in Canada. Companies from two or more countries may establish a joint venture in a third country—for example, Alcan (Canadian) and Pechiney (French) in Argentina. The ventures may be formed between a private company and a local government (sometimes called mixed ventures), such as Philips (Dutch) with the Indonesian government. Even some government-controlled companies have had joint ventures abroad, such as Dutch State Mines with Pittsburgh Plate Glass in the United States. The more firms are involved in the ownership, the more complex the ownership arrangement is. For example, Australia Aluminum is owned by two U.S companies (American Metal Climax and Anaconda), two Japanese companies (Sumitomo Chemical Company and Showa Denko), one Dutch company (Holland Aluminum), and one German company (Vereinigte Aluminum Werke).
The arguments for and against the sharing of ownership apply as well to joint ventures. Certain types of firms have a greater tolerance for joint ventures than others.47 Firms with higher tolerance include those that are new at foreign operations and those with decentralized decision making domestically, very often the multiproduct companies. Since the latter firms are accustomed to extending control downward in their organizations, it is an easier transition to do the same thing internationally.
Many joint ventures break up, primarily because the parties evolve different objectives for them. For instance, one partner may want to reinvest earnings for growth and the other partner may want to receive dividends. Another problem is that one partner may offer much closer management attention to the venture than the other. If things go wrong, the more active partner blames the less active partner for its lack of attention, and the less active partner blames the more active one for making poor decisions.48 Furthermore, partners may be suspicious that their partners are taking more from the venture (particularly technology) than they are. Therefore, the choice of joint venture partner is crucial, particularly if one is forced into a shared-ownership arrangement because of governmental regulations. For this reason many firms will develop joint ventures only after they have had long-term positive experiences with the other company through distributorship, licensing, or other contract arrangements. Compatibility of corporate cultures is also important in cementing relationships.49
When a firm does take an ownership in foreign operations, it may own the entire stock or it may share the ownership. There are various types of ownership sharing, just as there are several reasons for selecting an equity amount.
The Argument for 100 Percent Ownership
Most businesspeople would prefer to have a 100 percent interest in foreign operations in order to ensure control and to prevent the dilution of profits. As long as there are no other stockholders, corporate management has a greater freedom to enact measures that, although not in the best interest of the particular operations, are in the best interest of the company as a whole. With other stockholders, the parent firm has much less freedom of action, since even minority stockholders may become very vocal to their governments about practices that are not in the best interest of subsidiaries. In fact, most countries have legislation to protect minority stockholders. Freuhauf-France, for example, received export orders that, although in the best interest of that subsidiary, were not considered by its U.S. majority owners to be in the best interests of Freuhauf's worldwide operations. When Freuhauf-France did not fulfill the export orders, the minority stockholders contested the action in French courts. This left the majority stockholders with the options of either filling the export order or paying damages to the minority holders.39
Even when the majority owners act in what they consider to be the best interest of the local company, there may be conflicts with local stockholders because of different opinions as to what businesses should be doing. Some points of possible conflict are dividend pay-out versus the retention of earnings, the degree of public disclosure of activities, and the degree of cooperation with various governmental agencies.
The argument against diluting profits is simple: Many firms contend that if they own all the resources necessary for the successful foreign operation and are willing to contribute these resources, they should not have to share ownership.
Reasons for Shared-Ownership Arrangements
In spite of the advantages to owning 100 percent in a foreign facility, ownership sharing is popular.40 The reasons for this are undoubtedly a combination of outside pressures and internal willingness to take partial ownership abroad.
From an internal standpoint, there has been a need to bring outside resources into foreign operations. By sharing ownership in some existing foreign operations, many firms have been able to spread geographically at a faster rate. This has prevented competitors from gaining dominant market shares and also allowed maximum sales expansion, which helps to spread such relatively fixed costs as R&D to a larger sales base.
Externally, there have been increased pressures by many countries for ownership sharing with local shareholders, as countries feel this policy will enhance their economic or political objectives. In addition, many companies feel that by bringing local capital into the organization they take on a local character that decreases governmental and societal criticism (thus reducing the risk of nationalization or expropriation) and may bring captive sales to the participating shareholders. Some industries share ownership much more than others, especially those for which a high capital outlay is necessary for making the investment. The higher capital outlay in these large investments necessitates additional outside resources. Furthermore, local governments exert greater pressure for ownership sharing on those firms having the most significant impact on the economy.
A major reason for sharing ownership abroad is to gain more assured synergy among the assets held by two or more organizations in different countries. For example, Whirlpool has appliance technology and the Mexican firm Vitro has skills to manage a labor force, which the two companies put together for making washing machines in Mexico. Or they may combine certain resources to combat larger and more powerful competitors. For example, Volvo's 20 percent interest in Renault and Renault's 25 percent interest in Volvo's car subsidiary enhance their joint development and production of technically advanced components at low cost so that they can better compete against larger auto firms, such as General Motors and Volkswagen.41 Almost
any type of asset can be combined. For instance, one firm has manufacturing capabilities; another has distribution. The two may have research capabilities that complement each other. But why share in ownership instead of setting nonequity contract arrangements? Simply, a shared ownership of even a minority amount adds some assurance of say-so over the operation. For example, SAS acquired a 9.9 percent interest in Texas Air, Continental's parent. There are considerable synergies between SAS and Continental that Texas Air cannot easily nullify because SAS has a board seat on Texas Air.42
Equity as a Control Mechanism
The problem of deciding how much equity is necessary for control is cumbersome. With a few exceptions, the larger the percentage of equity held, the more likely it is that the owner of this equity will control the decisions and policies of the enterprise. Many firms are willing to share ownership but usually will specify whether the sharing is to be with or without control. If, for example, a firm takes only a minority holding in its foreign operations, ordinarily it can still control policies and decisions if the remaining ownership is widely fragmented. After the 1973 Mexicanization law discussed in the Grupo Industrial Alfa case, many foreign firms sought to maintain management control in spite of minority equity positions by selling 51 percent of their shares to a broad ownership market through the Mexican stock exchange. BASF, a German chemical company, maintained management control by transferring a majority interest in its pharmaceutical company to Bancomer, a big Mexican bank. The bank was simply interested in diversifying its investment holdings and had no desire to manage.43 Another possibility is to divide profits on the basis of shares but to give voting rights only to one class of shareholders. Still another is to stipulate that your own directors will appoint management and key officers.44
When no one company has control, the operation may lack a significant direction. In discussing the problems of a company that was jointly owned by a U.S. and a Japanese firm, a Sterling Drug spokesman said, "You must decide right off the bat whether you'll control it or will put confidence in the Japanese organization."45 This opinion is supported by studies showing that when two or more partners attempt to share in the management of an operation, there is a much higher incidence of failure than when one parent dominates.46
Joint Ventures
A type of ownership sharing very popular among international companies is the joint venture, which occurs when a company is owned by more than one organization. Although it is formed usually for the achievement of a limited objective, it may continue to operate indefinitely as the objective is redefined. Joint ventures are sometimes thought of as fifty-fifty companies, but often
more than two organizations participate in the ownership. Furthermore, one organization may frequently control more than 50 percent of the venture. The type of legal organization may be a partnership, corporation, or some other form of organization permitted in the country of operation. When more than two organizations participate, the resultant joint venture is sometimes referred to as a consortium.
Almost every conceivable combination of partners may exist in joint ventures. They may include, for example, two firms from the same country joining together in a foreign market, such as Standard Oil-California and International Minerals and Chemicals in India. They may involve a foreign company joining with a local company, such as Sears Roebuck and Simpsons in Canada. Companies from two or more countries may establish a joint venture in a third country—for example, Alcan (Canadian) and Pechiney (French) in Argentina. The ventures may be formed between a private company and a local government (sometimes called mixed ventures), such as Philips (Dutch) with the Indonesian government. Even some government-controlled companies have had joint ventures abroad, such as Dutch State Mines with Pittsburgh Plate Glass in the United States. The more firms are involved in the ownership, the more complex the ownership arrangement is. For example, Australia Aluminum is owned by two U.S companies (American Metal Climax and Anaconda), two Japanese companies (Sumitomo Chemical Company and Showa Denko), one Dutch company (Holland Aluminum), and one German company (Vereinigte Aluminum Werke).
The arguments for and against the sharing of ownership apply as well to joint ventures. Certain types of firms have a greater tolerance for joint ventures than others.47 Firms with higher tolerance include those that are new at foreign operations and those with decentralized decision making domestically, very often the multiproduct companies. Since the latter firms are accustomed to extending control downward in their organizations, it is an easier transition to do the same thing internationally.
Many joint ventures break up, primarily because the parties evolve different objectives for them. For instance, one partner may want to reinvest earnings for growth and the other partner may want to receive dividends. Another problem is that one partner may offer much closer management attention to the venture than the other. If things go wrong, the more active partner blames the less active partner for its lack of attention, and the less active partner blames the more active one for making poor decisions.48 Furthermore, partners may be suspicious that their partners are taking more from the venture (particularly technology) than they are. Therefore, the choice of joint venture partner is crucial, particularly if one is forced into a shared-ownership arrangement because of governmental regulations. For this reason many firms will develop joint ventures only after they have had long-term positive experiences with the other company through distributorship, licensing, or other contract arrangements. Compatibility of corporate cultures is also important in cementing relationships.49
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