Q.1 What are the unique advantages and disadvantages of International Joint Ventures?

Try to relate to the case when you answer this question.

The case illustrates the possibility of a Joint Venture between Nora, a leader in telecom
equipments in Malaysia and Sakari, a Finnish Conglomerate that deals in the manufacturing of
cellular phone sets and switching systems.
Joint Ventures between local players in developing countries and foreign companies have
become an apt means for both managements for satisfying their business needs and objectives.
Local partners bring local expertise of the target market, familiarity with local governance and
government regulations, understanding of the regional work ethics and culture, while, the foreign
players get the latest technological know-how, advanced operational frameworks and access to
export markets to the table. It can be seen as a symbiotic tryst between two mutually co
dependant parties.
In the light of the aforementioned case, some of the unique advantages and disadvantages of an
International Joint Venture are as follows:
Advantages of an International Joint Venture:

Access to new markets and a wider distribution capacity: As shown in the case, Sakari
was interested in enhancing its global market share by means of a Joint Venture. A Joint
Venture allowed it to foray into lesser known foreign markets with the help of an
established local player. This allowed the Finnish company to gain the much needed
expertise and foothold in a relatively alien market.
Cap the high growth potential of virgin markets (usually the developing countries) : A JV
allows a company to enter a market and tap the high growth opportunities almost
instantly. The case illustrates that the mobile telecommunication network is anticipated to
be about 40% a year in Asia in the next 5 years. Also the low telephone penetration rate
in Malaysia as opposed to its developed counterparts allowed for lucrative gains in the
near future. They provide higher returns compared to trade related and contractual
expansion modes.
Incorporation of New and Advanced Technology: The entities in a joint venture benefit
from each other by pooling in resources and technology to attain sustainable competitive
advantage over the other players. One of the examples of the same would be Sakaris
product SK33, a digital switching system, which worked on an open architecture. This
product would definitely leverage Noras chances of winning the TMB bid on a five year
project worth RM2 billion for installing digital switching exchanges across the country.
Sharing of risks and costs with a partner: A joint venture allows the participating
companies to mitigate the risks and distribute the fixed and variable costs.
Access to a greater resource base including specialized staff, technology and financial
resources.
Provide access to countries where complete ownership is restricted : For example, the
Malaysian government had strict norms related to participation of foreign equity. The set
standard was in the ratio 30:70, wherein the foreign player could invest not more than
30% in the equity of the joint venture.

Disadvantages of an International Joint Venture:

Risk of equity partner becoming a future competitor : Sakari feared the chances of Nora
gaining the much needed expertise and becoming a future competitor in the
telecommunication equipment market worldwide.
Management issues due to regional and cultural differences: The work culture and the
cultural environment of Malaysia were significantly different from that of Finland.
Malaysian culture promoted a large degree of separation between the upper management
and the line workers, while the Finnish preferred a decentralized organizational structure.
The notable difference is the value set and professional mannerisms did cause a conflict
and reduced the chances of a harmonious Joint Venture between the two entities.
Difference in goals, objectives of the parties may lead to future conflicts: Sakari and Nora
did have a lot in common in terms of their business objectives and functionalities.
However, there existed a few moot points that could lead to future clashes and conflicts
in terms of the revenue sharing and other managerial equations.
Issues arising due to sharing of trade processes, know-how: Sakari was known for its
ardent support for R&D in the telecommunication related arena. About 17% of its annual
sales revenue was invested in R&D and product development units across Finland, U.K.
and France. This strategy had allowed Sakari to develop an impeccable edge in product
innovation, development of new technologies (like the SK33 switching device) over the
years. Nora on the other hand still had a long way to go in terms of reaching global R&D
standards, it planned to increase its R&D spend to around 5-6% in the coming 2-3 years.
The status quo however made Sakari quite skeptical about divulging its trade secrets,
processes and implementation procedures to Nora.
Operational Issues: A host of operational issues also result in failure of Joint Ventures
world over. Some of these operational issues could arise due to the following :
Issues related to multi-nationality :
Export Disputes
Difference in tax policies of the participating nations
Valuation Problems: The participating entities bring with them certain financial and other
assets to the JV and often it is deemed cumbersome to assess the current worth of these
assets. For instance, the product that already has an ingrained technology is now
incorporated in the JV. What is the worth of such assets? How should they be valued?
Such problems often arise in case of Joint Venture negotiations and agreements.
These were some of the cumulative advantages and disadvantages of a Joint Venture. JV
relationships are often very fragile and have to be backed by articulate documentation
and consolidated common understanding to avoid future conflicts that might result in JV
failures.

Q.2 In the context of the case, why have the negotiations so far failed to result in an
agreement? Is the formation of the JV between Nora and Sakari the best option for
both companies to achieve their respective objectives?
The negotiations between Nora and Sakari have been taking place since a considerable
time (over 2 years) and over 20 meetings have been held in either KL or in Helsinki.
Also, an estimated amount of RM3 million had already been spent in promoting the
proposed JV between the 2 entities. However, even after these efforts an agreement had
not been reached and the participating companies were still not sure about the future of
the Joint Venture.
The mutual benefits sought from the collaboration have been clearly mentioned in the
case. From Sakari side, the JV allowed it to set foot in the South East Asian market while
Nora was motivated by the possibility of acquiring and emulating Sakaris innovative
telecom technology that would prove to be instrumental in the TMB contract.
The formation of the proposed JV would definitely benefit the two companies in more
ways than one.
The reasons why the negotiations between Nora and Sakari have not materialized can be
summarized as follows:
Notable Differences in the work ethics and value sets of the two companies :
On an analysis of the working environment and the organizational structure of the
participating countries, it is seen that there existed some major differences in the
working styles of the nations. Malaysian preferred a more centralized approach to
decision making, as Noras executive had the power to make on the spot and
instant decisions related to the JV while on the other hand, the Sakari team had to
report every minute detail to the Company Board before they could take any
further steps.
Also, the Malaysians preferred a hierarchical approach in terms of the magnitude
of the power distance. There existed a large degree of separation between the top
management and the staff and line workers The Finnish, on the other hand
followed a much relaxed approach towards the same.
Lack of trust between the contracting parties: As a reader, one feels that the Sakari
negotiators never vested enough faith in the industry practices and ideologies of
Nora. They were skeptical about a complete technology transfer agreement and
proposed to provide only the basic structure of the digital switch to Nora.
Nora was not happy with this proposal as it felt that the root of the switching
technology would still be unknown to them and only the technical aspects in
assembling and installing exchanges would be obtained.
Issues arising over Equity ownership: The parties had agreed to form the JV with
a paid up capital of RM5 million. However, no common ground could be reached
on the distribution of this capital between the companies. Sakari proposed an
equity split of 49:51 (49%-Sakari and 51%-Nora) while Noras proposal was of a
30:70 split, as mandated by the Malaysian Government. Sakari perceived this as a

These were
companies.

lack of control in protection of its interests in the future and did not agree to the
same.
Issues related to Royalty payment: Sakari proposed a royalty payment of 5% on
the JV gross sales while Nora proposed a payment of 2% on net sales. A common
understanding could not be reached on the same.
Issues pertaining to the Expatriates salaries and perks: Nora negotiators clearly
followed a more collective and less individualistic approach and were aiming at a
mutually viable JV for both the companies. On the other hand, the Sakari
negotiators were only bothered about extracting better portions of the pie for
themselves. They followed an individualistic approach and asked for exorbitant
salaries and perks for the on-site engineers and experts. The outrageous demands
made by them were without any reasoning and lacked regional considerations. For
instance, Sakaris arrogant engineer that was asked to leave and the notable
shortcomings in the local research conducted by the Sakari team.
Disagreement on the location for dispute resolution or arbitration: Sakari insisted
on Helsinki while Nora proposed KL.
some of the major hiccups that resulted in a sour relationship between the 2

Q3.As Zainal, what would you do to ensure that Nora fulfills the TMB Contract?
It is noteworthy that while Sakari had an alternative choice of expanding its operations in the EU
Market, Nora was left with no or little choice. Nora had already committed itself to the TMB
contract and was in dire need of a technology partner to complete this contract successfully.
The TMB Contract requires it to deliver 800,000 telephone lines over a period of five years
Considering the aforementioned situation, as Zainal I would try to achieve reconciliation with
Sakari by tweaking the terms of the contract to suit both parties.
The reason why this looks like the best alternative is that, Nora had already spent over 2 years
and a sizeable amount of RM3 million in nurturing a relationship with Sakari and clearly with
the deliverables of the contract round the corner, Nora was running short of time and did not
enjoy the liberty of starting a negotiation with another player from the scratch.
The other options like Alcatel, a French company could have been a potential partner but the
technical standards of the two companies were not compatible.
NEC and Ericsson were already involved with local competitors and could not be considered.
Sakari emerged as a viable option owing to various reasons, like:
Sakaris SK33 an innovative digital switching system was based on an open architecture which
allowed the use of standard components and languages. Also the SK33 components were widely
available in the open market.
Sakari was a small player in fixed networks but these networks were readily adaptable to urban
as well as rural needs.
Sakari also showed willingness to customize its offerings based on Noras requirements and
needs. The larger telecom companies did not offer such customization options.
Also Nora and Sakari had very similar interests in R&D and accepted its importance in the long
run. Nora could have made the most of learning from the sophisticated Finnish technology and
implemented the learning in its future projects.

These were some of the major reasons why Sakari enjoyed an edge over the other competitors in
the same niche.
Looking forward a compromise should be reached because Nora and Sakari are equally
necessary to each other, if the companies realize this a middle ground could be reached at as far
as the terms of the Joint Venture are concerned.
Some of the key issues can be addressed as follows:
Given that Nora has tremendous foothold and local expertise in Malaysia and has excellent terms
with the government as well, it is only justified that it has a majority stake in the equity
partnership. Also, the government regulations prevalent in Malaysia favor this break up.
Sakari is also bothered about the nature of technology transfer as it fears Nora will gain the much
needed expertise and become a future competitor once the contract ends, Nora should allow
Sakari to protect its technology and stick to Sakari assembly and installation plan. This is also
because they have a greater experience and know-how in digital switch making.
As far as the payment of expatriates and experts is concerned, Nora should try and devise a
compensation plan based on the current industry standards in Malaysia but at the same time
ensure that the Finnish staff is given enough perks and incentives to deliver its valuable support.
These experts are of utmost importance as they are going to be the torch bearers in the entire
implementation process of various technological platforms in the Joint Venture. Without them
the quality standards may suffer and the processes may get disrupted. However, if Sakari is
adamant on the pay packages of these employees, Nora can take a step back and amend its
compensation packages to meet the Helsinki standards.
However, royalties should be compromised upon as Nora has been the lenient partner so far.
Nora and Sakari should accept a royalty payment 3% on net sales, this would enable the
preservation of Noras request of a 10% ROI. Sakari should understand the constraints on Noras
part and give in to this demand of theirs.
The location for arbitration should be chosen as a neutral territory equidistant from Helsinki and
KL. This can remove the bone of contention between the two parties over the same.
As Zainal I would try and convince the Finnish counterparts over the necessity and advantages of
the deal. Sakari should be convinced by quoting the excellent growth potential in the South East
Asian region and the importance of this JV for them for entering these emerging markets.
This is seemingly the best option for Nora to complete the TMB contract within the stipulated
time.