Reasons for prefering joint ventures over wholly owned subsidiaries In their empirical research, Beamish/Banks (1987, p.

61) argue that a joint venture is a source not only for increasing revenue, but also one for reducing the costs for a multinational enterprise (MNE). A company such as Nestl may prefer joint ventures over wholly owned subsidiaries in order to reduce risk, enhance corporate growth. Nestl was a new player on the beauty market at the time of forming its alliances with LOral. Through Laboratoires Innov they succeed to open an unexplored market. Another reason concerns the R&D, technology and production facilities that permit them to develop new products. If we take the example of the two joint ventures with LOral we can easily deduce that Nestl benefits from LOrals expertise in the beauty industry. Through this joint venture they also profit from the opportunities of the new market of beauty. They can reach markets at a local, regional and global level faster, helping them to develop a wider network at a fast pace. They create competitive advantage in markets where their resources would be limited otherwise, such as in the beauty supplements and dermatological cosmetics. The three joint ventures analysed are characterized by a high degree of complexity in which case the company would have problems managing all by itself. By forming a joint venture the company can gain a better perspective and efficient operations of the subsidiaries. Internal expansion and the inevitable creation of hierarchy can negatively affect flexibility, speed of response to the market, and free flow of information so desperately needed to implement global strategies. (pp 76 Cooperative Strategy) they are more effective and flexible - for instance they decided to end the contract with Coca Cola in US, this wouldnt have been so easy to do it if it would have been a wholly owned subsidiary they can adopt rapidly new strategies of responding to market changes and developments, so speed is also another advantage od joint ventures information.

Joint ventures may be often be instruments providing firms with flexibility in responding to trends that are difficult to predict. (Porter and Fuller 1986:322). Joint ventures are an important source of international advantage. A portfolio of alternatives is preferable to one or two major investments and can be achieved at relatively low costs through a portfolio of real call options on potential investments. Alliances can provide these options -the initial investment is relatively low. The partners have the possibility to learn more about the market over time without too big investments. Alliances can allow firms to move into new businesses while hedging against the uncertainties inherent to new field. the joint ventures with LOreal offer to Nestle a little bot more certitude, especially in the case of Laboratoires Inneov, where there was a lack of knowledge, laws, market reglementations. They have alternatives and options Both in the case of Loreal and also in the case of Coca Cola they profit from the image of the brand that the companies have. It is easier for Nestle to advertise beauty supplements having the Loreal brand image behind it. Reasons for going into a joint venture: Organizations go into a joint venture because of the need for resources, notably money, skill and manpower. (Kogut 1988) The R&D teams united forces in the case of Laboratoires Inneov. Such a form represents the lowest transaction cost alternative It enables an improved strategic position to be achieved and it gives an opportunity for organizational learning Joint ownership largely eliminates the potential costs that arise in such situations as there is a mutual hostage position through joint commitment of financial or real assets which thereby align partners who otherwise may have potentially conflicting incentives. Tacit knowledge, Koguts third motive, cannot be transferred by contractual codified means and its communicated only by teams working together. (p 77) So: transaction cost analyses joint ventures as an efficient solution to the hazards of economic transactions. Strategic behavior places joint ventures in the context of competitive rivalry and collusive agreements to enhance market

power. Finally transfer of organizational skills views joint ventures as a vehicle by which organizational knowledge is exchanged and imitated. (Kogut 1988:323) the need of accessing superior qualities, capabilities, often in related but not core business areas without actually developing or internalizing them. So Nestle has no need through these joint ventures to internalize processes. As well ad implementation and control is easier through a joint venture. Loreal customers become customers of Nestle. Coca Colas custiomers and distributors become as well the ones of Nestle, that is Nestles power, capabilities and force is greatly enhanced through all these cooperations. Building a network of suppliers and customers can substitute for an extensive internal value chain. 7 other objectives for making an alliance 1. risk reduction 2. achievement of economies of scale and/ or rationalization 3. technology exchange 4. co-opting or blocking competition 5. overcoming government-mandated trade or investment barriers(General Mills) 6. facilating initial international expansion of inexperienced firms (Nestle was virtually inexperienced in the market of cosmetics) 7. vertical quasi-integration advantages of linking the complementary contributions of the partners in a value chain. The question is in fact how transparent are these motives when forming an alliance? Lack of transparency can limit trust and thus sustainable development of the joint ventures. The decision to form an IJV is not based solely on economic reasons, but also on social, psychological and emotional phenomenon. It is not a coincidence that ICVs are frequently described using such terms as trust, shared visions and understanding. Faulkners research suggests that a strategic alliance should be set up as a separate JV company if: the scope of the alliance constitutes a distinct business

the alliance assets are specific easily separable fro the parents and need to be jointly managed the scope of the venture is not central to the partners core business or is at least geographically distinct the partners wish to allocate a predetermined level of resources to the venture is it legally necessarily to enter a national market there is a perceived need to tie in the partners (pp 110-118)