Joint ventures with local partners are a common strategy adopted by foreign investors. Indeed, the approach is often required by host governments attempting to encourage the development of local business operations.

The main role of the local partner from the point of view of the foreign investor is to provide some degree of political protection against government actions that may affect the profitability of the venture. However, they can also have other advantages, such a knowledge of the local market, and may even help spread help spread the financial risks by contributing to the cost of the project.

Whether joint venture partners are really effective in providing political protection is an issue that has long been debated. One study in the 1970s came to the somewhat depressing conclusion that joint ventures were more likely to be expropriated than wholly-owned foreign enterprises1. However, this conclusion may be misleading, since it is highly likely that joint ventures have been more frequent in industries where the political risk is already high. That said, several studies have indicated that foreign investors were most likely to express dissatisfaction with a joint venture when it involved the government as the local partner.

Even so, the behaviour as well as the general nature of the political connections of one's local partners do need to be carefully monitored. The more the foreign partner relies upon a local partner to negotiate special arrangements with the host government, for example, the more likely it is that the project will be vulnerable to charges of favouritism or corruption should the government change hands.

It is therefore important to perform a thorough due diligence on the potential partner, not only to determine his financial standing, but also to gather information on the local company's reputation and possible political vulnerabilities.

See also
Dilemma for Japan's Corporate Strategists