Inadequate participation in the control of joint venture

Many developing countries have come to learn through experience that the degree of participation in equity by itself tells little about how the effective control of the enterprise is shared by the partners. Inadequate participation may be attributable to the minority control of the company, to the passivity of the local shareholders, to the reservation of the right to appoint a smaller number of directors than would be justified by the share in the equity. It may also happen that the foreign interest deliberately takes advantage of the lack of experience of the local partner and introduces into the basic agreement legal devices which limit the decision-making power of the latter. Another common practise is that of drawing a distinction between the board of directors and management the foreign partner having effective control over the day-to-day management. In the sophisticated industries effective control and management are likely to pass into the hands of foreign partner if the local directors and executives do not possess the necessary technical knowledge, which is rare in most developing countries.