Joint venture is a settlement made by two parties usually between a local and a foreign company, to combine their different strengths to compete more successfully in the marketplace. This type of agreement forces them to bring their own stock and share both, ownership and control over the new company.
Joint venture is not always necessarily a separate corporation. Sometimes it is just a very close collaboration between two companies while working on a certain project.
Main goals of joint venture
- Gaining access to the new markets
- Extension of already owned markets
- The synergy effect
- Risk diversification
- Effect of leverage scale
- Gaining access to cheaper labor costs
- Exchanging experience and technology
It may also be convenient due to economic or political regulations. The foreign company may lack the financial, physical or executive resources to be able to take on the venture alone. Sometimes also the government demands a joint ownership as a condition to enter the market. Even the corporate giants need the joint venture to break into the most difficult markets.
But joint ventures can also have serious drawbacks. These include for example the loss of flexibility to respond quick enough to market demands and labor needs, and the loss of control both in firing and hiring personnel. Partners may not agree to certain aspects of common investment, marketing and others. One may want to reinvest the earning to accelerate the growth, other to pay bigger dividends to the stockholders.
The success of joint ventures depends highly upon the degree to which managers who have different ways of running business and different visions can work together. Joint ventures usually involve composite structuring arrangements and hard negotiations. The basic problems are: the determination of the value of what each party gets along with the joint venture, the possession percentages, the timing and distribution of profits, the sharing of the losses and how the strategic business decisions will be made. All the contractual provisions of the joint venture agreement must be negotiated at the same time because the terms of one decision have an impact on the rest.
Joint venture examples
- Coca Cola and Nestlé joined their forces and created an international market for the instant tea and coffee, now very highly popular in Japan.
- Procter & Gamble created a joint venture company with its biggest Italian rival Fater, to deliver baby products to Great Britain and Italy.
- Whirlpool affiliated 53% of the stock of Dutch’s electronic group Philips to enter the European markets with their new technology.
- Beamish, P. W. (1985). Joint venture performance in developing countries.
Author: Agnieszka Paszek