Types of joint venture

A joint venture in business, it means an entity created jointly by more than one company in order to carry out a specific task or to carry out a specific activity. Joint venture partners share the profits and costs of the joint venture . In the classic form, a joint venture is created as a separate enterprise, to which the organisations that make up the joint venture contribute share capital and of which they are co-owners . In reality, however, the joint venture is not always an individual company. Sometimes it can only be a very close cooperation between two entities, which have allocated the capital to a given jointly implemented activity and then settle by dividing the costs and revenues according to the agreement concluded at the time of the creation of the joint venture, but without creating a separate economic entity .

Types of joint venture

• Business partnerships

They consist of merging two companies, creating a limited liability company or a commercial company .

• Separate activities of the Joint Undertaking

This option assumes the establishment of a new, separate company for the execution of a specific order or contract. It is a situation where a separate joint venture, or possibly a new company, is set up in order to perform a specific contract. A joint venture such as this can be a very flexible option. Each partner has a stake in the company and agrees on how to manage it . .

• Limited cooperation

It is a situation where you agree to cooperate with another company in a limited and concrete way. For example, a small company with an exciting new product may want to sell it through a distribution network of a larger company. Both partners agree on an agreement setting out the terms and conditions under which it will operate .

The objectives of the joint venture

Joint vetures are usually set up by companies that have different business profiles, converging at a particular point in which their experience or resources become complementary. Thanks to the joint venture, the companies carry out the tasks together, using knowledge from both sectors . Cooperating with each other, these companies create phones with many multimedia functions. If they wanted to build such telephones separately, each of these companies would have to devote large resources to research and development in a field in which its experience is smaller .

Risk diversification

The cost of starting a new business or entering a new market may be very high for one company and the risk of failure may be too high. Starting a new business in cooperation with other companies in a given industry means that the necessary start-up costs are divided between more entities, thus reducing the burden and risk for one company A. Roos et. All. 2018, https://www.transactionadvisors.com/insights/getting-more-value-joint-ventures).

Advertising

Another form of diversification may be the desire to enter a completely different market or a completely different sector of activity in order to diversify its activities . In order to do so, the company may form a joint venture with another company with more experience in the market in question and thus gain access to technology without incurring significant research and development costs. The second company will thus have access to additional capital, which will allow it to increase production and obtain additional economies of scale .

Economies of scale

Joint venture can be used to obtain economies of scale. Thanks to the cooperation of several entities, the amount of production in relation to the incurred fixed costs may be significantly higher, which will reduce the unit production cost .

Hedging against changes in the market

The fuel sector could be an example of this activity. Due to the depletion of fuel resources in the world, many fuel companies form joint ventures with companies working on alternative energy sources. This activity is aimed at securing the transfer of mankind to another - cheaper or more ecological - source of energy, and does not significantly distract the company's resources from its core business . As new energy sources become widely used, the companies involved in their production will gain a significant competitive advantage over unprepared ones, which will take a considerable amount of time to transfer to other activities without knowledge and experience .

Access to new markets

Two companies can create a joint venture if one of them wants to gain access to the market in which the other operates. In this way, foreign companies very often enter markets in new countries .

Examples of Types of joint venture

• A real estate joint venture is a type of joint venture in which two or more parties pool their resources together to purchase, renovate, or develop real estate property. An example of this type of venture is a group of investors that come together to purchase commercial property and then lease it out to tenants.
• A manufacturing joint venture is one in which two or more companies come together to produce a product. This type of joint venture is very common in the automotive industry. For example, General Motors and Toyota have a joint venture that produces cars under the "Pontiac-Toyota" brand.
• A technology joint venture is one in which two or more companies collaborate to develop a technology or a product. For example, Google and Apple have a joint venture in which they are collaborating to develop a new operating system for mobile devices.
• A research and development joint venture is one in which two or more companies come together to research and develop a new product or technology. An example of this type of venture is the collaboration between IBM and Intel to develop a new chip for mobile devices.
• A strategic marketing joint venture is one in which two or more companies come together to promote a product or service. An example of this type of venture is the collaboration between Coca-Cola and McDonald’s to promote their soft drinks.

Advantages of Types of joint venture

A joint venture is an advantageous business strategy for companies looking to expand their reach and expertise. It is a partnership between two or more businesses that agree to share resources and profits in order to pursue a specific goal. Some advantages of joint ventures include:

• Increased Efficiency: A joint venture allows two or more businesses to pool their resources, expertise, and capital in order to achieve a goal faster and more efficiently.
• Increased Capital: Having two or more businesses contribute capital to a joint venture can help to increase the available funds for the project.
• Shared Risk: Risk is shared between the businesses in the joint venture, which helps to reduce the financial burden for each business.
• Access to New Markets: Joint ventures can help businesses to access new markets and customers, which can lead to increased profits.
• Increased Expertise: By joining forces, businesses can benefit from the combined expertise of both partners. This can help to increase the success of the venture.

Limitations of Types of joint venture

A joint venture can be a great way for two or more companies to share resources, capital and knowledge to pursue a common goal. However, there are some limitations to bear in mind when considering this type of business arrangement. These are:

• Limited Liability - As a joint venture is an arrangement between two separate companies, each company is still responsible for its own liabilities, meaning that the liability of one company cannot be transferred to the other.
• Limited Control - Each joint venture partner holds an equal share in the business, meaning that both parties must agree on any decisions made. This can limit the control one partner has over the business.
• Limited Capital - A joint venture is limited to the resources and capital that each party can contribute, so capital may be restricted.
• Limited Duration - A joint venture is typically limited to a certain period of time, meaning that the business must be dissolved at the end of the agreement.
• Limited Ability to Grow - As the venture is limited to the resources and capital of the two partners, the venture may not be able to grow beyond the original size.

Other approaches related to Types of joint venture

This answer provides an overview of other approaches related to joint ventures. These include:

• A Strategic Alliance, which is an agreement between two or more organizations to work together to achieve a common goal or to share resources and knowledge.
• A Co-Marketing Agreement, which is an agreement between two or more companies to market and promote each other’s products and services.
• A Consortium, which is a formal agreement between two or more organizations to collaborate on a specific project or business activity.
• A Licensing Agreement, which is an agreement between two or more parties to grant one party the right to produce, sell, or distribute a product or service.

In summary, these approaches provide different ways for companies to collaborate and leverage each other’s resources and expertise. Joint ventures are just one example of these collaborations, but there are many others that companies should consider when seeking to expand their reach and increase their profits.

Types of joint venture — recommended articles

Syndicate — Large organizations — Strategic Buyer — Musharaka — Tuck-In Acquisition — Horizontal diversification strategy — Business format franchising — Stock insurance company — International joint venture

References

• Gong Y., Oded S., Luo Y., 2007, ‘Do multiple parents help or hinder international joint venture performance? The mediating roles of contract completeness and partner cooperation’ , Strategic Management Journal., 28: Pg 1021-1034.
• Harrigan K. R., 1988. ‘Joint Venture And Competitive Strategy’. Strategic Management Journal. issue 9: Pg 141-158 (1988).
• Lung-Tu L. 2007. ‘The Effect Of Cultural Similarity On International Joint Ventures: An Emperical Study’. International Journal of Management. Vol.24 No.2: Pg 230-241
• Nippa M., Beechler S., Klossek A., 2007. ‘Success Factors for Managing International Joint Ventures: A Review and an Integrative Framework’, Management and Organization Review, p. 3-4.
• Prevot F., Meschi P. X.. 2006. ‘Evolution of an International Joint Venture: The Case of a French - Brazilian Joint Venture’. Thunderbird International Business Review, Vol. 48(3) Pg 297-319.
• Roos, A.; Khannna D.; Verma S.; Lang, N.; Dolya A.; Nath G.; Hammoud T. "Getting More Value from Joint Ventures". Transaction Advisors, 2018

Footnotes

Author: Patrycja Barszcz