Types of joint venture

Types of joint venture
See also
Internationalization Merger Tuck-In Acquisition Meaning of synergy Related diversification Large organizations Musharaka Transformational outsourcing Importance of marketing strategy

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).

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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 .

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