Joint Venture
A joint venture is considered an effective and necessary means to enter a new market. In some markets with restrictions on foreign investment, a joint venture might be the only way to access that market. When participating in a joint venture, the participating members typically have clear positions through their capital contributions. Shareholders have significantly different capital contribution ratios, although establishing clear management measures to control decisions for success is crucial. A looser form of participation, which may or may not involve capital contribution, is a strategic alliance. Joint ventures tend to have a relatively high failure rate. However, the participating parties also gain certain advantages.
Advantages of Joint Ventures:
- Joint ventures allow companies to share technology and intellectual property assets related to innovative products and distribution of goods and services.
- For small organizations lacking financial resources and/or specialized management skills, joint ventures can be an effective way to obtain the necessary capital when entering new markets. This is particularly true in attractive markets where local partners, access to distribution networks, and political requirements may prioritize or even necessitate joint ventures as a legal solution.
- Joint ventures can be used to reduce political tensions and enhance local/national acceptance of the company. They can provide local market knowledge, access to distribution channels, and sourcing of raw materials, government contracts, and local manufacturing facilities.
- Joint ventures are becoming increasingly important to the host government. Joint ventures can be established either directly with state-owned enterprises or aimed at the strongest domestic firms.
- International conglomerates or temporary alliances are being established more and more to carry out special projects that are considered too large for individual companies (e.g., critical defense projects, civil projects, high-risk global technological investments).
- Control over transactions can impede a company’s foreign investment capital, making it more difficult for foreign branches to access the necessary capital. Therefore, providing technical know-how may be used to help the company obtain a certain percentage of ownership in a joint venture while providing local partners with the necessary capital.
Disadvantages of Joint Ventures:
- An important issue is that it is very difficult for joint ventures to integrate into a global borderless commercial strategy. In such cases, there will inevitably be issues related to transfer pricing and the movement of inputs and outputs, especially in support of subsidiaries entirely in other countries.
- The trend toward a global currency management system through a central fund can create conflicts between partners as parent companies try to impose restrictions or even guide cash and working capital management, foreign exchange management, and profit distribution.
- Another important issue is when the objectives of the parties become conflicting. For example, multinational companies may have a completely different attitude towards risks compared to local businesses and may be prepared to accept short-term losses to develop market share, assume higher debts or higher costs for advertising. Similarly, the goals of partners may change over time, especially when the establishment of subsidiaries replaces joint ventures to access markets for multinational companies.
- Issues related to the management structure and human resources of the joint venture.
- Many joint ventures fail due to conflicting profit tax interests among participants.
