Joint Joint Ventures:Ventures:

Concept:Concept:

A joint venture is a new enterprise A joint venture is a new enterprise owned by two or more participants. owned by two or more participants.

It represents a combination of subsets It represents a combination of subsets of assets contributed by two (or more) of assets contributed by two (or more) business entities for a specific business business entities for a specific business purpose and a limited duration. purpose and a limited duration.

It is essentially a medium to long-term It is essentially a medium to long-term contract which is specific and flexible. contract which is specific and flexible.

Though, the joint venture represents a Though, the joint venture represents a newly created business enterprise, its newly created business enterprise, its participants continue to exist as participants continue to exist as separate firms.separate firms.

A joint venture can be organized as a A joint venture can be organized as a partnership firm, a corporation or any partnership firm, a corporation or any other form of business organization other form of business organization which the participating firms choose to which the participating firms choose to selectselect

Contribution by partners of money, Contribution by partners of money, property, effort, knowledge, skill or property, effort, knowledge, skill or other assets to the common other assets to the common undertaking. undertaking.

Joint property interest in the subject Joint property interest in the subject matter of the venture. matter of the venture.

Right of mutual control or Right of mutual control or management of the enterprise. management of the enterprise.

Right to share in the property.Right to share in the property.

Characteristics of joint Characteristics of joint venturesventures

Characteristics of joint Characteristics of joint venturesventures

Limited scope and durationLimited scope and duration Generally involve only two firmsGenerally involve only two firms Involve only small fraction of Involve only small fraction of

participants' total activities participants' total activities Each participant offers something of Each participant offers something of

valuevalue Joint production of single productsJoint production of single products No sharing of assets/information beyond No sharing of assets/information beyond

ventureventure Need not affect competitive relationshipsNeed not affect competitive relationships

Goals/objectives of joint Goals/objectives of joint venturesventures

1) Risk sharing1) Risk sharing Each participant diversifies riskEach participant diversifies risk Reduces investment cost of entering risky new Reduces investment cost of entering risky new

areaarea

2)Knowledge acquisition2)Knowledge acquisition — learning — learning experience for both partnersexperience for both partners

Shared technologyShared technology Shared managerial skills in organization, Shared managerial skills in organization,

planning, and controlplanning, and control Successive integration — joint venturing as a Successive integration — joint venturing as a

way to learn about prospective merger partnersway to learn about prospective merger partners

GoalsGoals Entry into new, expanded, foreign Entry into new, expanded, foreign

marketsmarkets

Augments financial or technical Augments financial or technical capabilitiescapabilities

Reduces riskReduces risk Foreign country may require joint Foreign country may require joint

venture with local partnerventure with local partner

Financing — to raise capitalFinancing — to raise capital Share investment expenseShare investment expense Small company has product Small company has product

idea but no cashidea but no cash Joint venture with large Joint venture with large

company that has cash to company that has cash to develop productdevelop product

Distribution/marketingDistribution/marketing To obtain distribution channelsTo obtain distribution channels To obtain raw materials supplyTo obtain raw materials supply

Benefits of joint Benefits of joint ventures:ventures:

The main motive is to share the risks. The main motive is to share the risks. knowledge acquisitionknowledge acquisition. The complexity of . The complexity of

the knowledge to be transferred is a key the knowledge to be transferred is a key factor in determining the contractual factor in determining the contractual relationship between the partners. One or relationship between the partners. One or more participants may seek to learn more more participants may seek to learn more about a relatively new product market about a relatively new product market activity. This might concern all aspects of activity. This might concern all aspects of the activity or a limited segment like R&D, the activity or a limited segment like R&D, production, marketing or product servicing. production, marketing or product servicing.

A small firm with a new product idea that A small firm with a new product idea that involves involves high risk and requires relatively large amounts of investment capital may form a joint venture with a may form a joint venture with a large firm. The larger firm might be able to large firm. The larger firm might be able to carry the financial risks and be interested carry the financial risks and be interested in becoming involved in a new business in becoming involved in a new business activity that promises growth and activity that promises growth and profitability. In addition, the larger firm profitability. In addition, the larger firm might thereby might thereby gain experience in the gain experience in the new area of activity that may represent new area of activity that may represent the opportunity for a major new the opportunity for a major new business thrust in the futurebusiness thrust in the future. .

Tax advantages are a significant Tax advantages are a significant factor in many joint ventures. factor in many joint ventures.

It also helps in expanding the firm's It also helps in expanding the firm's operations into foreign countries. operations into foreign countries. The local partners contribute in the The local partners contribute in the form of specialised knowledge about form of specialised knowledge about local conditions, which are essential local conditions, which are essential to the success of the venture. to the success of the venture.

The basic reasons for The basic reasons for failure of a joint venture failure of a joint venture

are:- are:- Inadequate preplanning for the joint venture. Inadequate preplanning for the joint venture. The hoped-for technology never developed. The hoped-for technology never developed. Agreements could not be reached on Agreements could not be reached on

alternative approaches to solving the basic alternative approaches to solving the basic objectives of the joint venture. objectives of the joint venture.

People with expertise in one company People with expertise in one company refused to share knowledge with their refused to share knowledge with their counterparts in the joint venture. counterparts in the joint venture.

Parent companies are unable to share control Parent companies are unable to share control or compromise on difficult issues. or compromise on difficult issues.

A successful joint venture A successful joint venture needs to fulfill the following needs to fulfill the following

requirements:- requirements:- Each participant has something of value to Each participant has something of value to

bring to the venture. bring to the venture. The participants should engage in careful The participants should engage in careful

preplanning. preplanning. The agreement or contract should provide for The agreement or contract should provide for

flexibility in the future. flexibility in the future. There should be provision in the agreement There should be provision in the agreement

for termination including buyout by one of the for termination including buyout by one of the participants. participants.

Key executives must be assigned to implement Key executives must be assigned to implement the joint ventures. the joint ventures.

A distinct unit be created in the organizational A distinct unit be created in the organizational structure which has the authority for structure which has the authority for negotiating and making decisions. negotiating and making decisions.