Two or more firms join together to create a new business entity that is legally separate and distinct from its parents. Joint ventures are established as corporations and owned by the funding partners in the predetermined proportions. American Motor Corporation entered into a joint venture with Beijing Automotive Works called Beijing Jeep to enter Chinese market by producing jeeps and other vehicles. Joint ventures involve shared ownership. Joint ventures are common in international business. Various environmental factors like social, technological, economic and political encourage the formations of joint ventures.
Joint ventures provide required strengths in terms of required capital, latest technology, required human talent etc., and enable the companies to share the risk in the foreign markets. Joint ventures involve the local companies. This act improves the local image in the host country and also satisfies the governmental requirements regarding joint ventures ventures. In fact, support of the host country’s Government is essential for the success of the joint venture.
Advantages:
- Joint venture provides large capital funds.
- Joint ventures are suitable for major projects.
- Joint ventures spread the risk between or among partners.
- Different parties to the joint venture being different kinds of skills like technical skill, technology, human skills, expertise, marketing skills or marketing networks.
- Joint ventures make large projects and turn key projects feasible and possible.
- Joint ventures provide synergy due to combined efforts of varied parties.
Disadvantages:
- Joint ventures are also potential for conflicts. They result in disputes between or among parties due to varied interest. For ex., the interest of a host country’s company in developing countries would be to get the technology from its partner while the interest of a partner of an advanced country would be to get the marketing expertise from the host country’s company.
- The partners delay the decision-making once a dispute arises. Then the operations become unresponsive and inefficient.
- Decision-making is normally slowed down in joint ventures due to the involvement of a number of parties.
- Possibility of collapse of a joint venture is more due to entry of competitors, changes in the business environment in the two countries, changes in the partners’ strengths etc.
- Lifecycle of a joint venture is hindered by many causes of collapse.
How to make Joint Ventures successful?
It is indicated that joint ventures mostly fail due to potential problems and cultural variations. Harrigan suggests the following measures to make the joint venture successful.
- Don’t accept a Joint venture agreement too-quickly, weigh the pros and cons.
- Get to know a partner by initially doing a limited project together, if a small project is successful, bigger projects are more feasible.
- Small companies are vulnerable to having their expertise lost to larger joint venture partners; small companies must structure such deals with great care and guard against potential losses.
- Companies with similar cultures and relatively equal financial resources work best together, keep this in mind when looking for an appropriate partner.
- Protect the company’s core business through legal means, such as unassailable partners; if this is not possible, don’t let the partner learn your methods.
- Joint enterprise must fit the corporate strategy of both partners, if this is not the case, there will inevitably be conflicts.
- Keep the mission of the joint enterprise small and well-defined, ensure that it does not compete with the partners.
- Give the joint enterprise autonomy to function on its own and set up mechanisms to monitor its results, it should be separate entity from both parents.
- Learn from the joint enterprise and use this in the parent organization.
- Limit the time frame of the joint enterprise and review its progress frequently.