Joint ventures are a type of business collaboration in which two or more firms exchange equity and services. JVs can become a strategic way to combine resources with the potential for saving time, money, and assets. It is a method of sharing risks and rewards, transferring technical knowledge, sharing management experience, increasing access to foreign markets, etc. Different types of Joint ventures are categorized according to the degree of separation between partners (partial or complete), commitment levels, and the type of decision-making.
*Limited cooperation: it is widely used in underdeveloped and developing countries with scarce resources and capital. We can identify various Limited JVs that are usually of shorter duration, have maximum levels of pre-decided separation (e.g., defined objectives), and involve limited financial or technical risks.
*Separate joint venture business: in an SEJ, the partners’ activities are completely separate, and each partner bears the full risk. The term may also denote a partnership with equal equity participation.
*Partnership: where the JV involves two or more parties with equal participation and with the complete risks assumed by all members.
*Subsidiary: in which one company (the parent) owns all of another company’s assets and liabilities. It is often used as a way for a company to enter foreign markets without committing itself to becoming an exporter.
*Joint Venture: where the two or more firms combine their management but keep separate legal personalities and share in the profits and losses of the investment on a pre-determined basis.
Benefits And Risks Of Joint Ventures
Benefits
1. Cost Effectiveness
JV helps companies to reduce the cost of a single entity. The cross-utilization of resources brings down the cost and lowers the price. It can make an organization competitive in suppliers and customers. Because JVs are relatively low risk, they are used to lower overall financial risk. Like the other collaboration methods, JVs can help a company become more efficient and effective.
2. Faster Time To Market
JV provides a faster solution than single sourcing of a product or service. It is a timely and efficient way to save the customer’s time and money at times of uncertainty that can lead to failure. It is suitable for a company and its customers. Time to market for a new item has much to do with the time and cost required to research, design, test, and manufacture the product. Eliminating these steps helps reduce the time from idea to market using a JV approach.
3. Increased Access To Foreign Markets
With the increase in globalization of business, companies are likely to be exposed to or face trade barriers or complex customs controls. However, with in-house resources, it is difficult for companies to enter foreign markets since they might need help with communication, language barriers, etc. It is necessary to expand the universe of customers and markets.
4. Export Of Knowledge
One significant benefit is sharing knowledge and expertise between companies with similar goals. One partner can provide expertise in the other partner’s area while another partner can help them in their area. By sharing resources, each company benefits from new ideas which they can bring into their business using knowledge sharing with partners during the collaboration process and then competing against each other to develop a new product or service where they have provided expertise that could help them in developing a better product or service. It is the transfer of knowledge and information regarding their business from one company to another.
5. Increasing Scale And Scope Of Operations
JV enables a company to increase its scale and scope by using the resources of another firm. It helps a company access more distribution channels, a broader market, and the ability to enter foreign markets. It gives a competitive advantage over the competition by expanding at lower costs with greater flexibility compared to single sourcing.
6. To Give Financial Stability
One of the advantages of JV is to give financial stability to companies. It is a way through which a company can afford to take risks, expand into new markets and bring in new products. Also, by entering into JV, one can obtain funds and financing instead of seeking new funding options, which are likely expensive, lengthy, and time-consuming.
7. To Become A Major Player
JV can help in gaining a significant position in a market or company. It is how companies can outgrow and become competitive with much lower costs compared to single sourcing. It is advantageous to achieve that goal with a JV strategy, where both partners are willing to invest money and resources into the new venture.
8. To Enter Into New Opportunities
JVs can help enter new markets, products, and services where it is difficult for companies to enter due to restrictions in certain countries. Also, it allows them to gain access to foreign markets, get cheaper materials at low volumes, etc.
9. To Limit Financial Risk
JVs limit financial risks and are how companies can reduce their financial risks in favor of collaboration partners.
10. To Get International Experience
JV helps a company gain international market experience, improve its competitiveness and fasten time to market because of the global synergy between suppliers, customers, and production facilities, which ultimately helps them become more efficient. Also, it enables them to use their resources to expand in different parts of the world at a lower cost than single sourcing.
Risks
1. Carry Over Risks
When companies undertake a venture, they risk losing ownership and control over their new business. One company may need help to provide the services or products effectively and efficiently as expected by the other partner. It can lead to a situation where two companies may need help to run their business efficiently, leading to problems from different angles.
2. Joint Venture Formation
From a legal perspective, joint ventures are usually formed between the same owners of two companies cooperating for some specific purpose or goal. However, the relationship between these two companies can be different. If a company is collaborating with another to lose its independence, or if one company has no confidence in another company it is partnering with. The formation of their joint venture will be for their benefit and not for the benefit of both companies.
3. The Effect on Product Or Service Quality
One risk that arises from JVs is the effect on quality control when each partner tries to increase output or reduce costs by lowering standards. The lack of trust between partners can cause a deterioration in quality when they are involved in such collaborations. It can lead to the loss of customers and money.
4. Political Risk
Political risks can be a problem in JVs. There is a risk that the government will try to nationalize the JV’s assets, restrict its operations within that country, and limit its access to other countries. On a smaller scale, political risk can also be seen locally as each faction may have different interests than the company’s; this may be dangerous for the company’s activities in the country.
5. Lack Of Skills
Another risk involved in JVs is the personnel resources, which are both cost and time intensive. The workforce is one of the most critical factors of production, so not only must a new company be able to provide an adequate supply of workforce, but it must also be able to provide an efficient supply. It is also necessary for foreign companies to hire experts who are familiar with the culture and customs of that country so that they can operate efficiently and effectively in those markets. This risk is reduced if adequate arrangements are made to educate and train local personnel to replace foreigners who leave their positions. The company should hire local personnel in the first place in those states where it intends to expand business for foreign business people.
6. Lack Of Customers
Especially when there is competition with other JVs in the field, customers will be forced to use both due to the unavailability of quality or price in certain areas. Another problem arises because if customers are not happy with products and services offered by one company, they should be quick to utilize the services of other companies too. It can cause a problem for the competitor and may affect the services or products he provides consumers.
Since joint ventures are riskier than single sourcing, they are taken only after considering several factors, such as financial, future growth, and taxation. It is necessary to understand that even though some familiar risks are associated with these ventures, every JV business is different, and not all risks will apply to every company. It is important to note that a list of risks cannot be exhaustive, as new issues can appear as the new venture proceeds. JV has been an essential part of international business development due to its flexibility and cost-effectiveness. It has served as a tool for learning about different cultures and helped increase profits for businesses in the long run.
