A joint venture refers to joining together of any two businesses for a common purpose and mutual benefit. These two organisations may be private, government-owned or a foreign company. Joint venture maybe for either long term or short term duration.
Learn about:- 1. Introduction to Joint Venture 2. Meaning and Scope of Joint Venture 3. Features 4. Formation 5. Situations Favourable for Joint Ventures 6. Setting Up a Joint Venture 7. Types 8. Factors
9. Performance of Indian Joint Ventures Abroad 10. Types of Partners 11. Formulation Stages 12. Motivating Factors 13. Motives 14. How to Make Joint Ventures Successful between Multinational Companies
15. Advantages 16. Disadvantages 17. Reasons for Failure of Joint Ventures 18. Guidelines 19. How to Make Joint Venture Successful?.
Joint Venture: Introduction, Meaning, Features, Types, Advantages, Disadvantages, Formation, Guidelines and Formulation Stages
Joint Venture – Introduction
A joint venture is created by an agreement between two or more independent firms registered in different countries. The firms agree to contribute to the equity capital of the joint venture and run it to the mutual advantage of both. In India, joint ventures have been quite popular to attract not only foreign capital but also foreign technology.
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For instance, HCL entered into agreement with Hewlett-Packard of USA to float HCL-HP for setting up a multipurpose plant in NOIDA. Eicher Motors is a joint venture of Eicher Good worth (India) and Mitsubishi (Japan) and Thermax-Fuji is a joint venture of Thermax Co. (India) and Fuji Electric Co. (Japan). Maruti Udyog Ltd., Birla Yamaha Ltd. and Hero Honda Ltd. are the other very popular examples of joint ventures in India.
A joint venture is an arrangement between two or more partners sharing in a new project or venture through participation in its equity capital. In other words, two or more independent firms collaborate to create a new organisation called joint venture.
Joint ventures may be created in three ways:
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(i) A foreign company and an Indian company join together to form a new enterprise.
(ii) A foreign company acquires a portion of equity shares of an Indian company.
(iii) An Indian company acquires a portion of equity shares of a foreign company
When two or more independent firms mutually decide to participate in a business venture, contribute to the total equity capital and establish a new organisation, it is known as joint venture. For e.g. TISCO joined with IPICOL to promote IPITATA Sponge Iron Ltd., in 1984, involving equity participation of Rs. 3 crores by TISCO and Rs. 3.12 crores by IPICOL.
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Generally, joint ventured between companies within a country may take place for one or more of the following reasons:
i. It may enable new technology to be introduced more conveniently;
ii. High risks involved in new ventures may be reduced through joint ventures;
iii. Smaller firms joining hands may be able to compete with larger organisations.
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Firms in different countries may also find it beneficial to jointly establish a new enterprise for different reasons, e.g.:
i. The amount of capital outlay to be made by the respective parties may be less than what it would be otherwise for any one of the parties;
ii. The import content of a project may be conveniently financed by foreign equity participation;
iii. Entry of multinational corporations is rendered easier by joint ventures in developing countries as host governments generally do not favour foreign companies setting up branch establishments or subsidiaries;
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iv. Increased sales through joint ventures help in reducing production and marketing cost.
Two or more firms join to create a new business entity to achieve a common purpose. It is legally separated and distinct from its parents. Joint venture are established as corporations and owned by the funding partners in the predetermined proportions. Joint ventures involve the local companies. It acts to improve the local image in the host country and satisfies the governmental requirements regarding joint ventures. In fact, support of host country’s government is essential for the success of the joint venture.
Joint Venture – Meaning and Scope
A joint venture refers to joining together of any two businesses for a common purpose and mutual benefit. These two organisations may be private, government-owned or a foreign company. Joint venture maybe for either long term or short term duration.
The alliance helps expand business, develop new products or venturing into new markets, particularly in another country. A joint venture involves sharing in of share capital, technology, human resources, risks and rewards in the formation of a new entity.
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The right to control and manage the business is also shared among the parties involved. In India, there are no separate laws for these joint ventures, except for capacity to contract under the law. The companies incorporated in India, even with up to 100% foreign equity, are treated as same as domestic companies.
When two or more firms join together for a common purpose and mutual benefit, it is known as joint venture. For example, joint venture of Birla with Yamaha or Maruti with Suzuki.
The firms may be private, government-owned or a foreign company. Joint ventures are very useful to strengthen long- term relationships or to collaborate on short-term projects. Firms enter into joint venture for business expansion, development of new products or moving into new markets, particularly in another country. Joint venture involves pooling of resources and expertise by two or more businesses in order to achieve a particular goal. The risks and rewards of the business are also shared.
A joint venture may also arise between firms of different countries. However, in such case, firms will have to comply with the provisions provided by the governments of the two countries. In India, joint venture companies are the best way of doing business. There are no separate laws for these joint ventures and companies incorporated in India are treated the same as domestic companies.
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There is no limited scope for forming joint ventures. Generally, joint ventures can be formed between two or more firms from one industry, or between two firms from different industries, or between two firms from different countries, or between two firms from different industries and from different countries. Thus the scope of forming joint venture is unlimited and they can be formed and benefited wherever there is a need for mutual cooperation.
Particularly joint ventures are common in the oil industry and are often ventures between a local and foreign company. JV often is seen a very viable business strategy in the oil sector and the companies can complement their skills while the JV offers the foreign company a geographic presence. Fuji-Xerox is the most famous venture. P&G opted for a JV with Godrej mainly to access Godrej distribution network and manufacturing facilities.
Joint Venture – Features
The various features of a joint venture are explained below:
1. Formation:
When two businesses agree to join together for a common purpose and mutual benefit, like expansion of business, introduction of new products or venturing into new markets, particularly in another country a joint venture is formed. These two organisations may be private, government-owned or a foreign company of any size. In India there are no separate laws governing joint ventures.
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2. Agreement:
A joint venture is based on a memorandum of understanding signed by both the parties containing various terms and conditions. In case of a joint venture with a foreign company the provisions provided by the governments of the two countries have to be adhered to.
3. Risks and Rewards:
The risks and rewards of the business are shared amongst the parties on the basis on pre-decided terms and conditions.
Some Other Features of Joint Venture:
1. Business share the costs and profits of a project.
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2. Each business remains separate from each other.
3. Reasons for joint venture include business expansion development of new products or moving into new markets etc.
4. For a joint venture to be successful there must be clear objectives and effective communication between every one.
5. Two entrepreneurs or companies join together to establish a common undertaking investing money and other resources such as knowledge, skill or any other asset. The right of management or mutual control of the enterprise is clearly defined.
6. Generally, they have a limited scope and duration relevant to the purpose.
7. It involves only a small fraction of participants’ total activities.
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8. The partners to the joint venture are interested in the joint property.
9. The joint venture is to anticipate profit where partners define the right to share in profit.
Joint Venture – Formation
A joint venture company can be formed in any of the following ways:
1. Transfer of Business to New Company – Two parties incorporates a new company and business of one party is transferred to a new company in consideration of issue of shares to such party. The other party subscribes the shares in cash.
2. New Joint Venture Company – Both the parties subscribe to the shares of the joint venture company in cash in agreed ratio and start a new business.
3. Collaboration of existing Indian company with other party – When promoter shareholder of an existing Indian company collaborates with other party (resident or non-resident), to jointly carry on the business of that company. The other party may take up shares of the company through payment in cash.
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Important Points about Joint Venture:
1. All joint ventures in India require government approvals if a foreign partner or a Non-Resident Indian (NRI) is involved.
(i) If the joint venture is covered under automatic route, then the approval of the Reserve Bank of India is required.
(ii) If the joint venture is not covered under automatic route, then the special approval of Foreign Investment Promotion Board (FIPB) is required.
2. A Joint Venture must be based on a memorandum of understanding (MOU) and should be signed by both the parties highlighting the basis of agreement.
3. The agreement must also state that all necessary governmental approvals and licenses will be obtained within a specified period.
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4. In order to avoid any legal complications, the terms should be thoroughly discussed and negotiated. For negotiations and terms, the cultural and legal background of the parties should be considered.
Reasons for Its Formation:
Firms form joint ventures for several reasons which can be grouped into three categories:
1. Internal Reasons:
i. Build on company’s strengths
ii. Spreading costs and risks
iii. Improving access to financial resources
iv. Economies of scale and advantage of size
v. Access to new technologies and customers
vi. Access to innovative managerial practices
2. Competitive Goals:
i. Influencing structural evolution of the industry
ii. Pre-empting competition
iii. Defensive response to blurring industry boundaries
iv. Creation of stronger competitive units
v. Speed to market
vi. Improved agility
3. Strategic Goals:
i. Synergies
ii. Transfer of technology or skills
iii. Diversification
Joint Venture – Situations Favourable for Joint Ventures
The strategic partnership or joint venture can be useful in the following situations:
1. When pursuing an opportunity that is too complex, uneconomical or risky for a single organisation to pursue alone.
2. When the opportunity in a new industry requires a broader range of competencies and know-how though no one organisation can marshal.
3. When partner(s) are interested to enter a desirable foreign market (when foreign government requires companies wishing to enter the market to secure a local partner).
Steven Rattner, has given six situations in which joint venture strategy is effective.
4. When a privately owned firm is forming a joint venture with a publicly owned organisation.
5. When a domestic organisation is forming a joint venture with a foreign company.
6. When the distinct competencies of two or more firms complement each other well.
7. When some project is potentially very profitable, but requires overwhelming resources and high risks.
8. When two or more smaller firms have trouble competing with a large firm.
9. When there exists a need to introduce a new technology quickly.
Joint Venture – Setting Up a Joint Venture (With Examples and Reasons)
A joint venture may be set up as follows:
(a) A local company buy shares in a foreign company or
(b) A foreign company buys shares of the local company or
(c) A local company and a foreign company jointly set up a joint venture to achieve a common purpose.
(i) ‘Nokia-Siemens’ — between Nokia and Siemens.
(ii) ‘Birla Yamaha’ — between Yamaha Motor Company of Java and Tungbhadra Industries Ltd. etc.
Joint ventures are based on Memorandum of Understanding (MOU) signed by both the companies indicating the basis and the purpose of Joint Venture and laying the terms and conditions of Joint Venture agreement.
It must state that all necessary approvals and license requirement will be obtained as follows:
(a) RBI approval is required if Joint Venture is covered under automatic route.
(b) Approval of FIPB (Foreign Investment Promotion Board) is required in other cases.
Reasons for Setting-Up Joint Ventures
Transaction cost theory explains why firms prefer joint ventures over other contractual arrangements. Transaction costs are involved in all exchanges that occur while organizing business activities, and must be treated as a normal part of business. However, if the market is not perfect, it allocates resources rather sub-optimally. When a firm is not familiar with such dynamics, a joint venture could be a preferred option. In addition, one may note that joint ventures are more appropriate than mergers when there is complementary production that involves only a small subset of each participant’s assets.
What motivates the formulation of a joint venture?
The common reasons for setting-up joint ventures are as follows:
1. Pooling of complementary resources
2. Access to raw materials or new markets
3. Diversification of risk
4. Economies of scale
5. Cost reduction
6. Tax shelter
Joint Venture – Top 2 Types (With Key Elements)
1. Contractual Joint Venture (CJV):
Contractual joint ventures are established through a purpose agreement in which two or more parties come together for a particular business project and sign a contract outlining the terms under which they will work together. The parties do not set up a new jointly owned separate legal entity for the project. Contractual joint ventures are like a franchisee relationships.
In such a relationship the key elements are:
i. A common intention is shared by two or more parties like starting a business project;
ii. Each of the two parties has to contribute in terms of inputs for the project;
iii. The control on the business project is shared by both the parties; and
iv. It involves a relatively long term relationship rather than a one a transaction-to- transaction relationship.
2. Equity-Based Joint Venture (EJV):
Equity based joint ventures are the older and more rigid form of contracts that are established between two or more parties. The parties have to either set up a new jointly owned separate legal entity or one of the parties may agree to join into ownership of an existing entity for carrying out the project. Equity Joint Ventures may operate in the form of a Limited Liability partnership firms, Company, Partnership firm, Trusts, etc.
In such a relationship the key elements are:
i. It involves a contract to either create a new entity or for one of the parties to join into
ii. Ownership of an existing entity;
iii. The ownership of the business is jointly shared by the parties involved
iv. Both the parties involved have the right to you manage the jointly owned entity
v. The responsibility for arranging capital investment and other financing provisions rests with both the parties
vi. The profit and loss is shared among the parties involved as per the terms of the agreement.
vii. The contract must be based on a memorandum of understanding highlighting the basis of a joint venture agreement and signed by both the parties.
viii. In order to avoid any complication a later stage, it is important that all the terms and conditions of the contract are discuss in detail among the parties involved. Also, the cultural and legal background of the parties involved should be given due consideration at the time of such negotiations.
ix. The joint venture agreement take into account all necessary governmental approvals and licences that must be obtained within the specified time frame.
Joint Venture – Factors to be Considered
Following are the factors that must be considered in this regard:
(i) About Market for the Concern Product – This includes size, growth, and existing competition whether local or foreign.
(ii) Government Regulations – This includes, Tax concessions and incentives, price controls, local requirements, export obligations, extent of equality holding permitted, degree as well as nature of protection, profit and capital repatriation.
(iii) Economic Stability – This includes, the management— economic and fiscal policies-growth rate of the economy, inflation, trade balance, balance of its indebtness.
(iv) Political Stability – This includes – Sound political institutions, mechanism for orderly transfer of power, acceptance of the obligations of the previous Government, political relations with India.
Joint Venture – Performance of Indian Joint Ventures Abroad (With Problems and Suggestions)
i. Size of Investment:
In about 85 per cent of the joint ventures, Indian partners held only minority shares because the old guide-lines governing Indian joint ventures abroad stipulated only minority participation. The present guide-lines are flexible and allow majority participation if the host country does not object to it.
The average size of Indian participation in term of equity capital employment was about Rs. 1.05 crores but about 55 per cent of units had an equity capital Rs. 30 lakhs or less. The average size of joint ventures under implementation in terms of equity capital was Rs. 2.3 crores, indicating that the more recent joint ventures were relatively larger.
ii. Countries Covered:
Indian joint ventures currently in operation are dispersed over 28 countries. In 1984, 82 per cent of them were concentrated in 10 countries-Malaysia (26), Singapore (19), Indonesia (12), the USA (12), UAE, Thailand, and the UK (9 each), Sri Lanka (10), Nigeria (13), and Kenya (8). The other countries are—Mauritius, Saudi Arabia and West Germany (3 each), the Philippines, Oman and Hong Kong (2 each), Nepal, Bangladesh, Switzerland, Kuwait, Bahrain, Australia, Fiji, Tonga, Uganda, Botswana, France and the Netherlands (one each).
There was heavy concentrations of investment in South East Asian countries (64.5 per cent) followed by Africa (28.7 per cent). Now the share of these countries is declining while of South Asia, West Asia and the developed countries of Europe, America and Australia is increasing in joint ventures under implementation.
Problems Faced by Indian Joint Ventures:
(i) In ability to gauge the market prospects.
(ii) Failure to select the right partners.
(iii) Subsequent backing out of the local partners and non-approval of the technology sought to be supplied, by Indian partners.
(iv) Relentless price competition.
The basic cause of the failure of Indian joint venture was the lack of adjustment in the new marketing environment because they were habituated to a sheltered market in India. Many units found it difficult to survive in the face of relentless price competition.
Most of the problems could have been avoided if the entrepreneurs had thought seriously before entering into joint ventures agreements. There was information gap and the Indian entrepreneurs did not have enough information about many countries. Fortunately, the rate of mortality has come down in recent years. This could be due to greater care exercised in the scrutiny of the proposals by the Government.
According to Mr. M.K. Raju, poor performance of Indian joint ventures is due to:
(a) Poor project management;
(b) Poor operations control; and
(c) A lack of commitment.
Poor project management has led to cost escalation in the range of 40 to 100 per cent. Poor production control has led to poor quality, lack of cost consciousness and irregular deliveries. Mr. Raju’s study identified some other problems.
(a) Insistence on using ‘scaled down’ duplication of Indian plants back home in order to use Indian equipment and little regard to scale factor;
(b) The prohibition of cash remittance from India to joint ventures thus artificially restricting the growth of some Indian ventures, and in availability of Indian joint ventures to control any of the critical variables such as-price, product, leadership, distribution channel or manufacturing cost.
Suggestions for Improvement:
(i) Export Agencies – An export agency should be set up to disseminate information about business opportunities in other countries.
(ii) Better Study – The entrepreneur who is going to collaborate should make accurate feasibility studies, undertake market surveys and prepare their own project reports and not mainly depend upon the information supplied by other agencies.
(iii) Consortium of Banks – A consortium of Indian banks should be formed to ease the cash starvation problem of Indian joint ventures.
(iv) Flexibility – More flexibility should be afforded to Indian entrepreneurs to specify appropriate equipment and scale of operations rather than insisting on Indian equipment. Insistence on Indian equipment adversely affects India’s image as the host countries feel that the main motive behind setting up joint ventures is only to find sales avenues for Indian capital goods and equipment.
(v) Buy Back Arrangements – Indian industrialists should be prepared to enter into buy back arrangements from joint ventures in countries with limited home market like Sri Lanka.
Though the position of Indian joint ventures is not satisfactory but much progress is expected in the near future as is clear from the decline in mortality rate in recent years. The Government should be cautious in approving the proposals for joint ventures so that they can survive in the changing marketing environments in foreign markets.
Joint Venture – Types of Partners that Join the Joint Venture: Host Country’s Governments, Public and Private Venture and Private Partners
Different types of partners join the joint ventures. They include:
1. Host Country’s Governments:
Host country’s government normally acts as local partners in joint ventures. These are most effective joint ventures in developing and socialistic pattern of countries. This type of joint venture is called public private venture.
2. Public and Private Venture:
Public-private joint venture is involving the partnership between a government and private company.
This type of joint venture is created under the following circumstances:
i. When the priority of the government for development matches with competence of a private company.
ii. When a country allows entry of foreign companies only through joint ventures with the government.
iii. Firms enter centrally-controlled economies like China and Sweden only through joint ventures with the government. For example, Alcate’s joint venture with the ministry of Posts and Telecommunications, Shanghai Bell, China.
3. Private Partners:
Many companies would like to have joint venture with private companies. Local partners provide marketing knowledge, cultural know how, information regarding financial companies, creditors, employees work culture, trade unions etc. Active partners participate in ownership and management. Silent (sleeping) partners provide local acceptance and local knowledge.
Joint Venture – Formulation Stages (With Reasons for its Collapse)
Joint venture formulation stages are listed below:
1. Exploratory phase
2. Growth phase
3. Stability phase
4. Renegotiation phase
These are the important life cycle phases of a joint venture. The first stage of the life cycle of a joint venture begins with exploratory stage. During this stage, the prospective partners start making.
1. Alliances
2. Project collaborations
3. Feasibility studies
After making alliance, the growth phase of the joint venture takes place. If the interests of the parties vary at this stage, they will lead to collapse of the joint venture in this phase. If the partners work together, this phase leads to stability of the joint ventures. Even in the stability stage, the joint venture may collapse.
If not, the changed interests of the parties force them to renegotiate regarding their interests and shares. If the renegotiation is not successful, the joint venture may collapse.
The main reasons for collapse as mentioned below:
1. Entry of new competitors
2. Changes in partners’ strengths
3. Changes in business environment
4. Today’s partners may become tomorrow’s competitors
5. Changes in partners interest
Joint Venture – Motivating Factors in Setting Up Joint Ventures Abroad
A developing country like India requires:
(i) To propel the economy forward, and
(ii) To limit the foreign participation, management, and control.
This dual objective may be achieved by encouraging the establishment of joint ventures abroad with local partners.
In late fifties India took initiate in setting up joint ventures. India set up a textile mill in Ethiopia in 1957 in its first joint venture attempts. Since then India took active part in the economic development of many other foreign countries by establishing joint ventures.
Following are the motivating factors in setting up joint ventures abroad:
(i) Severe Curbs on Expansion:
As the Government of India has imposed severe curbs on the expansion of large industrial houses under the Industries (Development and Regulation) Act and the MRTP Act, many Indian firms, decided to invest abroad because they had little scope for expanding their business and industrial activities in India.
(ii) Attractive Incentives by Developing Countries:
Many less developed countries welcome long term investments in the form of capital or know-how by offering attractive incentive in the form of tax concessions, investment guarantees, and export incentives, freedom to remit profits and repatriate capital and in many cases protective tariff.
In this way developing countries offer many attractive possibilities for joint venture for India which lured most of the Indian firms. In this regard India has to meet a stiff competition in those markets from developed countries though this should be taken as a challenge not an obstacle.
(iii) Improving India’s Image Abroad:
Joint ventures helped in projecting India’s image abroad as a supplier of capital goods, technology etc. They gave improved India’s export trade of capital goods, spare parts and components. India has now a name in the exports of technical know-how and consultancy services through joint ventures.
Indian joint ventures have helped in the utilisation of ideal capacity in the capital goods industrial sector and thus reducing costs in general in several countries. India has emerged as a leader among the developing countries through joint ventures.
(iv) Labour Intensive Technology:
Most developing countries welcome India’s joint ventures because intermediate labour intensive technology developed by her is most suited to their requirements and may be adopted without or with slight modifications. As many developing countries do not encourage large scale capital intensive technology from developed countries due to their limited home market, they prefer medium scale technology developed by India.
(v) Fulfilling the Government’s Aim:
By setting up joint ventures in these countries Indian has actively participated in the economic development of many developing countries. She has developed capital goods and industries. She has served as an expert in providing technical know-how and consultancy services.
She is not only interested in exporting the goods for consumption to these countries but also in furthering their industrialisation programme through pooling resources for joint individual members. These have led to greater employment opportunities in the industries concerned.
India also gains greater foreign exchange earnings in the form of dividends, royalties, and technical know-how. India’s aim is achieving collective self-reliance and mutual cooperation among developing countries.
(vi) Neutralising Adverse Cost Effect:
According to the MacDougal Committee the differential rates between Indian and international price for non-traditional goods was 25 to 30 per cent. If it set up in foreign country near the market and near the sources of raw materials, a joint venture would give a fillip where there is solid domestic demand.
Some motivating factors have initiated the Indian industries to set up joint ventures in collaboration with some foreign firm in their home country. Some Indian firms have set up joint ventures in a third country in collaboration with foreign firms.
Joint Venture – Motives behind Setting Up a Joint Venture
The following are the motives behind setting up a strategic alliance/joint venture:
1. Funding a new business opportunity could be the focus of a joint venture, especially when the new project is likely to be in a niche area. The outcome is uncertain due to high risks as well as a long gestation period, forcing the two entrepreneurs to share the risk and resources.
2. Another strong motive for joint ventures has been the subsequent learning experience as well as experience curve benefits that follow. This is especially true for joint ventures in the area of technology, research, and knowledge-based/professional services such as medical, legal, tech services, and accounting. The knowledge acquisition and learning experience for both partners could be part of the shared technology, shared managerial skills in organization, planning and control, or the successful integration through joint venturing.
3. Ideation and scope could be their main inspiration for the joint venture, where sharing the risk and resources is incidental. This happens when there are new inventions, innovations, and a passion to experience new avenues. Again, these kinds of ventures are initiated by technocrats in some greenfield projects which have a first mover advantage.
For example, an industrial alcohol plant agreed to install new technology for spent wash incineration in India by collaborating with a German company that had used this technology for incineration of residuals in a paper plant. However, the initial progress for incineration of spent wash from industrial alcohol plant in India is limited.
4. As the parent companies continue to exist while a joint venture is formed, the regulatory authorities are not as stringent as in the case of a merger, where the distinct entities cease to exist. The government as part of its commitment to multilateral and bilateral agreements initiates joint venture proposals with other countries/with local industry. Thus for entry into new, expanded, or foreign markets, the need to augment financial or technical capabilities, reduce risk, and comply with a foreign country requirement for a local partner are common motives.
Other motives could be the scope to raise capital, enhance distribution/marketing, ability to obtain distribution channels, obtaining raw materials supplies, and more favourable tax/political treatment.
5. Sometimes joint ventures can be used as transitional mechanisms in a broad restructuring process. For example, consider a sugar manufacturing company facing a severe crunch in operations because of heavy debt burden was struck with cash flow problems One of the options considered for restructuring this company, could be to tie-up with a JV partner, either with a biogas-based power plant or an alcohol-based products plant, and raise capital required for cross subsidising sugar business. There could be scope for venture partners to use joint venture experience to be able to determine the value of the seller’s brands, distribution systems, and personnel better.
6. International JVs are a widely-used form of business today. They reduce the risks of expanding into foreign environments. There are situations wherein there would be a legal requirement to have a local joint venture partner to operate in some countries. The local partner’s contribution is likely to be in the form of specialized knowledge about local conditions. However, such joint ventures could be subject to cultural clashes, since the local partner may feel demotivated as they are in several instances used merely as a figurehead to comply with government norms.
Joint Venture – How to Make Joint Ventures Successful between 2 Multinational Companies
These types of joint ventures are quite common. Joint ventures are formed with special skills of the two multinational companies.
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 ventures successful.
1. Don’t accept a joint venture agreement too quickly.
2. Get to know a partner by initially doing a limited project together – of a small project is successful, bigger projects are more feasible.
3. Small companies are vulnerable to have their expertise lost to large joint venture partners; small companies must structure such deals with great care and guard against potential losses.
4. Companies with similar culture and relatively equal financial resources work best together; keep this in mind when looking for an appropriate partner.
5. Protect the company’s core business through legal means, such has unassailable patents; if this is not possible don’t let the partner learn your methods.
6. The joint enterprise must fit the corporate strategy of both parents, if this isn’t the case, there will inevitably be conflicts.
7. Keep the mission of the joint enterprise small and well defined; ensure that it does not compete with the parents.
8. Give the joint enterprise autonomy to fluctuation on its own and setup mechanisms to monitor its results; it should be separate entities form both parents.
9. Learn from the joint enterprise and use this in the parent organization.
10. Limit the time frame of the joint enterprise and review its progress frequently.
Joint Ventures as an Entry Strategy:
A company prefers internal new venturing to acquisition as an entry strategy into new business areas yet hesitates to commit itself to an internal new venture because of the risks and costs of building a new operation. A company’s possibility of establishing a business in embryonic or growing industry, in this situation joint ventures face more risks and cost associated with the project.
The company may refer to enter joint venture with another company and use the joint venture as a vehicle for entering the new business era. Such an arrangement enables the company to share the substantial risks and costs involved in a new project.
With the embryonic nature of the industry, the venture faces substantial risks. A number of competing technologies are on the horizon, a joint venture makes sense when a company can increase the probability of successfully establishing new business by joining forces with another company required for formulation of joint ventures, and it may increase the probability of success.
Joint Venture – Advantages
Some of the advantages offered by a joint venture are stated as follows:
1. Established brand name – The established brand name of a business partner benefits the joint venture as there is a ready market waiting for the product to be launched and a lot of investment in developing a brand name for the product or even a distribution system is saved in the process.
2. Increased resources and capacity – The resources and capacity of the new business increases as the financial and human resources of the different businesses are pooled. This enables the joint venture company to grow and expand more quickly and efficiently by dealing with market challenges and taking advantage of new opportunities.
3. Access to new markets and distribution networks – As a joint venture with foreign companies opens up a vast growing markets worldwide.
4. Access to technology – Since, an access to technology of advanced nature is readily provided by the business partner it saves a lot of time, energy and investment of the collaborating businesses as they do not need to develop their own technology. Advanced techniques of production lead to superior quality products at lower costs.
5. Innovation – Innovation are made as the joint ventures it allows business to come up with something new and creative for the same market because of new ideas and technology.
6. Low cost of production – The joint ventures help to reap advantages of low cost of raw materials and labour, technically qualified workforce; management professionals, excellent manpower in different cadres like lawyers, chartered accountants, engineers, scientists at a much lower cost than what is prevailing in their home country.
7. Joint venture provides large capital funds. It is suitable for major projects
8. Joint venture spread the risk between or among partners
9. Different parties to the joint venture bring different kinds of skill like technical skills, technology, human skills, expertise, marketing skills, or marketing networks.
10. Joint venture provides synergy due to combined efforts of varied parties.
Joint Venture – Disadvantages
The major drawbacks of joint ventures are:
A joint venture allows a company to share the risks and costs developing a new business, but it also requires the sharing of profit or loss of the new business.
The venture partners have different business philosophies, time horizons, reinvestment preferences, and substantial problems. It fails due to partner conflicts.
1. Conflict of Interest – The dual ownership may lead to conflicts between the partners over control of business.
2. Risk of Loss of Trade Secrets – There is a risk of disclosure of technology and trade secrets.
3. Lack of Coordination – There can be lack of coordination among the partners, which may affect the efficient functioning of the Joint Venture.
Joint Venture – Reasons for Failure
Research shows that not all joint ventures are successful nor do they all meet their intended purpose.
The reasons for this are as follows:
1. Lack of clarity in basic objectives of the joint venture leads to conflicts after formation.
2. The search for a new technology is not achieved.
3. Inadequacy in planning and preparation has led to failure.
4. Tussles in sharing managerial control between the JV partners leads to intransigency.
5. Continued secrecy and resistance to share expertise between the JV partners leads to a deadlock.
While JVs are known to have limitations, they have been successful when their purpose is clear and defined. The Braithwaite Burn and Jessop Construction Company Ltd, Kolkata was originally three separate companies that came together for the limited purpose of building the Howrah Bridge in Kolkata and successfully completed the project.
They were able to function successfully in a joint model and later became a public sector company, and continue to be involved in a number of infrastructure projects in India. In the same manner, chemical companies are known to come together for a definite period as a learning exercise and share competencies as part of a strategic alliance.
There are thousands, of joint ventures formed in every year, more than all mergers and acquisitions put together. Joint ventures are preferred over mergers as a means for gaining competitive advantage and achieving strategic goals. This is because joint ventures help in reducing risk, but the bad news is that most of joint ventures fail. There are countless examples of failed joint ventures.
A few common problems that cause fail are as follows:
1. Inability to find the right partner.
2. Hurry in starting joint venture.
3. Lack of time or a poor time management.
4. Improper business planning.
5. Improper communication of information about partner firms each other.
6. Not involvement of managers in forming or shaping the venture.
7. Lack of good quality products or services.
8. No equal support by all partners.
9. JV begins to compete more with one of the partners than the other.
Joint Venture – Guidelines
In order to avoid substantial transfer of capital from India and to link joint ventures with the promotion of exports of capital equipment and technology, the Government of India has framed certain guidelines which have the following main features –
(a) Indian participation abroad should ordinarily be through a corporate entity in India having at its command necessary manufacturing experience and technical competence;
(b) Participation by Indian companies should be in accordance with the rules and regulations of the host country; and
(c) Mode of participation in the equity share capital should normally be through export of capital equipment and technology but cash remittances will be permitted in deserving cases depending upon the merits of each case.
There were 208 effective Indian joint ventures abroad at the end of December 1985, out of which 156 were in production or operation and 52 were in various stages of implementation.
Extent and Pattern of Indian Participation:
According to data, in about 85 per cent of the joint ventures, the partners held only a minority of shares, this owing to the guidelines regulating participation. However, the present guidelines are flexible to accommodate majority participation when permitted by the host countries.
Indian investment (in equity capital) in the 154 joint ventures in operation in 1984 was mainly effected through exports of capital equipment. In addition to these, by the capitalisation of know how etc., (6.7 per cent), cash remittance (8.9 per cent), issue of bonus shares (18.9 per cent) and loans, adjustment of future profits, capitalisation of preliminary expenses, etc., was 2.0 per cent.
The total Indian equity in 156 joint ventures reported to be in operation on December 31, 1985 was about Rs. 94 crores.
Country Coverage:
Indian joint ventures, currently in operation, are dispersed over 30 countries. Over 80 per cent of them are concentrated in 10 countries Malaysia (25), Singapore and Sri Lanka (16 each), Indonesia and Nigeria (12 each), Thailand (10), USA, UK, and UAE (9 each) and Kenya (7).
The other countries where Indian joint ventures are in operation are – Mauritius, Saudi Arabia, West Germany, the Philippines, Oman, Hong Kong, Nepal, Bangladesh, Switzerland, Kuwait, Bahrain, Australia, Fiji, Tonga, Uganda, Botswana, France and the Netherlands.
There is a heavy concentration of investment in South East Asian countries (64.5 per cent) followed by Africa (28.7 per cent). This heavy concentration in South East Asian countries and Africa is declining and the share of South Asia, West Asia and the developed countries of Europe, America and Australia is increasing in the joint ventures under implementation.
Product Mix:
The product mix of these joint ventures is varied and includes diesel engines, paints and varnishes, bottling and packing, corrugated sheets, spinning mills, automobiles and ancillary products, viscose staple fibre, iron pipe fitting, oilseeds crushing, steel furniture, paper, bulk antibiotics, sugar mills, textiles, pharmaceuticals, electrical, cement products, readymade garments, cycles and vanaspati.
While most of the Indian joint ventures in developing countries are in the field of manufacturing, in developed countries they are mainly in the area of service ventures like hotels, restaurants, food processing, construction, consultancy, etc., with a few exceptions like the asbestos cement project in the United Kingdom and the tufted carpet yarn plant in Ireland.
The benefits that have accrued to India by the establishment of joint ventures till March, 1985 amounted to Rs. 9.31 crores by way of dividends, Rs. 29.64 crores by way of fee for technical know-how, engineering services, management and consultancy, selling agency commission, etc., and Rs. 147.91 crores by way of additional exports over and above exports towards equity which amounted to Rs. 62 crores.
Joint Venture – How to Make Joint Venture Successful? (8 Tips)
The following may help make joint ventures successful:
1. Finding the Right Partner – Who brings what you do not have and you are not able to acquire easily. Right partner is also some firm you know well, and who can provide right information about him/herself. Also select a person who has experience.
2. Timing and Vision – People who start a joint venture tend to be in a hurry. They want to succeed today as opposed to tomorrow. Choose a partner who is not in hurry to make money, and who has same grand vision about the business.
3. Lack of Time or Poor Time Management – Partners should spend more time on forming a joint venture which is going to be successful one, and monitor/share JV properly. Partners need to focus on one project rather than on multiple projects.
4. Write a Meaningful Business Plan – Once you write a business plan then you cannot improvise, because you do not have time and money. It is necessary to remember that only professional business plans get funds. Partnership firms need to have a good product, target market, and good business plan.
5. Have equal partnership stake among firms.
6. Don’t commit to any new investments in the company.
7. Plan proactively.
8. Companies not to procrastinate on decisions.