What are the advantages and disadvantages of
participating in a joint venture with another company?
Joint ventures
Joint ventures can prove to be a useful and necessary
way to enter new markets. In some markets that restrict
inward investment, joint ventures may be the only way to
achieve market access. Within joint ventures, clear
equity positions are usually taken by the participants.
Such holdings can vary in size significantly, although
it is usually important to establish clear lines of
management control over decisions in order to achieve
success. A lesser form of participation, which may or
may not involve equity participation, is that of
strategic alliances. Joint ventures do tend to have a
relatively high failure rate. Nonetheless, they also
enjoy a number of specific advantages.
Advantages of joint ventures
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Joint ventures enable
companies to share technology and complementary IP
assets for the production and delivery of innovative
goods and services.
-
For the smaller
organization with insufficient finance and/or
specialist management skills, the joint venture can
prove an effective method of obtaining the necessary
resources to enter a new market. This can be
especially true in attractive markets, where local
contacts, access to distribution, and political
requirements may make a joint venture the preferred
or even legally required solution.
-
Joint ventures can be
used to reduce political friction and improve
local/national acceptability of the company.
-
Joint ventures may
provide specialist knowledge of local markets, entry
to required channels of distribution, and access to
supplies of raw materials, government contracts and
local production facilities.
-
In a growing number
of countries, joint ventures with host governments
have become increasingly important. These may be
formed directly with State-owned enterprises or
directed toward national champions.
-
There has been growth
in the creation of temporary consortium companies
and alliances, to undertake particular projects that
are considered to be too large for individual
companies to handle alone (e.g. major defence
initiatives, civil engineering projects, new global
technological ventures).
-
Exchange controls may
prevent a company from exporting capital and thus
make the funding of new overseas subsidiaries
difficult. The supply of know-how may therefore be
used to enable a company to obtain an equity stake
in a joint venture, where the local partner may have
access to the required funds.
Disadvantages of joint ventures
-
A major problem is
that joint ventures are very difficult to integrate
into a global strategy that involves substantial
cross-border trading. In such circumstances, there
are almost inevitably problems concerning inward and
outward transfer pricing and the sourcing of
exports, in particular, in favour of wholly owned
subsidiaries in other countries.
-
The trend toward an
integrated system of global cash management, via a
central treasury, may lead to conflict between
partners when the corporate headquarters endeavours
to impose limits or even guidelines on cash and
working capital usage, foreign exchange management,
and the amount and means of paying remittable
profits.
-
Another serious
problem occurs when the objectives of the partners
are, or become, incompatible. For example, the
multinational enterprise may have a very different
attitude to risk than its local partner, and may be
prepared to accept short-term losses in order to
build market share, to take on higher levels of debt,
or to spend more on advertising. Similarly, the
objectives of the participants may well change over
time, especially when wholly owned subsidiary
alternatives may occur for the multinational
enterprise with access to the joint venture market.
-
Problems occur with
regard to management structures and staffing of
joint ventures.
-
Many joint ventures
fail because of a conflict in tax interests between
the partners.
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