Joint Ventures:

Concept:

A joint venture is a new enterprise owned by two or more participants. It represents a combination of subsets of assets contributed by two (or more) business entities for a specific business purpose and a limited duration. It is essentially a medium to long-term contract which is specific and flexible.

Though, the joint venture represents a newly created business enterprise, its participants continue to exist as separate firms. A joint venture can be organized as a partnership firm, a corporation or any other form of business organization which the participating firms choose to select

Characteristics of joint ventures

Contribution by partners of money, property, effort, knowledge, skill or other assets to the common undertaking. Joint property interest in the subject matter of the venture. Right of mutual control or management of the enterprise. Right to share in the property.

Characteristics of joint ventures

Limited scope and duration Generally involve only two firms Involve only small fraction of participants' total activities Each participant offers something of value Joint production of single products No sharing of assets/information beyond venture Need not affect competitive relationships

Goals/objectives of joint ventures

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

2)Knowledge acquisition learning experience for both partners

Shared technology Shared managerial skills in organization, planning, and control Successive integration joint venturing as a way to learn about prospective merger partners

Goals
Entry

into new, expanded, foreign markets

Augments

financial or technical capabilities Reduces risk Foreign country may require joint venture with local partner

Financing to raise capital Share investment expense Small company has product idea but no cash Joint venture with large company that has cash to develop product Distribution/marketing
To obtain distribution channels To obtain raw materials supply

Benefits of joint ventures:

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

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

Tax advantages are a significant factor in many joint ventures. It also helps in expanding the firm's operations into foreign countries. The local partners contribute in the form of specialised knowledge about local conditions, which are essential to the success of the venture.

The basic reasons for failure of a joint venture are:

Inadequate preplanning for the joint venture. The hoped-for technology never developed. Agreements could not be reached on alternative approaches to solving the basic objectives of the joint venture. People with expertise in one company refused to share knowledge with their counterparts in the joint venture. Parent companies are unable to share control or compromise on difficult issues.

A successful joint venture needs to fulfill the following requirements:

Each participant has something of value to bring to the venture. The participants should engage in careful preplanning. The agreement or contract should provide for flexibility in the future. There should be provision in the agreement for termination including buyout by one of the participants. Key executives must be assigned to implement the joint ventures. A distinct unit be created in the organizational structure which has the authority for negotiating and making decisions.