A contractual agreement joining together two or more parties for the purpose of executing a particular business undertaking. All parties agree to share in the profits and losses of the enterprise.
A joint venture takes place when two parties come together to take on one project. In a joint venture, both parties are equally invested in the project in terms of money, time, and effort to build on the original concept. While joint ventures are generally small projects, major corporations also use this method in order to diversify. A joint venture can ensure the success of smaller projects for those that are just starting in the business world or for established corporations. Since the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project, as well as the resulting profits.
A joint venture is not to be taken lightly. For a businessperson to embark on a joint venture, he or she needs to be committed and willing to work cooperatively with the other party involved. A person involved in a joint venture can no longer make all of the decisions for the business alone. For it to be truly a “joint venture,” there has to be 100% commitment from both sides.
When determining whether or not to embark on a joint venture, it is important to ensure both parties are a match with the projected client base. In a joint venture, each party must compliment the other in business. Sometimes, a misunderstanding or a lack of communication can destroy a joint venture. Therefore, it is necessary for both parties to be capable of communicating what they are able to offer to the project and what their expectations are.
Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In short, both parties must be committed to focusing on the future of the partnership, rather than just the immediate returns. Ultimately, short term and long term successes are both important. In order to achieve this success, honesty, integrity, and communication within the joint venture are necessary
JVs are normally formed both inside one's own country and between firms belonging to different countries. Within one, JVs usually combine different strengths in a field or are formed because of legal restrictions within a country; for example an insurance company cannot market its policies through a banking company. Some JVs are also formed because the law of a country allows dispute settlement, should it occur, in a third country. They are also formed to minimize business,tax and political risks. The JV is an alternative to the parent-subsidiary business partnership in emerging countries, discouraged, on account of (a) ignoring national objectives (b) slow-growth (c) parental control of funds and (d) disallowing competition.
JVs can be in the manufacture of goods, services, travel space, banking, insurance, web-hosting business, etc.
Today, the term 'JV' applies to more occasions than the choice of JV partners; for example, an individual normally cannot legally carry out business without finding a national partner to form a JV as in many Arab countries, where it is mentioned that there are over 500 JVs in Saudi Arabia with Indians alone. Also, the JV may be an easier first-step to franchising, as McDonald's and other fast foods, found out in China in the early difficult stage of development.
Other reasons for forming a JV are:
reducing 'entry' risks by using the local partner's assets
inadequate knowledge of local institutional or legal environment
access to local borrowing powers
perception that the goodwill of the local partner is carried forward
in strategic sectors, the county's laws may not permit foreign nationals to operate alone
access to local resources through participation of national partner
influence of local partners on government officials or 'compulsory' requisite (see China coverage below)
access by one partner to foreign technology or expertise, often a key consideration of local parties (or through government incentives for the mechanism)
again, through government incentives, job and skill growth through foreign investment, and
incoming foreign exchange and investment.
Strategic Reasons of One Partner
There may be strategic interests of one partner's alone:
adding 'clout' (the influence of the other partner) to the enterprise
build on company's strengths
economies of (international) scale and advantages of size ('industrial hubs')
'globalize' without size economies of scale (e.g.Indian and Israeli pharmaceutical industries)
influencing structural evolution of the industry
pre-empting competition
defensive response to blurring industry boundaries
speed to market
market diversification
pathways into R&D
outsourcing
JVs are formed by the parties’ entering into an agreement that specifies their mutual responsibilities and goals in an 'adventure. The JV partners can usually form the capital of the company through