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The Flevy Blog covers Business Strategies, Business Theories, & Business Stories.
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Editor's Note: Take a look at our featured best practice, Growth Strategy (41-slide PowerPoint presentation). The reality is: all businesses face the challenge of achieving sustainable Growth. They need viable Growth Strategies. So, what is Growth Strategy? It is the organization's high-level Corporate Strategy Plan that outlines everything the organization needs to do to achieve its goals for [read more]
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A joint-venture is a business agreement between two (or more) parties to create a new entity, with new assets, resources and management control. The goal of the new entity is the same one as all other business endeavors: to grow revenues and/or reduce costs and/or mitigate risk.
The term “joint-venture” (JV) is understood quite differently from country to country around the world. The global regions and each specific country have different laws and understanding of what constitutes a “joint venture,” especially as it relates direct capital investments.
Even within the European Union there are numerous terms for forms of JVs (Groupement d’Intérêt Economique, Konzern, Unión Temporal de Empresas, Gemeenschappelijke Onderneming…) and each form has slightly different set of legal and common law requirements, as well as business practices involving partnering solutions.
The so-called BRICS (Brazil, Russia, India, China, and South Africa) have been targeted for massive investments over the past twenty years, forcing their governments to update JV laws and international collaborative Agreements, mostly involving rules of engagement of capital flowing into and out of their countries.
Most international JVs involve some form of equity investments, and public authorities in the high growth emerging markets want to ensure that most if not all eventual profits stay at home to grow the domestic economy. In India, for example, in less than a generation, foreign investment has moved from US$100M thirty years ago to nearly US$100B today. In China, foreign investments have been even more impressive.
JVs are one form of the many collaborative frameworks which are changing the way we work in the new networked society. All forms of partnership models are proliferating at a remarkable rate in all sectors and across all geographies:
These new models of organization are being designed and implemented in all functional areas of private companies, non-profit and non-government organizations: from marketing & sales to production, operations, research & development, and all the back office functions.
Collaborative architecture to design the best network partnering solution to implement for each firm is critical to success. The issues concerning the optimal value are centered on two key concepts:
International joint ventures in particular are becoming more popular, especially in capital-intensive industries such as oil and gas exploration, mineral extraction, and metals processing.
But all sectors are implementing advanced value networks. For example, manufacturing is also a huge beneficiary of joint venture development, motivated by the lower costs of labor and overall operating expense. In this case, the basic reason for the JV is simple: to save money on production costs, especially on labor.
Joint ventures are extraordinarily helpful to some companies in gaining access to foreign markets. Neither party may really be interested in the primary project, but they participate simply to gain access to the new market. Such projects generally represent a direct investment, which is sometimes limited by laws in the country in which the operation takes place. One of the aims of a partner in a joint venture is to have a majority interest in it; that way, it maintains control over a project. This explains why some countries do not permit foreign companies to hold majority interests in their domestic business ventures.
What are the benefits and advantages of JVs?
What are the concerns and pitfalls of JVs?
Joint Ventures are one form of collaborative frameworks which contain huge potential benefits for the parent companies who create them.
JVs are similar to but different from acquisitions, mergers, strategic alliances and pure venture capital investments. Cooperative agreements to share technical services, for example, can adapt a JV structure without equity investments.
Contingency planning is of course a necessary step in the formation of any joint venture. But the overall benefits, weighed against the mitigated risks and limited costs make JVs, as well as strategic alliances and other collaborative frameworks a very attractive, flexible business proposition.
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