What is a Joint Venture and types
These goals can range from business tasks to a new project or any type of commercial activity for a specified period.
In a Joint Venture (JV), each party is responsible for profits, losses, and costs associated with the agreement but operates separately from the other business activities and objectives of the companies involved in the Joint Venture.
Benefits of a Joint Venture
Creating business ties through joint ventures can be beneficial in various ways.
On one hand, a Joint Venture can focus on leveraging combined resources by partners to achieve company objectives, optimizing costs and resources in production, marketing, and distribution of one or more brands.
It can also be based on joint expertise, where one company specializes in a lesser-known area than the other, and vice versa, aiding in achieving both joint and individual goals. Each company can benefit from the other in terms of human and/or material resources.
Other advantages of joint ventures include:
- Access to new markets and distribution networks
- Sharing risks and costs, resulting in shared responsibility among the partner companies.
- Access to new knowledge and expertise, including specialized personnel.
- Expanded access to greater resources, such as technology, finances, or even a broader target audience in digital marketing strategies.
- Strengthening business relationships
Opportunities within a Joint Venture
A joint venture can be highly flexible and contextually relevant to the organization’s requirements. The agreement between the companies should have detailed terms and conditions regarding the activities they will undertake. This helps in clarity and prevents any ambiguity among stakeholders. The agreement also helps in delineating the actual scope of work that each party has to perform.
Two organizations from different countries can also engage in a joint venture to do business. In such cases, they must adhere to the directives issued by their respective governments before entering into any joint venture. These regulations help governments monitor the activities of organizations and ensure that legal activities are carried out by the organizations in the joint venture.
Types of Joint Ventures
Partnerships in a joint venture business can take place under any commercial structure.
They can be established through the contribution of resources such as raw materials, capital, technology, joint marketing strategies for specific products, sales, distribution channels, financing, and more.
In some cases, joint ventures can even occur between a larger and a smaller company to undertake one or more projects and agreements between them.
According to Hubspot, multiple types of joint ventures can be created to benefit both parties in achieving specific objectives.
- Growth Joint Venture: This involves forming partnerships with larger companies to enhance the capabilities of a small business, startup, or entrepreneurship.
- Vertical Joint Venture: Much more common in import-export business relationships, where a small company partners with a larger one to enhance their processes and increase profits.
- Co-Investment Joint Venture: Emphasizes the investment that the associated companies will make with the aim of pooling capital to generate more profits than they would individually.
- Contractual Joint Venture: The agreement between the parties is made with the intention of achieving a common goal or jointly conducting a specific activity. Consideration should be given to profit-sharing, risks, and the use of agreements.
It’s important to note that, like any type of business partnership, it depends on the parties involved to reach specific agreements that define not only the responsibilities of each party but also the scope of the agreement.
So, before entering into random partnerships, we recommend reviewing the legal regulations in your country to ensure that a joint venture does not become a headache for your organization.”
Characteristics of a Joint Venture or Joint Enterprise
1. Creates Synergy
A joint venture is established between two or more parties to leverage each other’s strengths. One company may have a special feature that another lacks. Similarly, the other company possesses an advantage that another cannot achieve. These two companies can form a joint venture to generate synergies between them for a greater good. They can work on economies of scale to provide cost advantages.
2. Risks and Rewards Can Be Shared
In a typical joint venture agreement between two or more organizations, whether from the same country or different countries, there are many diversifications in terms of culture, technology, geographical advantage and disadvantage, target audience, and many more factors to overcome. Therefore, the risks and rewards related to the agreed-upon activity for the joint venture can be shared among the parties as agreed and established in the legal agreement.
3. No Separate Laws
Regarding joint ventures, there is no separate governing body that regulates the activities of the joint venture. Once they are in a corporate structure, the Ministry of Corporate Affairs in partnership with the Companies Registrar oversees the companies. Furthermore, there is no separate law to govern joint ventures.
Regardless of the legal structure established for this purpose, it is important to have clarity about the joint objectives you aim to achieve with a Joint Venture.
The business arrangement that is reached should take into account elements such as:
- What the goal and/or objectives will be.
- Who and how the joint project will be managed.
- What the scope will be in terms of time and geography.
- Specification of the development of day-to-day operations.
- What material or human contribution each party will make.
- Profit percentages.
Among other considerations that the parties may deem relevant, the clearer the contract consolidation, the greater the commercial trust, and potential legal consequences of non-compliance can be avoided for some of the associated companies.
In some cases, joint venture agreements are developed more informally to implement different digital marketing strategies, in which collaborative projects can be carried out to expand the reach of a target audience.
Advantages of a Joint Venture
1. Economies of Scale
A joint venture helps organizations increase their limited capacity. One organization’s strength can be utilized by the other. This gives a competitive advantage to both organizations to generate economies of scale.
2. Access to New Markets and Distribution Networks
When an organization enters into a joint venture with another organization, it opens up a vast market with the potential to grow and expand. For example, when a U.S.-based organization enters into a joint venture with an organization headquartered in India, the U.S. company gains the advantage of accessing vast Indian markets with diverse payment capabilities and a wide range of options.
At the same time, the Indian company gains access to the geographically dispersed U.S. markets with good purchasing power where product quality is not compromised. Unique Indian products have significant markets worldwide.
Joint ventures provide an added advantage for enhancing products and services in terms of technology. Marketing can be done through various innovative platforms, and technological upgrades help create quality products cost-effectively. International companies can introduce new ideas and technology to reduce costs and offer higher-quality products.
4. Low Production Costs
When two or more companies join forces, the primary goal is to provide products at the most efficient price. This can be achieved by reducing production costs or managing service costs. A genuine joint venture aims to provide the best products and services to consumers.
5. Brand Name
Separate branding can be established for the joint venture. This helps give the brand a distinct look and recognition. When two parties enter into a joint venture, the reputation of an already established company in the market can be used by another organization to gain a competitive advantage over other market players.
For example, a leading European brand entering into a joint venture with an Indian company creates a synergistic advantage, as the brand is already established worldwide.
6. Access to Technology
Technology is an enticing reason for organizations to enter into a joint venture. Advanced technology within an organization to produce superior quality products saves a significant amount of time, energy, and resources. Without the additional investment of a substantial amount of money to create technology that already exists, access to the same technology can only be achieved when companies enter into a joint venture, providing a competitive edge.
Examples of Joint Ventures
Joint ventures can be useful in any situation where different companies have complementary resources and a shared goal. The examples of joint ventures you’ve read about may have involved two mega-corporations joining forces, but small business owners can also benefit from this type of agreement.
According to Washington, DC business attorney Joy R. Butler, ‘If you think a joint venture is the exclusive territory of Fortune 500 companies, think again. Joint ventures offer the option of sharing resources with others, so you don’t have to go it alone. Your joint venture could be as simple as sharing a customer list for a combined marketing campaign… or providing original content for a website.’
Here are some examples of joint ventures:
- Two mobile phone companies agree to share their network.
- A transportation provider and a network provider team up to provide Wi-Fi on transportation platforms.
- Multiple real estate developers collaborate to build a commercial complex.
- A restaurant partners with a major distributor to bring its products to supermarkets nationwide.
- Two automotive companies join forces to conduct research on fuel efficiency.
These examples are inspired by real-life joint ventures, and I’m sure that as you read them, you can think of brands you’re familiar with.
For instance, in 2015, BMW and Toyota formed a joint venture to develop a hydrogen fuel cell-powered vehicle. And in 2009, Vodafone and Telefónica teamed up to share their mobile network infrastructure in parts of Europe, an agreement that allowed both companies to save millions.
Juan Esteban Yepes