A
joint venture (often abbreviated
JV) is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing
equity, and they then share in the
revenues,
expenses, and control of the enterprise. The venture can be for one specific project only, or a continuing business relationship such as the
Fuji Xerox joint venture. This is in contrast to a
strategic alliance, which involves no equity stake by the participants, and is a much less rigid arrangement.
The phrase generally refers to the
purpose of the entity and not to a type of entity. Therefore, a joint venture may be a
corporation,
limited liability company,
partnership or other legal structure, depending on a number of considerations such as
tax and
tort liability.
When are joint ventures used?
Joint ventures are not uncommon in the oil and gas industry, and are often cooperations between a local and foreign company (about 3/4 are international). A joint venture is often seen as a very viable business alternative in this sector, as the companies can complement their skill sets while it offers the foreign company a geographic presence. Studies show a failure rate of 30-61%, and that 60% failed to start or faded away within 5 years. (Osborn, 2003) It is also known that joint ventures in low-developed countries show a greater instability, and that JVs involving government partners have higher incidence of failure (private firms seem to be better equipped to supply key skills, marketing networks etc.) Furthermore, JVs have shown to fail miserably under highly volatile demand and rapid changes in product technology.
Some countries, such as the
People's Republic of China and to some extent
India, require foreign companies to form joint ventures with domestic firms in order to enter a market.
Brokers
In addition, joint ventures are practiced by a
joint venture broker, who are people that often put together the two parties that participate in a joint venture. A joint venture broker then often make a percentage of the profit that is made from the deal between the two parties.
Reasons for forming a joint venture
Internal reasons
- Build on company's strengths
- Spreading costs and risks
- Improving access to financial resources
- Access to new technologies and customers
- Access to innovative managerial practices
Competitive goals
- Influencing structural evolution of the industry
- Defensive response to blurring industry boundaries
- Creation of stronger competitive units
Strategic goals
- Transfer of technology/skills
Reasons for dissolving a joint venture
- Aims of original venture met
- Aims of original venture not met
- Either or both parties develop new goals
- Either or both parties no longer agree with joint venture aims
- Time agreed for joint venture has expired
- Legal or financial issues
- Evolving market conditions mean that joint venture is no longer appropriate or relevant
Examples
See also
