Advantages & disadvantages of joint venture alliances
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Joint ventures are alliances between two or more business entities to pool resources and share in the risks and rewards of a particular enterprise.
They involve the creation of new legal vehicles, mostly limited liability companies, and a contract between the partners stipulating their individual rights and obligations. As joint ventures are designed for specific projects, they are limited in their scope and duration compared with conventional business partnerships.
The most frequent reason for the creation of a joint venture alliance is risk sharing. Companies may find that they cannot assume 100 percent of the risk of launching a new product. They find a joint venture partner to share in the product development and eventual profits. Capital intensive industries such as energy, mining, and construction predominantly work through joint ventures. The disadvantages of this system are most apparent among the smaller capitalised companies in the venture. Changes in tax legislation or damage after natural disasters may create unforeseen liabilities that a small company cannot sustain. At this point, some of the larger partners in the venture may have to finance the entire project.
Joint ventures allow partners to pool their resources that include technical expertise as well as financial strengths. A small company may have access to proprietary technology developed by the larger partner. The partners also share their workforces on developing the project. In these cases, the smaller partner may employ more imaginative individuals. But problems may arise if one partner feels he is losing technical secrets to potential competitors.
The rights and obligations of all partners in a joint venture must be spelled out clearly in a written agreement. This includes the overall management control of the venture. In capital intensive industries, one company takes management control of the venture. That company may think it has the advantage of pursuing its own corporate goals, but the other partners may resent this. Equally, the managing partner may not be happy with the impression that the other companies are taking a free ride, and not contributing to the work load. Often, misunderstandings arise between partners about who is responsible for insurance. Does the managing partner buy insurance cover for the venture or does each partner make its own arrangements? The partners may find that the dispute procedures they agreed at the beginning of the venture prove inadequate in unforeseen circumstances.
Companies that are small by British or other industrialised country standards gain access to foreign markets through joint ventures with local companies in a foreign jurisdiction. The partnership with a local company helps the foreign company to navigate through local political and cultural difficulties. The foreign company may enhance its reputation by investing in social projects in an emerging economy. But the financial strength of a small to medium-sized foreign partner may overwhelm a partner that may be large by local standards and create resentment over tax matters and investment policies. Further problems may occur if the foreign partner wants to repatriate his share of project profits when the host country experiences an economic downturn.
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