Last Updated on March 8, 2021 by Filip Poutintsev
A joint venture is a partnership agreed among two or more individuals or organizations that is mutually beneficial to all parties involved. The joint venture is done when multiple entities are required to successfully implement an idea into a successful product or service. The expertise of individuals involved is merged together and resources are shared within them.
The joint venture is usually done to increase their consumer reach in the same places or in different places by entities of different places. Another reason for a joint venture is the shared benefit of a higher budget and lower risk. Here, we will discuss the pros and cons of a joint venture.
Pros of Joint Venture
A joint venture is a great way to increase your business and expand to a new jurisdiction. Big companies like Sony, Volkswagen Group, Volvo, Geely, etc, around the world, have a joint venture with companies in various new countries.
1. Combined expertise
In a joint venture, the combination of the expertise from different individuals works in their advantage. In any given project, there will be a vastly different problem to tackle for it to be successful. For example, one may be an expert in the field of marketing while the other may have a better production line and factories. Their joint venture is going to be more productive if they work together and bring a better business model to the table.
2. Better resources
Joint venture results in the increase of resources available for the project. The resources may be capital resources or equipment. Thus, they can work to improve their project or their business which results in higher profit. Different companies around the world have made joint ventures in a country where the resources are plenty and production cost is low. As an example, Many smartphone companies follow this model of partnership in China.
3. No long term commitments
Joint ventures are temporary agreements between different entities. They are not legally merged or bonded to each other. Once their goals are reached or they are not satisfied with their joint venture, entities can agree to dissolve their joint venture. Sometimes, the entities may have a change in the vision of their company or may want to change as the market changes. The joint venture allows you to have your business or your company intact and you can walk away with your company when your work is done.
4. Shared profit and risk
A joint venture allows all parties involved to share the profit earned. Similarly, the risk involved is also shared among the entities. This acts as a safety net as an individual is not subjected to lose a whole lot of money of their own. The risks are reduced by a huge amount which allows you to be more confident in exploring newer ideas for your business/ project without the fear of investing a lot of money.
5. Financial benefits
Financially, your company has the potential to grow exponentially when you work together. Better resources, expertise and shared risks allow to be more daring in your ventures. You don’t have to get a bank loan with increasing interest rates. Even If the business fails, you don’t have to worry about losing your collaterals to the bank.
Production may be cheaper in the country where the joint venture is placed and the production may be cheaper. Companies make deals with companies where the labor cost is low and production is cheaper. This results in high profits for both companies involved.
Similarly, as your business success, you will a bigger market and a bigger name for your brand. You get the opportunity to explore newer geographical regions with a newer market. The benefit doesn’t get limited to finance only. You will learn skills related to your industry or related to marketing yourself and your ideas.
Joint ventures with partners from different geography may also work to promote your business to a new market. This removes the need to advertise your business in a new place. And finding consumers can also be easy as your partners may already have a consumer base in their locality. An example of a Volvo Geely joint venture can be taken. Geely owns the right to produce Volvo vehicles in China.
Cons of Joint Venture
This process may be expensive and time-consuming. You must find a partnership where you can trust. Thus, proper planning and research are required for a joint venture. When done right, you sure to reap the benefits of your work
When different entities are involved then conflict may arise. Different goals of individuals with varying plans may result in a gap in communication. Unlike a single business where a single boss may keep things in control, a joint venture may have more than one man with responsibility. This may result in a conflict. The vision shared among the entities may not be similar.
2. Commitment issues
As one does not have long term bondage to the deal, one can back out easily. All members of the joint venture may not be fully committed. The work ethic of May differs vastly among the people in different places around the world. This may be quite annoying as the set goals may not be reached on time and up to the highest standards.
3. Vague objectives
The objectives among the members of the joint venture may be vague. Coming from different backgrounds, two companies of individuals may find it difficult to work together and find common ground. The objectives of the joint venture may not be clear as a merger or other business model. And since all parties can go back to their old ways, they don’t feel obliged to leave their vision of a project and may want to do things their own way.
Having a joint venture between parties of different countries may result in difficulties with the jurisdictions. The law of the country, on which the joint venture is placed, must be followed. In India, to open a private company there is a lower limit of US$2500. On the other hand, China requires 25% foreign investment in an equity joint venture. It can be difficult to deal with these legal issues.
5. Language and Culture
A deal between different regions of the world may result in difficulties in the language spoken and culture. A translator may be required for every interaction. Culturally, some things may not be allowed in the country where the venture is placed. So, proper knowledge about the place is required.
6. Proper planning and research
Proper planning is required to start a joint venture. All legal criteria must be met and the required documents have to be prepared. A research on the market of your product must also be done so as all parties involved may have profit. This is a lengthy process and requires a lot of money to be fulfilled.