Joint Venture and its Types
What is Joint Venture?
When two or more firms join together for a common purpose and mutual benefit, it is known as Joint Venture. It is a combination of two or more firms’ resources and skills to achieve a certain goal. A partnership between two companies is created to share capital, technology, human resources, risks, and benefits in order to achieve a strong market position. After the venture is completed, the joint venture agreement will be automatically terminated.
Joint Ventures can be created with an organisation in the same industry or with an organisation in a different industry, but after combining the two, they will get a competitive edge over other market players. In general, a Joint Venture is formed when two or more firms join together to form synergy and obtain a mutual competitive advantage. It can be a private, public, or even a foreign corporation. Firms enter into a joint venture for business expansion, development of new products or moving into a new market, especially in the case of another country.
Many Indian corporations entered into joint ventures with international companies that were either technologically more developed or geographically more dispersed. In India, important joint ventures were formed in industries, such as insurance, banking, commercial transportation vehicles, and so on.
Benefits of Joint Venture
The benefits of Joint venture are as follows:
- Establishing Entry into New Markets and Distribution Networks: When one company forms a joint venture with another, it opens up a wide market with the potential to expand and flourish. For example, when a firm from the United States of America forms a joint venture with another company from India, the company from the United States has access to enormous Indian markets with different variants of paying capacity and diversification of choice.
At the same time, the Indian firm has the benefit of being able to reach markets in the United States that are widely separated and have a high paying capacity where the product’s quality is not compromised. Unique Indian products have large global markets.
They can also make use of established distribution channels, such as retail outlets in various local marketplaces. Otherwise, building their own retail shops might be too expensive.
- Access to Technology: Technology is an alluring reason for companies to form joint ventures. Advanced technology combined with one organisation to generate higher quality products saves a significant amount of time, energy, and resources, as there is no need to develop its own technology. Superior quality products are also produced which adds to the efficiency and effectiveness of the organisation by reducing the cost of production.
- Economies of scale: Joint Venture helps companies with limited capacity to scale up. One organization’s strength can be utilized by another. This provides both firms with a competitive advantage in terms of generating economies of scalability.
- Innovation: Joint ventures provide an additional advantage in terms of technologically upgrading products and services. Marketing may be done through a variety of innovative platforms, and technological advancements help in the production of high-quality products at a low cost. International corporations can develop new concepts and technologies to decrease costs and produce higher-quality products.
- Low Production Costs: When two or more firms join hands, the primary goal is to deliver products at the lowest possible cost. And this is possible when manufacturing costs are decreased or service costs are controlled. A real joint venture simply aims to provide the best products and services to its customers.
- Established Brand Name: The Joint Venture can be given its very own brand name. This contributes to the brand’s distinct appearance and recognition. When two companies form a joint venture, the goodwill of one firm that is already established in the market can be used by another to gain an advantage over other market competitors. For example, A large European brand entering into a joint venture with an Indian firm will provide a synergistic benefit because the brand is already well-known throughout the world.
Types of Joint Venture
There are two types of Joint Venture:
- Contractual Joint Venture (CJV): A contractual joint venture does not result in the formation of a new jointly-owned business. There is only an agreement to cooperate and work together. The parties do not share ownership of the company, but they do have some influence over it. They exercise some elements of control in the joint venture. A franchisee relationship is a common example of a contractual joint venture.
The following are key elements in such a relationship:
a. Two or more parties share a common objective to run a business.
b. Each party contributes something to the venture or brings some input.
c. Both parties have some control over the business venture.
d. The relationship is not a transaction-to-transaction relationship but is of longer duration.
- Equity-based Joint Venture (EJV): An equity joint venture agreement is one in which a separate business entity, jointly owned by two or more parties, is formed with the parties’ agreement. The essential operating factor in such a scenario is joint ownership by two or more parties. The kind of business entity might vary in the form of corporation, partnership firm, trusts, limited liability partnership businesses, venture capital funds, etc.
The following are key elements in such a relationship:
a. There is an agreement to form a new entity or for one of the parties to join into ownership of an existing entity.
b. Shared ownership by the parties is involved.
c. Management is shared jointly.
d. Capital investment and other financing arrangements responsibilities are shared by both parties.
e. Profits and losses are shared according to the agreement.
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