Joint Ventures: Meaning, Advantages and Disadvantages
What is a Joint Venture?
Countries worldwide are witnessing significant changes in how they create and market different products and services. Earlier, national economies were working toward self-sufficiency, and now they are dependent on other nations for the supply of a wide range of goods and services. The development of a faster and more effective means of communication and transportation has brought nations closer to each other. The economies have removed the restrictions on cross-border transactions and integrated with the world economy for cooperation. Thus, a growing number of businesses are expanding into foreign markets, as it provides numerous growth opportunities and increases profits. There are different ways in which a business can enter into international business. A joint venture is a common strategy for entering international markets. When two business enterprises agree to join together for a common objective and mutual gain, it gives rise to a Joint Venture. These enterprises can be private, government, or foreign companies.
Joint Venture refers a partnership in which companies share management, risks, investments, and profits in the development, production, or selling of products. In Joint Venture, two or more firms join together for a common purpose and mutual benefit.
All the participants are responsible for sharing the profits and losses under the joint venture. It includes establishing those enterprises in which both the domestic and foreign are partners in ownership and management. Under this mode of international trade, business is conducted in collaboration with the company of importing nation. The primary purpose of this venture is to share a competitive gain among the companies. Maruti Suzuki India Ltd., Hero Honda, Sony and Ericson, etc., are some examples of Joint Venture.
A joint venture may be adopted due to the following reasons:
- When a company wishes to launch its business in the international market but lacks capital and human resource.
- When a business believes that working with a local partner will be helpful.
- When a company seeks to benefit from the existing distribution network of the local partner of importing country.
Many Indian companies entered into joint ventures with international companies that have advanced technologically or are geographically dispersed. In the Indian automobile sector, Maruti Suzuki is a well-known example of a joint venture. It is a venture between Suzuki Motor Corporation of Japan and the Indian Government. Maruti Suzuki is one of the top automobile companies in India. This resulted in the automobile revolution in India.
A joint venture can be created in three ways which are as follows:
- A foreign investor purchasing stock in a local business.
- A local firm is purchasing a stake in an already established foreign firm.
- Foreign and local enterprises collaborate to create new businesses.
Characteristics of Joint Venture
1. Create Alliance: The joint venture is created to combine the features of two or more companies. The company has a unique quality that other businesses usually lack.
2. Shared Risk and Rewards: In a joint venture, two or more companies of two countries come together. Companies have different cultures, technology, and ethics. Hence it provides a chance to acquire each other characteristics and collectively share risks and rewards.
3. No Separate Laws: No independent governing body governs the activities of the joint venture. Besides, there are no separate laws for regulating joint ventures.
Advantages of Joint venture
The advantages of Joint Venture are:
1. Increased Resources and Capacity
By collaborating or teaming up, one can increase capacity and resources, which helps joint venture companies grow and expand more quickly and efficiently. Joint venture results in the pooling of financial, physical, and human resources of two or more firms. With this, companies take advantage of new opportunities and face new challenges in the market.
2. Economies of Scale:
In joint venture strength of one organization can be utilized by the other. It helps businesses to expand despite their limited resources. In a joint venture, the businesses split operating costs, labour costs, advertising, marketing, and promotion expenses. The organization can reduce its cost and maximize its profits. This gives a competitive advantage to both organizations to produce economies of scale.
The cost of raw materials, labour, and technical workforce (CA, engineers, lawyers, or scientists) is comparatively low in India. As a result, many foreign firms can get the benefit of lower costs of production, getting products of the required quality and specifications by entering into joint ventures with Indian companies. So, India is becoming an important global source of different products and competitive in the market
Today’s market is demanding new and innovative products. Joint venture proves to be useful in providing new and innovative products. It provides the benefits of updated technology for goods and services. Advanced technology helps make high-quality goods at low costs. Moreover, international partners in a joint venture often generate new ideas, which can help to produce innovative products in our country.
4. Gaining Access to New Markets and Distribution Networks
When a company forms a joint venture with the other, it unlocks a vast market with the potential for growth and development. For example, when a firm from the United States of America forms a joint venture with an Indian company, the joint venture gives the American company access to a huge Indian market. It is simple for them to sell their products in new areas after they have attained saturation in their original markets.
It also provides the benefit of an established distribution channel, i.e., retail outlets in the domestic market. Otherwise, opening their retail shops may prove expensive. On the other hand, the Indian company can access a diverse American market.
5. Brand Exposure
When two or more parties form a joint venture, the established brand name of one company can be used by another organization to acquire a competitive gain over the other traders. It saves a lot of investment in developing a brand name for the products as there is a ready market waiting for the product to be launched. For example, if an Indian company enters into a joint venture with a foreign company, the Indian company can get the benefit of goodwill and the brand name of the foreign company in the market.
6. Access to Technology
Technology is one of the major reasons for most businesses to enter into a joint venture. With advanced technology, high-quality goods can be produced that save time, energy, and resources. It also adds to efficiency and effectiveness. When a joint venture is formed, one can get access to the same technology as other businesses as there is no need to develop own technology. Thus there is no need for further investment.
Disadvantages of Joint venture
The disadvantages of Joint Venture are:
1. Clash of Culture
A joint venture brings in people with different cultures to work together. Although it has the potential to provide innovative solutions to the workplace, it has some drawbacks. Some employees are not willing to compromise and resistant to change. As a result, there may be cultural differences among the organizations.
2. Trade disclosure
In joint ventures, foreign firms agree with local firms and share trade secrets. Thus, there is always a risk of trade secrets and technology being disclosed to others.
3. Conflict of Control
In a joint venture, both parties share ownership and management. The dual ownership arrangement results in conflicts, leading to a battle of control between the businesses.
4. Lack of Coordination
The functioning of the business can be affected if there is a lack of coordination among the partners.
In short, a joint venture makes business expansion possible. It is an easy way to approach foreign markets. On the other hand, since the business is operated remotely, there is no direct control or freedom in marketing activities, which may lead to losses.
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