A joint venture (JV) is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses, and assets. With individuals, when two or more persons come together to form a temporary partnership for the purpose of carrying out a particular project, such partnership can also be called a joint venture where the parties are "co-venturers. "
Joint Venture Basics and Benefits
A joint venture takes place when two parties come together to take on one project. In a joint venture, both parties are equally invested in the project in terms of money, time, and effort to build on the original concept. While joint ventures are generally small projects, major corporations also use this method in order to diversify. A joint venture can ensure the success of smaller projects for those that are just starting in the business world or for established corporations. Since the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project, as well as the resulting profits.
The venture can be for one specific project only or for a continuing business relationship which is known as a "consortium JV. " A consortium JV is formed where one party seeks technological expertise or technical service arrangements, franchise and brand use agreements, management contracts, or rental agreements, for one-time contracts. The JV is dissolved when that goal is reached.
By its formation the JV becomes a new entity with the following implications:
- It is officially separate from its founders, who might otherwise be giant corporations, even amongst the emerging countries
- The JV can contract in its own name, acquire rights (such as the right to buy new companies)
- It has a separate liability from that of its founders, except for invested capital
- It can sue (and be sued) in courts in defense or its pursuance of its objectives
Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In short, both parties must be committed to focusing on the future of the partnership, rather than just the immediate returns. Ultimately, short-term and long-term successes are both important. In order to achieve this success, honesty, integrity, and communication within the joint venture are necessary.
Domestic and Foreign Firm JVs
A joint venture is sometimes a partnership between a domestic firm and a foreign firm. Both partners invest money and share ownership and control of partnership. Joint ventures require a greater commitment from firms than licensing or the various other exporting methods. They have more risk and less flexibility.
A domestic firm may wish to engage in a joint venture for a variety of reasons; for example, General Motors and Toyota have agreed to make a subcompact car to be sold through GM dealers using the idle GM plant in California. Toyota's motivation was to avoid U.S. import quotas and taxes on cars without any U.S.-made parts.
Many countries limit foreign ownership of assets and legally force foreign companies into a joint venture with a local partner in order to do business there. Poland, for example, limits foreign ownership of farmland and will continue to do so for another decade under agreements with the EU.
Dissolution
The JV is not a permanent structure. It can be dissolved when:
- Aims of original venture are not met
- Either or both parties develop new goals
- Either or both parties no longer agree with joint venture aims
- Time agreed for the joint venture has expired
- Legal or financial issues
- Evolving market conditions mean that the joint venture is no longer appropriate or relevant
- One party acquires the other
Sony Ericsson
Sony (known for its electronics) and Ericsson (known in the B2B telecom industry) created a joint venture in order to expand the business in an industry that's new to Sony users