Enhancing business through joint venture
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25-02-2009, 12:05 AM
Enhancing business through joint venture
Trade and the motive of traders is not the constant for all the types of market prevailing globally. The developing countries has different trade strategy where as the developed countries has also acquired superior strategy for their dynamic growth. The measuring scale i.e. economy of a nation clearly explains the growth of trade in a particular nation. Trade practices are no more similar for all the players prevailing in the market in the same way driving workforce for fulfilling their need is also not a constant one. Globalization and the stiff competition have challenged every organization to adapt unique business model for existence and growth in the future. In the days of globalization, no economy can stand alone and immune from the developments in the abroad sector. India is, therefore, legitimately affected by what happens in the rest of the world. The international transmission effect is speedier, more substantial and more sustained than over before. International economic relations between India and other countries have been working through trade, payments, technology transfer, joint ventures and the like. The commodity-composition and the country-composition of India's exports to reflect the volume, value and direction of our foreign trade.
Joint Venture companies are the most ideal form of corporate entities for Doing Business in India. The companies incorporated in India, even with up to cent percentage foreign equity, are treated the same as domestic companies. A Joint Venture may be any of the business entities existing in India.
WHY COMPANIES GO FOR JOINT VENTURE:
The reasons behind forming a joint venture include business expansion, development of new products or moving into new markets, particularly overseas. One companies business may have strong potential for growth and the entrepreneur may have innovative ideas and products. However, a joint venture could be a successful integration of business for:
Increased technical expertise
Access to established markets and distribution channels
Entering into a joint venture is a major decision for an organization.
IMPORTANT FACTORS TO BE CONSIDERED BEFORE A JOINT VENTURE IS FORMED:
Screening of prospective partners
Joint development of a detailed business plan and shortlisting a set of prospective partners based on their contribution to developing a business plan
Availability of appreciated or depreciated property being contributed to the joint venture; by misunderstanding the significance of appreciated property, companies can fundamentally weaken the economics of the deal for themselves and their partners. special allocations of income, gain, loss or deduction to be made among the partnerscompensation to the members that provide services.
Due diligence - checking the credentials of the other party ("trust and verify" - trust the information you receive from the prospective partner, but it's good business practice to verify the facts through interviews with third parties)
Development of an exit strategy and terms of dissolution of the joint venture
Most appropriate structure (e.g. most joint ventures involving fast growing companies are structured as strategic corporate partnerships)
Availability of appreciated or depreciated property being contributed to the joint venture; by misunderstanding the significance of appreciated property, companies can fundamentally weaken the economics of the deal for themselves and their partners.
Special allocations of income, gain, loss or deduction to be made among the partners
Compensation to the members that provide services
JOINT VENTURE BUSINESS ADVANTAGES:
Businesses of any size can use joint ventures to strengthen long-term relationships or to collaborate on short-term project and implimentations. A successful joint venture gives rise to following benefits:
Combining complementary R&D or technology:
Provide companies with the opportunity to obtain new capacity and expertise
Efficient commercialization of a technology or business concept
Developing or acquiring marketing or distribution expertise
Sharing of scientists or professionals with unique skills- The complexity of the knowledge to be transferred is a key factor in determining the contractual relationship between the partners. One or more participants may seek to learn more about a relatively new product market activity. This might concern all aspects of the activity or a limited segment like R&D, production, marketing or product servicing.
Allow companies to enter into related businesses or new geographic markets or obtain new technological knowledge
Have a relatively short life span (5-7 years) and therefore do not represent a long-term commitment
Improving access to financial resources for both partners: - financial resources increases because when to parties undertake economic activity together then they share expenses this leads to more access to each others financial sources .Financial support, or sharing of economic risk- It reduces the risks in a number of ways as the activities can be expanded with smaller investment outlays than if financed independently. A small firm with a new product idea that involves high risk and requires relatively large amounts of investment capital may form a joint venture with a large firm. The larger firm might be able to carry the financial risks and be interested in becoming involved in a new business activity that promises growth and profitability. In addition, the larger firm might thereby gain experience in the new area of activity that may represent the opportunity for a major new business thrust in the future.
Proper utilization of resources- Resources are inputs into a firm's production process, such as capital, equipment, the skills of individual employees, patents, finance, and talented managers. Resources are either tangible or intangible in nature. With increasing effectiveness, the set of resources available to the firm tends to become larger. Individual resources may not yield to a competitive advantage. It is through the synergistic combination and integration of sets of resources that competitive advantages are formed.
Acceleration of revenue growth
Ability to increase profit margins
Expansion to new domestic markets and international markets- It also helps in expanding the firm's operations into foreign countries. The local partners contribute in the form of specialized knowledge about local conditions, which are essential to the success of the venture.
New product development
Higher rate of profit and more control over the operations.
Sharing of risk and ability to combine the local in-depth knowledge with a foreign partner with know-how in technology or process.
Tax advantages are a significant factor in many joint ventures.
A joint venture can also be very flexible. For example, a joint venture can have a limited life span and only cover part of what company needs, thus limiting the commitment for both parties and the business' exposure.
Market conditions require initial long-term build-up of contacts or creation of demand, e.g. China
THE DISADVANTAGES OF JOINT VENTURE
Partnering with another business can be complex. It takes time and effort to build the right relationship. Problems are likely to arise if:
The objectives of the venture are not 100 per cent clear and communicated to everyone involved
The partners have different objectives for the joint venture
Varied organizational structures may lead to less efficient decision-making
There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners
Cultural difference: Different cultures and management styles result in poor integration and co-operation
The partners don't provide sufficient leadership and support in the early stages
High level of commitment of staff and management
Time consuming (especially where a new venture is involved)
Political risks in the country where the joint venture is based
Working in a different legal and commercial system
Success in a joint venture depends on thorough research and analysis of aims and objectives. This should be followed up with effective communication of the business plan to everyone involved.
A joint venture may be subjected to several difficulties. As circumstances change, the contract might be too inflexible to permit the required adjustments to be made. The basic reasons for failure of a joint venture are:-
* Inadequate preplanning for the joint venture.
* Cultural differences
* Poor integration process
* The hoped-for technology never developed.
* Agreements could not be reached on alternative approaches to solving the basic objectives of the joint venture.
* People with expertise in one company refused to share knowledge with their counterparts in the joint venture.
* Parent companies are unable to share control or compromise on difficult issues.
REASON BEHIND JOINT VENTURE FAILURES:
Joint venture breakdowns, for example, are often accompanied by a lack of partner rapport. This lack of rapport can take either of two forms. Often there are allegations of interference in each others activities and even of outright cheating. In fact, even in joint ventures that ultimately succeed such allegations abound. In a few cases, however, exactly the reverse happens with a severe lack of communication between the partner firms. An important reason behind joint venture failures is the lack of frequent consultations between partners. While disagreements among partners can be caused by many factors, one oft mentioned point of contention is the supply of inputs by the parent firms to the joint venture. One of the most serious problems with a partnership arises when one or more parties supply the venture with product or services. The supply of inputs is one of the factors that lead to conflicts among the parent firms. In fact, such opportunistic behavior is an important manifestation of the control problems that make joint ventures problematic to manage. One way to mitigate such opportunistic behavior would be to monitor the activities of the partner firms. In fact one of the key features behind joint venture success is to monitor the progress of the alliance on a regular basis. With monitoring of course, it is easy to see why allegations of cheating and interference may arise.
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