JOINT VENTURES



Joint Ventures 239
Photo by: Guido Schmidt

Joint ventures are domestic or international enterprises involving two or more companies joining temporarily to undertake a particular project. They have grown in popularity in recent years—joint ventures between U.S. and foreign firms, for example, have increased at an average of 27 percent since 1985. Certainly, not all of them will be successful; estimates of the failure rate of joint ventures reaches as high as 70 percent. Nonetheless, companies persist in initiating them for a variety of reasons.

REASONS FOR JOINT VENTURES

Joint ventures may involve companies in one or more countries. International joint ventures in particular are becoming more popular, especially in capital-intensive industries such as oil and gas exploration, mineral extraction, and metals processing. The basic reason is simple: to save money. For example, just to start a mining operation in the United States in 1984, a company would have had to spend one to two billion dollars. Few companies then (or now) could finance such an expenditure on their own, so joint ventures became more attractive as a way to share risks and costs and create scale economies.

Another factor that contributed to the expansion in joint ventures in the past few decades was the cost involved for capital-intensive industries to continue their operations. Companies in these industries depend heavily on advances in technology to reduce costs. By pooling their money and personnel, companies enhanced their chances of developing advanced technological methods that would reduce exploration and production costs and increase profit margins. Joint ventures became a favored method of doing business for such industries.

Joint ventures between American and international companies are increasingly common. Estimates suggest that approximately one-quarter of American companies' direct investments, i.e., the establishment of operating facilities in a foreign country, were in joint ventures. Ideally, the partners contribute approximately equal amounts of resources and capital into each business. The word "approximately" is important in foreign joint ventures, since some countries, such as China, will not allow outside companies to own the majority of a domestic business (although they do encourage joint ventures). In some countries, joint ventures are the only way companies can engage in foreign business. For instance, Mexico requires that all foreign firms investing there have Mexican joint venture partners. In addition to government regulations, other reasons for multinational joint ventures include cutting the costs of doing business, sharing risks, and acquiring technological information and management expertise from other companies.

International joint ventures have also been fostered by international financial institutions such as the International Monetary Fund, the World Bank, and the World Trade Organization, who have instituted policies to eliminate trade barriers and deregulate foreign ownership restrictions and the international flow of capital. These policies have helped create a business climate in which international investment and partnerships are an increasingly attractive, and often necessary, means by which companies seek to expand profit margins and market share. In addition, regional trade areas such as the North American Free Trade Agreement (NAFTA), the European Union (EU), and the Association of South and East Asian Nations (ASEAN) have created particularly favorable conditions for joint ventures within specific, relatively localized regions.

Joint ventures are extraordinarily helpful to some companies in gaining access to foreign markets. Neither party may really be interested in the primary project, but they participate simply to gain access to the new market. Such projects generally represent a direct investment, which is sometimes limited by laws in the country in which the operation takes place. One of the aims of a partner in a joint venture is to have a majority interest in it; that way, it maintains control over a project. This explains why some countries do not permit foreign companies to hold majority interests in their domestic business ventures.

Companies seeking to cut the costs of doing business see joint ventures as a way to save money. In effect, they are sharing the risks should a particular project fail. For example, if two oil companies wish to produce a new drilling platform to search for oil in swamps or ocean areas, and neither one can finance the project on its own, they might join forces. That way, they are sharing the costs of the projects and reducing their individual risk should they find no oil. That is a decided advantage to many business people.

TYPES OF JOINT VENTURES

Joint ventures fall into several categories. Among them are equity based operations that benefit foreign and/or local private interests, groups of interests, or members of the general public. There are also non-equity joint ventures, also known as cooperative agreements, in which the parties seek technical service arrangements, franchise and brand use agreements, management contracts or rental agreements, or one-time contracts, e.g., for construction projects. Quite often, non-equity joint ventures are used simply to provide access for the participants into foreign markets.

Equity type arrangements involve two sides: one that provides the capital, and one that receives it. Since there is money involved, there are also inherent risks, particularly with equity ventures launched in less developed countries. The biggest risk is that the business will fail and the money invested will be lost. There is also the risk that some foreign governments will nationalize certain industries in order to protect their own domestic interests. For example, the Chilean government nationalized its copper industry in the 1960s to prevent foreign companies from gaining control over the ore. In 1988, Peru took over Perulac, a local milk producer owned by Nestle, because of a national milk shortage. However, such risks are (or should be) included in both the cost of doing business and in joint venture participants' contingency planning.

Participants do not always furnish capital as part of their joint venture commitments. There are, for example, non-equity arrangements in which some companies are more in need of technical services or technological expertise than they are of capital. They may want to modernize operations or start new production operations. Thus, they limit partners' participation to technical assistance. Such arrangements often include some funding as well, albeit limited.

There is also a growing prevalence of franchising joint ventures. American companies such as McDonald's, Coca-Cola Co., and Stained Glass Overlay have opened foreign franchise operations at an increasing rate. The emergence of new markets such as China and Vietnam have made such operations lucrative and have attracted more and more businesses to joint venture participation. A logical extension of franchising and brand-use agreements is the need for managerial expertise. Consequently, companies in developed countries form joint ventures with businesses in emerging countries in which they provide management expertise through contractual agreements. Such arrangements benefit both parties immeasurably, which is one of the goals of joint ventures.

Not all joint ventures involve private companies—some include government agencies. This is most common in less developed countries, but there are notable exceptions. For example, the British and French governments combined their resources in conjunction with privately owned firms to develop a supersonic transport (SST) intended to revolutionize transatlantic flying between the two countries and the United States. The project did not realize its financial goals. The flights were too expensive for average flyers, costing as much as $3,368 one way between London and Washington D.C. As a result, most flights were discontinued, although some between European and New York City still exist. Such are the risks of joint ventures, whether they involve private business or government agencies.

Generally, joint venture participants in the private sector furnish the capital, resources, and management and technological expertise involved in the operation. In less developed countries, however, government agencies are often active in business enterprises. They may provide or arrange for funding; own or manage certain industries, such as utility companies and airlines; or act as agents in attracting foreign investment or participation in businesses. They are no less active than privately held businesses in joint ventures, however. The rules for all participants remain the same, and strategies do not change.

JOINT VENTURE STRATEGIES

Businesses should not engage in joint ventures without adequate planning and strategy. They cannot afford to, since the ultimate goal of joint ventures is the same as it is for any type of business operation: to make a profit for the owners and shareholders. A successful company in any type of business is often recruited heavily for participation in joint ventures. Thus, they can pick and choose in which partnerships they would like to engage, if any. They follow certain ground rules, which have been developed over they years as joint ventures have grown in popularity.

For example, experience dictates that both parties in a joint venture should know exactly what they wish to derive from their partnership. There must be an agreement before the partnership becomes a reality. There must also be a firm commitment on the part of each member. One of the leading causes for the failure of joint ventures is that some participants do not reveal their true intentions in the partnerships. For example, some private companies in advanced countries have formed partnerships with militant governments to supply technological expertise and develop products such as chemicals or nuclear reactors to be used for allegedly peaceful purposes. They learned later that the products were used for military purposes. Such results can be detrimental to the companies involved and adversely affect their bottom lines and reputations, to speak nothing of the direct victims of the military development.

Businesses should form joint ventures with experienced partners. If the partners do not have approximately equal experience, one can take advantage of the other, which can lead to failure. Joint ventures generally do not survive under this imbalanced dynamic. Nor do they survive if companies jump into them without testing the partnership first.

Partners in joint ventures would often be better off participating in small projects as a way to test one another instead of launching into one large enterprise without an adequate feeling-out process. This is especially true when companies with different structures, corporate cultures, and strategic plans work together. Such differences are difficult to overcome and frequently lead to failure. That is why a "courtship" is beneficial to joint venture participants.

WHY JOINT VENTURES FAIL

Joint ventures fail for many reasons. In addition to those mentioned above, other factors include: disappearing markets, lagging technology, partners' inability to honor the contract, cultural differences interfering with progress, or governmental and macroeconomic de-stabilizing factors. However, many of these reasons can be eliminated with careful planning.

Inconsistent government interference is a difficult problem to overcome. For example, the United States government has long maintained restrictions against exporting certain technologies to selected foreign countries, such as those utilized to produce jet engines and computers. These restrictions place American companies at a competitive disadvantage, since other countries do not place similar constraints on their businesses. Thus, American companies are unable to engage in certain joint ventures.

Companies that engage in military-oriented joint ventures are often subject to unanticipated risks. The federal government may allocate funds for the production of certain weapons, sign contracts with manufacturers, and then discontinue the project due to changing needs, budget restrictions, or election results. Such government actions are a common risk to these joint ventures. They introduce an element of insecurity into the projects, which is something that partners try to avoid as much as possible.

Another problem with joint ventures concerns the issue of management. The managers of one company may be more adept at decision making than their counterparts at the other company. This can lead to friction and a lack of cooperation. Projects are doomed to failure if there is not a well-defined decision-making process in place that is predicated on mutual goals and strategies.

For example, if two auto manufacturing companies engage in a joint venture, it is imperative that they be similar in their structures and approach to business. If one company relies heavily on nonunionized workers who operate in an autonomous team-building environment, and the other comprises a unionized workforce oriented toward assembly line production in which workers specialize in narrow tasks, the chances of success are poor. The workers at the first plant would be prone to making decisions and solving problems on their own, which would reduce the levels of bureaucracy needed to manage production. Conversely, the workers at the second plant would likely defer to higher-level managers to make decisions. The differences would be difficult to overcome and would lead to higher costs and slower production. While the differences could be alleviated through planning before the actual manufacturing process began, the time expended might lead to technology gaps and other impediments to earning a profit. Most companies engaging in joint ventures would prefer not to deal with such problems after a project was implemented. Rather, they aim to eliminate them through careful planning. Doing so increases profits in the long run, which is one of the many benefits of successful joint ventures.

BENEFITS OF JOINT VENTURES

Among the most significant benefits derived from joint ventures is that partners save money and reduce their risks through capital and resource sharing. Joint ventures give smaller companies the chance to work with larger ones to develop, manufacture, and market new products. They also give companies of all sizes the opportunity to increase sales, gain access to wider markets, and enhance technological capabilities through research and development (R&D) underwritten by more than one party. In fact, funding for R&D today is often provided by government agencies in a myriad of countries operating under all types of economies, ranging from capitalist to socialist and hybrid. This is particularly true in the United States.

Until recently, U.S. companies were reluctant to engage in research and development partnerships, and government agencies tried not to become involved in business development. However, with the emergence of countries that feature technologically advanced industries (such as electronics or computer microchips) supported extensively by government funding, American companies have become more willing to participate in joint ventures. Likewise, the U.S. government, along with state governments, has become more generous with its financial support.

Government's increased involvement in the private business environment has created more opportunities for companies to engage in domestic and international joint ventures, although they are still legally limited in what they can do and where they can operate. Nonetheless, more and more companies are involving themselves in joint ventures, and the trend is to increase their participation, since the advantages outweigh the disadvantages.

DISADVANTAGES OF JOINT VENTURES

The disadvantages of joint ventures include: potential financial losses if a project fails, expropriation or nationalization, disagreements among partners, and less-than-anticipated results. For instance, in the 1980s, American Motors Corp., which has since been acquired by Chrysler Corp., entered a joint venture with the Chinese government to produce Jeeps in Beijing. The Chinese government, which did not allow joint ventures before 1980, created many complications that prevented American Motors from operating efficiently. The result was greatly reduced profits for American Motors.

THE FUTURE OF JOINT VENTURES

It is almost certain that the number of joint ventures will continue to increase in the near future. More and more companies are adopting the joint venture approach as a part of their growth strategies, particularly in the international arena. Foreign companies can benefit mutually by combining their technological and monetary resources and taking advantage of respective market conditions. Thus, international joint ventures are becoming the norm rather than the exception—and in more industries than ever before.

Joint ventures may grow in importance so much in the next few years that many companies could lose their national identities. There could be a growth in the activities of multinational corporations to the point where joint ventures will be virtually unrecognizable. In fact, some companies, especially those in capital-intensive industries, have already lost sight of the fact that they engage constantly in joint ventures because they have become so commonplace.

Finally, the wave of privatization, on a global scale, of state-owned industries and enterprises promised an added catapult for joint venture formations. The estimated worth of world-wide state-owned industry sales in 1995 reached $65 billion. This trend will make investment and inroads by companies into previously closed, and still relatively unfamiliar and structurally adverse, countries such as China and the former eastern bloc nations increasingly attractive.

[ Arthur G. Sharp ]

FURTHER READING:

Beamish, Paul, and J. Peter Killing. Cooperative Strategies, vol. 1-3. San Francisco: New Lexington Press, 1997.

Bendaniel, David J. International M&A, Joint Ventures, and Beyond: Doing the Deal. Englewood Cliffs, NJ: Prentice Hall, 1998.

Child, John, and David Faulkner. Strategies of Cooperation: Managing Alliances, Networks, and Joint Ventures. Oxford, U.K.: Oxford University Press, 1998.

Tesler, Lester G. Joint Ventures of Labor and Capital. Ann Arbor, MI: University of Michigan Press, 1998.



Also read article about Joint Ventures from Wikipedia

User Contributions:

1
ch venkata reddy
Report this comment as inappropriate
Jan 5, 2008 @ 3:03 am
Is registraion with companies act required for joint ventures?

Comment about this article, ask questions, or add new information about this topic:

CAPTCHA