An international joint venture (IJV) occurs when two businesses based in two or more countries form a partnership. A company that wants to explore international trade without taking on the full responsibilities of cross-border business transactions has the option of forming a joint venture with a foreign partner. International investors entering into a joint venture minimize the risk that comes with an outright acquisition of a business. In international business development, performing due diligence on the foreign country and the partner limits the risks involved in such a business transaction. IJVs aid companies to form strategic alliances, which allow them to gain competitive advantage through access to a partner’s resources, including markets, technologies, capital and people. International joint ventures are viewed as a practical vehicle for knowledge transfer, such as technology transfer, from multinational expertise to local companies, and such knowledge transfer can contribute to the performance improvement of local companies. Within IJVs one or more of the parties is located where the operations of the IJV take place and also involve a local and foreign company.
A joint venture is a common method to combine the business prowess, industry expertise and personnel of two otherwise unrelated companies. This type of partnership allows each participating company an opportunity to scale its resources to complete a specific project or goal while reducing total cost and spreading out the risk and liabilities inherent to the task. In most cases, a joint venture is a temporary arrangement between two or more businesses, and a contract is formed under which the terms of the joint venture project are detailed for each participant. Once the joint venture is completed, all parties receive their share of the profit or loss and the agreement that established the joint venture is dissolved. Although there are advantages to forming a joint venture, companies entering into this type of arrangement face some disadvantages as well.
Limited Outside Opportunities:It is common for joint venture contracts to limit the outside activities of participant companies while the project is in progress. Each company involved in a joint venture may be required to sign exclusivity agreements or a non-compete agreement that affects current relationships with vendors or other business contacts. These arrangements are meant to reduce the potential for conflicts of interest between participant companies and outside businesses and keep the focus on the success of the new joint venture. Although contractual limitations expire once the joint venture is complete, having them in place during the project has the potential to impede on a partner's core business operations.
Uneven Division of Work and Resources: Participating companies in a joint venture share control over the project, but work activities and use of resources relating to the completion of the joint venture are not always divided equally. It is common for one participant business to be expected or required to contribute technology, access to a distribution channel or production facilities throughout the duration of the joint venture, while another partner company is only tasked with providing personnel to complete the project. Placing a heavier weight on one business creates a disparity in the amount of time, effort and capital contributed to the joint venture, but it may not mean an increase in the share of profit for the overburdened partner. Instead, unequal distribution of work and resources can lead to conflicts among participating companies, and result in a lower success rate for the joint venture.
The majority of companies that enter into joint ventures are established as a partnership or a limited liability company and operate with an understanding of the risks of liability associated with their chosen business types. The contract under which a joint venture is created exposes each participating company to the liability inherent to a partnership unless a separate business entity is established for the purpose of pursuing the joint venture. This means each company is responsible for claims against the joint venture on an equal basis despite its level of involvement in the activities that prompted the claim.
Although forming a joint venture is a viable business strategy for some companies focused on a common objective, it has its caveats. Companies considering entering into a joint venture should compare the advantages of cost savings through pooling resources to the disadvantages innate to this type of business arrangement.
A partnership is a business owned and operated by two or more partners. A joint venture is a type of partnership that has many of the same advantages and disadvantages of a general partnership. Owning and operating a partnership presents a number of advantages, such as ease of formation and the ability to collaborate with other owners. A joint venture or a partnership has a number of disadvantages in terms of potential conflicts amongst partners and lack of personal asset protection.
Liability: Partners in a partnership and joint venture have unlimited liability for company debts and obligations. The partnership is not a separate legal entity from the partners of the business. This means a business creditor may pursue a partner’s home, automobile, bank account and other personal assets if the company’s assets do not cover the obligation. Likewise, a partner’s personal creditor may pursue business assets as compensations for a partner’s personal debts. Also, partners are liable for the negligent acts of the other partners.
Taxes:Taxation is an advantage for partners of a joint venture and a partnership. A joint venture and a partnership are not required to file taxes as a business entity. Partners are allowed to pass their portion of company profits and losses directly to their personal income tax return. This means that partners pay taxes on company profits according to their personal income tax rate. Also, business losses reported on a partner’s tax return can be used to offset income gained from other sources.
Conflicts and Disputes:The potential for conflicts and disputes is one of the biggest disadvantages present in a partnership and a joint venture. Partners may disagree on how to manage the company’s business affairs. There may be disagreements regarding the direction or future of the business, as well as disputes regarding how to capitalize the business. A written partnership agreement may help eliminate partner disputes, but a conflict can arise at any time when more than one person has an ownership interest in a business. Operating without a written partnership agreement leaves the door open for a multitude of conflicts to arise between partners.
Considerations: One of the biggest benefits in a partnership and a joint venture is the ability to collaborate with other partners when making business decisions. Partners can share the work load so that the burden does not fall on one person. Also, partners can share the financial responsibility of capitalizing the business. Partnerships and joint ventures can adopt whatever management structure owners deem suitable because partnerships are not regulated in the same fashion as corporations.