Joint ventures: what are they?

Joint ventures are commercial arrangements where two or more parties agree to share resources for the purposes of business activities. In a joint venture, the risks and returns are shared between them.

Joint ventures are created between businesses for various reasons, most commonly where two or more businesses wish to invest in and collaborate on a particular project or business enterprise. The parties may be similar businesses which decide to pool their resources – or they may completely merge with one another. In other cases, the parties may operate in different spheres but decide to collaborate on a project which will benefit from their respective areas of expertise.

Types of joint ventures

Short-term collaborations

A short-term collaboration may be appropriate when the joint venture is only required for a particular project. A long-lasting business relationship is not the parties’ intention. Most joint ventures are short term.

Limited-function joint ventures

The powers in a limited-function joint venture are based largely on co-operation or co-ordination between the joint venture parties, rather than a complete merge of the businesses.

Full-function joint ventures

A full-function joint venture is designed on a much larger scale compared to the limited-function joint venture, with the intent to merge the businesses involved to create an autonomous economic entity, often a new company, in exchange for shares. It performs all the functions of that autonomous entity on a lasting basis.

Full-scale worldwide mergers

These are international joint ventures on a large scale, often with the involvement of international companies. A new company or subsidiary is created, for example, the merger between Shell and Texaco resulted in Equilon to deal with a particular product (industrial lubricants).

Structures for joint ventures

There are a number of joint venture processes businesses can adopt. The potential structures include:

  • entering into a contractual arrangement;
  • specific collaboration agreements between the parties;
  • establishment of a corporate joint venture through a limited company, or;
  • creation of a general/limited liability partnership. These can be for a fixed term; or an ‘at will’ partnership (continuous until dissolution occurs); or created for a specific project so that the joint venture will end on completion of the project.

Reasons for joint ventures

A primary reason for businesses entering joint ventures is to save costs, particularly the costs of research and development. Businesses are also able to share any financial risks involved which can be considerable depending on the nature of the business. Other reasons include sharing resources and skills, such as providing access to technology.

The customer base of each business can increase with a joint venture, particularly if an international market is involved, providing a larger geographic scope and the ability to utilise one party’s distribution or sales network within another territory. The pressures of global competition can be significantly reduced as a merger can lead to wider access to customers throughout the world with better purchasing powers.

As well as entry into new geographical markets, joint ventures provide the opportunity to enter into new technical markets if they are collaborating with businesses with an advanced technical start in the sector or industry.

Problems with Joint Ventures

Management

Given that a joint venture requires the input of each party involved, the management of the joint venture business can often lead to conflicts; or one party may dominate the management of the project/joint venture and so tensions may arise. There may also be confusion as to who the management consists of: it may be that each party brings in its own management team. However, a new joint venture management team may need to be created. Disagreements will also have to be resolved by senior management.

Differences

Ultimately, the parties have the same interests in the joint venture, but their objectives in relation to outcomes may differ – leading to conflicts. Joint ventures also require parties to work in close proximity, which may highlight the different working patterns adopted by the respective parties. This can adversely affect the harmony of work relationships amongst the management team and may make the operation of the joint venture lengthy and costly.

Competition

There is a possibility when the joint venture comes to an end, that one of the parties takes market knowledge from the other party or parties in the joint venture and sets up a business in direct competition. The parties typically protect themselves against this by way of an anti-competition clause in the joint venture contract or agreement.