Joint Ventures: Types, structure and reasons for joint ventures as well as the problems with them

What are Joint Ventures?

Joint ventures often occur between businesses for a number of reasons; most commonly where two or more businesses collaborate on a particular project or business enterprise. They may be similar businesses, which are pooling their resources, or completely merging with one another. Alternatively, they may operate in different spheres and be collaborating on a project which involves the application of both of their areas of expertise.

Types of Joint Ventures

Short-term collaborations

The length of the joint venture is of importance here as it is often that such collaborations will only take place for a particular project, rather than to create a long lasting business relationship.

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 businesses.

Full-function joint ventures

A full-function joint venture on the other hand is designed on a much larger scale compared to the limited function, with the intent to merge the businesses involved to create an autonomous economic entity, often a new company, in exchange for shares.

Full-scale world wide mergers

This type of joint venture is on the largest scale, which is often with the involvement of international companies, creating a new company or subsidiary, for example the merger between Shell and Texaco, to create Equilon to deal with a particular product, namely industrial lubricants.

Structures for Joint Ventures

There are a number of methods businesses can adopt when entering into a joint venture. Possible structures include; entering into a contractual arrangement, specific collaboration agreements between the parties, a corporate joint venture can be established or a general/limited liability partnership can be created. Such partnerships can exist in the form of a fixed term, can be an ‘at will’ partnership; which is continuous until dissolution occurs, or it may be created for specific project; which will end the joint venture upon completion of the project.

Reasons for Joint Ventures

One of the main reasons for businesses entering into a joint venture is to save costs; in particular 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 for joint ventures can include sharing resources, such as providing access to technology or sharing skills with one another. The customer base of each business can increase with a joint venture, in particular 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 of entering into new technical markets if collaborating with businesses that have an advanced technical start in the field.

Problems with Joint Ventures

Management

The management of a business can often lead to conflicts in joint venture as a joint venture requires the input from both or all of the parties involved. However, it is likely that one party may dominate the management of the project or of the new company and so tensions may arise within the joint venture. There may also be confusion as to who the management consists of, it may be that each party brings in his own management team, or that a new joint venture management team needs to be created.

Disagreements will also have to be resolved by senior management.

Differences

Although ultimately the parties have the same interest in the joint venture, their objectives for the outcome may differ; causing conflicts. Joint ventures also require parties to work in close proximity, which may highlight different working patterns adopted by respective parties. This can affect the harmony amongst the management team and may make the operation of the joint venture lengthy and costly.

Competition

Of there is no appropriate clause in the contract or the agreement between the parties when creating the joint venture, it may be possible for one party to take the market knowledge from the other party or parties in the joint venture and set up a business in direct competition. This is of particular significance when the joint venture comes to an end, with each business taking away from the joint venture what they have learned from each other.