What is a Joint Venture?
A joint venture abbreviated as JV is a type of business arrangement in which more than two or two parties agree to pool their resources for the purpose of fulfilling a specific task which can be a new project or any business activity.
All the participants in this venture are responsible for the profits and losses. Joint ventures, which actually run on a partnership basis can take the form of any legal structure. Henceforth, in this section, we shall talk about the JV business, its types, characteristics, and further move on to its advantages and disadvantages.
Types of Joint Venture
In this section we are going to talk about a few, most common types of joint ventures:
Limited Co-Operation Type JV
Collaboration is done with another business in a specific way like when a small business with a new product wants to sell it through a larger company's distribution network this leads to the merging of business. The two partners agree on a contract of setting out the terms and conditions of how these function.
Separate Joint Venture Business
When a separate joint venture business is set up by a new company by handling a contract, a separate joint venture business is formed. The partners each own shares individually in the company and agree on how they should manage it.
Business Partnerships
Joining a business partnership or a limited liability partnership is a type of merger of two businesses.
Corporations, Partnerships, and Limited Liability Companies and also other business entities can survive as a JV.
Characteristics of a Joint Venture
The characteristics of a Joint Venture are as follows –
Creates Synergy
A joint venture is entered between two or more parties to merge each other's qualitative features. The company possesses a special characteristic which another company might lack.
Risk and Rewards to be Shared
Joint venture agreement between two or more organizations which might be of the same country or two different countries who diversifies in culture and ethics, different technology, have a chance to endure the possibility of inheriting one another’s characteristic need for each one’s requirement thus developing the target audience in their own hemisphere.
No Separate Laws
For a joint venture, there is no separate governing body that regulates or refines the activities of the venture. While they are into a corporate structure, the Ministry of Corporate Affairs like any other corporate check also keeps a check on this structure as well.
Advantages of Joint Venture
The most important joint venture advantages can help businesses to grow faster, increase their productivity and generate profits. Benefits of joint ventures include:
Access to new markets and enlarge their audience.
Increased the capacity.
Sharing of risks and costs on a wide surface basis.
Access to new knowledge and expertise in business which includes specialized staffing necessity.
Access to higher resources, for example, the technology and the finance.
Joint venture partners help in providing a huge pool of resources together.
Disadvantages of Joint Venture
Joint ventures can pose significant risks, the disadvantages are like the follows:
The communication between partners is not great as they belong to different societal classes.
The partners expect different things from the joint venture, their interests may clash.
The expertise and investment level may not match well.
Work and Resources are not distributed equally.
Different cultures and management styles may create barriers to the organization.
The contractual limitations may pose risk to a partner's core business operations.
FAQs on Understanding Joint Ventures
1. How do we choose the right type of Venture?
While deciding the form of the joint venture, one should really find out if they are interested in managing the venture.
They must think of the pros and cons that are to be considered while taking up the risk of the venture.
Due diligence should be assured while choosing the correct venture.
They should analyze their potentiality and moreover the need of acquiring the type of business offered in each venture style.
2. What is meant by the target audience?
The target audience for a joint venture refers to the section of the consumer base for which they are producing and launching a product or service. Essentially this consumer/ audience is their main market for which they will assess the risks, demands, trends, and existing competition to avail maximum profit and keep their product and brand image inconsistent demand. Almost all the efforts are directed towards luring and retaining the target audience.
3. “Sharing of risks and costs on a wide surface basis.” What is meant by this?
The statement “sharing of risks and costs on a wide surface basis” implies that one of the advantages for partners in a joint venture is that whatever risks the companies face during their venture ship, they will be tackled together in a synergistic manner. No partner shall have to solely face the losses or issues like market uncertainty alone. However, this also naturally means that the profit owned will not belong to any single partner. It is only fair that there is a clear profit-sharing formula in joint ventures because both parties equally invest in the venture.
4. Does Joint Venture have a parent company? What is the purpose of a joint venture?
No, generally a joint venture does not have a parent company like other business ventures (example: Wholly owned subsidiaries). This is because all the subsidiaries/partners of a joint venture equally and mutually participate and invest capital and resources for business. The main reasons for a company to enter in a joint venture are:
Firstly, it helps many foreign-based corporations to expand their coverage area of business. They can collaborate with locally established companies to branch out in many nations and become truly multinational, rather than simply exporting their goods to a country.
It helps acquire the resources that may be lacking in their own company for better growth of the organization.
It helps the partnering companies to infiltrate more diverse markets and reach a wider consumer base, especially in countries whose laws do not equally support business activities by a totally foreign company.
5. State the various types of Joint Ventures.
Following are some of the types of joint ventures frequently owned in the business world:
Project-based joint venture: In a project-based joint venture, the purpose of the collaboration is to accomplish a definite objective (called “project”) by the allying corporations. It is limited to this objective and the association will eventually end when the objective is fulfilled. Such joint ventures are comparatively rare and happen for exclusive reasons such as if the collaborating companies want to foray into a new arena. For example, in some recent collaboration, the two renowned companies Axon Limited and Trump Industries went into a project-based joint venture where the Trump Industries (originally in the marketing services) allied for Axon Limited’s new residential project “Living Rise”.
Function-based joint venture: In this type of joint venture, two groups/ corporations come together to meet a specific need in a mutual way. The two corporations lack in certain areas of successful business and through synergy, provide for each other the missing aspect so that both can be successful. It is a type of commercial symbiosis. For example, If company X has good marketing strategies but no novel service to offer. Company Y has a brilliant idea but lags in its marketing skills; both can collaborate and produce a novel product with good marketing.
Vertical joint venture: This type of joint venture does not equally benefit both parties. This is because it occurs between the suppliers and the buyers. Since it is not a very profitable venture, it is sometimes referred to as “bilateral trading”. The inequality inherently occurs due to the powerful corporation who can terminate contracts as per their needs while the buyer is at the mercy of the collaborator.
Horizontal joint venture: In this type of joint venture, the collaborators work in such a way that they benefit the collaborating partner as well as the competitor of the partner. Such joint ventures are not fruitful mainly because they can cause disputes. The nature of this type of venture is distinctly opportunistic.
