Joint Ventures: Joint ventures facilitates a fast and economic route for gaining increased competitive capabilities and abilities of partners to create new products, reduce costs, introduce new technologies, penetrate new markets and preempt competition.
In some markets that restrict inward investment, joint ventures may be the only option to gain market access. Within joint ventures, the participants take clear equity positions; such holdings can vary substantially in size, although it is usually important to establish clear lines of management decision- making control in order to achieve success. They are a special case of consolidation where two or more companies form a temporary partnership for a specified purpose.
Joint ventures may be useful to obtain entry to a new business mainly under four conditions. An activity is uneconomical for an organization to do it alone. The risk of business has to be shared and reduced for the participating firms. The distinctive competence of two or more organizations can be brought together. The setting up an organization needs to overcome such obstacles as tariffs, import quotas, cultural road-blocks and nationalistic political interest. Thus, joint ventures are an effective strategy for sharing development costs, spreading risks and expertise to make effective use of resources.
The joint venture can be an effective method, particularly for the smaller organizations with insufficient finance and/or specialist management skills, of obtaining the necessary resources to enter a new market. This is especially true in attractive developing country markets, where local contacts, approach to distribution channels, and political preconditions may make a joint venture the preferred strategy. Joint ventures can reduce prejudice against foreign-owned corporations. Moreover, political rules may discriminate against subsidiaries that are fully foreign-owned, and in favor of local firms through discriminating taxes and restrictions against foreign firms importing key materials, machinery and components. Joint ventures may provide specialist knowledge of local markets, access to needed channels of distribution, and approach to supplies of raw materials, government contracts, and local production resources.. Japanese companies have actively exploited joint ventures for these purposes. In a growing number of countries, joint ventures with domestic governments have acquired increased importance. These may be made directly with state-owned enterprises or directed toward national champion. Such ventures are common in the extractive and defense industries, where the foreign partner is expected to provide the necessary technology to aid the developing country partner. Exchange controls may prevent a company from exporting capital and thus make the funding of new overseas subsidiaries uneasy. The availability of know-how may therefore be employed to enable a company to get an equity stake in a joint venture, where the domestic partner may have access to the needed funds.
Despite the advantages Joint Ventures, also have few disadvantages: 1. A joint venture allows a company not only to share the risks and cost of developing a new business, but also requires the sharing of profits if the new business succeeds.2. Joint ventures are difficult to integrate into a global strategy that involves substantial cross-border trading. There are problems concerning inward and outward transfer pricing and the sourcing of exports, in particular, in favor of wholly owned subsidiaries in other countries. A company that enters into a joint venture always runs the risk of giving critical know-how away to its joint venture partner, which might use that know how to compete directly with the company in the future. An integrated system of global cash management, via a central treasury, may cause conflict with local partners when the corporate headquarters impose restrictions or even guidelines on cash and usage of working capital, management of foreign exchange, and the amount and means of remitting profits. A serious problem in joint ventures can occur when the objectives of the partners are incompatible. The MNC may have a very different attitude to risk than its domestic partner, may be prepared to accept short-term losses in order to acquire market share, to take on higher levels of debt, or do more of advertising. Problems also occur with regard to management structures and staffing of joint ventures especially in countries in which nepotism is common and jobs have to be found for members of the partner's families, or when employment is given to family members of local politicians. The partners may have different business philosophies, time dimensions or investment choices leading to emergence of several problems.
Joint ventures may be useful to obtain entry to a new business mainly under four conditions. An activity is uneconomical for an organization to do it alone. The risk of business has to be shared and reduced for the participating firms. The distinctive competence of two or more organizations can be brought together. The setting up an organization needs to overcome such obstacles as tariffs, import quotas, cultural road-blocks and nationalistic political interest. Thus, joint ventures are an effective strategy for sharing development costs, spreading risks and expertise to make effective use of resources.
The joint venture can be an effective method, particularly for the smaller organizations with insufficient finance and/or specialist management skills, of obtaining the necessary resources to enter a new market. This is especially true in attractive developing country markets, where local contacts, approach to distribution channels, and political preconditions may make a joint venture the preferred strategy. Joint ventures can reduce prejudice against foreign-owned corporations. Moreover, political rules may discriminate against subsidiaries that are fully foreign-owned, and in favor of local firms through discriminating taxes and restrictions against foreign firms importing key materials, machinery and components. Joint ventures may provide specialist knowledge of local markets, access to needed channels of distribution, and approach to supplies of raw materials, government contracts, and local production resources.. Japanese companies have actively exploited joint ventures for these purposes. In a growing number of countries, joint ventures with domestic governments have acquired increased importance. These may be made directly with state-owned enterprises or directed toward national champion. Such ventures are common in the extractive and defense industries, where the foreign partner is expected to provide the necessary technology to aid the developing country partner. Exchange controls may prevent a company from exporting capital and thus make the funding of new overseas subsidiaries uneasy. The availability of know-how may therefore be employed to enable a company to get an equity stake in a joint venture, where the domestic partner may have access to the needed funds.
Despite the advantages Joint Ventures, also have few disadvantages: 1. A joint venture allows a company not only to share the risks and cost of developing a new business, but also requires the sharing of profits if the new business succeeds.2. Joint ventures are difficult to integrate into a global strategy that involves substantial cross-border trading. There are problems concerning inward and outward transfer pricing and the sourcing of exports, in particular, in favor of wholly owned subsidiaries in other countries. A company that enters into a joint venture always runs the risk of giving critical know-how away to its joint venture partner, which might use that know how to compete directly with the company in the future. An integrated system of global cash management, via a central treasury, may cause conflict with local partners when the corporate headquarters impose restrictions or even guidelines on cash and usage of working capital, management of foreign exchange, and the amount and means of remitting profits. A serious problem in joint ventures can occur when the objectives of the partners are incompatible. The MNC may have a very different attitude to risk than its domestic partner, may be prepared to accept short-term losses in order to acquire market share, to take on higher levels of debt, or do more of advertising. Problems also occur with regard to management structures and staffing of joint ventures especially in countries in which nepotism is common and jobs have to be found for members of the partner's families, or when employment is given to family members of local politicians. The partners may have different business philosophies, time dimensions or investment choices leading to emergence of several problems.
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