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Joint Ventures

Contributed by Bestar Services
28 September, 2020

A joint venture is a special type of strategic alliance. This involves two or more independent organizations, which together form new entities with equity and assets. Partner management and decision-making of a joint venture must typically meet certain legal and accounting requirements.

Collaboration takes many forms, including joint ventures between the following companies:

  • High technology and other major organizations
  • Multinational and state-owned companies
  • International and small local organizations in developing countries.

This is a common way for international organizations to share business ownership with local organizations. In some cases, it may be the only option. Governments, especially in developing countries, often urge the use of joint ventures as a means of ensuring the transfer of technology, maintaining ownership, and controlling corporate expansion in the economy.

Such joint ventures are usually the preferred method for international organizations to enter the market because they can reduce the cost of establishment and minimize risk by working with partners who understand the local market, culture and tax system, legal and political conditions. Large international organizations usually establish joint ventures in some countries / territories with limited purpose initially - for example, to develop a market or to produce and sell certain products suitable for the market. However, if the joint venture goes well, the international partner can redefine and expand its goals. Some joint ventures have been short-lived, while other joint ventures can last for many years.

Organizations of all sizes can use joint ventures to strengthen long-term relationships, or they can collaborate on specific projects, such as quotations for specific projects or tenders. Participating organizations form a consortium. If successful, the project will be completed before the consortium or joint venture is dissolved. Thus, joint ventures typically have a limited lifespan and cover only a portion of the activities of the organization, which limits their participation and exposure.

A joint venture agreement is required to, regardless of the purpose:

  • Recognize the contribution of each partner to work
  • Identify goals and timeline that the joint venture wants to achieve, and situations where expectations cannot be met
  • Establish a method to measure performance.

Reaching a clear consensus is an important part of establishing a good relationship and building a business relationship effectively and professionally without losing the reputation of the business. Therefore, contractual joint ventures (such as sales contracts) should always include a termination clause.

A joint venture could face problems in the following situations:

  • The purpose of the joint venture is unclear and communication is inadequate
  • Collaborative partners bring a different level of expertise, efforts, investments or assets to the venture and violate the original contract
  • Different management cultures and styles result in inadequate integration, understanding and cooperation
  • Lack of leadership and support provided at the time of inception
  • Business partners have different ways of doing business.

Circumstances often change. As the overseas market matures, joint ventures developed to enter the market are no longer needed.

For more information about joint venture formation using a company or agreement, please contact Bestar.

Tags: business


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