Joint ventures are considered to be a quick way of entering a new market. With globalization, there has been an increase in the number of cross-border joint ventures. In this article we will discuss the advantages and disadvantages of joint ventures in general, and cross-border joint-ventures in particular. I have also added examples of some successful, not-so successful and clearly unsuccessful cross-border joint ventures in recent times.

Introduction

After the dawn of globalization, there has been a great rush towards joint ventures as it has opened up the vast third world market to the developed western industrial houses. Be it hardware industries like steel, automobile or software development and service industries like hotel and BPO industries, there has been a great deal of cross border joint ventures. India has been regarded as the most lucrative target for these industrial houses of the West. But these joint ventures are not all boon. They have created many problems in the host country also. The following points are to be taken up in the presentation.

1. Definition

2. Advantage

3. Disadvantage

4. Case Studies

1. Definition:

A joint venture is a strategic alliance between two or more individuals or entities to engage in a specific project or undertaking. Partnerships and joint ventures can be similar but in fact can have significantly different implications for those involved. A partnership usually involves a continuing, long-term business relationship, whereas a joint venture is based on a single business project.

Parties enter Joint Ventures to gain individual benefits, usually a share of the project objective. This may be to develop a product or intellectual property rather than joint or collective profits, as is the case with a general or limited partnership.

A joint venture, like a general partnership is not a separate legal entity. Revenues, expenses and asset ownership usually flow through the joint venture to the participants, since the joint venture itself has no legal status. Once the Joint venture has met it’s goals the entity ceases to exist.

2. Advantages:

Provide companies with the opportunity to gain new capacity and expertise.

Allow companies to enter related businesses or new geographic markets or gain new technological knowledge.

Access to greater resources, including specialised staff and technology.

Sharing risks with a venture partner.

Joint ventures can be flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business' exposure.

In the era of divestiture and consolidation, JV’s offer a creative way for companies to exit from non-core businesses.

Companies can gradually separate a business from the rest of the organisation, and eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a sale by one partner to the other.

C. Disadvantages:

It takes time and effort to build the right relationship and partnering with another business can be challenging. Problems are likely to arise if:

The objectives of the venture are not 100 per cent clear and communicated to everyone involved.

There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners.

Different cultures and management styles result in poor integration and co-operation.

The partners don't provide enough leadership and support in the early stages.

Success in a joint venture depends on thorough research and analysis of the objectives.

Not considering the benefits of all the stake holders especially the persons who are displaced for big manufacturing concerns.

D. Case studies

Successful cross border joint ventures.

Indo Zambia Bank Limited, in Lusaka, Zambia. 

The Government of India contributed its share of 60% in the joint venture through its three largest public sector banks viz: Bank of Baroda, Bank of India and Central Bank of India, each contributing 20% to the share capital of the Bank, apart from seconding senior personnel from their banks. The Government of Republic of Zambia contributed the remaining 40% shares initially through Zambia Industrial and Mining Corporation (ZIMCO) which was subsequently transferred to Ministry of Finance and Planning, Government of Zambia.

In an intensively competitive banking industry, Indo-Zambia Bank Ltd is proud to have made several significant contributions to the Zambian economy. Consistent with its founding principles and mission the bank is truly acting as a catalyst for the economic development of Zambia. The bank has designed innovative schemes and products that cater to the requirements of all sections of the Zambian economy/society whether it is Agriculture, Mining, Tourism, Trade, Manufacturing, SME, Real Estate etc.

Starting as a single branch bank in 1984, the bank has come a long way and has now twelve branches. The Bank is well represented at all the major business centres in Zambia. The bank is also planning to open more branches in future. The bank has attained a well deserved place in the banking industry in Zambia, and has become a household name as `The Bank You Can Trust’. 

Not so successful cross border ventures.

Mahindra-Renault joint venture

In a joint venture between the two companies, 51 per cent of the stake is held by Mahindra and Mahindra while the rest of 49 per cent is being held by French car maker Renault. But their first car Logan was a failure because of technical reasons as well as stiff competition from other makers. So this is the example of a not so successful joint venture 

Failed joint ventures

Chinese consumer electronics, IT and telecom products major TCL Corporation – Baron international in Mumbai

Loss of 40 cr.

Reason without understanding the market and local aspirations. 

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written by Valery, June 30, 2010

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