Read about the different types of joint venture. Joint ventures can pose significant risks relating to liabilities and the potential for conflicts and disputes between partners. Problems are likely to arise if:. Partnering with another business can be complex. It takes time and effort to build the right business relationship and, even then, it can be difficult to completely avoid all the issues. Success depends on good communication, a carefully planned joint venture relationship and a clear joint venture agreement.
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Joint ventures and business partnerships Joint venture advantages and disadvantages. Advantages of joint venture One of the most important joint venture advantages is that it can help your business grow faster, increase productivity and generate greater profits. In 12 of the 20 such partnerships in this study, both parents contributed functional personnel.
The board of directors, also consisting of executives from each parent, has a real decision-making function. While shared management ventures can arise in any industry, they are most common in manufacturing situations in which one parent is supplying technology and the other knowledge of the local market. Independent ventures, which I shall not go into in this article, are free of interference from either parent and perform well; but since freedom in part results from good performance, their high performance ratios are not surprising.
The difference in failure rates between dominant parent ventures and shared management ventures is striking. Since shared management ventures are not consistently used for riskier business tasks, their higher failure rate is a strong indication that they are more difficult to operate than dominant parent ventures.
For this reason, corporate executives should know when dominant parent ventures are feasible and use them whenever possible. The trade-off between using shared management and dominant joint ventures is clear-cut: Will the extra benefit of having a partner who is helping to run the joint venture outweigh the resulting disadvantages?
That the amount and type of help needed from a partner changes over time complicates the choice. Many companies prefer to start with a shared management venture that they can later convert to a dominant venture. Once both parents have become accustomed to operating the venture, however, such transitions are difficult to make. Thus, if a partner is chosen for reasons other than managerial input—financial backing, access to resources, patents, or because it consumes a large amount of the product to be made—a dominant parent venture provides the best fit.
Dominant parent joint ventures are also appropriate when a company takes on a partner solely in response to pressures from a host government. In such a situation, foreign companies often prefer to find a passive local company that 1 has no knowledge of the product, 2 is willing to be a passive investor, and 3 is neither a government agency nor controlled by the government.
The passive partner, which may be supplying large sums of money or important technology to a venture over which it will exert very little influence, must trust the competence and honesty of the dominant parent. Dominant parent rather than shared management joint ventures are more likely to be successful.
And while half of the shared ventures in this study had to be liquidated or reorganized, the others worked well. Given the problems that a board with representatives from each parent can create, it is not surprising that autonomy plays an important role in the achievements of shared ventures.
The veteran manager of one venture cited a critical success factor for any venture: early success. This gives the general manager a base of credibility so that when the inevitable downturn occurs, the manager has the freedom to ask the parents for help if necessary, rather than having it thrust on him or her. Deteriorating performance in a shared management venture, however, obliges each parent to become more involved in the details of the venture. Such a small fluctuation thus triggers a series of events that can throw the system out of equilibrium, leading to the destruction of the venture.
The worst case of parental overinvolvement I found concerned a U. Rather, he spent most of his time collecting information for, and making presentations to, his board of directors.
I felt I was dragging an elephant behind me whenever I tried to do something. It takes considerable willpower for a parent company not to intervene when a venture is faring poorly. One Canadian company in the study did restrain itself, to its ultimate benefit. When performance began to falter, the Canadians allowed their British partners to become more involved but did not jump in themselves. When the British failed to rectify the situation, the Canadians approached them directly—not via the joint venture—and argued that they had had their chance and should now let the Canadians run the show.
This was done and performance improved. Of course, majority ownership and dominance of a joint venture do not necessarily go hand in hand. And one parent dominated four other ventures, despite the fact that they were deals. Many companies avoid joint ventures, although they can be managed by one parent if the passive partner agrees. Of course, not all parents of shared management ventures own equal shares, as evidenced by 5 of the 20 shared ventures in this study.
The manager of one successful venture stated that the ownership made little difference to the general manager of a shared management venture. In this particular case, the eight-man board consisted of four executives from the American parent, three from the German parent, and the general manager, who was a former employee of the German company. The manager made it clear to both parents that, should any issue come to a board vote, he would vote with the German parent executives—even if he disagreed with them—thus creating a four-four deadlock.
In other words, all issues would have to be negotiated. Yet in 14 years of his administration, no issue has ever been put to the board for a formal vote. Naturally, joint ventures that draw functional managers from both parents are more difficult to manage than those that do not.
Managers of international joint ventures may not only have communication problems because of language barriers; they may also have different attitudes toward time, the importance of job performance, material wealth, and the desirability of change.
Particularly troublesome are programs between partners from developed and developing countries. For example, an American-Iranian venture one of only two in the study between the developed and developing worlds did have problems until a new general manager sent most of the Americans back home. They could not adapt to dealing with a work force that had, on average, a grade three education. The Americans were replaced with Iranians who were first sent for short training periods with the U. Performance improved considerably.
Of course, such differences can delay the creation of an effective, cohesive management team. The president of one Canadian venture with functional managers from three companies supported this notion:. In one division, I discovered I had insulted a senior manager by going directly to a subordinate to get some information.
In his previous company, the hierarchy was very strictly observed, and if you wanted information you asked at the top and the request was relayed down until someone could answer. Then the answer came all the way back up. Employees of another division are disgruntled with the bureaucracy they find here. They are used to a small, entrepreneurial organization.
What we regard as the facts of life, like the time taken to get an approval, they look at with surprise and dismay. JV parties retain ownership of their own assets. JV party is not normally liable for the debts of the other JV party but they may share liability on specific contracts with third parties. Each JV party will be taxed directly on its share of the profits and losses of the venture.
Disadvantages Lacks a separate legal identity — can suffer from a lack of clear structure and identity which may affect both internal operation and dealings with third parties.
Risk of creating a partnership, giving rise to unlimited joint and several liability where each of the JV parties is liable for all losses of the venture. Potentially difficult to raise external loan finance as not a legal entity and does not own assets — it cannot grant a floating charge as security for financing.
The LLP itself is not taxed on its profits provided it is carrying on a trade or business with a view to profit. Limited liability of members. Increasingly common vehicle for commercial ventures no longer used solely for professional partnerships. Legislative framework for LLPs is not as comprehensive as for limited companies allowing greater flexibility e. Separate legal identity — benefits from a clear corporate identity both internally, in terms of a dedicated management and workforce, and to the outside world.
Disadvantages The roles and responsibilities of LLP members are not as familiar as the defined roles of directors and shareholders in limited companies. Public filing requirements exist, in particular in relation to accounts, but these are not as extensive as for limited companies.
Fiscal transparency means that the individual JV parties will be taxed directly. The partnership is not taxed on its profits. Sensitive details of the venture can remain completely private between the JV parties. Limited partnership — popular as investment vehicles where the majority of participants are passive investors but not suitable for commercial joint ventures as limited partners must not be involved in the management of the venture.
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