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Joint venture

From Academic Kids

A joint venture (often abbreviated JV) is a strategic alliance between two or more parties to undertake economic activity together. The parties agree to create a new entity together by both contributing equity, and they then share in the profits, losses, and control of the enterprise. The venture can be for one specific project only, or a continuing business relationship such as the Sony Ericsson joint venture.

Organizations can also form joint ventures, for example, a child welfare organization in the Midwest initiated a joint venture whose mission is to develop and service client tracking software for human service organizations. The five partners all sit on the joint venture corporation's board, and together have been able to provide the community with a much-needed resource.

When are joint ventures used?

Joint ventures are very common in the oil and gas industry, and are often cooperations between a local and foreign company (about 3/4 are international). A joint venture is often seen as a very viable business alternative in this sector, as the companies can complement their skill sets while it offers the foreign company a geographic presence. Studies show a failure rate of 30-61%, and that 60% failed to start or faded away within 5 years. (Osborn, 2003) It is also known that Join ventures in low-developed countries show a greater instability, and that JVs involving government partners have higher incidence of failure (private firms seem to be better equipped so supply key skills, marketing networks etc.) Futhermore, JVs have shown to fail miserably under highly volatile demand and rapid changes in product technology.

Some countries require foreign companies to form joint ventures with domestic firms in order to enter a market. This requirement often forces technology transfers and managerial control to the domestic partner.

Reasons for forming a joint venture

Internal reasons

  1. Spreading costs and risks
  2. Improving access to financial resources
  3. Economies of scale and advantages of size
  4. Access to new technologies and customers
  5. Access to innovative managerial practices
  6. Taxation as a partnership (in the case of unincorporated joint ventures)

Competitive goals

  1. Influencing structural evolution of the industry
  2. Pre-empting competition
  3. Defensive response to blurring industry boundaries
  4. Creation of stronger competitive units

Strategic goals

  1. Synergies
  2. Transfer of technology/skills
  3. Diversification

Examples

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