Check out this article to learn what is a joint venture, the types of joint ventures, and the need to form a joint venture. Also, learn about the advantages and disadvantages of joint ventures.
Introduction – Different Types of Joint Ventures
A business arrangement or activity between two or more parties with consent to use their resources towards accomplishing a particular task is termed a joint venture. A joint venture or partnership is an independent body and not teamed with any other ventures or projects of the partners. Also, each partner of the joint venture is equally responsible for the costs, profits, and losses. A joint venture can be formed between any legal entity. Big or small Corporations, Limited Liability Companies (LLCs), partnerships, and other businesses can all form a joint venture. Medium, big, and small companies together can combine and form a joint venture to begin projects and deals as desired. Although joint ventures are basically for production or research purposes, business companies opt for them for reasons like leverage resources, cost-saving, combined expertise, and entering foreign markets. Let us know about the different types of Joint Ventures in this blog.
Reasons to form a Joint Venture
There are four main reasons to form a joint venture:
- Leverage Resources
A joint venture is an advantage since it can avail of the combined resources of all partners to achieve the target. One partner might possess the expertise, while another has a well-established manufacturing unit. Some have good distribution channels, while others include a very efficient and motivated workforce. Channelling all these together can help achieve excellent results.
Today, with the costly implementation of technical advances, joint ventures can apply economies of scale and increase their production at a lower cost than if they were working separately. Cost savings can also be made in advertising and labour costs.
- Combined Expertise
The companies can combine their expertise and gain from the other partner’s talent within their company.
- Enter foreign markets
Companies also use joint ventures to enter a foreign market by partnering with a local business of the said country. Companies that desire to spread their distribution networks in foreign lands can enter a joint venture agreement to supply goods to a local business in that country.
Types of joint ventures
There are four main types of joint ventures. They are mentioned below:
- Project-based joint venture
- Vertical Joint Venture
- Horizontal Joint Venture
- Functional-based Joint Venture
Project-Based Joint Venture
Under the Project-Based Joint Venture, the partners come together to accomplish a fixed task. Since these collaborations are usually done for an exclusive purpose, they stand cancelled once the project is accomplished. These joint ventures exist for a particular task, project, or time span.
Function-Based Joint Venture
In the function-based joint venture, the parties form an agreement to mutually benefit from the arrangement. This agreement is in order that they gain from each other’s expertise in different areas. This enables them to work efficiently and effectively. Before entering an agreement, the would-be partner companies ascertain whether they will be able to function and perform efficiently together or not.
Vertical Joint Venture
In this type of joint venture, the transaction is between the buyers and the suppliers. Not an economically viable option, it is termed bilateral trading. In such a joint venture, different manufacturing stages of a single product are integrated to create economies of scale that reduce the per-unit cost of the finished product. Usually, this category of joint venture proves to be very successful. The relationship between the buyer and supplier also remains good. The business prospers, and quality products reach consumers at a reasonable price.
Horizontal Joint Venture
In this venture, companies dealing in/ selling similar products and direct competitors in the market join hands to create an output that can be reached to customers of either party. In this joint venture, disputes often arise because both companies are dealing in identical/ similar businesses. The parties also face opportunistic behaviour from each other. The gains from this alliance are shared according to agreement by the parties. Such ventures are not very satisfying as, despite the cooperation, a feeling of resentment stays.
Advantages of a Joint Venture
Companies enter into a joint venture to combine their expertise and resources, thus reaping gains from this new partnership. It is to be understood that no venture is without risk. The advantages of a joint venture are mentioned below:
- A joint venture, if managed efficiently, helps the partners to grow
- It results in increased productivity
- Rise in profits
- The partners can utilise each other’s distribution networks and access new markets
- Increase in production capacity
- Avail of new knowledge and expertise
- Efficient and specialised staff
- Access to each other’s resources like finance and technology
- Growth without the need to borrow outside funds or scout for investors
- In a joint venture the parties can use the partner’s customer database for marketing products
- Invest together in development and research
- A joint venture is very flexible
- It has a limited lifespan and covers a part of what you do. This limits the commitment of all the parties
- Joint ventures are very popular with businesses operating overseas.
Disadvantages of Joint Venture
There are significant risks relating to liabilities, possible conflicts, and disputes between the partners. Reasons for this can be:
- Unclear objectives of the venture
- Lack of communication between the partners
- Expectation also not met
- Discrepancies in the level of expertise and investment of either party
- Unequal distribution of work and resources
- Lack of cooperation due to different cultures and management
- Lack of leadership and support
- Conflict between the workers
Conclusion – Different Types of Joint Ventures
We hope this article has been useful in providing details of the types of joint ventures. A joint venture is an agreement between two or more parties for mutual benefit. The purpose of the partnership, the obligations, risks, and gains are mentioned clearly in the agreement. The joint ventures are mostly limited period agreements, but sometimes they may not be time-bound.
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