What are The Different Types of Joint Ventures?

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.

What is a Joint Venture?

A joint venture is a cooperative business venture where two or more entities combine their resources and capabilities to achieve a specific goal. These entities, often separate companies, form a new entity or collaborate without creating a new legal entity. Joint ventures can take various forms, each catering to specific business needs and objectives.

Purpose of the Joint Venture

The primary purpose of a joint venture is to leverage the strengths of each participating entity to achieve mutual benefits. Common goals include entering new markets, sharing technology or expertise, reducing costs, and mitigating risks. Joint ventures provide a platform for entities to collaborate without the necessity of a full merger, allowing for flexibility and strategic partnerships.

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.

• Cost-Saving

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 (JV)                                                                 

There are four main types of JV. 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 ventures, the transaction is between the buyers and the suppliers. Not an economically viable option, it is termed bilateral trading. In such a joint ventures, 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 JV, disputes often arise because both companies are dealing in identical/ similar businesses. The parties also face opportunistic behavior from each other. The gains from this alliance are shared according to the 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

Joint Venture Examples

1. Strategic Alliances

Companies form alliances to combine strengths in areas such as research and development, marketing, or distribution.

2. Equity Joint Ventures

   Parties invest equity capital to create a new entity, sharing ownership and control.

3. Contractual Joint Ventures

Entities collaborate on a specific project without forming a new legal entity, often governed by a contractual agreement.

4. Minority/Non-Equity Joint Ventures

 One party invests capital, while the other provides expertise or resources without transferring ownership.

5. Limited Liability Joint Ventures

Participants limit their liability to the extent of their investment, protecting their assets from the venture’s potential risks.

Joint Venture Alternatives

1. Mergers and Acquisitions

Instead of collaborating on specific projects, companies may choose mergers or acquisitions for more comprehensive integration.

2. Strategic Partnerships

 Companies may form partnerships without creating a new entity, focusing on specific projects or initiatives.

3. Wholly Owned Subsidiaries

 One party establishes a subsidiary, retaining full control, but also assuming all risks and costs.

4. Licensing and Franchising

Companies may opt for licensing or franchising arrangements to share products, services, or technology without forming a joint venture.

5. Alliance Networks

  Entities join larger networks, gaining access to a broader range of partners and resources.

Conclusion

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. 

FAQs on Different Types of Joint Ventures

What are the different types of joint venture?

Joint ventures can take various forms, including strategic alliances, equity joint ventures, contractual joint ventures, minority/non-equity joint ventures, and limited liability joint ventures.

How do you operate a joint venture?

Operating a joint venture involves clear communication, defined goals, and a formal agreement outlining each party's roles, responsibilities, and contributions. Regular communication and joint decision-making are essential for success.

What are the nature and characteristics of joint venture?

Joint ventures are characterized by collaboration between two or more entities to achieve common objectives. They involve shared risks, costs, and benefits, with parties often forming a new entity or entering contractual agreements.

Why are joint ventures important?

Joint ventures offer companies a flexible way to pool resources, share risks, and enter new markets. They facilitate strategic partnerships without the need for full mergers, providing a balance between collaboration and independence.

What is a joint venture in strategic management?

In strategic management, a joint venture is a collaborative business arrangement where companies align their strategies and resources to achieve shared strategic objectives. It allows entities to leverage complementary strengths and capabilities.

Why is joint ventures good for international expansion?

Joint ventures are advantageous for international expansion as they enable companies to navigate foreign markets with the support of local partners. They provide a means to share risks, navigate regulatory complexities, and access local expertise.

Also, Read:

• Ownership in Joint venture agreement
• Is Joint Venture Agreement Legally Binding
• 8 Ways to Grow Your Business With A Joint Venture