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When to set up a joint venture?

By Lawfarm Team December 29, 2021


BY - TANAY SHARMA

A joint venture (JV) is a partnership between two companies with the objective of achieving a common goal and reaping mutual benefits. These two entities could be private, government-owned, or international in nature. A joint venture could last a long time or only a few months. JV's beginnings can be dated back to the 1920s. American firms pioneered this strategy, which was quickly followed by people in other exporting countries. This technique of doing business grew prevalent all around the world after World War II ended. The term "joint venture" became popular in the 1909s as markets in Europe and China opened up.
 
Advantages and disadvantages of joint venture agreements
The advantages offered by a joint venture 
1. Established brand name – The joint venture benefits from a business partner's established brand name because there is a ready market waiting for the product to be introduced, and a lot of money is saved in the process by not having to construct a brand name for the product or even a distribution system.
2. Increased resources and capacity – The new business's resources and capability grow as the financial and human resources of the individual enterprises are pooled. This allows the joint venture company to adapt more rapidly and effectively to market obstacles and capitalise on new opportunities.
3. Access to new markets and distribution networks – When you form a joint venture with a foreign company, you have access to one of the world's fastest-growing markets.
4. Access to advanced technology –
 It saves the collaborating businesses a lot of time, energy, and investment since they don't have to develop their own technology because the business partner has easy access to advanced technology. The resulting product is better quality and more affordable.
5. Innovation – Joint ventures can enable businesses to find innovative ways to tackle the same market through new ideas and technology.
6. Low production costs – Joint ventures provide companies with low raw material and labour costs, highly qualified workers, as well as engineers, accountants, and scientists at a much lower price than in their own country.
7. Substantial Capital Funds–
 The capital provided by a joint venture is substantial. Large projects can benefit from joint ventures.
8. Risk diversification – A joint venture divides the risk among partners.
 Disadvantages of a Joint Venture Agreement
The major drawbacks of joint ventures are:
A joint venture allows a corporation to share the risks and costs of launching a new business in exchange for a percentage of the new business' profit or loss.
The venture partners have diametrically opposed business philosophies, time horizons, reinvestment preferences, and major challenges. It fails owing to conflicts between partners.
 
 
1. Conflict of Interest – Dual ownership may lead to disagreements between partners over control of the business.
2. Risk of Trade Secret Disclosure – There is a risk of technology and trade secret disclosure.
3. Lack of Coordination – There may be a lack of coordination among the partners, which may inhibit the Joint Venture’s efficiency.
 
 

Tags: A joint venture , Substantial Capital Funds , Risk diversification , resources and capacity


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