NATURE OF JOINT VENTURE.

A joint venture (JV, sometimes 'J-V') is a legal entity formed between two or more parties to undertake an economic activity together. It is a term more restricted to the US and the 'new' countries on the world map such as India and China.

The JV parties agree to create, for a finite time, a new entity and new assets by contributing equity. They then share in the revenues, expenses, and assets and "control" of the enterprise.

The term is not used in the U.K. where 'company law' originates. In European law, the term 'joint-venture' is an elusive legal concept, better defined under the rules of company law. In France, the term 'joint venture' is variously translated as 'association d'entreprises', 'entreprise conjointe', 'co-entreprise' and 'entreprise commune'. But generally, societe anonyme covers' foreign collaborations. In Germany,'joint venture' is better represented as a 'combination of companies' (Konzern)

The venture can be for one specific project only - when the JV is referred more correctly as a consortium (as the building of the Chunnel) - or a continuing business relationship. The consortium JV (also known as a cooperative agreement) is formed where one party seeks technological expertise or technical service arrangements, franchise and brand use agreements, management contracts, rental agreements, for ‘’one-time’’ contracts. The JV is dissolved when that goal is reached.

The Joint-Venture Concept

A JV on a continuing basis is the normal business undertaking. It is similar to a business partnership with two differences: the first, a partnership generally involves an ongoing, long-term business relationship, whereas an equity-based JV comprises a single business activity. Second, all the partners have to agree to dissolve the partnership whereas a finite time has to lapse before it comes to an end (or is closed by the Court due to a dispute).

The term JV refers to the purpose of the entity and not to a type of entity. Therefore, a joint venture may be a corporation, a limited liability enterprise, a partnership or other legal structure, depending on a number of considerations such as tax and tort liability.

JVs are normally formed both inside one's own country and between firms belonging to different countries. Within one, JVs usually combine different strengths in a field or are formed because of legal restrictions within a country; for example an insurance company cannot market its policies through a banking company. Some JVs are also formed because the law of a country allows dispute settlement, should it occur, in a third country. They are also formed to minimize business,tax and political risks. The JV is an alternative to the parent-subsidiary business partnership in emerging countries, discouraged, on account of (a) ignoring national objectives (b) slow-growth (c) parental control of funds and (d) disallowing competition.

JVs can be in the manufacture of goods, services, travel space, banking, insurance, web-hosting business, etc.

Today, the term 'JV' applies to more occasions than the choice of JV partners; for example, an individual normally cannot legally carry out business without finding a national partner to form a JV as in many Arab countries[2] where it is mentioned that there are over 500 JVs in Saudi Arabia with Indians alone. Also, the JV may be an easier first-step to franchising, as McDonald's and other fast foods, found out in China in the early difficult stage of development.

Other reasons for forming a JV are:

reducing 'entry' risks by using the local partner's assets inadequate knowledge of local institutional or legal environment access to local borrowing powers perception that the goodwill of the local partner is carried forward in strategic sectors, the county's laws may not permit foreign nationals to

operate alone access to local resources through participation of national partner influence of local partners on government officials or 'compulsory' requisite

(see China coverage below) access by one partner to foreign technology or expertise, often a key

consideration of local parties (or through government incentives for the mechanism)

again, through government incentives, job and skill growth through foreign investment, and

incoming foreign exchange and investment.

[edit] Strategic Reasons of One Partner

There may be strategic interests of one partner's alone:

adding 'clout' (the influence of the other partner) to the enterprise build on company's strengths economies of (international) scale and advantages of size {'industrial hubs') 'globalize' without size economies of scale (e.g.Indian and Israeli

pharmaceutical industries) influencing structural evolution of the industry pre-empting competition defensive response to blurring industry boundaries speed to market market diversification pathways into R&D outsourcing

JVs are formed by the parties’ entering into an agreement that specifies their mutual responsibilities and goals in an 'adventure. The JV partners can usually form the capital of the company through injections of cash alone or cash together with assets such as 'technology' or land and buildings. Subsequent to its formation the JV can raise debt for additional capital. A written contract is crucial for legal provisions. All JVs also involve certain rights and duties. Each partner to the JV has a fiduciary responsibility, even to act on someone’s behalf, subordinating one's personal interests to those of the other person or that of the ‘sleeping

partner’. Upon its incorporation (see later) it becomes a company in most places, or a corporation (in the US).

[edit] Downsides of a JV

Some of the downsides of a joint venture may be [3]:

differing philosophies governing expectations and objectives of the JV partners an imbalance in the level of investment and expertise brought to the JV by the

two parent organizations inadequate identification, support, and compensation of senior leadership and

management teams or conflicting corporate cultures and operational styles of the JV partners

A JV can terminate at a time specified in the contract, upon the death of an active member (unusual) or if a court so decides in a dispute taken to it.

Joint ventures have existed for many years in the US, from their usage in the railroad industry (one party controls the sources of oil and the other party the rights of ferrying it) and even to manufacturing and services. In the financial services industry JVs were widely employed for marketing products or services that one of the parties, which acting alone, would have been legally prohibited from doing so.[4]

[edit] JVs and Game Theory

JVs may also be formed by companies on the 'game theory' that is grounded on the perception that of the many possible moves 'on the chessboard', a competitor cannot properly guess the motive of the JV [5].

[edit] Finding the JV Idea or Partners

In the era of the Internet, finding opportunities for exploiting an idea is sizeable together with remote, or advertised, communicating. There are also the blogging networks as well the social networking sites and search engines. There are also other venues to find a JV partner such as seminars, exhibitions, directories, websites such as http://www.clickbank.com/index.html and the plain newspaper advertising of opportunities. One should not forget websites which have become prosperous like eBay and Amazon.com, Wikipedia, Youtube to name the most obvious. Forming JVs with distributor and marketing agencies is possible in this flat world to market a product. But finding an entrepreneur for a JV is another task!

Nonetheless, there are risk-takers- Venture capitalists, angel investors and venture managers (See Carried Interest [6] - especially in the high-tech industries like IC chips or biotechnology. Although they typically exit once an idea or an opportunity proves itself, there are watchful funds and investors who could go in for a JV.

[edit] Formulating the JV

Formulating the JV is a series of steps, one which needs a lot of work and yet, at the same time, precision. One can here only underline the steps or information that will be needed by the JV candidate. They are [7]

the objectives, structure and projected form of the joint venture, including the amount of investment and financing arrangements and debt

the JV(s) products , their technical description and usage alternate production technologies estimated cost of equipment estimated product price(s) costing market analysis for the product, inside and outside the ‘territory’ analysis of competition projected sales and methods of distribution details of offered site, including output projections, transport and warehousing,

testing and quality control, by-products and waste;- supply, utility, and transport requirements;

estimated technology transfer costs foreign exchange projections ( where applicable) staff requirements and training financial projections environmental impact social benefit

[edit] Selecting the Partner

While the following offers some insight to the process of joining up with a committed partner to form a JV, it is often difficult to determine whether the commitments come from a known and distinguishable party or an intermediary. This is particularly so when the language barrier exists and one is unfamiliar with local customs, especially in approaches to Government, often the deciding body for the formation of a JV or dispute settlement.

The ideal process of selecting a JV partner emerges from:

screening of prospective partners short listing a set of prospective partners and some sort of ranking ‘due diligence’ - checking the credentials of the other party availability of appreciated or depreciated property contributed to the joint

venture the most appropriate structure and invitation/bid foreign investor buying an interest in a local company

Companies are also called JVs in cases where there are dominant partners together with participation of the public. There may also be cases where the public shareholding is substantial but the founding partners retain their identity. These companies may be 'public' or 'private' companies. It would be out of place to describe them, except to say there are many in India.

Further consideration relates to starting an new legal entity ground up. Such an enterprise is sometimes called 'an incorporated JV', one 'packaged' with technology contracts (knowhow,patents,trademarks and copyright), technical services and assisted-supply arrangements.

The consortium JV (also known as a cooperative agreement) is formed where one party seeks technological expertise or technical service arrangements, franchise and brand use agreements, management contracts, rental agreements, f or 'one-time' contracts, e.g., for construction projects. They dissolve the JV when that goal is reached.

[edit] Feasibility Study

A nascent JV project outlines:

the partners the objectives and structure of the JV investment and financing arrangements product(s)and description and usage, output production technology equipment required and costs technology transfer costs cost-benefit analysis market analysis analysis of competition details of the site transport and warehousing by-products and waste supply, utility, and transport requirements foreign exchange projections staff requirements and training

Its feasibility, besides its profitability,is assessed (in terms of Government control over the JV) by considering it, along with the Articles which will regulate it, by its strength and weakness factors (for the economy or the country) in aspects as:

(a) the quality of the technology - its appropriateness to the national infrastructure, exports, etc

(b) value to national economy and other contributions (i.e.labor intensity, environment factors, utility usage, "greeness" of the technology), waste-treatment and disposal

(c) capability of recipient to absorb the technology (d) cost of the technology and competitiveness (e) supporting strengths (trademarks, patents, know-how,copyrights in case of

IT) (f) limits imposed (by its supplier) on the use or non-use of the technology.

[edit] Incorporation of the Company

A JV can be brought about in the following major ways:

Foreign investor buying an interest in a local company Local firm acquiring an interest in an existing foreign firm Both the foreign and local entrepreneurs jointly forming a new enterprise Together with public capital and/or bank debt

In the U.K and India - and in many Common Law countries - a joint-venture(or else a company formed by a group of individuals)must file with the appropriate authority the Memorandum of Association. It is a statutory document which informs the outside public of its existence. It may be viewed by the public at the office in which it is filed. A sample can be seen at http://upload.wikimedia.org/wikipedia/meta/5/5f/Wikimedia_UK_-_Memorandum_of_Association.pdf. Together with the Articles of Association, it forms the 'constitution' of a company in these countries.

The Articles of Association regulate the interaction between shareholders and the Directors of a company and can be a lengthy document of up to 700 + pages. It deals with the powers relegated by the stockholders to the Directors and those withheld by them, requiring the passing of Ordinary resolutions, Special resolutions and the holding of Extra-Ordinary General Meetings to bring the Directors' decision to bear.

A Certificate of Incorporation [8] or the Articles of Incorporation ( see sample at [9] ) is a document required to form a corporation in the US ( in actuality, the State where it is incorporated) and in countries following the practice. In the US, the 'constitution' is a single document. The Articles of Incorporation is again a regulation of the Directors by the stock-holders in a company.

By its formation the JV becomes a new entity with the implication:

that it is officially separate from its Founders, who might otherwise be giant corporations, even amongst the emerging countries

the JV can contract in its own name, acquire rights (such as the right to buy new companies), and

it has a separate liability from that of its founders, except for invested capital it can sue (and be sued) in courts in defense or its pursuance of its objectives.

On the receipt of the Certificate of Incorporation a company can commence its business.

[edit] The Shareholders' Agreement

This is a legal area and is fraught with difficulty as the laws of countries differ, particularly on the enforceability of 'heads of' or shareholder agreements. For some legal reasons it may be called a Memorandum of Understanding. It is done in parallel with other activities in forming a JV. Though dealt with briefly in shareholders’ agreement in Wikipedia, (also see samples in [10],[11]) some issues must be dealt with here as a preamble to the discussion that follows. There are also many issues which are not in the Articles when a company starts up or never ever present. Also, a JV may elect to stay as a JV alone in a ‘quasi partnership’ to avoid any nonessential disclosure to the Government or the public.

Some of the issues in a shareholders' agreement are:

Valuation of intellectual rights, say,the valuations of the IPR of one partner and ,say, the real estate of the other

the control of the Company either by the number of Directors or its "funding" The number of directors and the rights of the founders to their appoint

Directors which shows as to wether a shareholder dominates or shares equality. management decisions - whether the board manages or a founder transferability of shares - assignment rights of the founders to other members

of the company dividend policy - percentage of profits to be declared when there is profit winding up - the conditions,notice to members confidentiality of know-how and founders' agreement and penalties for

disclosure first right of refusal - purchase rights and counter-bid by a founder.

There are many features which have to be incorporated into the Shareholders Agreement which is quite private to the parties as they start off. Normally, it requires no submission to any authority.

The other basic document which must be articulated is the Articles which is a published document and known to members.

This repeats the Shareholders Agreement as to the number of Directors each founder can appoint to the (see Board of Directors). Whether the Board controls or the Founders. The taking of decisions by ‘simple’ majority of those present or a 51% or 75% majority with all Directors present (their Alternates/proxy); the deployment of funds of the firm; extent of debt; the proportion of profit that can be declared as dividends; etc. Also significant is what will happen if the firm is dissolved; one of the partner dies. Also, the ‘first right’ of refusal if the firm is sold, sometimes its ‘puts’ and ‘calls’.

Often the most successful JVs are those with 50:50 partnership with each party having the same number of Directors but rotating control over the firm, or rights to appoint the Chairperson and Vice-chair of the Company. Sometimes a party may give a separate trusted person to vote in its placeproxy vote of the Founder at Board Meetings. (See also [12] ).

Recently, in a major case the Indian Supreme Court has held that Memorandums of Understanding (whose details are not in the Articles of Association) are "unconstitutional" giving more transparency to undertakings.

[edit] Joint Venture Laws of China

It is interesting to study the JV laws of China because they are of recent vintage and because such a unique law exists.

According to a report of the United Nations’ Conference on Trade and Development 2003, China was the recipient of US$ 53.5 billion in direct foreign investment, making it the world’s largest recipient of direct foreign investment for the first time, to exceed the USA. Also, it approved the establishment of near 500,000 foreign investment enterprises. [13]. The US had 45000 projects ( by 2004) with an in-place investment of over 48 billion [14]

Until 1949, no guidelines existed on how foreign investment was to be handled due to the restrictive nature of China toward foreign investors. Since Mao Zedong initiatives in foreign trade began to be applied, and Law applicable to foreign direct investment was made clear in 1979, The first Sino-foreign equity venture took place in 2001 . [15] The corpus of the law has improved since then.

Companies with foreign partners can carry out manufacturing and sales operations in China and can sell through their own sales network. Foreign-Sino Companies have export rights which are not available to wholly-Chinese companies as China desires to import foreign technology by encouraging JVs and the latest technologies. Under Chinese law, foreign enterprises are divided into several basic categories. Of these five will be described or mentioned here: three relate to industry and services and two as vehicles for foreign investment.

They are the Sino-Foreign Equity Joint Ventures EJVs) ,Sino-Foreign Co-operative Joint Ventures (CJVs), the Law pertaining to Wholly Foreign-Owned Enterprises (WFOE) (although they do not strictly belong to Joint Ventures) and the Investment Laws pertaining to foreign investment companies limited by shares (FICLBS) and Investment Companies through Foreign Investors (ICFI).

[edit] Equity JVs

The EJV Law is between a Chinese partner and a foreign company. It is incorporated in both Chinese (official) and in English (with equal validity), with limited liability. Prior to China’s entry into WTO – and thus the WFOEs – EJVs predominated. In the EJV mode, the partners share profits, losses and risk in equal proportion to their respective contributions to the venture’s registered capital. These escalate upwardly in the same proportion as the increase in registered capital.

The JV contract accompanied by the Articles of Association for the EJV are the two most fundamental legal documents of the project. The Articles mirror many of the provisions of the JV contract. In case of conflict the JV document has precedence These documents are prepared at the same time as the feasibility report. There are also the ancillary documents (termed "offsets" in the US) covering know-how and trade-marks and supply of equipment agreements.

The minimum equity is prescribed for investment (truncated) [16] (also see [17]:

Where the foreign equity and debt levels are:

less than US$3million, equity must constitute 70% of the investment; more than US$3 million, but less than US$10 million, equity must constitute at

least 50% of the investment; more than US$10 million but less than US$30 million, 40% must be equity;

and more than US$30 million, 33% of the investment must be equity.

There are also intermediary levels.

The foreign investment in the total project must be at least 25%. No minimum investment is set for the Chinese partner. The ‘timing’ of investments must be mentioned in the Agreement and failure to invest in the indicated time, draws a penalty

[edit] Co-operative Joint Ventures

Co-operative Joint Ventures (CJVs) [18] are permitted under the Sino-Foreign Co-operative Joint Ventures. Co-operative Enterprises are also called Contractual Operative Enterprises.

The CJVs may have a limited structure or unlimited – therefore, there are two versions. The limited liability version is similar to the EJVs in status of permissions - the foreign investor provides the majority of funds and technology and the Chinese party provides land, buildings, equipment, etc. However, there are no minimum limits on the foreign partner which allows him to be a minority shareholder.

The other format of the CJV is similar to a partnership where the parties jointly incur unlimited liability for the debts of the enterprise with no separate legal person being created. In both the cases, the status of the formed enterprise is that of a legal Chinese person which can hire labor directly as, for example, a Chinese national contactor. The minimum of the capital is registered at various levels of investment.

Other differences from the EJV are to be noted:

A Co-operative JV does not have to be a legal entity. The partners in a CJV are allowed to share profit on an agreed basis, not

necessarily in proportion to capital contribution. This proportion also determines the control and the risks of the enterprise in the same proportion.

it may be possible to operate in a CJV in a restricted area a CJV could allow negotiated levels of management and financial control, as

well as methods of recourse associated with equipment leases and service contracts. In an EJV management control is through allocation of Board seats [19].

during the term of the venture, the foreign participant can recover his investment, provided the contract prescribes that and all fixed assets will become the property of the Chinese participant on termination of the JV.

foreign partners can often obtain the desired level of control by negotiating management, voting, and staffing rights into a CJV's Articles; since control does not have to be allocated according to equity stakes.

Convenience and flexibility are the characteristics of this type of investment. It is therefore easier to find co-operative partners and to reach an agreement.

With changes in the Law, it becomes possible to merge with a Chinese company for a quick start. A foreign investor does not need to set up a new corporation in China. He uses the Chinese partner’s business license, under a contractual arrangement. Under the CJV, however, the land stays in the possession of the Chinese partner

There is another advantage: the percentage of the CJV owned by each partner can change throughout the JV’s life, giving the option tot the foreign investor, by holding higher equity,

obtains a faster rate of return with the concurrent wish of the Chinese partner of a later larger role of maintaining long term control

The parties in any of the ventures, EJV, CJV or WFOE prepare a feasibility study outlined above. It is a non-binding document - the parties are still free to choose not to proceed with the project. The feasibility study must cover the fundamental technical and commercial aspects of the project before the parties can proceed to formalize the necessary legal documentation. The study must contain details referred to earlier under Feasibility Study. [20] (submissions by the Chinese partner).

[edit] Wholly Foreign Owned Enterprises (WFOEs)

The basic Law of the PRC Concerning Enterprises with Sole Foreign Investment controls WFOEs. China’s entry into the World Trade Organization around 2001 has had profound effect on foreign investment. Not being a JV, they are only considered here only in comparison or contrast.

To implement WTO commitments, China publishes from time to time updated versions of {| class="wikitable" |-its ‘Catalogs for the Guidance of Investments’ (affecting all ventures) - the areas in which investment which is prohibited, encouraged and restricted. All foreign investments which are absent in the list are permitted.

The WFOE is a Chinese legal person and has to obey all Chinese laws. As such, it is allowed to enter into contracts with appropriate government authorities to acquire land use rights, rent buildings, and receive utility services. In this it is more similar to a CJV than an EJV.

WFOEs are expected by PRC to use the most modern technologies and to export at least 50% of their production, with all of the investment is to be wholly provided by the foreign investor and the enterprise is within his total control.

WFOEs are typically limited liability enterprises (like with EJVs) but the liability of the Directors, Managers, Advisers, and Suppliers depends on the rules which govern the Departments or Ministries which control product liability, worker safety or environmental protection.

An advantage the WFOE enjoys over its alternates is the protection to its know-how but a principal disadvantage is absence of an interested and influential Chinese party.

As of the 3rd Quarter 2004 the WFOEs had replaced EJVs and CJVs as follows [21] :

Distribution Analysis of JV in Industry - PRCType JV 2000 2001 2002 2003 2004 (3Qr)WFOE 46.9 50.3 60.2 62.4 66.8EJV,% 35.8 34.7 20.4 29.6 26.9CJV,% 15.9 12.9 9.6 7.2 5.2Misc JV* 1.4 2.1 1.8 1.8 1.1CJVs (No.}** 1735 1589 1595 1547 996

=Financial Ventures by EJVs/CJVs

o =Approved JVs

[edit] Foreign Investment Companies Limited By Shares (FICLBS)

These enterprises are formed under the Sino-Foreign Investment Act . The capital is composed of value of stock in exchange for the value of the property given to the enterprise. The liability of the shareholders, including debt, is equal to the amount of shares purchased by each partner.

The registered capital of the company the share of the paid-in capital. The minimum amount of the registered capital of the company should be RMB 30 million. These companies can be listed on the only two PRC Stock Exchanges – the Shangri and Shenzhen Stock Exchanges. Shares of two types are permitted on these Exchanges – Types “A” and Type “B” shares.

Type A are only to be used by Chinese nationals and can be traded only in RMB. Type “B” shares are denominated in Remembi but can be traded in foreign exchange and by Chinese nationals having foreign exchange. Further, State enterprises which have been approved for corporatization can trade in Hongkong in “H” shares and in NYSE exchanges.

“A” shares are issued to and traded by Chinese nationals. They are issued and traded in Renminbi. “B” shares are denominated in Renminbi but are traded in foreign currency. From March 2001, in addition to foreign investors, Chinese nationals with foreign currency can also trade “B” shares.

[edit] Investment Companies by Foreign Investors (ICFI)

Brief coverage is provided.

Investment Companies are those established in China by sole foreign-funded business or jointly with Chinese partners who engage in direct investment. It has to be incorporated as a company with limited liability.

The total amount of the investor's assets during the year preceding the application to do business in China has to be no less than US $ 400 million within the territory of China. The paid-in capital contribution has to exceed $ 10 million. Furthermore, more than 3 project proposals of the investor's intended investment projects must have been approved. The shares subscribed and held by foreign Investment Companies by Foreign Investors (ICFI) should be 25%. The investment firm can be established as an EJV.

[edit] Joint-Ventures in India

[edit] Introduction

India’s has an open philosophy on capital markets and it closely parallels its English peers in operation. The Bombay Stock Exchange (BSE) has close to 5000 listed shares, and trades in several thousand more, making it the largest stock exchange in the world [22]. The National Stock Exchange is the other exchange at present. English is one of the preferred languages of the market and its policies are first announced in English.

The Indian people are skilled and entrepreneurial by nature as evident in world markets but in India less than 1% of its billion population at present – that is, only 11 million people - representing 3% of households invest in the market [23].

People who ‘work’ the market in other languages are adept in recognizing concepts in derivatives and futures and trade in them. India is one of three countries that has supercomputers, one of six that has satellite launching facilities and has over 100 Fortune 500 companies doing R&D in the country [24].

India does not restrict the repatriation of investments, dividends, profits an if need be, the principal ,through the single autonomous entity, the Reserve Bank of India (RBI). The Indian currency – the Rupee – is 100% convertible for ‘’ earnings’’ at free market rates

India’s new policies (described below) have resulted in aggregate foreign investment flowing into India increasing from US$103 million in 1990-91 to US$61.8 billion in 2007-2008 [25], [26]

.

[edit] Liberalization of Policy

India’s basic outlines of industrial development were framed by Pandit Jawaharlal Nehru in 1956 making the private sector a participant in development, but giving the public sector a dominant position. [27] .

However, by the early 90s the situation in the world economies turned: Japan entered a phase of stagnancy of growth, the pace of the ‘Asian tigers slowed, as did the European economy. But, also, the country’s balance of payments crisis.

To counteract these effects a new policy was born in July 1991, the reformed New Industrial Policy (NIP) [28] . It and later modifications (further liberalization) streamlines procedures, deregulated industrial licensing, and vastly expanded the role for the private sector, while shrinking the Public Sector. Also, anti-trust laws ( the Monopoly and Restrictive Practices Act) were trimmed and customs duties for industrial goods slashed. The restrictive Foreign Exchange Regulation Act (FERA) was replaced by the Foreign Exchange Management Act (FEMA).

Industrial policy divided industry into three categories:

those that would be reserved for public sector development, those under private enterprise with or without State participation, and those in which investment initiatives would ordinarily emanate from private

entrepreneurs.

Only six industries are exclusively ‘reserved’ for the Public Sector.

Trading (except single-brand retailing), agricultural or plantation activities housing and real estate business (except development of townships), agriculture, atomic energy, gambling & betting, lottery business, and retail construction of residential/commercial premises, roads or bridges are on the ‘’’negative’’’ list for foreign participation..

[edit] Automatic licensing and Administered Licensing

India’s investment policy as of April 2010 is presented at the site [29]. Briefly, India allows investments both through Foreign Direct Investment (FDI), meant for long-term controlling investments and Portfolio Investment - taking a position by buying shares of a company - which is likely short-term capital market operation. Foreign Institutional Investors ("FII’s) from reputable institutions (like pension funds, mutual funds) may (and do) participate in the Indian capital markets.

Industrial approvals are ‘’ automatic ‘’ ( RBI approval of investment) for most manufacturing industries with equity investment up to 51% foreign control and as of 1997 to 74% in certain select industries ( See the current policy highlighted above). For another 36 ‘’ sectors’’ there are varying limits ‘’without output restrictions’’. RBI approvals come within two weeks for the invested entity. Investments can flow to the country prior to approvals for such cases. Even in sectors limited to 51%, a higher level of control, up to 74%, is feasible if approach is made to the Foreign Investment Promotiomn Board (FIPB) – thus, ’administered’’-licensing . Investments up to 100% are allowed in power generation, coal washeries, electronics, an Export Oriented Unit (EOU) in the EPZ's).

NRI (Non-Resident Indians), PIO (People of Indian Origin), and OCBs (Overseas Commercial Bodies) have relaxed accommodation

Industrial licensing of the 1951 policy is applicable to “Annex II” (not shown here) industries which revolve around certain key natural resources. It is administered through FIPB .

[edit] Joint Venture Companies

JV companies are the preferred form of corporate investment but there are no separate laws for joint ventures. Companies which are incorporated in India are treated on par as domestic companies .

India prefers the joint venture mode of operation. It generally recognizes three modes in JVs [30], which distinguish them from other entities:

The above two parties subscribe to the shares of the JV company in agreed proportion, in cash, and start a new business.

Two parties, (individuals or companies), incorporate a company in India. Business of one party is transferred to the company and as consideration for such transfer, shares are issued by the company and subscribed by that party. The other party subscribes for the shares in cash.

Promoter shareholder of an existing Indian company and a third party, who/which may be individual/company, one of them non-resident or both residents, collaborate to jointly carry on the business of that company and its shares are taken by the said third party through payment in cash.

Private companies ( only about $2500 is the lower limit of capital, no upper limit) are allowed [31] in India together with and public companies, limited or not, likewise with partnerships. sole proprietorship too are allowed. However, the latter are reserved for NRIs.

Through capital market operations ‘’foreign’’ companies can transact on the two exchanges without prior permission of RBI but they cannot own more than 10 percent equity in paid-up capital of Indian enterprises, while aggregate foreign institutional investment (FII) in an enterprise is capped at 24 percent.

The establishment of wholly-owned subsidiaries (WOS) and project offices and branch offices, incorporated in India or not. Sometimes, it is understood, that Branches are started to ‘test’ the market and get a its flavor. Equity transfer from residents to non-residents in mergers and acquisitions (M&A) is usually permitted under the automatic route. However, if the M&As are in sectors and activities requiring prior government permission (Appendix 1 of the Policy) then transfer can proceed only after permission [32] .

Joint ventures with trading companies are allowed together with imports of secondhand plants and machinery.

It is expected that in a JV, the foreign partner supplies technical collaboration and the pricing includes the foreign exchange component, while the Indian partner makes available the factory or building site and locally made machinery and product parts. Many JVs are formed as public limited companies (LLCs) because of the advantages of limited liability. [33].

JVs are expected in the nuclear industry following the NSG waivers for nuclear trade. The nuclear power industry has been witnessing several JVs. The country has set an imposing target of achieving an installed capacity of 20 GW by 2020 and 63 GW by 2030. The total size of the Indian nuclear power market will be around $40 billion by 2020 with a growth rate (AAGR) of 9.2% in installed nuclear capacity during 2008–20. The total investments made are to a tune of around $1.30 billion following the Indo-US nuclear deal in 2008 [34] .

There is a group of industries reserved for the small scale sector wherein foreign investment cannot exceed 24% and if does then approval is necessary from the FIPB, and the unit looses its ‘smallness’ and requires an industrial license [35] .

There are many JVs. lying outside of this discussion – Hindusthan Unilever-Unilever, Suziki-Govt. of India (Maruti Motors), Bharti Airteli-Singapore Telecom, ITC-Imperial Tobacco, P&G Home Products, Whirlpool, having financial participation with the financial institutions and the lay public which are monitored by SEBI (Securities and Exchange Board of India), also an autonomous body. This lies outside this discussion.

Under the country’s laws, a public company must:

Have at least seven shareholders Have at least three directors Obtain government approval for the appointment of its management. Have both a "trading certificate" and certificate of incorporation before

commencing its business. Publish also a prospectus (or file a statement) before it can start transact

business. Hold statutory meetings

There are several other provisions contained in the Companies Act 1956 which also need to be followed.

[edit] Royalty Payments and Capitalization

For the automatic route, RBI allows [36]:

Lump sum payments ‘’not’’ exceeding US$ 2 million.

Royalty payable is limited to 5 % for domestic sales and 8 % for exports,’’ ‘’without’’ any restriction on the duration of the royalty payments’’. The royalty limits are net of taxes and are calculated according to standard conditions. Payments are made through RBI.

The royalty is calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of the standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc.

Issue of equity shares against lump sum fees and royalty fees is permitted..

For exceeding this norm, the firm has to approach FPBI.

[edit] Legal System in the Country

India is a common law country with a written constitution, guaranteeing individual and property rights.

There is a single hierarchy of courts.

Arbitration can be in India or International Commercial Arbitration.

The country has recently enacted the Arbitration and Conciliation Act, 1996 ("New Law"). The New Law is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration ("Model Law [37].

All agreements are under Indian laws.

[edit] Articles of Association

This article or section is in the middle of an expansion or major revamping. You are welcome to assist in its construction by editing it as well. If this article has not been edited in several days, please remove this template.This article was last edited by 98.70.72.189 (talk | contribs) 9 hours ago.

[edit] Dissolution

The JV is not a permanent structure. It can be dissolved when:

Aims of original venture met Aims of original venture not met

Either or both parties develop new goals Either or both parties no longer agree with joint venture aims Time agreed for joint venture has expired Legal or financial issues Evolving market conditions mean that joint venture is no longer appropriate or

relevant

[edit] References

1. ̂ http://www.mallat.com/articles/joint_ventures.htm 2. ̂ The Hindu, 1-3-2010 3. ̂ http://definitions.uslegal.com/j/joint-venture/ 4. ̂ http://www.1000ventures.com/business_guide/jv_main.html 5. ̂ http://hbr.org/product/global-gamesmanship/an/R0305D-PDF-ENG 6. ̂ http://en.wikipedia.org/wiki/Carried_interest 7. ̂ http://www.avrio.net/1646.0.html?

&tx_ttnews[pS]=1265242075&tx_ttnews[tt_news]=17&tx_ttnews[backPid]=1645&cHash=262e3f3c65

8. ̂ http://definitions.uslegal.com/a/articles-of-incorporation/ 9. ̂ http://managementhelp.org/legal/articles.htm 10. ̂ http://smallbusiness.findlaw.com/business-forms-contracts/business-forms-contracts-a-to-z/

form4-2.html 11. ̂ http://www.airportsindia.org.in/righttoinformation/SHA_DIAL.pdf 12. ̂ http://www.opsi.gov.uk/acts/acts2006/pdf/ukpga_20060046_en.pdf 13. ̂ http://www.avrio.net/1646.0.html?

&tx_ttnews[pS]=1263022345&tx_ttnews[tt_news]=17&tx_ttnews[backPid]=1645&cHash=ae5990e5cd

14. ̂ http://www.chinatoday.com/data/data.htm 15. ̂ http://www.china.org.cn/english/features/investment/36752.htm 16. ̂ http://www.avrio.net/1646.0.html?

&tx_ttnews[pS]=1265242075&tx_ttnews[tt_news]=17&tx_ttnews[backPid]=1645&cHash=262e3f3c65

17. ̂ http://www.iflr.com/Article/1984450/The-pros-and-cons-of-joint-ventures.html?ArticleId=1984450

18. ̂ http://www.P020060620322310939539.pdf 19. ̂ http://www.chinabusinessreview.com/public/0501/folta.html 20. ̂ http://www.avrio.net/1646.0.html?

&tx_ttnews[pS]=1263022345&tx_ttnews[tt_news]=17&tx_ttnews[backPid]=1645&cHash=ae5990e5cd

21. ̂ http://www.chinabusinessreview.com/public/0501/folta.html 22. ̂ http://www.bseindia.com/about/introbse.asp 23. ̂ The Hindu, May 3,2010 24. ̂ http://www.xebecindia.in/business/doingBusiness.html 25. ̂ http:/ /PDFs/87541.pdf 26. ̂ http://www.ifri.org 27. ̂ http://eaindustry.nic.in/handbk/chap001.pdf 28. ̂ http://siadipp.nic.in/publicat/nip0791.htm 29. ̂ http://siadipp.nic.in/policy/fdi_circular/fdi_circular_1_2010.pdf 30. ̂ http://www.majmudarindia.com/pdf/Joint%20ventures%20in%20India.pdf 31. ̂ http://www.xebecindia.in/business/incBusiness.html 32. ̂ http://www.ifri.org 33. ̂ http://www.majmudarindia.com/pdf/Joint%20ventures%20in%20India.pdf 34. ̂ http://www.reportlinker.com/p0180792/Joint-Venture-Partnerships-Set-to-Boost-India-s-

Nuclear-Industry-Growth.html

35. ̂ http://madaan.com/fdiapprovals.html 36. ̂ http://www.rbi.org.in/scripts/FAQView.aspx?Id=26 37. ̂ http://www.xebecindia.in/business/incBusiness.html

[edit] Examples

Airtel (India) + Zain(Kuwait) (2010) Air Hong Kong (Cathay Pacific + DHL Express) Airport Authority of India + Fraport AG Frankfurt Airport Services Worldwide +

Delhi International Airport + GMR Group|GMR Infrastructure + GMR Group |GMR Energy Ltd + GVL Investments Pvt. Ltd + Malaysia Airports(Mauritius) Private Limited + India Development Fund

Air France-KLM (Air France + KLM) AutoAlliance International (Ford + Mazda) Brewers Retail Inc. (Inbev, Molson Coors + Sapporo Breweries) Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited. (Canara

Bank + HSBC + Oriental Bank of Commerce) CW Television Network (CBS Corporation + Warner Bros.) Bank DnB NORD (DnB NOR + NORD/LB) Dow Corning (Dow Chemical Company + Corning Incorporated) FAW |Volkswagen Automotive Company (China) Fujitsu Siemens Computers (Fujitsu + Siemens AG) GlobalFoundries (AMD + Advanced Technology Investment Co. (ATIC)) Huawei Symantec (Huawei + Symantec) Hulu (NBC Universal + Fox Entertainment Group + ABC, Inc.) INTO University Partnerships specialises in creating JVs with British universities Hochtief + Bahrain International Airport Philips Components (LG + Philips) MSNBC (Microsoft + NBC Universal) NBC Universal (NBC [part of General Electric] + Vivendi Universal Entertainment

[part of Vivendi]) Nokia Siemens Networks (Nokia + Siemens AG) NUMMI (General Motors + Toyota) Penske Truck Leasing (GE + Penske) PetroAlam (Royal Dutch Shell + Vegas Oil and Gas + GDF Suez) Prime Time Entertainment Network from the Prime Time Consortium (Warner Bros.

+ the Chris-Craft group of independent stations.) Reliance Petrochemicals + Atlas Energy (Canada)) (2010) Rigar Donuts (Rigarsia + Dunkin' Donuts, (2010) Shell-Mex and BP (Royal Dutch Shell + British Petroleum, 1932) Sony BMG Music Entertainment (Sony Music Entertainment [part of Sony] +

Bertelsmann Music Group [part of Bertelsmann]) Sony Ericsson (Sony + Ericsson) Strategic Alliance (Northwest Airlines + KLM) The Balfour Beatty Skanska, construction contractors (Balfour Beatty + Skanska) The Baseball Network (ABC, NBC, + Major League Baseball) Tata DoCoMo (Tata Teleservices + NTT DoCoMo) TNK-BP (BP + TNK (Tyumen Oil Co.))

TriStar Pictures (Columbia Pictures, HBO, + CBS) United Launch Alliance (ULA) (Boeing + Lockheed Martin) Uninor (Telenor + Unitech Group) Verizon Wireless (Verizon Communications + Vodafone) Virgin Mobile India (Virgin Group + Tata Teleservices) The XFL (NBC + World Wrestling Entertainment) Wal-Mart |China International Trust and Investment Corp

[edit] See also

Consortium Institute

[edit] External links

Cornell Law School's Joint Venture Info Page Contains legal information and relevant definitions regarding joint venture partnerships

Retrieved from "http://en.wikipedia.org/wiki/Joint_venture"Categories: Business law | Strategic alliances | Joint ventures | Types of companiesHidden categories: Articles needing cleanup from April 2010 | All pages needing cleanup | Pages actively undergoing construction

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Joint ventures are domestic or international enterprises involving

two or more companies joining temporarily to undertake a

particular project. They have grown in popularity in recent years—

joint ventures between U.S. and foreign firms, for example, have

increased at an average of 27 percent since 1985. Certainly, not all

of them will be successful; estimates of the failure rate of joint

ventures reaches as high as 70 percent. Nonetheless, companies

persist in initiating them for a variety of reasons.

REASONS FOR JOINT VENTURES

Joint ventures may involve companies in one or more countries.

International joint ventures in particular are becoming more

popular, especially in capital-intensive industries such as oil and

gas exploration, mineral extraction, and metals processing. The

basic reason is simple: to save money. For example, just to start a

mining operation in the United States in 1984, a company would

have had to spend one to two billion dollars. Few companies then

(or now) could finance such an expenditure on their own, so joint

ventures became more attractive as a way to share risks and costs

and create scale economies.

Another factor that contributed to the expansion in joint ventures in

the past few decades was the cost involved for capital-intensive

industries to continue their operations. Companies in these

industries depend heavily on advances in technology to reduce

costs. By pooling their money and personnel, companies enhanced

their chances of developing advanced technological methods that

would reduce exploration and production costs and increase profit

margins. Joint ventures became a favored method of doing business

for such industries.

Joint ventures between American and international companies are

increasingly common. Estimates suggest that approximately one-

quarter of American companies' direct investments, i.e., the

establishment of operating facilities in a foreign country, were in

joint ventures. Ideally, the partners contribute approximately equal

amounts of resources and capital into each business. The word

"approximately" is important in foreign joint ventures, since some

countries, such as China, will not allow outside companies to own

the majority of a domestic business (although they do encourage

joint ventures). In some countries, joint ventures are the only way

companies can engage in foreign business. For instance, Mexico

requires that all foreign firms investing there have Mexican joint

venture partners. In addition to government regulations, other

reasons for multinational joint ventures include cutting the costs of

doing business, sharing risks, and acquiring technological

information and management expertise from other companies.

International joint ventures have also been fostered by international

financial institutions such as the International Monetary Fund,

the World Bank, and the World Trade Organization, who have

instituted policies to eliminate trade barriers and deregulate

foreign ownership restrictions and the international flow of capital.

These policies have helped create a business climate in which

international investment and partnerships are an increasingly

attractive, and often necessary, means by which companies seek to

expand profit margins and market share. In addition, regional trade

areas such as the North American Free Trade Agreement

(NAFTA), the European Union (EU), and the Association of

South and East Asian Nations (ASEAN) have created particularly

favorable conditions for joint ventures within specific, relatively

localized regions.

Joint ventures are extraordinarily helpful to some companies in

gaining access to foreign markets. Neither party may really be

interested in the primary project, but they participate simply to

gain access to the new market. Such projects generally represent a

direct investment, which is sometimes limited by laws in the

country in which the operation takes place. One of the aims of a

partner in a joint venture is to have a majority interest in it; that

way, it maintains control over a project. This explains why some

countries do not permit foreign companies to hold majority

interests in their domestic business ventures.

Companies seeking to cut the costs of doing business see joint

ventures as a way to save money. In effect, they are sharing the

risks should a particular project fail. For example, if two oil

companies wish to produce a new drilling platform to search for oil

in swamps or ocean areas, and neither one can finance the project

on its own, they might join forces. That way, they are sharing the

costs of the projects and reducing their individual risk should they

find no oil. That is a decided advantage to many business people.

TYPES OF JOINT VENTURES

Joint ventures fall into several categories. Among them are equity

based operations that benefit foreign and/or local private interests,

groups of interests, or members of the general public. There are

also non-equity joint ventures, also known as cooperative

agreements, in which the parties seek technical service

arrangements, franchise and brand use agreements, management

contracts or rental agreements, or one-time contracts, e.g., for

construction projects. Quite often, non-equity joint ventures are

used simply to provide access for the participants into foreign

markets.

Equity type arrangements involve two sides: one that provides the

capital, and one that receives it. Since there is money involved,

there are also inherent risks, particularly with equity ventures

launched in less developed countries. The biggest risk is that the

business will fail and the money invested will be lost. There is also

the risk that some foreign governments will nationalize certain

industries in order to protect their own domestic interests. For

example, the Chilean government nationalized its copper industry

in the 1960s to prevent foreign companies from gaining control

over the ore. In 1988, Peru took over Perulac, a local milk producer

owned by Nestle, because of a national milk shortage. However,

such risks are (or should be) included in both the cost of doing

business and in joint venture participants' contingency planning.

Participants do not always furnish capital as part of their joint

venture commitments. There are, for example, non-equity

arrangements in which some companies are more in need of

technical services or technological expertise than they are of

capital. They may want to modernize operations or start new

production operations. Thus, they limit partners' participation to

technical assistance. Such arrangements often include some

funding as well, albeit limited.

There is also a growing prevalence of franchising joint ventures.

American companies such as McDonald's, Coca-Cola Co., and

Stained Glass Overlay have opened foreign franchise operations at

an increasing rate. The emergence of new markets such as China

and Vietnam have made such operations lucrative and have

attracted more and more businesses to joint venture participation.

A logical extension of franchising and brand-use agreements is the

need for managerial expertise. Consequently, companies in

developed countries form joint ventures with businesses in

emerging countries in which they provide management expertise

through contractual agreements. Such arrangements benefit both

parties immeasurably, which is one of the goals of joint ventures.

Not all joint ventures involve private companies—some include

government agencies. This is most common in less developed

countries, but there are notable exceptions. For example, the

British and French governments combined their resources in

conjunction with privately owned firms to develop a supersonic

transport (SST) intended to revolutionize transatlantic flying

between the two countries and the United States. The project did

not realize its financial goals. The flights were too expensive for

average flyers, costing as much as $3,368 one way between London

and Washington D.C. As a result, most flights were discontinued,

although some between European and New York City still exist.

Such are the risks of joint ventures, whether they involve private

business or government agencies.

Generally, joint venture participants in the private sector furnish

the capital, resources, and management and technological expertise

involved in the operation. In less developed countries, however,

government agencies are often active in business enterprises. They

may provide or arrange for funding; own or manage certain

industries, such as utility companies and airlines; or act as agents

in attracting foreign investment or participation in businesses. They

are no less active than privately held businesses in joint ventures,

however. The rules for all participants remain the same, and

strategies do not change.

JOINT VENTURE STRATEGIES

Businesses should not engage in joint ventures without adequate

planning and strategy. They cannot afford to, since the ultimate

goal of joint ventures is the same as it is for any type of business

operation: to make a profit for the owners and shareholders. A

successful company in any type of business is often recruited

heavily for participation in joint ventures. Thus, they can pick and

choose in which partnerships they would like to engage, if any.

They follow certain ground rules, which have been developed over

they years as joint ventures have grown in popularity.

For example, experience dictates that both parties in a joint venture

should know exactly what they wish to derive from their

partnership. There must be an agreement before the partnership

becomes a reality. There must also be a firm commitment on the

part of each member. One of the leading causes for the failure of

joint ventures is that some participants do not reveal their true

intentions in the partnerships. For example, some private

companies in advanced countries have formed partnerships with

militant governments to supply technological expertise and develop

products such as chemicals or nuclear reactors to be used for

allegedly peaceful purposes. They learned later that the products

were used for military purposes. Such results can be detrimental to

the companies involved and adversely affect their bottom lines and

reputations, to speak nothing of the direct victims of the military

development.

Businesses should form joint ventures with experienced partners. If

the partners do not have approximately equal experience, one can

take advantage of the other, which can lead to failure. Joint

ventures generally do not survive under this imbalanced dynamic.

Nor do they survive if companies jump into them without testing the

partnership first.

Partners in joint ventures would often be better off participating in

small projects as a way to test one another instead of launching into

one large enterprise without an adequate feeling-out process. This

is especially true when companies with different structures,

corporate cultures, and strategic plans work together. Such

differences are difficult to overcome and frequently lead to failure.

That is why a "courtship" is beneficial to joint venture participants.

WHY JOINT VENTURES FAIL

Joint ventures fail for many reasons. In addition to those mentioned

above, other factors include: disappearing markets, lagging

technology, partners' inability to honor the contract, cultural

differences interfering with progress, or governmental and

macroeconomic de-stabilizing factors. However, many of these

reasons can be eliminated with careful planning.

Inconsistent government interference is a difficult problem to

overcome. For example, the United States government has long

maintained restrictions against exporting certain technologies to

selected foreign countries, such as those utilized to produce jet

engines and computers. These restrictions place American

companies at a competitive disadvantage, since other countries do

not place similar constraints on their businesses. Thus, American

companies are unable to engage in certain joint ventures.

Companies that engage in military-oriented joint ventures are often

subject to unanticipated risks. The federal government may allocate

funds for the production of certain weapons, sign contracts with

manufacturers, and then discontinue the project due to changing

needs, budget restrictions, or election results. Such government

actions are a common risk to these joint ventures. They introduce

an element of insecurity into the projects, which is something that

partners try to avoid as much as possible.

Another problem with joint ventures concerns the issue of

management. The managers of one company may be more adept at

decision making than their counterparts at the other company. This

can lead to friction and a lack of cooperation. Projects are doomed

to failure if there is not a well-defined decision-making process in

place that is predicated on mutual goals and strategies.

For example, if two auto manufacturing companies engage in a joint

venture, it is imperative that they be similar in their structures and

approach to business. If one company relies heavily on

nonunionized workers who operate in an autonomous team-building

environment, and the other comprises a unionized workforce

oriented toward assembly line production in which workers

specialize in narrow tasks, the chances of success are poor. The

workers at the first plant would be prone to making decisions and

solving problems on their own, which would reduce the levels of

bureaucracy needed to manage production. Conversely, the

workers at the second plant would likely defer to higher-level

managers to make decisions. The differences would be difficult to

overcome and would lead to higher costs and slower production.

While the differences could be alleviated through planning before

the actual manufacturing process began, the time expended might

lead to technology gaps and other impediments to earning a profit.

Most companies engaging in joint ventures would prefer not to deal

with such problems after a project was implemented. Rather, they

aim to eliminate them through careful planning. Doing so increases

profits in the long run, which is one of the many benefits of

successful joint ventures.

BENEFITS OF JOINT VENTURES

Among the most significant benefits derived from joint ventures is

that partners save money and reduce their risks through capital

and resource sharing. Joint ventures give smaller companies the

chance to work with larger ones to develop, manufacture, and

market new products. They also give companies of all sizes the

opportunity to increase sales, gain access to wider markets, and

enhance technological capabilities through research and

development (R&D) underwritten by more than one party. In fact,

funding for R&D today is often provided by government agencies in

a myriad of countries operating under all types of economies,

ranging from capitalist to socialist and hybrid. This is particularly

true in the United States.

Until recently, U.S. companies were reluctant to engage in research

and development partnerships, and government agencies tried not

to become involved in business development. However, with the

emergence of countries that feature technologically advanced

industries (such as electronics or computer microchips) supported

extensively by government funding, American companies have

become more willing to participate in joint ventures. Likewise, the

U.S. government, along with state governments, has become more

generous with its financial support.

Government's increased involvement in the private business

environment has created more opportunities for companies to

engage in domestic and international joint ventures, although they

are still legally limited in what they can do and where they can

operate. Nonetheless, more and more companies are involving

themselves in joint ventures, and the trend is to increase their

participation, since the advantages outweigh the disadvantages.

DISADVANTAGES OF JOINT VENTURES

The disadvantages of joint ventures include: potential financial

losses if a project fails, expropriation or nationalization,

disagreements among partners, and less-than-anticipated results.

For instance, in the 1980s, American Motors Corp., which has since

been acquired by Chrysler Corp., entered a joint venture with the

Chinese government to produce Jeeps in Beijing. The Chinese

government, which did not allow joint ventures before 1980,

created many complications that prevented American Motors from

operating efficiently. The result was greatly reduced profits for

American Motors.

THE FUTURE OF JOINT VENTURES

It is almost certain that the number of joint ventures will continue

to increase in the near future. More and more companies are

adopting the joint venture approach as a part of their growth

strategies, particularly in the international arena. Foreign

companies can benefit mutually by combining their technological

and monetary resources and taking advantage of respective market

conditions. Thus, international joint ventures are becoming the

norm rather than the exception—and in more industries than ever

before.

Joint ventures may grow in importance so much in the next few

years that many companies could lose their national identities.

There could be a growth in the activities of multinational

corporations to the point where joint ventures will be virtually

unrecognizable. In fact, some companies, especially those in

capital-intensive industries, have already lost sight of the fact that

they engage constantly in joint ventures because they have become

so commonplace.

Finally, the wave of privatization, on a global scale, of state-owned

industries and enterprises promised an added catapult for joint

venture formations. The estimated worth of world-wide state-owned

industry sales in 1995 reached $65 billion. This trend will make

investment and inroads by companies into previously closed, and

still relatively unfamiliar and structurally adverse, countries such as

China and the former eastern bloc nations increasingly attractive.

[ Arthur G. Sharp ]

FURTHER READING:

Beamish, Paul, and J. Peter Killing. Cooperative Strategies, vol. 1-3.

San Francisco: New Lexington Press, 1997.

Bendaniel, David J. International M&A, Joint Ventures, and Beyond:

Doing the Deal. Englewood Cliffs, NJ: Prentice Hall, 1998.

Child, John, and David Faulkner. Strategies of Cooperation:

Managing Alliances, Networks, and Joint Ventures. Oxford, U.K.:

Oxford University Press, 1998.

Tesler, Lester G. Joint Ventures of Labor and Capital. Ann Arbor,

MI: University of Michigan Press, 1998.

Read more: Joint Ventures - benefits

http://www.referenceforbusiness.com/encyclopedia/Int-Jun/Joint-

Ventures.html#ixzz0pCaE12Sv

Advantages & Disadvantage of a Joint Venture

 

There are many good business and accounting reasons to participate in a Joint Venture (often

shortened JV). Partnering with a business that has complementary abilities and resources, such as

finance, distribution channels, or technology, makes good sense. These are just some of the

reasons partnerships formed by joint venture are becoming increasingly popular.

A joint venture is a strategic alliance between two or more individuals or entities to engage in a

specific project or undertaking. Partnerships and joint ventures can be similar but in fact can have

significantly different implications for those involved. A partnership usually involves a continuing,

long-term business relationship, whereas a joint venture is based on a single business project.

Parties enter Joint Ventures to gain individual benefits, usually a share of the project objective. This

may be to develop a product or intellectual property rather than joint or collective profits, as is the

case with a general or limited partnership.

A joint venture, like a general partnership is not a separate legal entity. Revenues, expenses and

asset ownership usually flow through the joint venture to the participants, since the joint venture

itself has no legal status. Once the Joint venture has met it’s goals the entity ceases to exist.

What are the Advantages of forming a Joint Venture?

Provide companies with the opportunity to gain new capacity and expertise

Allow companies to enter related businesses or new geographic markets or gain new

technological knowledge

access to greater resources, including specialised staff and technology

sharing of risks with a venture partner

Joint ventures can be flexible. For example, a joint venture can have a limited life span and only

cover part of what you do, thus limiting both your commitment and the business' exposure.

In the era of divestiture and consolidation, JV’s offer a creative way for companies to exit from

non-core businesses.

Companies can gradually separate a business from the rest of the organisation, and eventually,

sell it to the other parent company. Roughly 80% of all joint ventures end in a sale by one

partner to the other.

The Disadvantages of Joint Ventures

It takes time and effort to build the right relationship and partnering with another business can

be challenging. Problems are likely to arise if:

The objectives of the venture are not 100 per cent clear and communicated to everyone

involved.

There is an imbalance in levels of expertise, investment or assets brought into the venture by

the different partners.

Different cultures and management styles result in poor integration and co-operation.

The partners don't provide enough leadership and support in the early stages.

Success in a joint venture depends on thorough research and analysis of the objectives.

 

Embarking on a Joint Venture can represent a significant reconstruction to your business. However

favourable it may be to your potential for growth, it needs to fit with your overall business strategy.

It's important to review your business strategy before committing to a joint venture. This should

help you define what you can sensibly expect. In fact, you might decide there are better ways to

achieve your business aims.

You may also want to study what similar businesses are doing, particular those that operate in

similar markets to yours. Seeing how they use joint ventures could help you decide on the best

approach for your business. At the same time, you could try to identify the skills they use to partner

successfully.

You can benefit from studying your own enterprise. Be realistic about your strengths and

weaknesses - consider performing strengths, weaknesses, opportunities and threats analysis (swot)

to identify whether the two businesses are compatible. You will almost certainly want to identify a

joint venture partner that complements your own skills and failings.

Remember to consider the employees' perspective and bear in mind that people can feel

threatened by a joint venture. It may be difficult to foster effective working relationships if your

partner has a different way of doing business.

When embarking on a joint venture it’s imperative to have your understanding in writing. You

should set out the terms and conditions agreed upon in a written contract, this will help prevent

misunderstandings and provide both parties with strong legal recourse in the event the other party

fails to fulfil its obligations while under contract.

A written Joint Venture Agreement should cover:

The parties involved

The objectives of the joint venture

Financial contributions you will each make whether you will transfer any assets or employees to

the joint venture

Intellectual property developed by the participants in the joint venture

Day to day management of finances, responsibilities and processes to be followed.

Dispute resolution, how any disagreements between the parties will be resolved

How if necessary the joint venture can be terminated.

The use of confidentiality or non-disclosure agreements is also recommended to protect the

parties when disclosing sensitive commercial secrets or confidential information.