Joint Venture
A joint venture is a business entity created by two or more companies through an arrangement that typically includes shared governance, resources, profits, losses, and expenses for a particular project.
How Does a Joint Venture Work?
Joint ventures can take various forms, such as contractual agreements or the creation of a new, separate entity. Joint ventures are common across all industries and can involve domestic or international partners.
Key features of a joint venture include:
- Shared responsibilities
- Decision-making
- Financial contributions.
This collaborative approach enables companies to access new markets, technologies, or skills, leading to mutual growth and increased competitiveness.
Successful joint ventures rely on clear agreements, effective communication, and a shared vision. However, they also require careful consideration of potential challenges and establishing mechanisms for conflict resolution. Ultimately, joint ventures can be a powerful tool for businesses seeking to leverage complementary strengths and achieve strategic goals.
Four Types of Joint Ventures
Joint ventures increase efficiency, reduce cost, and improve risk management.
There are four common types of joint ventures: project-based, functional-based, vertical, and horizontal.
1. Project-based Joint Venture
A project-based joint venture has two or more parties working on a specific project. This agreement is usually temporary, lasting until the project’s completion.
2. Functional-based Joint Venture
A functional-based joint venture is a business relationship where two or more parties share resources and expertise to support each other’s operations. The partnership is usually ongoing, lasting as long as both parties find it beneficial.
3. Vertical Joint Venture
A vertical joint venture takes place between buyers and suppliers. These agreements are often preferred when bilateral trading isn’t beneficial. A vertical joint venture creates economies of scale and reduces costs for both parties.
4. Horizontal Joint Venture
A horizontal joint venture occurs between two or more companies operating in the same industry. The goal is to pool resources to gain a competitive edge. It has a lot of similarities with vertical joint ventures, but the difference is the two partners may be competitors.
Four Main Reasons Why Companies Form Joint Ventures
Forming a joint venture can be beneficial to all parties involved. There are usually four main reasons why companies choose to form such a partnership for a particular time. Here are the main reasons:
1. To Leverage Resources
A joint venture can take advantage of the combined resources of both companies to achieve the goal of the venture. One company might have a well-established manufacturing process, while the other might have superior distribution channels.
2. To Reduce Costs
By using economies of scale, both companies in the joint venture can leverage their production at a lower per-unit cost than they would separately. This is particularly appropriate with technological advances that are costly to implement. Other cost savings as a result of a JV can include sharing advertising, business supply, or labour costs.
3. To Combine Expertise
Two companies or parties forming a joint venture might each have different backgrounds, skill sets, or expertise. When these are combined through a JV, each company can benefit from the other’s talent.
4. To Enter Foreign Markets
Another common use of joint ventures is to partner with a local business to enter a foreign market. A company that wants to expand its distribution network to new countries can enter into a JV agreement to supply products to a local business, thus benefiting from an already-existing distribution network.
Some countries have restrictions on foreigners entering their market, making a JV with a local entity almost the only way to do business in the country.
Advantages of Forming a Joint Venture?
A joint venture affords each party access to the resources of the other participant(s) without having to spend excessive amounts of capital. Each company can maintain its own identity and can easily return to normal business operations once the JV is complete. JVs also provide the benefit of shared risk.
Disadvantages of Forming a Joint Venture?
Joint venture contracts commonly limit the outside activities of participant companies while the project is in progress. Each company involved in a JV may be required to sign exclusivity agreements or non-compete agreements that affect current relationships with vendors or other business contacts.
Is a joint venture different from what you are looking for? Perhaps you should consider a partnership. Find out more about partnerships in our article What Is A Partnership Contract?
Suggested Experts Of Joint Venture
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**Themba Mtsali** is a prominent media entrepreneur and the Founder and CEO of **Sounds Divine Studios** and **Showflix Africa**. Overcoming early speech challenges, he developed a passion for storytelling and innovation. Under his leadership, Sounds Divine Studios has excelled in high-quality MC services and media content, while Showflix Africa aims to become the "African Netflix" and the "BET of Africa." Committed to values of innovation, empowerment, and spiritual growth, Themba is dedicated to building a legacy of excellence and community impact.
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