Advantages and Disadvantages of the Joint Venture Entry Mode - Essay Example

? Advantages and disadvantages of the joint venture entry mode Introduction Globalization brought many changes in the business world. It is easy for the current organizations to do business in overseas countries now because of the changing global economic principles. Earlier, most of the countries put harder restrictions upon overseas organizations because of the misconceptions and superstitions about the intentions of those companies. However, globalization succeeded in removing the concerns over international business. Countries like China, which opposed globalization once, became strong supporters of globalization at present. No country can develop properly with the help of domestic resources alone. The above truth was realised by the countries only after the entry of globalization. Today, countries are competing in attracting foreign direct investments. It is easy for the organizations to enter a foreign soil at present. Merger, acquisition, strategic alliances, Joint venture etc are some of the major mode of entry adopted by organizations. Joint venture is “a contractual agreement joining together two or more parties for the purpose of executing a particular business undertaking. All parties agree to share in the profits and losses of the enterprise” (Joint Venture, n. d). Joint venture is an alliance of two or more companies or individuals. The parties involved in joint venture will utilize their skills, expertise, resources etc to carry out the objectives, visions and missions of the enterprise they formed under the label of joint venture. In joint venture agreements both the parties exercise control over the enterprise and all the assets, revenues and expenses. This paper analyses the structure of joint venture alliances and the advantages and disadvantages of joint venture as a mode of entry. Structure of Joint venture The structure of the joint venture depends on many factors like the legal structure, political climate, business climate, economical aspects, cultural aspects etc of the country in which the joint venture is registered, Generally, Corporations, General partnerships, Limited partnerships, Limited Liability Company etc are the accepted structure of joint venture. Corporations are one of the most preferred choices or structures of joint venture mode of entry. The legal status of a corporation is clear, and its ability to own assets, incur liabilities and enter into legally binding contracts is obvious to third parties. The liability of shareholders for the corporation’s debts and obligations is limited to their capital investment in the corporation, something that is not always the case with other entities (Vaughan, 2010) Corporations operate strictly in accordance with the corporate law. The corporate laws can be different in different countries. The joint venture corporations should obey the corporate laws of the country in which the corporation is registered. For example, Dubai Internet City and Kerala (one of the Indian states) recently formed a corporation called smart city in order to do IT business in Kochi. There were lots of controversies before the formation of this corporation. Dubai Internet City insisted some demands about the ownership of the land provided to them by the Kerala government. They asked for total control (Including selling right) over some portions of the land allocated to them by the Kerala government. “The main barrier that caused postponement of the smart city Kochi project was the conflicts about the free hold rights for 12 percent land of 30 acres which demanded by Dubai based promoters”(Kochi smart city new agreement details, 2011). However, the Kerala government insisted that it is impossible to give outright ownership of the land as per the existing laws in India. Finally, Dubai Internet City forced to give up their arguments. General partnership is another structure of joint venture mode of entry. In this case all the members in the partnership agreement may have personal liability for all the obligations performances of the enterprise including the profits, losses debts etc. Generally, the profits and losses are shared equally by the partners in this type of partnership. However, in some cases, the partners agree to share the profit and losses based on certain criteria. This type of profit or loss sharing occurs when the capital raised by the partners for the joint enterprise becomes unequal. One of the major advantages of this type of mode of entry is the tax benefits. In United States and many other countries no income tax or franchise tax is imposed on enterprises formed under general partnerships. In Limited partnerships, there would be limited partners and general partners. The general partner would be the one who actually do the business whereas the limited partner may not have any involvement in the actual business activities. The actual management of the business is done by the general partner in this case. The limited partner’s duty is only to raise the capitals as agreed with the general partner. Thus the limited partner may have claims only on the profits. In cases of losses, the limited partner may not have any liability. Limited Liability Company is another form of joint venture. It is the blend between the corporation and the partnerships. In other words, some elements of the corporation and partnerships are mixed in the structure of Limited Liability Company. In this case of joint venture, all the members in the enterprise have responsibilities in the management of the company. Advantages and disadvantages of the joint venture As mentioned earlier, joint venture mode of entry has lot of advantages and disadvantages “Asset sharing is one of the best advantages about joint venture” (Advantage Disadvantage Joint Venture, n. d). It is quite possible that a person struggled to conduct his business because of the lack of financial abilities even though he has better business ideas and potentials. He can establish a JV with a financially sound person so that his expertise and his partner’s financial abilities together will lead their business to success. In other words, joint venture provides business people an opportunity to share their skills, resources and expertise for mutual benefit. For example, consider a joint venture advertising company formed by a designer and a management expert. The expertise of the designer will help the company in developing creative designs whereas the skills of the management expert will help the JV to market the designs in a proper manner so that the designs earn maximum revenues. Another advantage of JV is the opportunity given to the entrepreneurs in doing cross cultural businesses. For example, Wal-Mart is one of the largest companies in the world. It is easy for them to acquire a retailer from India as the mode of entry to Indian market. However, instead of acquisition, they established collaboration with Bharti group in India for doing business in India. “In August 2007, Walmart announced an agreement with Bharti Enterprises to establish a joint venture, Bharti Walmart Private Limited, for wholesale cash-and-carry and back-end supply chain management operations in India” (Walmart India, n. d). Walmart established the collaboration with Bharti because of the fact that Walmart knows nothing about Indian market whereas Bharti knows everything about Indian markets. Walmart calculated that the blending of the knowledge of Bharti about Indian markets and the technological, financial and management skills of Walmart together will bring dividends to them. “Access to greater resources, including specialized staff and technology, sharing of risks with a venture partner, flexibility in operation, etc are some other benefits of joint venture mode of entry” (Advantages & Disadvantage of a Joint Venture, 2011) The major disadvantage of JV is the time and effort needed to build the relationships between the partners. In cross cultural joint ventures, the above problem will be more evident. The business philosophies and strategies of the partners in the joint venture could be different. For example, it is not necessary that the business strategies of Walmart and Bharti are the same. In order to reach a consensus on the business strategy and management of the joint venture enterprise, lot of lengthy discussions needed. Lack of clarity in communication is another disadvantage of the joint ventures. The communication channels of the partners in the joint venture could be different. In cross cultural JV’s the communication problem would be more severe. The verbal and nonverbal means of communication need not be the same when two entrepreneurs from different countries or cultures engage in a JV. Moreover, the levels of expertise would also be different for the different partners in the JV. For example, it is not necessary that Bharti possesses the same expertise of Walmart in doing business. The differences in expertise levels may often end up in conflicts and clashes. Some of the other disadvantage of JV is the “poor integration and co-operation, lack of leadership and support in the early stages, lack of research and analysis of the objectives, etc” (Advantages & Disadvantage of a Joint Venture, 2011). Profit sharing is another disadvantage of JV’s. It is impossible for the partners to claim the full profit as in the case of conducting business independently. Moreover, it is difficult for the partners to exercise full control over the JV business. Each and every business strategy or policy needed to be discussed with the partner before the implementation. References 1. Advantages & Disadvantage of a Joint Venture, (2011). [online] available at: http://www.rpemery.com/articles/advantages_and_disadvantages_jv.htm [accessed on 3 March 2011] 2. Advantage Disadvantage Joint Venture, (n. d). [online] available at: http://positivearticles.com/blog/1379/advantage-disadvantage-joint-venture/ [accessed on 3 March 2011] 3. Joint Venture, (n. d). [online] available at: http://www.investorwords.com/2671/joint_venture.html [accessed on 3 March 2011] 4. Kochi smart city new agreement details, (2011) [online] available at: http://www.spiderkerala.net/resources/4981-Kochi-Smartcity-new-agreement-details.aspx [accessed on 3 March 2011] 5. Vaughan,J. (2010). FAQ: What is a Joint Venture? [online] available at: http://www.uiowa.edu/ifdebook/faq/faq_docs/Venture.shtml [accessed on 3 March 2011] 6. Walmart India, (n.d) [online] available at: http://walmartstores.com/AboutUs/276.aspx [accessed on 3 March 2011] Read More