The precise origin of the legal concept of the joint venture (or joint “adventure,” as it sometimes is called) is not known. Some believe that the concept originated in the United States. Originally, the courts treated joint ventures simply as a special form of partnership, applying the law of partnership. But beginning in the late nineteenth century, the courts began to recognize the joint venture as a separate legal entity with qualities that distinguished it from a partnership.
In a modern joint venture, the parties combine their resources, usually comprising capital, knowledge, skill and services, in the conduct of a business venture, but without necessarily organizing a partnership in the legal sense.
What Is It?
Joint ventures may be either structural or contractual, or both. They also may conform to a statutory or other regulatory scheme. The cooperative relationship may be broad based or narrowly defined. It may be long term or transitional. While subsequent chapters primarily address long term joint ventures having a corporate structure, all ventures-regardless of duration or form-have some characteristics in common. Understanding these characteristics is the first step toward reducing the inevitable risks associated with joint ventures through effective planning, negotiation, management and ultimate termination of the venture.
Long term joint ventures, particularly those that are broad based, usually are best suited to a corporate structure. Short term or narrowly defined joint ventures often are better formulated contractually. Partnerships, business trusts and hybrid structures also house joint ventures. Corporate joint ventures are characterized by shared ownership and often by shared functions, such as research and development, manufacture, assembly or marketing as well. Shared function often leads to shared dependency. Contractual joint ventures usually are more narrowly based than corporate joint ventures. They often involve a combination of product distribution, licensing or OEM arrangements. They also may involve research and development. While contractual joint ventures may be long term, they have no shared ownership with its accompanying shared governance. The participants may, however, share a function, with resulting mutual dependency. Contractual joint ventures may require shared management of a particular function. Thus, contractual joint ventures and corporate or other structural joint ventures share the need for management continuity.
Why Joint Venture?
Joint ventures are vital to business. They have become an important strategic option for many companies-particularly those operating internationally. Few companies have the capital, skills or market access necessary to achieve their commercial objectives entirely through their own resources. Rarely a day passes without an announcement of a new joint venture, alliance or collaboration. Reason for particular joint ventures do, of course, vary. They include:
- Cost savings. A common rationale is the objective of saving costs by sharing with a joint venture partner or partners the costs of research and development (R&D) or capital investment programmers (a particular feature given the magnitude of investment costs involved in many industries such as electronics, defense, pharmaceuticals, telecommunications and aero-engines).
- Risk sharing. A similar rationale is the objective of sharing with another party or parties the significant financial risks involved in undertaking a speculative or capital intensive project.
- Access to technology. Joint ventures may also provide a route for a party to gain access to a co-venturer’s technology and skills and thus accelerate its entry into a particular technology or market.
- Expansion of customer base. International joint ventures can also provide the most effective route for a party to expand the scope of its customer base by utilizing a co-venture’s strength in different geographic markets or by buying-in to a co-venture’s distribution or sales network.
- Entry into emerging economies. Similarly, joint ventures may provide the best, and sometimes only realistic, route for gaining entry to new emerging markets in areas such as Eastern Europe or Asia where access to local knowledge, contacts or sponsorship is often a practical necessity.
- Entry into new technical markets. The rapid pace of technological change is itself producing new markets and effective entry into those markets can often be accelerated by participation with another company that already has a technical start in that field; a ‘go-it-alone’ strategy may simply take too long or cost too much.
- Pressures of global competition. On an international scale, the merger of similar businesses between two or more participants may be desirable in order to establish the economies of scale, global customer reach, and purchasing power or capital investment resources necessary to meet the strength of international competition.
There may be other reason, since many ventures will be based on more than one objective. The objectives may also not be the same for all joint venture parties. An added complexity in analyzing commercial objectives is that a joint venture may not be an ‘and-game’ in itself. It may be an interim stage in a party’s long-term business strategy or simply, in itself, intentionally a short-term strategy which may be subject to review at a later stage. Joint ventures frequently change in scope over time.
Planning Joint Venture
A joint venture initiative may arise internally or in response to an external proposal. Internal initiatives may result from strategic planning or from existing suppliers, distributors, or competitors or from companies with whom no current business relationship exists. Whatever the source of the initial joint venture proposal, whether internal or external, participants must undertake financial and operational analysis, evaluate managerial, technical and other staffing requirements, deal with legal and administrative requirements, and evaluate the other venture’s capabilities and motives.
This planning process should include both those with financial or administrative responsibilities and those with operational responsibilities. Internal consensus as to the venture’s structure and course must be reached among those who are to share ongoing operational, financial and administrative responsibilities for the venture. Operational consideration such as a perceived need for entry into a particular market should not dictate a joint venture with undue long term financial or administrative risks. Conversely, a long range strategic plan calling for market expansion should not impose a joint venture upon an operation with insufficient resources or motivation to successfully implement it. If consensus is not reached an anti-venture lobby within the company may ultimately poison a particular joint venture by withholding financial or operational resources critical to its success.