What is Joint Venture? Advantages, Disadvantages

What is Joint Venture?

When two or more firms join together to create a new business entity, it is called a joint venture. In this kind of agreement the companies share their core competencies and share the ownership. Environmental factors like social, technological, economic and political environments may encourage joint ventures.

There are five common objectives in a joint venture:

• Market entry
• Risk/reward sharing
• Technology sharing
• Joint product development
• Conforming to government regulations

Advantages of Joint Venture

• Since two or more firms join together to form a joint venture, there is availability of increased capital and other resources.
  
  
• By engaging with a foreign collaborator, the products and services can be marketed in a foreign country.
  
  
• One partner may have the new and improved technology but do not have the resources. Other partner may have resources like capital but do not have the technology. In such causes joint venture can fetch new and improved technology as well as great resources. By engaging a foreign partner, improved foreign technology can be availed from its foreign collaborator.
  
  
• • Use of existing marketing arrangements or existing distribution network of one of the party is possible.
  
  
• Access to improved resources like experienced technicians, experienced staff, greater capacity and financial resources etc. are possible through joint venture business.
  
  
• Joint venture companies can offer their existing product to sell through the partner’s network and share the profit. Both JV partners can do the same. By exchanging products and services of the partner, they can diversify the product basket and sell it to their existing customers and increase the profit.

Disadvantages of Joint Venture

• It takes time and efforts to form the right relationship.
  
  
• The objectives of each partner may differ. The objectives needs to be clearly defined and communicated to everyone involved.
  
  
• Imbalance in the share of capital, expertise, investment etc., may cause friction in between the partners.
  
  
• Difference in the culture and style of business lead to poor cooperation.
  
  
• Lack of assuming responsibility by the partners may lead the collapse of business.
  
  
• Lack of communication between the partners may affect the business.