Joint ventures are common ways to combine the resources and expertise of two companies that would otherwise be unrelated. Joint ventures (JVs) can be structured in many different ways and are often formed for different reasons. These may include pooling financial resources or pooling knowledge.
It is always prudent for enterprises to share risk and rewards. Establishing a joint venture is business expansion, product development, or access to new markets, especially overseas.
Having innovative ideas and products may boost your business’ growth potential. For this reason, a joint venture is a feasible and significant step on the path to starting a business. In contrast to a partnership agreement, a project agreement focuses on just one project.
This article will explain the disadvantages of a joint venture arrangement when entering a new global market. Let’s get started;
What is a joint venture?
It is defined as an agreement between two or more companies to come together for a particular project or service. The duration of the agreement and the resources included in it vary. Participating companies usually agree to split any profits generated by the venture.
To pursue specific projects, the industry often enters into joint ventures based on each company’s goals. A JV may involve creating a new firm with different core business activities or launching a new venture with similar products or services.
Those involved in a JV bear responsibility for their profits, costs, and losses. It is, however, an independent entity apart from the other business interests of the participants.
Types Of Joint Ventures
What you are trying to accomplish from your venture depends on how you structure your joint venture.
An option would be to join forces with another business for a limited and specific purpose. Small businesses might wish to sell their exciting new products through the distribution network of a larger company. Possibly, this could be outlined in a contract between the two partners.
To handle a specific contract, you might want to establish a separate joint venture, perhaps a new company. Such a company can offer a great deal of flexibility. Each partner owns a share of the company, and the partners decide how it is run.
Business corporations may not be the best option for all circumstances. A business partnership, for example, could be a better option. You may even consider merging your businesses completely.
If you want to manage a joint venture, you should consider what type of joint venture is best for you. It is also essential to consider what might happen if the venture fails and how much risk you are prepared to take.
You may want to obtain legal advice to determine the best option. Depending on how you set up your joint venture, you’ll be able to control how it functions and share and tax the profits. Your arrangements will also determine how much you’re liable for if something goes wrong. It is essential to have a legal agreement detailing how the joint venture operates and distributes the income.
What is the cause of joint venture failure?
The most common cause of joint venture failure is that the partners are not “right fits.” This may be due to different expectations of their role and the purpose of the venture. Making strategic decisions for the international partner is often viewed as their role. On the other hand, the local partner refuses to give up control and expects a passive partner.
Foreign investments have often been hampered by complex regulations that make them difficult to operate or enforce. As a result, international parties and their local partners develop structures that keep control in the hands of the local partners to comply with local restrictions but aim to shift control or economic responsibilities to the international party.
This only leads to greater vulnerability for the foreign partner.
A lack of shared vision about the exit strategy from the investment can also cause problems. An acute problem arises when a private equity fund is one of the partners looking to make money from its investment in the medium to long term. Many local partners don’t see the venture as a long-term partnership, leading to deadlock or litigation as the need to exit and monetise conflicts.
There is also a strong impact of cultural differences on joint efforts.
The Disadvantages Of A Joint Venture Arrangement
Now let’s learn about the disadvantages of a joint venture arrangement;
There Can Be A Limit On Flexibility
In a joint venture, there are times when flexibility is limited. Participating in a joint venture requires participants to focus exclusively on that joint venture, which damages their individual businesses. That’s not good for the joint venture. A better way to handle these situations is to set up a compensation mechanism that can smooth out the impact of such restrictions on individual businesses and help everyone in the joint venture do their part and focus on sales and profits.
Unbalanced Situation
Because there will be different companies working together, there is a chance of a significant imbalance of expertise, assets, and investments. As a result, the joint venture may not be as effective as it could be. To find sufficient expertise, assets, and investment for the joint venture to be effective, you need to research the companies involved in it.
Reliable Partners Are Hard To Find
Joint ventures are primarily concerned with the relative power of their partners. Joint venture partners have a chance of not giving a 100 per cent commitment to the project due to their different nature. Joint ventures are susceptible to problems if one partner has more influence than the other.
Unclarity in communication
Due to the fact that joint ventures often involve different companies with different goals, a severe lack of communication between partners results in the venture failing. When partners fail to communicate, one might pull out, leaving the other with more than they bargained for.
Opportunities outside the company are limited
When joint venture companies work on a project, they are typically restricted from engaging in outside activities. It is essential to understand what you are getting into to avoid negatively impacting your entire business. For example, if a joint venture is working on a project that requires outside funding, one of the companies may be restricted from raising money from outside investors. This would require the company to focus on the venture project to invest in other unrelated products and services.
FAQs
What are the disadvantages of market competition?
When there is a limited demand for your products or services, competition will decrease your market share and shrink your customer base. As a result of a competitive market, you might need to lower your prices to remain competitive, resulting in a decreased return on each item.
What is the disadvantage of international trade for developing countries?
International trade also poses an environmental risk for countries making international trade since developed countries sometimes export harmful products to developing countries, resulting in environmental damage.
Conclusion
Due to competing commercial needs and priorities, joint ventures require a high level of collaboration and cooperation. Without appropriate planning and expert advice, these competing features may be put under particular strain during these challenging and uncertain times.
An interesting joint venture example is the development of the planet Mars by NASA and private industry. NASA funded a mission to explore Mars in 2001 but did not have enough money to land humans on the Martian surface. As a result, NASA established a contest for organisations (companies, universities) to design and build an automated rover that could roam on the red planet.
The law of joint venture partners is not always clear, and in some cases, the remedies for breach of contract are limited.
