A Joint Venture is a legal entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise. The venture can be for one specific project only, or a continuing business relationship such as the Sony Ericsson joint venture. This is in contrast to a strategic alliance, which involves no equity stake by the participants, and is a much less rigid arrangement.
Organizations other than businesses can also form joint ventures; for example, a child welfare organization in the Midwest initiated a joint venture with other child welfare organizations, etc., whose mission is to develop and service client tracking software for human service organizations. The five partners all sit on the joint venture corporation’s board, and together have been able to provide the community with a much-needed resource.
When are joint ventures used
Joint ventures are common in the oil and gas industry, and are often cooperations between a local and foreign company (about 3/4 are international). A joint venture is often seen as a very viable business alternative in this sector, as the companies can complement their skill sets while it offers the foreign company a geographic presence. Studies show a failure rate of 30-61%, and that 60% failed to start or faded away within 5 years. (Osborn, 2003) It is also known that Joint ventures in low-developed countries show a greater instability, and that JVs involving government partners have higher incidence of failure (private firms seem to be better equipped to supply key skills, marketing networks, etc.) Furthermore, JVs have shown to fail miserably under highly volatile demand and rapid changes in product technology.
Advantages to Forming a Joint Venture
- Spreading costs and risks
- Improving access to financial resources
- Potential Economies of Scale
- Access to new or different technologies and customers
- Access to new, different, or innovative management practices
Disadvantages of Joint Venture
- Subject to local laws, if an international venture
- Susceptibility to volatile demands or rapid changes in technology
- High rate of failure, statically