Typically, a joint venture is a business arrangement or activity in which two or more parties consent to using their resources to accomplish a specific task. As an independent organization, joint ventures and partnerships do not partner with other ventures or projects.

Likewise, each partner is equally responsible for the joint venture’s profits, losses, and costs. A joint venture can be formed between any legal entity. A joint venture can be formed by a corporation, limited liability company (LLC), partnership, or any other company. A medium, large, or small company can join forces and form a joint venture to initiate projects and deals as they see fit. Although joint ventures are primarily used for production or research purposes, many businesses opt for them for reasons such as cost savings, combined expertise, and access to foreign markets.

Joint Venture Reasons

Forming a joint venture has four main benefits:

  • Resource Utilization

Joint ventures are advantageous since they combine all the resources of all partners to achieve their goals. One partner may have expertise while another may have a well-established manufacturing facility. In addition to having good distribution channels, other companies also have highly motivated and efficient employees. When all these factors are channeled together, excellent results can be achieved.

  • Reduced costs

Through the advancement of technology, joint venture agreement are now able to increase their production at a lower cost than they would have if they were working independently. They can also save on advertising and labor, which also contribute to cost savings.

  • Complementary expertise

Through this partnership, each company may be able to benefit from the talent of the other partner within their company by combining their expertise.

  • Extend your business abroad

A company may also enter a foreign market through a joint venture with a local company. Those companies that wish to expand their distribution networks abroad can form joint ventures with local businesses in those countries to supply goods.

Joint venture types

Project-Based Joint Venture

In this type of collaboration, two or more partners work together to accomplish a fixed task. As these collaborations are often done exclusively for a specified purpose, they are usually terminated once the project is completed. Joint ventures typically last for a certain period of time.

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Function-based joint venture

It is an agreement between the parties in a function-based joint venture to benefit both of them. In this way, the parties can benefit from each other’s expertise in various areas. By determining if they are able to function and perform efficiently together before entering an agreement, the would-be partner companies are able to work efficiently and effectively together.

Vertical joint venture

A joint venture such as this is one where the transaction takes place between the buyers and the suppliers. Trade on a bilateral basis is not an economically viable option and is known as bilateral trading. Normally, in a joint venture of this kind, different steps of the manufacturing process of a single product are integrated in order to create economies of scale that can be used to reduce the cost per unit of each product produced. Joint ventures of this type are usually very beneficial to the company in the long run. It is important that the relationship between the buyer and the supplier remains good as well. Business prospers, and quality products are offered at a reasonable price to consumers, and the company prospers.

Horizontal joint venture

As a result of this venture, companies dealing with similar products and direct competitors in the market work together to create a product that can be sold to customers of either party. Due to similar/identical businesses, disputes often arise in this joint venture. Also, there is opportunistic behavior. A joint gain is shared by the parties. There is a feeling of resentment over such ventures, despite the cooperation.

Joint Venture Advantages

Joint ventures combine expertise and resources, thus reaping benefits from their partnership. All ventures involve risk. Below are the benefits of a joint venture:

  • Growing together is easier with a joint venture
  • Enhances productivity
  • Gains
  • Partnering allows both companies to use each other’s distribution networks
  • An increase in production
  • Knowledge and expertise are at your fingertips
  • A highly skilled and efficient team
  • Technology and finance resources shared with each other
  • Invest in growth without having to borrow funds from outside
  • For marketing purposes, parties can use each other’s customer databases
  • Joint ventures are very popular with businesses operating overseas.

Joint Venture Disadvantages

In the partnership, some significant risks are associated with liabilities, conflicts, and disputes in the relationship between the partners. There can be several reasons for this, including:

  • The venture lacks clear objectives
  • The partners don’t communicate well
  • A similar disappointment occurred with expectations
  • A discrepancy between the parties’ levels of expertise and investment
  • Work and resources are not distributed equally
  • Due to cultural and management differences, there is no cooperation
  • Inadequate leadership and support
  • Employee conflict.