Joint ventures are the most important form of international business organization in any country. Joint ventures can take the form of licensing or joint ownership.
Licensing gives foreign participants (enterprises) the right to the process of production, use of trademarks, or patents of trade secrets in exchange for commissions or royalties. A production contract is an agreement with a foreign company under which the latter produces its products in a given country and the national enterprise markets the finished products and provides management experience.
When concluding management contracts, the national enterprise acts as a consultant to foreign companies. When jointly owned, the national enterprise agrees to produce and sell products in partnership with the foreign company to reduce new costs and share risk.
Any enterprise operating in the production or marketing of products must be fully aware of the consequences of establishing an enterprise abroad with the participation of a foreign partner. These traces are of a long-term nature. Therefore, it is advisable to establish joint ventures, of course, if the prerequisites are met. These may include, but are not limited to:
- the industrial enterprise in question does not have sufficient capital or production staff to carry out its own operations abroad;
- the enterprise has the opportunity to cooperate with a firm that already has a strong market position;
- The enterprise does not have at its disposal sufficient raw materials, supplies or components to significantly expand the production of competitive products;
- The enterprise does not have modern equipment and technologies, but has sufficient manpower, materials and raw materials to produce modern competitive products, which can find a wide market in the country where the enterprise is located.
In some countries, the law prohibits the organization of enterprises wholly owned by foreign representatives (direct ownership), so the establishment of joint ventures when entering the domestic markets of these countries is mandatory.
The main advantages of joint ventures can be grouped as follows
Joint ventures are most beneficial for small enterprises that want to enter multiple markets, but do not have sufficient financial capacity to do so.
Most often, such an enterprise does not have the staff corresponding to the international requirements, and also does not have the information about the situation and capacity of external markets, positions of competitors, etc.
In fact, such an enterprise offers its technical knowledge in exchange for a number of other attributes missing for its successful foreign trade activities.
In case of lack of financial resources, this enterprise may have several foreign partners, and it implies the release of shares of the enterprise for free sale.
However, it should be remembered that it is only possible to retain control over such a joint venture by retaining more than 50% of the share capital.
Entering a foreign market is significantly easier if a local company participates in a joint venture. For a number of countries, joint ventures are the only way to work in the local market.
A joint venture can be particularly effective if it has an experienced intermediary, a well-established system of customer relations and a strong business reputation in its marketplace.
In times of economic crisis, joint ventures can significantly help the national industry to overcome difficulties, which is particularly important for the domestic economy.
It is clear that joint ventures are also characterized by certain disadvantages. Therefore, before implementing its idea, it is necessary to assess both possible advantages and possible negative traces of joint work. Among the latter, special attention should be paid to the following:
1. When setting up joint ventures, the exporter often overlooks the fact that it contributes to the development of production and the training of production and management personnel, possibly their future competitor. Such consequences are also possible when technical knowledge and skills are transferred to foreign firms with large financial resources and human resources.
2. Nor should the national characteristics of the partner country be overlooked. Addressing the country’s interests as a representative of the foreign participant in the joint venture requires a great deal of diplomacy and tact. In cases where there is a conflict of interest between the partners, misunderstandings arise. Therefore, all forms of international business relations should be carried out by highly qualified and professionally trained people.
3. Participants in a joint venture may also be owners of other enterprises whose products are marketed in the same markets, often under a very different brand. In this case, it is possible to compete with the products of the joint venture.
4. When setting up a joint venture, a foreign participant often contributes securities (shares) rather than cash. This point should be closely monitored, because in the case of an approximate equality (e.g. 51% and 49%) at face value, the actual value of the exporter’s share may be significantly higher if the share price is now higher than the face value.