Joint venture

What is a joint venture?

A joint venture (JV) is a business venture in which two or more organizations combine their resources to gain a tactical and strategic advantage in the marketplace. Companies often enter into a joint venture to pursue specific projects, which may involve new or similar products or services or the creation of an entirely new company with different core business activities. The joint venture is initiated through a contractual agreement between all parties involved, and the profit and loss of the venture are shared by the participants.

Benefits of a joint venture

A joint venture offers several benefits to its participants. It can help a business grow faster, increase productivity, and generate additional profits.

Shared investment

Each party to the venture contributes a certain amount of initial capital to the project, according to the terms of the partnership agreement, thereby alleviating some of the financial burden imposed on each company.

Shared expenses

Each party shares a common pool of resources, which can reduce costs on an overall basis.

Technical expertise and know-how

Each party to the joint venture often brings specialized expertise and knowledge, which helps make the joint venture strong enough to move aggressively in a specified direction.

New market penetration

A joint venture can enable companies to enter a new market very quickly, as all relevant regulations and logistics are handled by the local player. An international joint venture is an agreement between a company headquartered in country “A” and a company headquartered in country “B” that wants to gain market access in country “A”. With the creation of the joint venture, the companies are able to expand their product portfolio and market size, and the company from country B gets easy access to the market in country A.

New sources of revenue

Small companies often face limited resources and capital for growth projects. By entering into a joint venture with a larger company with more financial resources, the small business can grow faster. The larger company’s expanded distribution channels can also provide the smaller company with larger and/or more diversified revenue streams.

Intellectual property gains

Advanced technologies are often difficult for companies to create in-house. Therefore, companies often enter into joint ventures with technology-rich companies to gain access to these assets without having to spend the time and money to develop the assets for themselves. A large company with good access to financing can bring its working capital strength to a joint venture with a company that has limited financing capabilities but can provide key technology for product or service development.

Synergy benefits

Joint ventures can offer the same type of synergy benefits that companies often seek in mergers and acquisitions – either financial synergy that lowers the cost of capital or operational synergy where two companies working together increase operational efficiency.

Increased credibility

It usually takes a long time for a start-up company to build market credibility and a strong customer base. For these companies, forming a joint venture with a larger, well-known brand can help them achieve greater market visibility and credibility more quickly.

Barriers to competition

One of the reasons for creating a joint venture is also to avoid competition and price pressure. Through collaboration with other companies, companies can sometimes effectively erect barriers to competitors that make it difficult for them to enter the market.

Improved economies of scale

A larger company always benefits from economies of scale, from which all parties in the joint venture also benefit. This refers to the notion of operational synergy.