Meaning of Joint Venture Ι Characteristics of Joint Ventures

Meaning of Joint Venture Ι Characteristics of Joint Ventures.

Meaning of Joint Venture

The term ‘JV’ is an umbrella term that describes the commercial arrangement between two or more economically independent entities.

In practice, the legal form of a JV is likely to be determined by a number of factors including the nature and size of the enterprise, the anticipated length of the venture, the identity and location of the partners and their commercial and financial objectives.

 Example

Mahindra & Mahindra and Renault decided to join forces to produce and commercialise Logan in India. The state-of-the-art Logan facility in Nashik offers a body shop, stamping shop, a paint shop with top quality pre-treatment and an assembly line specific for Logan.

Characteristics of Joint Ventures

  • JVs are basically not inactive investments. The parties provide skills as well as money.
  • JVs are basically a particular business project rather than a long-term bond between the partners.
  • JVs are not the major activity of the concerned parties who have core businesses to which the JV is an aide. JV is a combined extension of its commercial activities.
  • The relationship between the participants is almost consistently regulated by a written agreement called a JV Agreement (JVA).

 Explanation of rationale for JVs

  • To supplement insufficient financial or technical ability required to enter a particular line of business.
  • To share technology and general management abilities in organisation, planning and control.
  • To diversify risk.
  • To gain distribution channels or raw material supply-chains.
  • To attain economies of scale.
  • To outspread activities with a smaller investment than if done independently.
  • To take benefit of the favourable tax treatment or political incentives.

Explanation of alternatives to JVs as expansion strategy options with example

Strategic alliances, in the form of partnerships, licensing arrangements and plain alliances are viable alternatives to JVs as the route for business expansion and/or diversification. But the format of each of these options has notable differences. 

  • Partnerships are Special Purpose Vehicles (SPV) set up by two independent entities for a specific purpose.
  • Licensing arrangements are adopted for similar short-term ad hoc purposes. An entity with an income-producing asset licenses the asset to be used for the purpose of working the asset to generate revenues and net incomes.
  • A strategic alliance is when two or more businesses join together for a set period of time..

Example

Walmart Stores (Walmart), the world’s largest retailer, and Bharti Enterprises (Bharti), a leading business group in India, signed a Memorandum of Understanding (MoU) to explore business opportunities in the Indian retail industry.

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