What are the benefits of international joint ventures?

Most businesses are eager to expand internationally but worried about how complex it can be. An international joint venture can be the way to overcome a lot of the difficulties of international expansion and gain credibility in a new market.

What is an international joint venture?

An international joint venture is a partnership between two or more businesses from more than one country. This partnership can take many forms depending on the skills, resources, and expertise of the contributing businesses from the respective country. A business could buy into another company, or create a new temporary company for their project or services.

Choose an international partner wisely; your company will be linked to their reputation and knowledge. Research partners before you sign an agreement to ensure the joint venture is profitable and doesn’t harm your company. A good partner can help you gain a foothold in the local market and give you access to quality local employees, manufacturers, distribution services, and a customer base.

Because a joint venture is a fixed-term agreement, it is less risky than acquiring a local company. The partners share expenses, capital, and liability as well as assets and revenue. Some companies enter into a joint venture with an option to buy agreement if the venture is profitable.

When considering an international joint venture, prepare the following things:

• Objectives and strategy

  Come to an agreement of how much control each party has and which decisions need partner approval. What processes and policies must be in place? How much oversight must each partner provide? Will you hire employees specifically for the joint venture, or will each partner provide employees? How will you provide essential functions?

• Joint Venture Partnership Compatibility

  Does your business culture match with your partner’s? Do they have a good local reputation? What is your partner’s risk tolerance? How much are they willing to invest in the joint venture?

• Operational clarity

  Who will employees report to? How will disputes be settled? How will you measure success? Who will make investments? What investments will be made? The international joint venture agreement has to be clear on operations.

Disadvantages of intentional joint ventures

• Joint ventures can be fragile – If company cultures are different, it can cause disputes. Disputes about control and decision-making are common if there is not a clear contract to begin with. Define who has the ultimate say in any disagreements about particular issues. Agreeing on the operational, financial, and ethics policies in advance will be beneficial.
• It is difficult to find balance – Striking the right amount of oversight is crucial to the joint venture’s success.

Joint ventures are by nature short term agreements, but the cooperation of two businesses with different goals and objectives means they are doomed to be short-lived. The shared resources and knowledge can mean your partner becomes a strong competitor after the joint venture dissolves. Ensuring your intellectual property is protected before entering into a joint venture is crucial.

Hiring an expert business lawyer will ensure your business interests are protected in a joint venture. The financial, compliance, tax, and employment issues need to be considered.

A joint venture will make sense in the following scenarios:

• You have identified a marketplace with great potential and a strong partner
• The local market requires a joint partnership for foreign businesses
• You have experience in expanding internationally
• You can balance risk and control while operating in an effective partnership
• You can afford to invest the resources and capital necessary for the joint venture
• You are looking to reduce risk when making local acquisitions

Properly chosen and implemented, joint ventures can be a way for your small business to get in on opportunities (and profits) that otherwise you would miss out on. They're like diamonds on the beach. You see the diamonds lying on the sand but try as you might, you can't pick them up – until you team with someone else who knows the trick of scooping them up.

Key Takeaways

• Joint ventures (JVs) are a strategic alliance, where business can pool their resources and expertise to achieve a goal
• Advantages of JVs include shared costs, access to more resources including capital, labor, assets and expertise.
• Joint ventures are different from partnerships because JVs do not involve any sharing of ownership of the venture.
• In the U.S., joint ventures are taxed in the same way as partnerships

What Is a Joint Venture?

A joint venture is a strategic alliance where two or more people or companies agree to contribute goods, services and/or capital to a common commercial enterprise. The contributions can include resources such as capital, labor, or assets, skill or expertise such as experience and knowledge.

Joint Venture Advantages

By teaming up with other people or businesses in a joint venture, you can:

• Extend your marketing reach
• Access needed information, resources, and skill sets
• Build credibility with a particular target market
• Access new markets that would be inaccessible without the partner
• Access technical expertise and know-how that your company may be lacking
• Access intellectual property that would otherwise be out of your reach
• Access new revenue streams
• Share risks and expenses

Note

Joint ventures allow allow for businesses to get together and compete for government contracts specially reserved for small businesses.

For instance, suppose you and five other potters form a joint venture to hold a Potter's Fair on a particular date. Because you pool your resources, you're able to do much more advertising and promotion than you would be able to go alone, bringing out crowds of customers for your joint event.

Joint Ventures Vs. Partnerships

At first thought, a joint venture sounds like a partnership, doesn’t it? But legally, joint ventures and partnerships are not the same thing, they're two distinct forms of business ownership. In a strategic alliance there is no exchange of ownership between the companies involved.

The main difference between a joint venture and a partnership is that the members of a joint venture have teamed together for a particular purpose or project, while the members of a partnership have joined together to run "a business in common".

Each member of the joint venture retains ownership of his or her property. And each member of the joint venture shares only the expenses of the particular project or venture.

Note

In the U.S., joint ventures are taxed in the same way as partnerships. However, a married couple running a joint venture together, can treat each spouse as a sole proprietor for tax reasons if they elect to file as a qualified joint venture.

Examples of Joint Ventures

Agriculture is a business that is well suited to to joint ventures. As the cost of land, equipment, and supplies continues to increase, smaller farms are under pressure to increase the size of their operations to take advantage of economies of scale.

By grouping multiple small operations in a joint venture, farmers might, for example, be able to share expensive pieces of equipment that may be idle part of the time, rather than each individual farmer having to purchase the same tractors, combines, etc.

Or a biotech company might team with another to share the cost of research.

Note

A small business may be able to expand more quickly by getting into a joint venture with a company that has more financial resources.

But almost any business is capable of leveraging the power of joint ventures. For instance, or Google and NASA developing Google Earth.

The key to getting the advantages of joint ventures working for your business is to identify another business or businesses that would benefit from the same project your business will benefit from.

How to Start a Joint Venture

While there are many advantages to setting up a joint venture to boost your business, research from McKinsey suggests that a big chunk of JVs don't last. So, take your time before you team up with another business and consider taking the following steps.

Set Goals and Expectations

The first step to creating a joint venture is to set your goals and decide what you want your joint venture to do. If you need help getting started with this, look at the four things a joint venture can do that I've listed at the beginning of this article, pick one, and then develop a goal that is as specific as possible.

Seek Like-Minded Partners

Then it's time to look for the like-minded - people or firms that might be interested in the same goal or goals you want to pursue. Look in the business groups you already belong to, both in person and virtually. Use your social networking connections. Study business listings on websites and social media to find those that might share your goals.

Do some background research on potential candidates and ask the following questions:

• Do they have resources that complement yours?
• Are they financially secure?
• Do they have a good reputation with customers and other businesses they may be involved with?

Be Open to Possibilities

Be open to being asked. Once you start talking to other people about what you might do together, a joint venture idea you haven’t even thought of might pop up - one with a lot of potential.

Professional Help and Paperwork

Once you've found the people to share in a joint venture, be sure to have it all put into writing in a joint venture agreement. It is strongly recommend that you hire a legal professional to do this. The agreement should cover issues such as:

• The goals and structure of the joint venture
• The management structure - roles, responsibilities, and decision making
• The financial obligations of each participant
• The division of profits, losses, expenses, liabilities, etc.
• How disputes should be resolved
• The ownership and protection of intellectual property
• Termination of the joint venture

The Bottom Line

So instead of dismissing an opportunity as out of your reach, start thinking instead about how you could participate with a joint venture. Properly planned and executed, the advantages of joint ventures can help your small business go where it's never been able to go before.

Frequently Asked Question (FAQs)

What are the advantages of a joint venture with a foreign firm?

Joint ventures with foreign entities are a common way for businesses to break into international markets. If you're a small business partnering with a foreign firm looking to enter your market, you can benefit from their expertise, technology, or business practices. If you are entering into a JV with a foreign firm in an international market, you could benefit from their understanding of the local market, rules and regulations as well as their supply chain.

What are the advantages of a joint venture of non-profit and for-profit companies?

A joint venture between a non-profit and a for-profit entity can be beneficial to both. the for-profit entity can garner goodwill. The not-for-profit entity can gain more resources for their charitable cause, they can gain an alternate revenue source as well as capital and expertise. But there's a big catch. The non-profit must ensure that its joint venture does not run afoul of IRS rules and that its assets protected and its tax-exempt status is not lost.