Joint Venture: Meaning, Types, Advantages and Disadvantages

In a joint venture, more than two parties agree to combine resources to complete a specific task, which could be a start-up or any commercial activity. It may be restricted to a single project and thus time-limited, or it may be a plan to operate a particular form of business as a continuing concern and thus not time-limited. 

In the case of a time-limited agreement, the venture ends when the project it is based on is completed. Given that most joint ventures are for little time, assigning them names might not be a bright idea. Therefore, a joint venture may not have a specific name for itself. Profits and losses from this endeavour are the collective responsibility of all participants. Joint ventures, which function more like partnerships, can have any organisational structure. Joint venture businesses, their varieties, qualities, advantages and downsides will all be discussed in this article.

Did you know? 

Businesses in the transportation and travel sectors that operate across borders frequently form joint ventures.

How Is a Joint Venture Formed?

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A joint venture may be formed in any of the following manners. When a local company wants to expand into new markets, it can buy some stake in an already established foreign corporation, or vice versa, when a foreign company wants to enter a new market by acquiring equity in a local company. However, a new firm could be created if the coventurers decide to launch a brand-new business venture. 

The government occasionally forms partnerships with businesses to benefit from their knowledge and experience. The joint venture‘s participants are sometimes referred to as coventurers. If it is a long-term joint venture, the books of accounts can be kept separately; but, if it is a short-term joint venture or the amount of the activities is not very large, the books of accounts can also be integrated with those of the coventurers.

Types of Joint Ventures

The most significant joint venture models used by businesses are as follows:

1.  Project-Based Joint Venture 

• A venture focused on a specific project brings parties together to work toward a common goal. 
• This joint venture involves a firm entering into an agreement to carry out a particular task; the mission could be anything, such as the execution of a specific project or an exceptional service that will be provided jointly.
• Companies often engage in these collaborations for a single, distinct reason, and they end once the targeted project is completed. 
• They are the kinds of joint ventures constrained by a specific goal, for a particular project, or by time.

2.  Vertical Joint Venture

• It is a joint venture in which the parties are at different stages of the same product and have chosen to collaborate as a joint venture. 
• This joint venture involves a transaction between the suppliers and the purchasers. It is typically referred to as bilateral trade and is not a financially viable choice. 
• The provider-side parties in these joint ventures usually receive the highest profit, while the client-side parties only receive a certain amount of games. 
• In this joint venture, many steps in the production of a single product are integrated to achieve economies of scale, which decreases the cost per unit of goods by streamlining the entire process. 
• This joint venture typically has a greater success rate and favourable ties between the client and provider.

3.  Horizontal Joint Venture

• A horizontal joint venture is a sort of joint venture in which rival parties opt to work together.
• This kind of cooperative venture involves businesses that are fierce rivals and market comparable goods. 
• They join forces in a partnership to produce a product that can be offered to both their customers and the customers of the rival company at the same time. 
• Since relationships between the parties in the same field of business have formed, the management of this joint venture is particularly demanding and frequently results in disagreements. Additionally, because the partners in this joint venture operate in similar industries, the parties experience opportunistic behaviour. 
• Gains made by this partnership in the joint venture are split evenly or by the terms of the agreement.

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4.  Functional Based Joint Venture

• It is a joint venture that is functionally based on those in which the parties join forces to gain from their complementary strengths. 
• This joint venture brings together two or more business entities in an arrangement for mutual benefit, or mutual based on synergy, which is functional expertise in one or more areas that can help the business entities work effectively and efficiently. 
• Before entering a joint venture agreement, organisations should consider if they can effectively do the same task as a team.

5.  Limited Co-Operation Joint Venture

• When a small firm with a new product wishes to sell it through the distribution network of a larger company, this results in the merger of businesses. 
• It is an example of collaboration with another company in a specific method. 
• The two partners decide on a contract outlining how these operate.

6.  Separate Joint Venture

• A different joint venture business is created when a new company manages a contract to establish a particular joint venture business. 
• Each company has a specific share in the industry, and they all concur on how it should be run.

7.  Business Partnership

• It is a type of merging of two businesses by joining a limited partnership or business partnership. 
• Other business entities, such as corporations, partnerships, limited liability companies, and others, can endure as a joint venture.

Advantages of Joint Ventures

• The parties can expand their distribution network and access new markets by selling their products.
• One can make better use of the resources.
• The parties will benefit from one another’s knowledge, skill, and specialised personnel.
• You can distribute your other commodities in the marketplaces that have recently grown.
• The business’s associated expenses and risk will be split.
• Improved R&D department because of more resources.
• Utilising the help of the partner to offer your clients services.

Disadvantages of Joint Ventures

• Early on, there is a shortage of leadership and support.
• Resources and labour are not distributed equally.
• The managerial styles and cultural differences between the two or more enterprises could hinder the joint venture’s success.
• In a joint venture, one company may be in a stronger position, and as a result, the other side may not offer the same degree of R&D knowledge.
• Due to their varying management styles, all communication that should occur between the partners may not be beneficial.
• The goals of the joint venture aren’t always obvious.
• The joint venture contract may impact the partners’ core business due to the joint venture’s contractual requirements.
• The partners’ expectations for the joint venture are divergent, and their interests can conflict.
• The level of investment and experience might not be a good match.
• Various cultures and management philosophies could create barriers to the organisation.
• The partner’s core business units may be at risk due to the contractual restrictions.

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Conclusion

In this article, we learned that access to new markets, distribution networks, and capacity could all be provided by a successful joint venture. Access to additional resources, including specialised employees, technology, and financing, as well as the sharing of risks and costs with a partner, are also provided by joint venture. Additionally, a joint venture may be very adaptable according to the situation. For instance, a joint venture may only last a short time and only apply to a portion of what you do, reducing both partners’ commitment and the risk to the company.

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