Joint Ventures
If a business entity is looking for further flexibility and has an ability to adapt to a changing mission or goal with its participants, then the entity should consider forming one of many types of strategic alliances like joint venture. This strategic alliance is a cooperative effort with two or more participants towards an agreed goal. The cooperative effort can take several forms and can be comprised of any or all of the following: technology, licensing arrangements, research and development agreements, manufacturing relationships, sales and distribution agreements and equity investments. A strategic alliance may take on the form of a joint venture by forming a separate distinct entity, but typically strategic alliances are created through contractual arrangements.
Advantages and Disadvantages of Joint Venture
The creation of a joint venture or any other type of strategic alliances can open new opportunities for any business that is looking to expand and grow. However, with these new opportunities can come additional burdens and risks and that should be considered.
Advantages
i. Access to new technologies:
Access to the latest technologies is definitely what all the companies need to grow their business and to enter into the global markets. A joint venture or strategic alliance can provide a growing business with technology from a participant that it will not otherwise be able to develop due to costs, resources or time constraints. The right new technologies can provide the new business with a spring board into new markets and products.
ii. Cost Reduction:
Usually it is not possible for one company to do it all, but a joint venture or other strategic alliance may be able to provide a growing business with the technology, manufacturing or distribution capabilities that it could not otherwise afford. This sort of partnership allows the combination of collective strengths that makes it more likely for all participants to succeed. At the same time alliances may also free up capital for use in other markets and activities.
iii. Learning Opportunities:
Forming an alliance permits the participants to work with other businesses in the same or related industries. This provides participants with the opportunity to learn from each other’s successes and mistakes. It may also lead to a regular transfer or collaboration of information, business practices, operational processes and technology.
iv. Tax Transparency:
Tax transparency or “pass through” ( with profits and losses being treated directly as those of the partners in their proportionate shares) may be advantageous for tax planning purposes and may enable the partners to obtain more effective tax relief or capital expenditure or losses.
v. No Public Filing:
The lack of any need to incur publicity or expense in making filings with any regulatory body ( such as the companies registry) can be an advantage.
Disadvantages
i. Loss of Competitive Advantage:
An alliance with an actual or potential competitor, as is often the case with alliances may jeopardise the cooperative advantage that the business might otherwise have developed in the absence of the relationship. The growing business must determine before entering into an alliance whether such opportunities and goals can be achieved without the assistance of the competitors or whether the price of such opportunities and goals in excessive in light of the overall objectives of the business and entity.
ii. Lack of Control:
No matter how the alliance is structured, participants inevitably will lose some aspect of control over the project. In order for participants to gain, they must also give something up, which is usually control of some aspect of their business and, in turn, rely on the other participants. Therefore, it is important that participants simultaneously;
- Structure the management of the alliance in such a manner as to retain as much control as possible without stifling the project and
- Conduct due diligence on the participants to ensure a level of trust to ensure a level of trust amongst them.
iii. Governmental Relations:
Alliances may be formed with foreign entities that can lead to substantial opportunities for a growing business. But such alliances must also be mindful of local regulations and government review procedures that may impact the activities of the participants. For example, the European Union strictly regulates joint ventures for possible antitrust violations.
iv. External Finance:
A strategic alliance provides fewer ways of obtaining external finance compared with a corporate entity.
v. Liability:
The disadvantage is the joint unlimited liability of each partner for liabilities incurred by the alliance or by any partner acting within the express implied scope of strategic alliance business. Liability is not limited to the capital contributions of the parties . However, the difficulties which unlimited liablilities might cause can largely be mitigated in practice by establishing a strategic alliance between companies.
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