Topics for exam / JOINT VENTURES

JOINT VENTURES

Joint venture is a corporate entity or partnership created under local law and jointly owned-by the. parent and local interests- It is similar to a. partnership agreement where. each party makes some fixed capital contribution in the form of cash, equipment and technology. Each party has defined management responsibilities. Profits are distributed pursuant to agreement of both parties.

Decision to Form the Venture,

It is important to understand clearly why a company wants a joint venture. Many ventures are poorly conceived and probably should not be formed.

Even if there are sound strategic and economic reasons for the venture, a Western company may lack the necessary skills and qualities to be a good joint venture. The firm's capability and commitment to function in a cooperative mode must be realistically assessed. The first indication of whether or not a company is likely to be a successful joint venture is rts commitment to international business and to working in difficult conditions. It is important to ensure senior management support for the JV.

Before seeking and entering into a JY in a developing country, a company must recognize that developing business in the Third World is a long-term proposition and investment. Overseas travel is expensive and negotiations are slow. In most areas, establishing a personal relationship is a prerequisite to doing business. Technical skills are only part of the package - cultural sensitivity, adaptability, interpersonal and communications skills are also required.

Partner Selection,

Identifying and selecting a partnership is possibly the most consideration in establishing a JV. It may be the most difficult and time-consuming task- Partners are often chosen for short term and political reasons but when the situation changes, relationship often ends.

To be successful, a partnership must operate on the principle of exchange. There must be value in the relationship for both parties. JVs are much more likely to be successful when there exists a long-term need, commitment and compatibility between the partners. Such needs may include raw materials, distribution channels, labor, political connections and local knowledge.

Designing a JV.

Among the decisions to be made by both partners are the equity structure, by whom the venture will be staffed, and who has decision-making responsibilities in which areas. The most important issue is to establish a fair, equitable and workable commercial relationship.

Decision-making can be either shared or dominated by one of the partners. Even when decisions are shared within a JV, they are usually divided between the partners based upon knowledge, skill, experience and understanding of the particular issue.

Expectations and contributions of each partner should be made explicit. The use of a large proportion of local managers rather than expatriates will ensure the foreign parent acquires the necessary knowledge of the local economy, politics and culture. The demand for competent managers is high.

Ongoing Management and Relationship.,

The real work, operating the JV, begins after the partner has been selected and the management structure decided upon. Commitment is necessary for success and is required at each step in the process. There are many facets to commitment: financial commitment; commitment to customer and partner support; to company employees around the world; to understanding the politics, economics and culture of trading partners; to the building of trust and sharing of information and to the building of cooperative relationships.

Commitment is the most important attribute in me on-going management of a JV. A sense of duty to the JV and the partner is the basis upon which problems are addressed and solved, changes made and help provided. Western partners should not take an "arm's length", investment approach to the JV, or manage it as if it were a wholly-owned subsidiary,

A successful JV is a stable, healthy and profitable business relationship based on cooperation and two-way communication that meets the needs of both partners over the long-term period.