Pros and Cons 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