International joint venture is a joint undertaking among two or more business entities from different jurisdictions. It means that the concept of joint venture can vary from country to country depending on the domestic law of the country where the joint venture exists. Within the European Union, joint venture agreement can be identified by some common features. It is important to mention that the joint venture aim is to reach a common result for the benefit of all the parties involved, and this kind of agreement lasts for a reasonable period of time. The definition generally refers to the purpose of the entity and not a type of entity. Therefore, as I will present, a joint venture may be a corporation, limited liability company, partnership, or other legal structure.
Joint ventures are common in the oil and gas industry and can often be the co-operations between the local and foreign companies. It is said that 75% of joint ventures are international. A joint venture is often seen as a very viable business, as the companies can complement their skill sets while it offers the foreign company a geographic presence. It is also known that joint ventures show a greater instability in under-developed countries. Also, those joint ventures involving government partners have a higher incidence rate of failure. Furthermore, joint ventures are shown to fail miserably under highly volatile demand and rapid changes in product technology.
Joint ventures can be managed by partners by themselves or by a joint venture broker, who is the one that puts together the two or more parties that participate in a joint venture. A joint venture broker then makes a percentage of the profit that is made from the deal between two or more parties.
Main classification of joint ventures
Joint ventures can be classified in two main groups:
1) Corporate joint venture, with the purpose to start a new business by means of the respective contributions;
2) Non-corporate joint venture (contractual JV), confined to a single operation where one of the parties is the general contractor and the other acts as subcontractor.
On the basis of this classification we can also distinguish:
- operational joint venture - structured as a corporate venture;
- instrumental joint venture - structured as a contractual venture.
To choose one of these structures, we should take in consideration following factors: complexity of cooperation, period of time to achieve the targets, independence of JV's activity, and flexibility of parties.
Structure of the joint venture entity
Choice of the structure is a very important issue for joint ventures. It should be decided carefully if the joint venture should be contractual or corporate and what legal form it should have: partnership, limited liability company, joint stock company, consortium, etc.
The main steps should be also considered in structuring the joint venture entity:
I) Initial contributions of the partners (type of assets, quantity);
II) Future contributions of the partners (decisions, penalties);
III) Choice of Board of Directors (number of members, veto power, deadlocks);
IV) Restriction on share transfer;
V) Rights of first refusal and pre-emptive rights;
VI) Employee stock benefit plan (if stipulated).
The contributions of joint venture partners often differ. The local joint venture partner will usually supply physical space, channels of distribution, sources of supply, on-the-ground knowledge and information. The other partner typically provides cash, key marketing personnel, certain operating personnel, and intellectual property rights.
A company forming an international joint venture will often partner with one of its customers, vendors, distributors, or even one of the competitors. In the latter, two or more competitors create a new entity that carries out some activities instead of the partners. An example of this kind of joint venture could be a research joint venture: when two or more partners cease doing independent research and development to do it together, within a new entity jointly set up. There are also many other possible activities that could make the object of joint venture, such as:
- manufacturing of foreign parent's products,
- marketing and distribution of foreign parent's products,
- sales support for independent representatives or distributors,
- engineering support, service and repair.
These businesses agree to exchange resources, share risks, and divide profits from a joint enterprise, which is usually physically located in one of the parents' jurisdictions.
International joint ventures are becoming more and more popular and give the partners new ways to make profitable investments.