What is a key disadvantage to joint ventures as an approach to internationalization?

The advantages of international joint ventures enable businesses from different countries to cooperate and rapidly expand into new markets. With the pace of globalization increasing, international joint ventures are becoming a common phenomenon. American businesses, for example, seek to explore and develop their capabilities to source or distribute goods, services or intellectual property internationally, while non-American businesses wish to access the United States marketplace.

Because most businesses, except for the largest of companies, lack the infrastructure, management, financial resources and required know-how to enter new markets, forming an international joint venture is an attractive option.

International joint ventures aids companies to establish strategic business allianceswhich allows them to access the global marketplace more economically and effectively, and reduce the legal, regulatory, cultural, language and currency differences.

An international joint venture is often described as two or more businesses or business partners based in different countries coming together to form a joint enterprise

The location of the international joint venture is usually where the operations of the venture are or in the country where one of the partners is physically located. In a common international joint venture structure, a foreign company agrees with a local company to share legal ownership and contribute resources, technologies, capital and knowledge to pursue business opportunities together.

An international joint venture has elements of a partnership but is typically formed for a defined purpose or a specific project, and as a result is limited in duration, scope and purpose.

For examples, Company A has production facilities and the technology to manufacture in country A and Company B in Country B needs to create a product and distribute it. A joint venture between Company A and Company B, gives Company B access to the manufacturing facility and manufacturing equipment without having to purchase or lease the equipment, while Company A produces the product Company B developed without incurring  research and development costs.

An alternative to a cross-border business merger and acquisition, an international joint venture is a business strategy often used among companies seeking to reach new foreign customers, a specific consumer market, technology or achieve a common goal. Unlike a cross-border business acquisition, an international joint venture offers the opportunity to explore international trade without taking the full responsibility of a cross-border business transaction and conducting due diligence in a foreign country.

What are the key advantages of an international joint venture?

The key advantages of international joint ventures include:  

• International joint venture provides faster and less costly access to foreign markets than can be achieved by purchasing an existing company or setting up a new venture in the foreign market.
• International joint venture provides access to local reputation, know-how, distribution channels, consumer market, knowledge of the local marketplace, local production facilities or government contracts, among others.  
• International joint venture is a practical vehicle to transfer knowledge, such as technology knowledge or complimentary intellectual property assets between the companies.
• International joint venture limits the costs and risks associated with doing business in a foreign market, especially for small to mid-size business.
• International joint ventures are less risky than acquisition of a company in the foreign market – it offers flexibility when local conditions change or if the market and relationship is unattractive.
• Typically, international joint ventures can be sold to the local partner when conditions prove undesirable.
• International joint ventures can be used to reduce risks associated with political, legal and regulatory environment in the local market.

However, legal agreements are required to create and sustain international joint ventures, in order to a create a prosper, practical, living and evolving relationship between the partner companies.

We successfully plan and prepare incorporated and unincorporated international joint ventures.

Contact us, your international business attorney to help you plan and execute an international joint venture.

Malescu Law – Florida business lawyers

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