Joint Venture: Meaning, How It Works, Advantages, Disadvantages

A joint venture is a business arrangement of two or more partners for a specific business purpose. The objective can be in the form of working on new projects or other business activities. Each partner contributes resources, owns shares, and agrees on how they will manage the entity. 

An example is an arrangement between NASA and Google to launch Google Earth.

Difference between a joint venture or partnership

A joint venture is relatively similar to a partnership. In partnerships, two or more partners become joint owners of one business company for profit.

In general, a joint venture has more limited scope and duration. It also involves two or more companies joining together in a business. Meanwhile, in a partnership, individuals join together for a combined venture. 

Furthermore, the partnership will last for years until the parties involved have no difference, while joint ventures will only last for a limited period until partners achieve goals.

How does joint venture work?

Joint ventures are a type of strategic alliance. Two or more businesses form a mutual arrangement. Each party contributes cash, assets, intellectual property, knowledge, or other resources to the entity. Each party agrees on how management, business control, profit, loss, and management will be shared.

A joint venture is a temporary arrangement. It can be short or long term, depending on the nature of the task and the objectives. The agreement can last for 5-7 years, during which a contract will bind each party.

Types

Joint ventures take a variety of forms, including:

• Jointly controlled entity. It involves a new legal entity, where each party has an interest, shared management, and control over economic activities. The new entity controls the assets and liabilities, as well as its revenues and expenses. When partners contribute cash or other assets to the entity, they record this transfer as an investment in a jointly controlled entity.
• Jointly controlled assets. In this arrangement, each party together contributes to the purchase of assets and divides them according to the contract. Each partner receives a share of the asset output and receives a share of the costs incurred.
• Jointly controlled operations. In this arrangement, the partners share equipment and collaborate on daily operations. However, they do not share ownership of assets or management of any economic activity. The contract states how revenues and expenses related to joint ventures should be shared.

The legal structure of a joint venture can take the form of a corporation, partnership (either limited or unlimited liability), franchise arrangements, or distribution arrangements. Each depends on the needs and goals of the parties involved.

Advantages and disadvantages 

The establishment of joint ventures offers several advantages, especially when entering new businesses in foreign markets. The benefits include:

• Access to new markets and distribution networks
• Capacity building through a combination of assets, insights, expertise, and experience from each party.
• Share risks and costs with partners, so reducing the chances of failure.
• Access to more significant resources, including specialized staff, technology, and finance

However, this strategy also has several weaknesses, including:

• Flexibility can be limited. Clashes of corporate culture between participating partners also often arise.
• Objectives are not clear
• It requires a lot of coordination between partners. It also requires substantial time, planning and research to be successful.
• Difficult to leave the partnership because a contract binds them.