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A joint venture (J.V.) is a new corporation formed through the participation of two or more companies in an enterprise in which each party contributes assets, owns the equity (property of the J.V.such as equipment, buildings, capital, etc.) to some agreed upon degree, and shares the risks and benefits of the new enterprise. Joint ventures are not new. In 1879 Thomas Edison teamed up with Corning Glass Works to make his experimental incandescent light bulb. In the 1880's railroads in the United States formed partnerships for large-scale projects. The key to a successful joint venture is sharing of a clearly defined common business objective.
Advantages of international joint ventures:
International joint ventures can be extremely advantageous for all partners since they provide participation to income and growth. Developing countries give joint ventures preferential treatment because they present the desired mix of foreign technological and capital involvement, they guarantee local management, and effect an efficient transfer of technology.
|Advantages of JV's for the international investing company:||Advantages of JV's for the host country and corporation:|
|1) Chance to penetrate a
2) Chance to sell technology, processes, equipment, consulting services, etc.
3) Chance to invest capital and get return streams for many years
4) Take advantage of the expertise in the local market of the host country company
5) Chance for growth
|1) Chance to gain
up-to-date technological and managerial know-how
2) Chance to create new industries, skills, training, etc.
3) Chance for increased employment
4) Chance to get important return streams for many years
5) Chance for growth
A joint venture may be the only way that a firm can participate in a certain market. For example India restricts equity participation by foreign firms in local operations to 40%. Many Western firms are using JV's to get access to Eastern European markets. In the former Soviet Union, 49% foreign equity ownership in JV's is now possible as a result of economic reforms.
An important commercial reason for participating in JV's is to minimize the risk of exposing long-term investment capital while at the same time maximizing leverage on the capital that is invested. In minimizing the risk, the partners in a JV must understand that economic and political conditions in many countries are volatile. Due to this, corporations tend to shorten their investment planning time span more and more by expecting higher return in the early years of the investment. The financial rationale therefore takes greater importance.
|Drawbacks of JV's for the international investing company:||Drawbacks of JV's for the host country and corporation:|
|1) Rapid change in the
host country political or economic situation can create
substantial losses for the investing corporation
2) Differences in culture and management style can create problems between the partners over settlement of claims, valuation of assets and liabilities, etc.
3) Adverse publicity in local and international media can damage the image and reputation of a company.
|1) If the host country is
perceived as a difficult marketplace, foreign investors
may avoid doing business there.
2) The international partner might not deliver on all the promises made.
The financial structure of a JV:
Once the capital required to start a JV is established (based on the initial technology cost, licenses, equipment, buildings, transportation, cost of salaries, permits, etc.), this capital has to be raised in two forms:
This is the total capital portion which represents the ownership in the JV of its partners. Generally about 30 to 40% of the total capital is put as equity, and is issued as stocks to the partners, proportional to their respective share in the JV.
The balance of required capital (70 to 60%) is borrowed from various international banks, investment firms, or private investors. The JV issues bonds which show its debt obligations.
For example: If a JV with two partners needs 100 million dollars to start operations, the partners will put lets say 40 million as equity, and receive stock in the JV. If their ownership shares are 49 and 51% respectively, one will put in equity 19.6 mil. and the other 20.4 mil., or other agreed upon amounts. JV stock will be issued for this money.
The rest of 60 mil. will be raised as debt of the JV from banks, private investors, etc. The JV will issue bonds corresponding to this sum.
The managerial structure of the JV:
The percentage ownership is extremely important, since it establishes which of the partners has the leadership role in a JV. That's why, in many international JV's, American firms insist to have at least 51% ownership, in order to control the Board of Directors (BOD) and the JV management. Of course this is a very political issue, and in many developing countries a foreign investor can own maximum 49% of a JV.
Generally, in function of its size, a JV can have a BOD of 9 to 13 directors, some employed by the JV and others from outside organizations. The Chief Executive Officer (CEO) of the JV is also a BOD member and is nominated by the BOD. The Head of the BOD is also chosen by the BOD.
The number of BOD members appointed by each partner is important, since they tend to agree with that particular partner in case of difficult policy issues.
Managerial control of the JV is extremely important since it sets the production norms and affects all productivity, labor, financial, etc. decisions.
In the GTK-V project you'll have to establish joint ventures and negotiate the ownership and management terms. A thorough understanding of how a JV operates will be essential to successfully complete the GTK-V project.
Responsibilities of the BOD:
The main responsibility of the BOD is to satisfy the stockholders of the corporation, to represent and uphold their interests and concerns to the best of their abilities. The BOD should set policies and oversee the corporation's management and its CEO. A second concern of the BOD is corporate social performance, that is the "good corporate citizen" concept. A third is corporate morality or the ethics of business practices.
Corporate governance models:
The type of BOD and corporate governance chosen by an international JV depends on the following:
The content of a JV proposal/agreement:
The difference between the initial proposal and the final JV agreement between partners is that in-between takes place the negotiation process that establishes the final format of the agreement.
A JV proposal/agreement should address, in sufficient detail to show competence and not to leave any important loose ends, all the requirements outlined in the Request for Proposal (RFP). The main areas that should be addressed are:
The essence of the JV proposal/agreement is to be a document as comprehensive as possible, and to prevent misunderstandings and future conflicts between the partners from the start.
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