EID-372 -> Resources -> Joint Ventures Information

Joint Ventures Information:

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 new market 1) Chance to gain up-to-date technological and managerial know-how
2) Chance to sell technology, processes, equipment, consulting services, etc. 2) Chance to create new industries, skills, training, etc.
3) Chance to invest capital and get return streams for many years 3) Chance for increased employment
4) Take advantage of the expertise in the local market of the host country company 4) Chance to get important return streams for many years
5) Chance for growth 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 1) If the host country is perceived as a difficult marketplace, foreign investors may avoid doing business there
2) Differences in culture and management style can create problems between the partners over settlement of claims, valuation of assets and liabilities, etc. 2) The international partner might not deliver on all the promises made
3) Adverse publicity in local and international media can damage the image and reputation of a company  

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:

  1. Equity:
    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.

  2. Debt:
    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:

  1. The local legal, economic, and managerial conditions and customs of the host country
  2. The type of industry the company is involved in
  3. The formal and informal structure of the parent companies

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:

  1. The scope (purpose) of the JV: The exact, clear business reason(s) for creating the JV should be defined. The input to the JV of each partner as far as technology, assets, capital, expertise, goodwill, etc. should also be stated.
  2. The financial structure of the JV: The total start-up capital requirements and the expected revenue streams for the next five years should be calculated. The start-up capital should be calculated in such a way as to cover all the expected expenses till the time when the revenues generated by the JV can be utilized. The total equity and debt percentages should be established. The % equity contributed by each partner, based on his ownership share, should also be defined.
  3. The managerial structure of the JV: The proposal/agreement should clearly spell-out which of the partners will have the leadership role in the main managerial decisions and for how long. Who will nominate the CEO, how many directors will be nominated to the BOD, and how many by each partner. How the head of the BOD will be elected.
  4. The environmental impact of the JV: This important aspect of operations should be addressed. If the impact is significant (i.e. liquid, gaseous, or solid toxic or harmful wastes, depletion of the natural environment, etc.), a separate environmental study to mitigate all the environmental effects is required.
  5. Technology transfer and worker training: The specific technology transfer of the JV, its time frame, and the types of worker training to be undertaken should be clearly discussed.
  6. JV dissolution terms: If the JV dissolution or change in ownership is contemplated at a later date, the terms under which one partner can buy the other out should be mentioned.

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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