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
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
|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
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
|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:
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
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 traditional model of corporate
governance, prevalent in the U.S., holds that the
shareholders' rights are paramount. The shareholders own
the corporation, elect the BOD, which acts as an
intermediary between the shareholders and the management
of the corporation. The BOD appoints the officers who run
the corporation on a daily basis. Management exercises
its authority over the firm's employees in order to
achieve the corporate objectives. In this type of
organization the main emphasis is on stockholders'
interests. management is more concerned with production
and and their own rewards. Employees are concerned with
wages and benefits. The model relies on the ability of
the CEO to run the company efficiently and effectively.
- The codetermination model is a
two-tiered system in which there is a division between
supervision and management. This system originated in
Germany and has spread in many European countries. the
codetermination, or European model, maintains that both
capital (shareholders) and labor should be represented in
the process of corporate governance. Representatives of
both ownership and the employees comprise the BOD. One
practical version of this model promotes a two-tiered
structure, with a supervisory board and a management
board. The supervisory board oversees the operation, and
the management board is involved in the daily operation
of the corporation. The supervisory board has ultimate
authority in that it can select and dismiss members of
the management board. The major feature of this system is
that it makes a clear distinction between those who
manage and those who monitor. this results in a system of
checks and balances which avoids conflicts of interest.
- In the stakeholder model of
corporate governance, all constituencies that have a
direct stake in the performance of a corporation are
represented in the governance process. The constituents
include more than just the employees and owners. The
interests of all stakeholders such as employees, major
customers, major suppliers, major creditors,
environmentalists, bankers,and other affected parties are
represented on the BOD. Objectives are achieved by
balancing the often-conflicting interests of the
different constituents. The participation of these
various stakeholders groups in the governance process
ensures that a wide range of interests will be taken into
account in corporate decision making.
The type of BOD and corporate governance chosen
by an international JV depends on the following:
- The local legal, economic, and managerial
conditions and customs of the host country
- The type of industry the company is
- The formal and informal structure of the
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
- 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.
- 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.
- 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.
- 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.
- 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.
- 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