Introduction
One popular method multinational companies (MNCs) use to venture into foreign markets is foreign direct investments (FDI). FDI has many constructs, but at the core of its existence are joint ventures or strategic alliances that companies build with each other to overcome the challenges of entering into new markets (Cai et al. 2015). Joint ventures could happen in different ways. One of them is when foreign companies collaborate with a local company that already operates within the desired market. The second one occurs when foreign companies collaborate with another foreign company that also wants to operate in the market where the joint venture is intended to serve (Beamish 2013). However, some of these strategies have unique challenges and considerations that need to be explored before firms commit to using them.
This paper analyses key constituents and considerations of the joint venture/alliance strategy in international business. It is in two parts. The first one is exploratory because it highlights the essential features of a joint venture and explains some of the problems that participating companies are likely to experience. In the same section of the paper, some key issues that firms need to consider when evaluating the suitability of other companies in a joint venture strategy are analyzed. Collectively, the first part of the analysis highlights the main considerations foreign companies have to look out for when seeking joint venture agreements with other companies. The second part of this paper explores what they may have to review when exiting such venture agreements. In other words, it contains discussions about what companies have to examine when exiting joint venture agreements, especially if they intend to maximize their shareholder value. Overall, this study aims to understand the intricacies surrounding the joint venture as a viable foreign market entry strategy in global trade.
Essential Features of a Joint Venture
Joint venture agreements have unique features that are identifiable to any player in the global market. One of them is the presence of a contractual agreement between two or more parties (Dong et al. 2014). Such agreements outline specific legal responsibilities for all partners involved and are often registered for a specific business purpose. The second essential feature of a joint venture is the presence of a specific purpose and a limited duration of the partnership (Cai et al. 2015). Indeed, joint venture agreements are established with a specific objective because they involve the deployment of assets that are also limited in nature and service life (Jiang & Li 2014). At the same time, most of the services or products that emerge from joint venture agreements have limited efficacy (Dong et al. 2014).
Joint venture agreements also have a common property interest that binds all parties involved (Yue & Zhu 2014). This feature states that all the parties involved should contribute some type of resource for the pursuit of common interest. Based on this arrangement, contractual relationships are not only legally binding, but also designed to achieve an intended goal, such as forming a new enterprise, or a limited liability company. Within this partnership model, the joint venture agreement means that the associated parties assume a common position, in terms of the subject matter of the agreement and the assets involved (Dong et al. 2014).
Another feature of a joint venture agreement in international trade is the presence of common and intangible goals, which should bind all the parties involved (Karev 2015). This analysis means that such agreements are designed to combine the expectations of all parties regarding what they expect out of the partnership. Often, these common objectives are narrowly focused and cognizant of the fact that all parties have contributed some type of resource towards their realization (Yue & Zhu 2014).
Lastly, most international joint ventures stipulate that all partners share profits, losses, and control of the business (Karev 2015). This attribute stems from the fact that most joint ventures are premised on the idea that the participating parties are equal players. Pivoting on this view, many international alliances are founded on a strong principle of mutual respect and equality (Yue & Zhu 2014). While this is a positive attribute of such types of agreements, some participating MNCs have experienced problems when entering into such forms of alliances.
Problems that the Participating Companies in a Joint Venture are Likely to Experience
One of the biggest problems affecting companies in a joint venture is the potential for disagreements. Indeed, as Akahori et al. (2016) point out when two or more companies agree to engage in a joint venture, the potential for disputes arising is inevitable. One of the common areas of disagreement is deciding the law that should govern the joint venture (Beamish 2013). In most cases, each partner wants the law governing their home country to apply to the joint venture as well (Anselmsson et al. 2014). To solve such conflicts, parties often form a consensus and agree to have a neutral set of laws to govern such joint ventures.
Another problem that participating companies in a joint venture could experience is the difficulty in integrating their operations with global strategies (Yanmei 2016). For example, global alliances involving cross-border trading are notorious for having this problem (Beamish 2013). Such issues commonly emerge through challenges that involve inward and outward transfer pricing. For example, the process of valuing exports is prone to the same challenge, and it usually happens in favor of companies that own subsidiaries in other countries (Beamish 2013).
Additionally, the objectives of different partners may become incompatible in the course of the joint venture, thereby leading to operational inefficiencies. For example, Christian et al. (2016) say there have been several instances where joint venture partners have participated in international business with different risk appetites, which further cause the lack of operational synergies in the end. Problems may also occur with future management agreements because when implementing a joint venture, partners may develop different outlooks on management, which may further affect how they make important decisions about business operations (Christian et al. 2016).
Lastly, companies that enter into joint ventures in international business could experience trouble when choosing a tax regime to follow (Nervold et al. 2016). This problem often emerges when there is a conflict about tax interests between different partners within the joint agreement structure. Collectively, these issues draw attention to the need for companies to have a common focus or direction regarding how they implement their daily operational activities and how they chart the future of the company. To get these two points right, MNCs need to evaluate the suitability of joint venture partners (critically) before entering into such agreements. Some common pointers are highlighted below.
Evaluating the Suitability of a Joint Venture before Committing
Evaluating the suitability of a joint venture before getting into such an agreement is regarded as the process of undertaking due diligence (Nervold et al. 2016). Due diligence is critical to the successful implementation of joint ventures because it helps parties to understand the potential pitfalls, costs, and opportunities of pursuing their desired business goals. The suitability of a joint venture agreement is often determined after a proper evaluation of several issues. Top among them is the review of a company’s financial records because it is essential to know whether partners would be able to finance the operations of the joint venture, or not (Nervold et al. 2016). Furthermore, such a report would be instrumental in valuing the joint venture.
Another critical component to review in a joint venture agreement is the management structure of the prospective partners (Yue & Zhu 2014). This review is essential in determining how the alliance would look like and the kind of management compromises that need to be made to create a common management structure that would steer the operations of the new business. General corporate matters, such as the assumed name that the partners have been using to do business and the list of jurisdictions in which they have been operating in will be established. The list of directors, charters, or committees, and subcommittees should also be assessed in this segment to understand how the businesses operated (Yue & Zhu 2014). A tax compliance report should also be sought to assess the suitability of a joint venture before parties commit to it because it is an indicator of the ability of international partners to comply with future tax obligations. In this assessment, due diligence should be conducted to evaluate different issues relating to tax compliance, such as the corporate tax rate paid by the company, and the jurisdictions where prospective partners have tax obligations (among others). In this assessment, it would also be useful to evaluate whether the partners have any pending legal cases and whether they are paying associated damages to other parties.
In this assessment, it would be essential to understand the debt obligations of a company and the amount of money owed, if any. At the same time, an evaluation of a company’s operational processes should also cover the evaluation of its human resource strategies, marketing plans, rights/patents/trademarks, insurance, environmental matters, and material contracts (Connell et al. 2014). Broadly, this due diligence needs to happen to make sure that partners in the joint venture agreement share the same vision of the business they intend to engage in. This is the only sure way of avoiding some of the pitfalls and challenges of joint ventures mentioned in this report (Yanmei 2016).
Exiting a Joint Venture While Maximizing Value
The process of exiting joint ventures may be a difficult one for most companies because it may signify a strategic failure by the company to achieve its objectives. Consequently, in most cases, companies that have to undergo such a process have to deal with the real possibility that they may not do so at a fair value to their shareholders. Therefore, the process of exiting a market becomes an important one because companies need to protect themselves from an erosion of their shareholder value (Anselmsson & Bondesson 2013). To do so, they have different options to explore. One of them is ensuring that the joint venture company is registered as a limited liability entity. The aim of doing so is to protect the owners of the company from possible bankruptcy because if the firm is not registered as such, the owners may be liable for its losses when it is wound up (Sandner et al. 2016).
The dissolution of the company is also another method that one partner may pursue to end a joint venture. In this method, the owners of the firm may decide to sell its assets and share the proceeds equally. After doing so, no one has any obligations to indemnify the other for new claims. Profits and losses at the time of dissolution are often shared equally (Anselmsson & Bondesson 2013). If there is a conflict regarding the terms that an exit should occur, the parties to a joint venture may choose arbitration as a dispute resolution method (Teichert et al. 2015). In an arbitration framework, a third party is introduced in the joint venture agreement to act as a neutral party to solve issues that involve the exit of a company from the joint venture. Their decision is usually final.
Conclusion
In this paper, the issues involved with joint ventures have been explored to make it easier to understand the main characteristics of such ventures. The main issues that parties need to consider before committing to the joint venture, the problem they may experience when pursuing joint ventures, and the possible exit strategies that they may use to end such contractual agreements are explored. These views provide a snapshot of some of the main issues that have characterized the successes and the failures of joint ventures as a market entry strategy in global trade. Future research should further explore how different economic, political, and social issues affect the strength of these issues in implementing joint venture agreements. This analysis could provide a contextual review of the findings presented in the paper.
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