Introduction to Types of Joint Venture
In a Joint Venture, two or more business entities come together to form a new business entity which is supposed to conduct a specific business and the ownership, risk and rewards of this business is shared among the co-venturers in the ratio as defined at the time of creation of the venture, therefore it leads to merging of knowhow and resources of the two entities for a mutual benefit.
Explanation of Joint Venture
A few key aspects of the Joint venture form of arrangement need to be looked at carefully:
- The purpose of the joint venture is defined. It can be limited to one specific project and therefore time bound, or can be an arrangement of conducting a specific kind of business as a going concern and therefore not time bound. In case of a time bound arrangement, the venture comes to an end when the project underlying the same comes to an end.
- Joint venture may not have a specific name, basically, most of the ventures are for a limited period and therefore giving a name to the same might not be a good idea. An example of the same could be the DSP BlackRock Joint Venture that was set up for a period of 10 years after which the Joint Venture was split.
- The members of the Joint Venture are sometimes called the co-venturers
- The books of accounts of a Joint Venture can be maintained separately if it is a long run Joint Venture while they can also be merged with those of the co-venturers in case it is a short run Joint Venture or the value of the transactions is not too significant.
- Joint venture can come into existence through any of the following ways:
- A foreign company comes into a new market by acquiring interest in an local company or the opposite is also true when the local company wishes to expand its business into new avenues, it can buy some interest into the an already present foreign entity
- However, there can be a totally new company creation for a new business project to be undertaken by the coventurers.
- At times the government also enters into joint ventures with corporate entities for their skill and expertise.
- Joint venture is a separate legal entity and therefore enjoys all the benefits of a company such as acquiring assets in its own name, limited liability and so on.
Types of Joint Ventures
Following are the types are as follows:
1. Project Joint Venture
This is the most common form of joint venture. It could be created for purposes like creating a toll road or an office complex and so on. Key characteristic is that the purpose is defined and limited to the completion of the single project as per the agreement of the venture. Once the project is completed, the Joint Venture comes to an end. Recently, in Feb 2020, Trilogy metal and South 32 completed a joint venture in Vancouver, and formed the company Ambler metals LLC, with the purpose of advancement of Arctic & Bornite projects & exploration of the Ambler mining district.
2. Functional Joint Venture
This is a format in which both the companies come together because each has expertise in one or the other business functions and therefore they wish to create a symbiotic environment for each other and benefit from the synergies so developed. For example, if a company has owned fleet of transport while another has extra storage space, both can help each other out in inventory management and save each other’s costs of having individual fleets or storage spaces and use them in their idle time.
3. Vertical Joint Venture
As in the vertical M&A, the Joint venture is between two business entities in the same supply chain. This is done when one of the entities produces a particular kind of good for which it needs a raw material of specialized nature. For this purpose, it can invest with the supplier to develop and maintain the capacity of such production and avoid the uncertainty arising due to unavailability of this input material. This is the case when the production company wishes to maintain a certain level of secrecy or the demand for this input is low however the demand for the final product is very high. A real life example would be a particular kind of computer chip that is used in production of certain patented technology items. This is even the case when the costs can be saved for example Marks & Spencer has its sweat shops in south east Asian countries because it is cost effective.
4. Horizontal Joint Venture
Similarly, this form of Joint venture is between two business entities producing the same goods or services. The benefit of this is that one of the companies can enter into a new market such as a geographical region. The local partner has the know how of the local country such as established distribution network while the foreign partner can have the economies of scale. Further at times regulations demand involvement of a local company and therefore Joint venture is one of the possible modes to enter such markets.
So we understand that the Joint venture is most of the times a limited period agreement between two or more business entities but at times it may not be time bound. The purpose of the venture is clearly defined and the risk and reward sharing ratio is clear in the agreement to the joint venture. Further, Joint Venture is more or less another form of a business combination such as mergers and acquisition and in theory even in they are defined distinctly, in practice, they tend to have a lot of overlaps.
In case of very short run or single project joint ventures, the venture is not given any name to avoid the related paperwork and the disclosure requirements of a joint venture are relatively low. In some countries, the JV is the only means of entering certain markets as per the rules and regulations of the country and therefore a useful tool.
This is a guide to Types of Joint Venture. Here we also discuss the introduction to a joint venture along with different types and explanation. You may also have a look at the following articles to learn more –