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JOINT VENTURES.
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Worldwide corporate alliances to gain access to new consumer markets. Types of J.V. Appropriateness, consequences, advantages for entrepreneurial companies.... More...
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12 Pages / 2700 Words
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Paper Abstract:
Worldwide corporate alliances to gain access to new consumer markets. Types of J.V. Appropriateness, consequences, advantages for entrepreneurial companies.
Paper Introduction:
Joint Ventures
Text of the Paper:
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In such cases, the tax andlegal rights and obligations of joint venturers may be treated or not asthose of partners depending on the function and performance of the jointventure. Essentially, joint ventures are established as a general partnershipin which the ownership interest is split between two or more partners whoare usually themselves also corporate entities (Miller et. al., 2 ). 62).Furthermore, companies that form joint ventures with other companies indeveloping countries face particular consequences. al., 2 ). Thus an out-of-state or out-of-country contractor or one seeking a toehold in a new specialty maypartner with a local or experienced contractor. Essentially, the law will treat a joint venture differentlydepending upon the practicalities of its formation. Consequently, such business enterprisesmust be approached cautiously. Regardless of what type of joint venture the parties enter into, jointventures can further be defined as either vertical or horizontal dependingon the nature of the relationship between the parties to the joint ventureand what each party brings to the venture. In every case, establishing a joint venture can be a challengingenterprise due to the often uncertain legal status of such a strategicalliance, whether formed between corporations all resident within adeveloped country or when formed between corporations who reside in bothdeveloped and developing countries. Joint-venture partners in this category could include anarchitect, engineer, contractor, financing institution, or materialssupplier, among others (IOMA, 1999). Vertical or "turnkey" jointventures are formed when the partners perform everything for the owner ofthe venture. view of joint ventures: Permission to "Walk with the devil." Written for Presentation at the International Bar Association, Future of Merger Control in Europe Seminar, Florence, Italy. In fact, the term joint venture is often used to describemany types of business relationships between two or more organizationsincluding, outsourcing arrangements, technology transfers and marketingagreements. & Lambrecht, J. "Discussion Paper Number 29: International joint ventures in developing countries." [WWW: www.ifc.org/economics/pubs/dp29/dp29.htm].Tate, C. al., 2 ). Joint ventures are loosely defined as a common project between legallyand commercially independent companies in which the parties jointly bearboth the responsibility for management and the financial risk (Miller et.al., 2 ). 62). Competitors, particularly in technology-based industries, have enteredinto an unprecedented level of collaborative activities in recent years inan attempt to capitalize on growth in several lateral industries. al., 2 ). Such ventures are termed verticalbecause performance of the purpose of the joint venture occurs along achain of command, with the entities at the lowest chain of commandproviding the bulk of the performance for the financial benefit largely ofthe entity or entities at the higher end of the chain of command. Thereality of global competition today is that few corporations possess all ofthe competitive advantages necessary to enable them to be successfulinternationally. However, while licenses permit a very fastrepresentation in that market with a relatively limited investment, thecompany offering the license will not gain the specific knowledge, such asthat of the characteristics of the country, that can really only betransferred through joint ventures (Miller et. First is theincorporated joint venture. Thus, with a joint venture, when the purpose of the partnership iscompleted the joint venture automatically terminates (Gabriel, 2 ). Suchventures are termed horizontal because they are formed between partners ofsimilar knowledge and ability to perform. As demonstrated, the term"joint venture" encompasses a wide variety of collaborative businessarrangements that have made attempts at rulemaking or coherent analyticalstructure problematic and the numerous sources of law that may or may notgovern joint ventures have made their advantages and legal consequencesconfusing and uncertain. A non-equity international joint venture is an example of anunincorporated joint venture where the agreement between the partners isfor cooperation in the creation of a product without the creation of a newand separate corporate entity (Zeira & Newburry, 2 , p. "Everyone's partnership book." [WWW: http://www.attorneyetal.com/Previews/Partnr.html].IOMA. The key,however, is that all partners in the JV are exposed to the same risks,although the way in which this responsibility is divided among the partnersthrough their agreement is quite variable (Miller et. 52). al., 2 , p. al., 2 , p. 62). This isparticularly true where there are substantial cultural differences betweenthe partner countries. DEFINITIONS There is no definitive statutory definition of a joint venture (Tate,1998, p. A joint venture, on theother hand, is essentially a partnership formed to make a profit from aspecific, identified enterprise, usually on a one-time basis. CONSEQUENCES The substantive and tax laws governing joint ventures can be numerousand uncertain. 62). Entities may form ventures to explore emergingmarkets or areas where state laws are onerous or where bidding preferencesare granted to local contractors (IOMA, 1999). However, such business arrangements can alsoserve in a broader context by providing a flexible and clean businessstructure to accomplish an objective that one company cannot accomplishalone. The management companyoperates the business for each of the joint venturers (Tate, 1998, p. Forexample, in most developing countries, investment regulations attempt toretain as much foreign and local investment within the country's borders aspossible. Finally, another horizontal risk-sharingscenario occurs during "megaprojects" where the risk is far too great foreven the biggest contractors to cover it (IOMA, 1999). 11). Developing countries often have a culture that iscompletely alien to corporations from developed countries and assimilatingthis culture successfully can be vital to opening the locks on the marketin the developing country (Miller et. "Interaction between the business environment and the corporate strategic positioning of firms in the pharmaceutical industry: A study of the entry and expansion of MNEs into China." Management International Review, 353-377.Zeira, Y. al., 2 ). The Internal Auditor, 55, 2, 52.Miller, R., Glen, J. Depending on terms of the agreement, the parties may constitute apartnership for general law purposes and the joint venture will be treatedas a partnership for legal and taxation purposes. al., 2 ). Thus, the contractor will enter a joint venturewith another contractor who can add sufficient financial weight to obtainsufficient bonding (IOMA, 1999). (October 1, 2 ). & Karmokolias, Y. Moreover, a local entrepreneur can also be an excellent guide throughthe administrative jungle that often governs developing countries (Milleret. In addition, many entrepreneurial companies seeking to capitalize onemerging markets in developing countries do not have the financial ororganizational resources to set up their own sales branch, let alone aproduction plant (Miller et. al., 2 ). al., 2 ). al., 2 ). For example, a joint ventureformed for bonding purposes is one of the most common forms of horizontaljoint ventures. Joint Ventures INTRODUCTION Strategic alliances between corporations are growing at unprecedentedrates around the world. Nonetheless, joint ventures offer numerousadvantages to entrepreneurial companies, particularly those seeking toenter emerging markets in developing countries. APPROPRIATENESS Joint ventures are usually intended to be short-term arrangements setup for specific projects. [WWW: www.wsgr.com/library/libfileshtm.asp?file=jntventr.htm].Donckels, R. [WWW: www.ioma.com/nls/archives.shtml?cbmr_ 3_99]."Joint ventures defined." (April 1998). al., 2 ). And in many cases, a non-minority contractor can form ajoint venture with a minority contractor for a share of the profit on aproject where a minority contractor is required on the job (IOMA, 1999). Contractors who lackcrucial equipment can form a joint venture with a contractor who possessesthese assets. However, for numerous reasons, doingbusiness in a developing country is often considered far riskier than doingbusiness in a developed nation. An entrepreneurial company from an industrialized country may oftenfind it extremely difficult to penetrate markets in developing countries.In addition to the problems posed by geographical distance, there can alsobe a psychological distance between the company and the local market itseeks to penetrate. In many cases, corporations are choosing to worktogether more closely both to strengthen their competitive position intheir own domestic market as well as to strengthen their position or evenexpand in international business (Donckels & Lambrecht, 1995, p. & Li, X. A joint venture, on the otherhand, can boost the entrepreneur because the initial capital investment isshared with a local entrepreneur. Sucharrangements range from joint research to standard setting to cooperationin the production, distribution, and marketing of products and services(Compton, 1997). Corporate entities also form horizontal joint ventures to gainexpertise in areas they may be lacking. However, such relationships would be more accuratelycharacterized as strategic business alliances rather than joint venturesper se. Generally, a business arrangement is a joint venture and not apartnership when the purpose of the arrangement is merely to produce aproduct to be shared by the parties, none of the parties to the arrangementhave the power to legally bind any of the others and all parties have thepower to assign their interest in the joint venture (Tate, 1998, p. The high costs and great risk involved inestablishing a joint venture in a developing country are most frequentlycited as recurring reasons for entrepreneurial companies' decision not toset up a joint venture (Miller et. al., 2 ). Such a venture occurs when a small contractor can performa specific job but cannot obtain sufficient bonding to satisfy the"employer's" requirements. A joint venture differs from such alliances because it is acompletely separate business entity created by two or more companies toachieve mutually agreed-upon goals (Miller et. Generally, partnerships are formed to make a profit while engaging ina particular type of business such as a law firm or an association ofmedical doctors operating out of a single clinic. This unincorporatedjoint venture is often used instead of a partnership to carry on a businessin certain circumstances and the parties generally rely on a managementcompany to carry on the business on behalf of the joint venturers (Gabriel,2 ). The unincorporated joint venture is formed when the parties enterinto a contract (either written or oral) to establish their legal rightsand obligations in relation to a particular business venture (Gabriel,2 ). The most substantial legal and tax differences occur when theparties form an unincorporated joint venture. Thus, the joint venturers can each claim their owndeductions, and make their own elections, thereby providing flexibility notavailable under a partnership (Tate, 1998, p. For example, one research surveyed 37international joint ventures to find that participants rated 36 percent ofthem as having performed unsatisfactorily (Miller et. Thus, a joint venture can allow each party to the venture to sharecosts and risks, perhaps leveraging innovation in a new product market suchas information technology in a developing country, while avoiding importrestrictions on foreign companies in that given market (The InternalAuditor, 1998, p. al., 2 ). Jaspersen, F. (December 2 ). These joint ventures have the same legal and taxramifications as any other trust (Gabriel, 2 ). "The changing U.S. Thesecond basic type of joint venture is the unit trust. Such a joint venture is in fact a corporation and istreated as such by the Internal Revenue Service for taxation purposes.Each shareholder or member of the joint venture participates in the profits(Gabriel, 2 ). Increasingly, the formation of joint ventures worldwide hasresulted, in part, from the need to gain access to new consumer markets.The formation of a joint venture represents a complicated process wherebycorporations must identify their own strengths and weaknesses and set clearstrategic directions in an attempt to match their goals and motivationswith those of another company (Miller et. To ensure the success of such aventure, each corporation must be motivated. Still, there remains little precision in the law governing jointventures in the United States (Compton, 1997). 62). (March 1999). In other words, asdiscussed above, an incorporated joint venture will likely be treated as acorporation for legal and tax purposes and a unit trust joint venture as aunit trust. For example,two people or corporations would form a regular partnership to form acement paving company, whereby they intend the company to continuallyengage in obtaining and completing cement paving contracts for anindefinite period of time, perhaps forever. 353). Such factors will affect the growth andprofitability of a foreign firm's operations in the host country and couldeven threaten its survival (Van Den Bulcke et. al.,2 ). Such a partner can provide invaluable information aboutcompetition, consumer behavior and the distribution system in the localmarket (Miller et. & Newburry, W. al., 2 ). Furthermore, included in thecountry-specific risk factors are "political risk, uncertainty about theeconomic and political conditions and government policies" (Van Den Bulckeet. 353). Joint ventures have areputation for instability and failure, particularly when one corporationin a developed country partners with another in a developing country toform the joint venture. Thus, it is often in such a company's best interest toestablish a relationship with a partner local to the market sought to bepenetrated. "What you must know before beginning a joint venture." Institute of Management and Administration. Inanother study by the IFC, the percentage of success was higher, but even inthat case 27 percent of participants estimated that the joint venture wouldnot eventually continue in its present form (Miller et. 323). "Joint ventures: No longer a mysterious world." International Small Business Journal, 13, 2, 11.Gabriel, M. 62). Instead, each joint venturer lodges aseparate tax return and may adopt a different tax treatment for the incomeand expenses referable to each share of the joint venture business (Tate,1998, p. "Tax planning: Joint ventures." Australian CPA, 68, 5, 62-63.Van Den Bulcke, D., Zhang, H. Bona fidejoint ventures that are not partnerships are not required to lodge incometax returns (Tate, 1998, p. Most significantly,such joint ventures must be formed according to the legal and investmentregulations of the local government, and to be successful, they must alsotake into account political considerations of the host country. 62).For tax purposes, it is important that the joint venture is not seen to becarrying on a business, which is why many joint ventures rely on amanagement company to perform this purpose. (September 26, 1997). al., 2 ). An incorporated joint venture is one that isestablished to conduct a business in which the parties to the joint ventureare the shareholders. (October 1, 2 ). Consequently, outside companies attempting to penetrate such amarket will often be required to partner with a local company as well asreinvest some minimum percentage of its earnings in that country (Milleret. 353). Thus, a cement paving company thatintends to pave a bridge across the Mississippi may form a joint venturewith a company whose expertise lies in determining the best type of asphaltfor paving wide bridges. CONCLUSION The pace of technological change and global competition hasaccelerated and now challenges many of the economic underpinnings andassumptions employed in traditional joint venture analysis (Compton, 1997). In all cases, however,the entrepreneur from the industrialized country runs the risk ofmisunderstanding the culture or spending too much time attempting tounderstand the culture if he tries to discover the possibilities of thatmarket by himself. There are three situations that can give rise to a joint venture,thereby creating three basic types of joint ventures. Therelationship between the partners to a joint venture is governed by theterms of the agreement between them, which may often be oral and notcodified or outlined in any formal written contract, as well as the generallaw as applied to contracts and partnerships (Tate, 1998, p. 52). Still, the entrepreneurial company willrequire strong financial backing to gain approval of such agreements inmost developing countries. (June 1998). ReferencesCompton, C. "Equity international joint ventures (EIJVs) and international acquisitions (IAs): Generic differences in the pre- and post-incorporation stage." Management International Review, 323-352. Investment risk in a developing country is relatedprimarily to the general business environment within the country as well asthe specific regulations for the desired industry within the country (VanDen Bulcke, Zhang & Li, 2 , p. Still, developing country markets arebecoming much more open to international competition, thereby providingboth opportunities and dangers for domestic companies (Miller et. 323).Basically, an EIJV is a separate legal organizational entity thatrepresents the partial holdings of two or more parent firms, where theheadquarters of at least one of the firms is outside the country ofoperation of the joint venture (Zeira & Newburry, 2 , p. (January-March 1995). For example, although international acquisitions remainthe most popular form of investment worldwide for American multinationalcorporations, equity international joint ventures (EIJV) are now morefavored in Asian/Pacific Rim companies (Zeira & Newburry, 2 , p. 323). Thus, althoughlike many business alliances a joint venture requires capital commitmentsfrom each partner, the joint venture is actually a partnership created toaccomplish a very narrow purpose (Miller et. On theother hand, horizontal joint ventures are formed through more specificarrangements, usually for the purposes of risk sharing (IOMA, 1999). However, it is in cases where the joint venture is not deemed apartnership that joint ventures are often most advantageous. In particular, corporations in developed countries seeprospects for future growth increasingly within developing countries ratherthan in their own more familiar markets (Miller et al., 2 ).Consequently, many corporations in developed nations are choosing to engagein joint ventures with corporations or other entrepreneurs in developingnations to solidify and expand their global market share. Joint ventures are also often a more advantageous means for access todeveloping markets than other forms of association. The third type of jointventure is actually the one most commonly understood as a true jointventure. In most cases, sucharrangements are also advantageous to developing countries, providingaccess to expertise, infrastructure and financing that they may otherwisebe unable to obtain. al., 2 ). For example, one study found that there was agreater incidence of joint ventures where cultural differences were mostpronounced (Miller et. In such a venture,one party to the venture operates as a corporate trustee with the remainingparties as unitholders. In many cases,forming a joint venture with a local company resident in a developingcountry may be the only entree for an American or Western European business(The Internal Auditor, 1998, p. For example, licensingagreements allow an outside company to license its rights to market aproduct in the emerging market. On the other hand, the sametwo people or corporations would form a joint venture if they came togetherfor the specific purpose of paving a bridge over the Mississippi River,with the intention that the partnership would end as soon as the bridge ispaved.
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