Joint venture

There are good reasons for a company to participate in a joint venture. You may want to access new markets or share the risks involved in a major investment.

Joint ventures, however, also have their drawbacks. Before proceeding with one, business owners need to understand how such arrangements work, how they are structured and the implications when it comes to managerial control, information sharing and ownership arrangements.

“The popular take on joint ventures is that they are not very profitable and impossible to manage,” says Paul Beamish, Professor, International Business, at Ivey Business School. “But the reality is that their profitability is identical to other organizational alternatives, and they can create win-win situations.”

What is a joint venture?

A joint venture is a strategic partnership where two or more companies develop a new entity in order to collaborate on a specific project or venture. This arrangement allows each company to pool their resources, expertise and capital to achieve a common objective—and share the risks and rewards.

Joint ventures are often established to pursue opportunities that may be too ambitious, costly or risky for a single company.

How does a joint venture work?

Joint ventures can take various forms, such as contractual agreements or the creation of a new, separate entity. Joint ventures are prevalent across all industries and can involve domestic or international partners.

Key features of a joint venture include shared responsibilities, decision-making and financial contributions. This collaborative approach enables companies to access new markets, technologies or skills, leading to mutual growth and increased competitiveness.

Successful joint ventures rely on clear agreements, effective communication and a shared vision. However, they also require careful consideration of potential challenges and the establishment of mechanisms for conflict resolution. Ultimately, joint ventures can be a powerful tool for businesses seeking to leverage complementary strengths and achieve strategic goals.

Why would you choose to participate in a joint venture?

The overarching rationale for a joint venture is simply to make money, says Beamish. “But if we look at what a joint venture allows a company to accomplish, there are many good reasons to participate in this type of arrangement.”

Here are some of the most important reasons to participate in joint ventures:

• Product innovation
  Each partner can bring a set of complementary resources and expertise with the goal of developing a product or service that partners would not be able to create on their own.
• Expanding into foreign markets
  A company can break into a new market by, for instance, partnering with a local business specialized in logistics, distribution or retail.
• Reduce production costs
  With their economies of scale, two companies can reduce their per-unit costs by amalgamating their production.

Is a joint venture always 50-50?

Joint ventures do not necessarily have to be formed through an equal 50-50 ownership split. The exact terms can be what the partners decide and negotiate, such as a 60-40 or 70-30 split, with the majority partner typically having more control in decisions and earning a greater share of the profits.

“Partners who own less than 20% of a business seldom have much of a voice,” explains Beamish. “They have very limited control over any decisions made in the venture.”

When it comes to sharing in the decision-making, Beamish suggests that the best practice is for each company to have more say in the area in which they are strongest. “Unless each partner is making a solid contribution to the business, why do a joint venture?” he asks.

With that in mind, if one partner is an expert in technology, they should control the decisions pertaining to technology. And if the other partner, a distributor in Nigeria, for instance, their local market knowledge should enable them to make the decisions on that aspect of the business.

Advantages and disadvantages of a joint venture

Before initiating a joint venture, it’s important to understand the advantages and disadvantages of this type of arrangement.

Advantages of a joint venture

• Increased growth, productivity and profits
• Reduced costs and risks
• Growth opportunity that does not require having to borrow funds or look for outside investors
• Quick access to expertise

Disadvantages of a joint venture

• higher likelihood of conflicts arising
• decreased control and flexibility through joint decision-making
• more widely shared knowledge, which can lead to sensitive information being communicated to other parties

​How to set up a joint venture

There are two main ways of setting up a joint venture in Canada. The first is for the partners to agree on a contract that will set out the terms of the venture; the second is to form a separate corporate entity.

1. Contractual joint venture

A contractual joint venture occurs when two or more entities agree to pool resources or expertise for a specific project or venture. Unlike partnerships, these ventures are not governed by a specific set of laws. Rather, they are regulated by the contractual laws of the chosen jurisdiction. Indeed, in Canada, a contractual joint venture is not recognized as a legal entity.

In a contractual joint venture, the interaction between the partners will be governed by the terms of a contractual agreement. It is this contract that will govern all decision-making requirements. In Canada, the agreement governing a joint venture is a confidential private contract between the parties, with the partners not required to register or file the agreement. An example of this would be if a fast-food chain included in kids’ meals a toy supplied by a movie franchise.

Note that the term “joint venture” is used loosely here, and that while certain experts consider this type of arrangement to be a joint venture, others, like Beamish, see them simply as contracts.

2. Corporate joint venture

A corporate joint venture is established when two or more entities form a corporation. The partners become shareholders in this joint venture vehicle, which then needs to be incorporated. Generally, shareholders’ liability will be confined to their invested capital.

In a corporate joint venture, the partners’ interactions are regulated by the provisions within the contractual agreements, the constitutional documents of the joint venture entity itself, as well as applicable law more generally.

Difference between a joint venture and a partnership

The main difference between a joint venture and a partnership is that the former will be formed by companies with distinct primary operations that they continue to maintain, while the latter is typically established between people, who may or may not have another business besides the partnership.

“Law firms, for example, are usually formed on the basis of a partnership,” says Beamish. Similar to the corporate joint venture, the partnership can be formed under the laws of the province chosen by the partners.

Usually, a partnership is formed because the parties recognize the entity for its profit-generating potential and agree to contribute resources and expertise, and share in its profits. In some jurisdictions, legislation requires that the partnership’s purpose be set out in the partnership agreement or in the registration documents.

Joint venture conflicts

Conflicts can flare up between partners for a number of reasons. Here are five of them, with potential solutions.

1. Unclear or incompatible objectives for the venture

A problem that joint ventures frequently encounter is that the objectives of the partners, which may have aligned when the venture was established, shift over time. This can be brought on by changing market dynamics. For instance, in 2001, when Sony and Ericsson entered into a 50/50 joint venture, both companies aimed to enhance their presence in the burgeoning high-end mobile handset market. However, a decade later, as Apple's dominance in the premium mobile handset market became evident, Ericsson began to pivot towards focusing on the provision of mobile and wireless networks, while Sony opted to concentrate its efforts on delivering content to personal computing devices like tablets, PCs, and mobile phones. As a result, Sony acquired Ericsson's stake in the joint venture, a move designed to support Sony's new goal of capturing a larger market share in content delivery.

2. Poor communications

Healthy communication leads to understanding, and understanding each other’s thinking is a first step in resolving, or better yet, preventing conflict. In a manufacturing joint venture, for instance, if Partner A makes significant product design changes without consulting Partner B, this lack of communication can engender disputes and mistrust, and will lead to production delays, increased costs and frustration. One solution, in this case, would be to implement regular cross-functional meetings to discuss design changes and project updates. More generally, work with your partner to establish a clear communications protocol involving both parties in decision-making to ensure transparency and alignment.

3. An imbalance of resources or expertise

One partner may end up contributing significantly more financial resources or top-tier talent than the others, for instance, as a result of unforeseen regulatory hurdles or a shift in market conditions. This may lead to conflict over the sharing of profits and decision-making responsibilities. Unequal contributions can lead to feelings of inequity and frustration among the partners, as the company contributing the most might reasonably expect a larger, increased share of the profits generated by the venture. However, profit-sharing agreements are often established at the venture's inception. In this case, one solution may be to renegotiate the profit-sharing terms to account for the unequal contributions.

4. Differences in work cultures

Western managers are often frustrated by the slow, consensus-oriented decision-making culture of the Japanese. At the same time, the Japanese are sometimes equally uncomfortable with American individualistic decision-making, since the decisions are made quickly, but the implementation is slow. To minimize such problems, Ford has offered training to more than 1,500 managers to improve their ability to work with Japanese and Korean managers.

5. Incompatible management styles

Imagine a joint venture between Company ABC, a traditional, hierarchical, and centrally controlled firm, and Company XYZ, a more modern, collaborative, and decentralized organization. The two companies’ diverging management styles may lead to clashes and disputes over decision-making authority and daily operations. To make sure you are compatible with your potential partners, visit them in their own milieu to see how they work. You can also solicit opinions from their other partners and suppliers. Finally, before betting big on a joint venture, collaborate on a small project that will allow you and your partners to get to know each other.

What is an international joint venture?

An international joint venture is a company owned by two or more firms of different nationalities. It may be formed from scratch, also known as a greenfield investment, Beamish explains.

A greenfield investment refers to a form of direct foreign investment in which a parent company establishes a subsidiary in a foreign country, building its operations from start to finish.

International joint ventures may also be formed as the result of several established companies deciding to merge existing divisions.

Usually, the purpose of an international joint venture is to allow the parties to pool their resources and coordinate their efforts to achieve results that neither could obtain on their own.

Why create an international joint venture?

There are four main reasons for businesses to form an international joint venture:

• strengthen a company’s existing business
• take a company’s existing products into new markets
• obtain new products that can be sold in the firm’s existing markets
• diversify into a new business

Examples of joint ventures

Here are three examples of international longstanding or successful joint ventures.

1. Apple and Unicom

In 2009, Apple formed a joint venture with China Unicom. The goal of the venture was to bring the iPhone to China’s growing market. According to the agreement, China Unicom obtained the exclusive rights to be the iPhone’s carrier in China. At the time, China was the world’s largest wireless telecom market, with nearly 700 million mobile subscribers, but most of the phones on the market were cheap models. The deal allowed Apple to make a breakthrough into China’s telecommunications sector, while Unicom was able to offer users a sought-after brand.

2. Boeing and Lockheed Martin

Formed in December 2006, United Launch Alliance (ULA) is a joint venture between Lockheed Martin Space and Boeing Defense, Space & Security. Their joint venture was meant to reduce costs and has reportedly been very profitable. To form ULA, both companies merged into a single entity, each taking a 50% stake. Since its creation, ULA has launched more than 100 satellites into orbit. The satellites perform weather monitoring and Global Positioning System (GPS) navigation, aid in scientific research and support military operations.

3. SABMiller and Molson Coors

MillerCoors was a joint venture formed in 2008 between SABMiller and Molson Coors. Each partner was to have a 50% voting interest and five board seats in the new entity. SABMiller, the larger of the two companies, was to have a 58% economic interest, and Molson Coors, 42%. At the time of creating the venture, U.S. beer sales had been mostly flat, with growth coming from small upscale brands. The new entity was created to better compete for U.S. consumers. The partners estimated that the joint venture would result in $500 million in annual cost savings. Shipping costs, for instance, were expected to be reduced significantly. The company was acquired by Molson Coors in 2016.

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