Before entering an international joint venture, businesses are advised by business advisers to do a thorough due diligence on the country, the business, and the partner. Due diligence is the investigation of a country, business or person, for the purpose of obtaining useful information on the potential benefits, pitfalls and costs. It helps investors to make better profit and mitigate risk. It includes a thorough research about the potential partners through channels like internet, database and media search, establishing each partner’s duties and responsibilities, management control, agreeing on splits of returns, exit strategies, contingency plans, etc. International law firms working with businesses who are considering a joint venture will use a due diligence checklist to ensure that it is a sound business development.
Many of the benefits associated with international joint ventures are that they provide companies with the opportunity to obtain new capacity and expertise and they allow companies to enter into related business or new geographic markets or obtain new technological knowledge. Furthermore, international joint ventures are in most cases have a short life span, allowing companies to make short term commitments rather than long term commitments. Through international joint ventures, companies are given opportunities to increase profit margins, accelerate their revenue growth, produce new products, expand to new domestic markets, gain financial support, and share scientists or other professionals that have unique skills that will benefit the companies.
International joint ventures are developed when two companies work together to meet a specific goal. For example, Company A and Company B first begin by identifying and selecting an IJV partner. This process involves several steps such as market research, partner search, evaluating options, negotiations, business valuation, business planning, and due diligence. These steps are taken on by each company. There are also legal procedures involved such as IJV agreement, ancillary agreements, and regulatory approvals. Once this process is complete, the IJV Company is formed and during this final procedure the steps taken are formation and management.
Structuring IJVs can pose a challenge when parties are from two different cultural backgrounds or jurisdictions Once both parties have come to an agreement on fundamental issues such as commercial nature, scope and mutual objectives of the joint venture, the parties must decide on where, geographically, the venture will take place and what the legal structure for the venture will look like. Most of the time, the structure agreed on will be between different types of corporations, partnerships, or some form of a limited liability company.
Limited liability allows to limit debts and losses to the assets of the venture and protect the assets of the members themselves from being liable for the venture’s debts.
In a limited liability partnership (LLP), the partners have limited liability and can be held liable only to the extent of their capital investments. In the U.S., in addition to limited liability partners, the law requires that every limited partnership have at least one general partner who has unlimited liability. The general partner can be held responsible for all the liabilities of the limited partnership. Many ventures resolve this problem by forming a special purpose entity, usually a limited liability company or a corporation, which then acts as the general partner.
A joint venture formed as limited liability company (LLC) offers protection to the partners by providing limited liability to all of its members. Unlike a limited liability partnership (LLP), there is no requirement to have a general partner who has unlimited liability and can be held responsible for all the liabilities. Both limited partnerships and limited companies in the U.S. enjoy the advantage of being pass-through entities for U.S. tax purposes. The limited partnership does not pay taxes. Instead, the tax liability of the venture is allocated to the members of the LLP in proportion to their interests in the venture.
There are two types of international joint ventures: dominant parent and shared management. Within dominant parent IJVs, all projects are managed by one parent who decides on all the functional managers for the venture. The board of directors, which is made up of executives from each parent, also plays a key role in managing the venture by making all the operating and strategic decisions. A dominant parent enterprise is beneficial where an international joint venture parent is selected for reasons outside of managerial input.
On the other hand, shared management ventures consist of both parents managing the enterprise. Each parent organizes functional managers and executives that will be within the board of directors. In this form of management, there are also two types of shared management ventures. The first type is 50:50 IJV and this is where each partner puts in 50% of the equity in return for 50% participating control. The second type is where both partners can negotiate that not all shared management ventures are 50:50 and that one partner has more than a co-equal role in the IJV.
When two or more partners get together and form an international joint venture agreement, they must decide early on in regards to what the financial structure will entail as this will aid in management and control. Some of the steps include establishing the capital required to start the IJV, the impact of securing a strong strategic alliance partner, and financial reporting. Once an arrangement is made, a tax-planned joint venture will be created which will aid in maximizing the after-tax returns.
Factors affecting IJV
Poor formation and planning
Problems that arise in joint ventures are usually as a result of poor planning or the parties involved being too hasty to set up shop. For example, a marketing strategy may fail if a product was inappropriate for the joint venture or if the parties involved failed to appropriately assess the factors involved. Parties must pay attention to several analysis both of the environment and customers they hope to operate in. Failure to do this sets off a bad tone for the venture, creating future problems.
Unexpected poor financial performance
One of the fastest ways for a joint venture is financial disputes between parties. This usually happens when the financial performance is poorer than expected either due to poor sales, cost overruns or others. Poor financial performance could also be as a result of poor planning by the parties before setting up a joint venture, failure to approach the market with sufficient management efficiency and unanticipated changes in the market situation. A good solution to this is to evaluate financial situations thorough before and during very step of the joint venture.
One of the biggest problems of joint ventures is the ineffective blending of managers who are not used to working together of have entirely different ways of approaching issues affecting the organization. It is a well-known fact that many joint ventures come apart due to misunderstanding over leadership strategies. For a successful joint venture, there has to be understanding and compromise between parties, respect and integration of the strengths of both sides to overcome the weaker points and make their alliance stronger.
Inappropriate management structure
In a bid to have equal rights in the venture, there could be a misfit of managers. As a result, there is a major slowdown of decision making processes. Daily operational decisions that are best made quickly for more efficiency of the business tends to be slowed down because there is now a ‘committee’ that is in place to make sure both parties support every little decision. This could distract from the bigger picture leading to major problems in the long run.
Economic environment of IJV
The ultimate goal of a successful JV partnership is more customers and a stronger body. To ensure a JV’s partnerships are as profitable as possible, it helps to look at them from the customer’s point of view. The features a JV partnership should aim to address for an effective marketing campaign: Channeling the expertise and strengths of both parties to maximize value for the customers and stakeholders while downplaying the weaknesses and presenting a united font.
Cultures of IJV
When a joint venture is formed, it is an attempt at blending two or more cultures in the hope of leveraging on the strength of each party. Lack of understanding of the cultures of the individual parties poses a huge problem if not addressed. A common problem in these multi-cultural enterprises is that the culture is not considered in their initial formation. It is usually assumed that the cultural issues will be addressed later when the new unit has been created. Usually, compromises are reached and certain cultural from the parties are kept on while others are others are either out rightly discarded or modified.