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What is a Joint Venture? Advantages and disadvantages of JV Business
What is a Joint Venture?
When two or more persons join together
to carry out a specific business venture and share the profits on an
agreed basis it is called a 'joint venture'. Each one of them who
join as a party to the joint venture is called 'Co-Venturer'. No
firm name is normally used for the joint venture business because its
duration is limited to a short period. During this period, the
co-ventures are free to carry on their own business as usual, unless
agreed otherwise. The business relationship amongst the co-venturer
comes to an end as soon as the venture is completed. Thus, a joint
venture is some kind of a temporary partnership between tow or more
persons who have agreed to jointly carry out specific venture. The
joint ventures are quite common in construction business,
consignment, sale and purchase of property, underwriting of shares
and debentures, etc. For example, A and B agreed to construct a
college building for which they pooled their resources and skill. A
proveded Rs. 6 lakh and B Rs. 4 lakh as capital. They completed the
building and shared the profits in the ration of their contributions
to capital. In this example, joining hands by A and B to construct a
building is a joint venture. A and B are co-ventures. They will
share the profits in the ration of 6 and 6 (same as the ratio of
From the above the essential features
of a joint venture can be listed as follows:
It is formed by two or more persons.
The purpose is to execute a particular venture or project
No specific firm name is used for the joint venture business.
It is of a temporary nature. Hence, the agreement regarding the venture automatically stand terminated as soon as the venture is completed.
The co-venturers share profit and loss in the agreed ratio. However, in the absence any other agreement between the co-venturers, the profits and loss are to be shared equally.
During the tenure of joint venture, the co-venturers are free to continue with their own business unless agreed otherwise.
The main advantages of a joint venture are:
Sufficient Resources: Since two or more persons pool their resources, there is sufficient capital available.
Ability and Experience: In joint venture the different venturers may be having different skills and experience. The benefit of their common wisdom will be available to the venture.
Spreading of Risk: The co-ventures agree to share the profits and losses in a particular ratio. The implies that the risk is also borne by them in that ratio.
Advantages and disadvantages of Joint Venture form of Business
When two or more business join together to carry out a business by providing expertise and resources, it is called a joint venture. The risk and rewards are shared as per the proportion of the investment by the parties concerned.
The main advantages of a joint venture are:
1. More resources: since two or more firms join together to form a joint venture, there is availability of increased capital and other resources.
2. Access to new markets: by engaging with a foreign collaborator, the products and services can be marketed in a foreign country.
3. New and improved Technology: One partner may have the new and improved technology but do not have the resources. Other partner may have resources like capital but do not have the technology. In such causes joint venture can fetch new and improved technology as well as great resources. By engaging a foreign partner, improved foreign technology can be availed from it's foreign collaborator.
4. Use of existing marketing arrangements or existing distribution network of one of the party is possible.
5. Access to improved resources like experienced technicians, experienced staff, greater capacity, financial resources etc. are possible through joint venture business.
6. Sharing of costs and risks with partners.
7. Diversification of business by producing new products or new area of business.
8. Increased productivity and grater profits.
9. Exchange of Products: Joint venture companies can offer their existing product to sell through the partners network and share the profit. Both JV partners can do the same. By exchanging products and services of the partner, they can diversify the product basket and sell it to their existing customers and increase the profit.
There many disadvantage in the joint venture form of business. They are:
1. It take time and efforts to form the right relationship.
2. The objectives of each partner may differ. The objectives needs to be clearly defined and communicated to everyone involved.
3. Imbalance in the share of capital, expertise, investment etc., may cause friction in between the partners.
4. Difference in the culture and style of business lead to poor co-operation.
5. Lack of assuming responsibility by the partners may lead the collapse of business.
6. Lack of communication between the partners may affect the business.