A joint venture takes place when a foreign and a domestic firm combine to form a new entity for a specific purpose, while each partner retains its independence in its other operations. 1 In a minority joint venture, the foreign partner holds less than 50 percent of the total equity; in a majority joint venture, the foreign partner holds over 50 percent of the total equity; and in a 50-50 joint venture, the partners share equally in the equity of the new company. Joint ventures may involve the partial acquisition of an existing company, which the foreign investor buys into, or they may be started from scratch. Figure 10.3 illustrates some of the reasons MNCs enter into joint ventures.
Joint ventures are not the mode of entry preferred by most u.s. companies. Research has indicated that Japanese and Western European MNCs are much more likely to become involved in joint ventures than are U.S. companies. Some firms, notably IBM, are philosophically opposed to the entire idea of joint ventures, which are considered to be a second-best type of arrangement. Management will give in to forming a joint venture only after all efforts to form a wholly owned business have failed.
A joint venture does offer some notable advantages. First, it permits expansion with limited capital outlay. Second, a suitable partner can provide expertise not possessed by the parent company. Finally, a joint venture can improve sales prospects, especially to governments; sometimes joint ventures provide captive markets.
The disadvantages of joint ventures are that one partner may lack adequate control; one partner may lack skills; or there may be disagreements between partners regarding such issues as dividends, trading areas, pricing and production policies, and competition. 2
Joint ventures are very common in East-West deals. Some Communist countries that lack modern technology and managerial know-how have reached out to the West to form joint ventures in which the local firm or government agency provides the raw materials and/ or the market and the foreign investor provides the know-how and some of the capital, as well as export channels.
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