Taking the leap in company with a joint venture

16-04-2018 | Redacción CEU

Entering a foreign market can be an adventure. The companies that undertake this feat have to save major obstacles like financial limitations, the difficulty when choosing distribution channels, the lack of specialized professionals, some technical barriers or the complexity in obtaining information about those new markets. One strategy that can help these companies overcoming these and other difficulties is to build a temporary strategic partnership with another company. Union makes force. It is about sharing the feat, the adventure, but also the efforts, profits and risks. Is it advisable to take the leap together with a "joint venture"? What risks does this type of business internationalization imply?

 

Opening the doors to new environments and taking the risk to undertake a project outside the native borders offers a wide variety of advantages. Among others, they could be the exponential growth, the competitiveness increase, the brand consolidation, the cost readjustment, achieving new customers or strengthening the position facing potential crisis. Nevertheless, taking the leap to a new market always sets out certain uncertainty. Although the companies that would be willing to start this adventure previously and meticulously studied the field, the stablished companies in the country will always start from a great competitive advantage. A solution to this problem is joining forces with other companies to achieve a successful corporate internationalization.

What does the joint venture consist of?

There are several ways to facilitate entry into foreign markets through joint operations like the export consortium, the licenses or the franchises. However, joint ventures are one of the most convenient models of new market immersions, because the companies that participate in them continue to maintain their business and identity independently from the common project that they undertake. The birth of the union of these companies begins precisely with the premise of the autonomy conservation of the parties involved.

Joint venture is a term used to refer to a type of business collaboration in which, as the name suggests, the participants begin a joint adventure. Specifically, this is a strategic partnership limited in time that is established between two or more companies in order to achieve a specific commercial objective -such as launching a new project, offering a better service or entering a new market- . A relationship that is convened under the same rules, and as long as both parties are willing to share both benefits and efforts, as well as, risks and costs.

These companies agree to make contributions to this common business: raw materials, distribution channels, market knowledge, etc. As a general rule, the most common case of joint venture will be the agreement between a foreign and a local enterprise to set up a company in the market where the first one wants to enter. This way they can be both benefited from their own particularities such as the contribution of capital and technology, on one hand, and the environment knowledge and the ability to access to the market, on the other. However, in this type of collaboration models, there are different legal formulas that can be adopted. Therefore, it is not necessary, to set up a new company (non-equity joint venture or non-corporate joint venture) to embark on this new adventure and there are as many types of scenarios as complex is the reality that surrounds them.

Taking the leap in company with a joint venture

Before undertaking this international adventure

According to their character, these adventures can adopt different formulas. For example, the strategic alliance joint venture does not require the economic contribution of the parties, the sum of its own characteristics will be sufficient. In the co-investment joint venture, it is precisely the economic contributions their main characteristic, thanks to this type of union, companies may be able to face the internationalization adventure with a higher probability of success than if they did it alone. In fact, it is likely that if they did it that way, they will not succeed. Another type is the contractual joint venture that establishes the collaboration agreement through a detailed regulation and different clauses, providing details about the distribution of benefits, activities, risks or adjacent contracts.

Joint venture is based on the synergy principle. These companies decide to take the leap in company due to the great advantages that this type of associations can offer them, like the increase of competitiveness, the risk diversification, the greater facility to obtain financing, the operation expansion, the flexibility when entering new markets, the power to decide on the type of accounting or distribution of expenses, the increase in the production process or the access to new technologies. These collaboration models stand out for their great capacity when it comes to adapting to different realities. This feature makes them ideal tools to serve as a lever for corporate internationalization.

When making a business decision of this magnitude, entrepreneurs must take into account the different risks involved in this type of unions. In the course of the activity different conflicts of interests and disagreements may arise and these will not be easy to manage. There will be also a loss of autonomy, they will depend on their partners when making decisions. Finally, it is possible that problems arise due to the different level of integration of the parties, since there will usually be an imbalance between the local and foreign companies. As it can be seen from the nature of these setbacks, the partner choice will be key to the future success of this "joint adventure". Reaching the goal will depend largely on the willingness and flexibility of the parties involved.

At The CEU IAM Business School we have designed an Executive MBA that contemplates different perspectives within the multitude areas of the company, without forgetting important subjects such as work on the capacity for innovation, the entrepreneurship, the social responsibility, the impulse of the managing skills and necessary knowledge to carry out an internationalization process. An EMBA that will provide you with the required managerial skills and key tools to be able to face new challenges, start new "adventures" and make the right decisions.