Joint Venture Definition and Meaning
Abbreviated as JV by ABBREVIATIONFINDER, joint venture is an agreement between two or more companies that establishes strategic alliances for a common commercial objective, for a fixed period. The companies agree to pool their resources for the development of a joint business and share the results, whether profit or loss.
The resources offered by the companies can be financial capital, raw material, technology or even labor, according to the terms of the joint ventures.
Joint Ventures Characteristics
- Single and common objective, which can be complex or simple (which will influence the duration of the joint venture) with a view to developing a specific project that benefits all parties.
- Determined time, being automatically dissociated when reaching the goal.
- Division of results, which can be profits or other objectives, such as the development of new technology, for example.
- Loyalty between the parties, in terms of information privacy and other indispensable elements for the achievement of the common objective without jeopardizing the co-venture.
- It can be contractual, establishing only an agreement between the parties, or corporate, in which the co-ventures form a new legal entity.
Advantages and disadvantages
Business partnerships offer multiple opportunities and risks, and the security of the business will largely depend on the joint venture agreement.
The parties can benefit in terms of expansion. You can look for association with another company (national or regional) as a way to enter new markets, for example. It is also an advantage to be able to have a distinct knowledge of the company ‘s core business without jeopardizing other operations or investing in the acquisition of another company.
From a legal point of view, another benefit is the limited power of the co-venture. If in a society all agents speak on its behalf, in the joint venture contract the limitation of the parties’ power is assumed. One company is not responsible for the other, in the event of bankruptcy or others. Each of the co-ventures remains isolated as a legal entity.
But bear in mind that the excitement of the new business and the initial friendly atmosphere may not be able to withstand some losses and complications. It is very common for joint ventures to wear out and end in fights before reaching their goal.
The case of dividing the results, whether positive or negative, is where the greatest difficulties typically occur. For example, if one company invests financial capital and the other invests with expertise and manpower, sometimes the calculation of the profit sharing may not be clear to the parties. Or lagging behind, which creates conflicts between the companies involved.
Knowledge sharing can also present a disadvantage if there is a lack of loyalty to the project, or complications, which result in the misuse of the resources of the other organization.
It is also important to be careful in managing the project so that the involvement of two or more companies, and their respective sectors, does not impair flexibility.
Some steps can be prolonged or even impede the progress of the project, due to the differences between the two companies, from routine processes to decision making.
The most common example of a joint venture is between a land owner and a construction company interested in the space. The joint venture contract is made, without the owner having to sell the land to the construction company, and the consideration for entering the business is previously agreed.
Upon delivery of the building, the contract is automatically terminated as the objective has been achieved, benefiting both parties.
It is very common for international companies to use joint ventures to explore markets in other countries. In China the practice is usual, as the Chinese government establishes that corporations that want to enter the country must do so through cooperation with national companies, which encourages the country’s economy and expands the joint ventures.
Joint Venture in Brazil
A current Brazilian example of a joint venture is the union of Unilever and Perdigão around Becel and Doriana products. Unilever, owner of the two brands, supplies the production, while Perdigão distributes at the points of sale negotiated by it, guaranteeing the entry of the brand in new markets. The two companies together contribute together to marketing and innovation.
The agreement between the parties can be prevented by control bodies such as CADE (Administrative Council for Economic Defense).
This was the case when Banco Itaú and Mastercard aimed to launch a card banner. The suit was challenged at first instance, alleging risk to competition.