Joint ventures are domestic or international enterprises involving two or more companies joining

temporarily to undertake a particular project. They have grown in popularity in recent years—
joint ventures between U.S. and foreign firms, for example, have increased at an average of 27
percent since 1985. Certainly, not all of them will be successful; estimates of the failure rate of
joint ventures reaches as high as 70 percent. Nonetheless, companies persist in initiating them for
a variety of reasons.

REASONS FOR JOINT VENTURES

Joint ventures may involve companies in one or more countries. International joint ventures in
particular are becoming more popular, especially in capital-intensive industries such as oil and
gas exploration, mineral extraction, and metals processing. The basic reason is simple: to save
money. For example, just to start a mining operation in the United States in 1984, a company
would have had to spend one to two billion dollars. Few companies then (or now) could finance
such an expenditure on their own, so joint ventures became more attractive as a way to share
risks and costs and create scale economies.

Another factor that contributed to the expansion in joint ventures in the past few decades was the
cost involved for capital-intensive industries to continue their operations. Companies in these
industries depend heavily on advances in technology to reduce costs. By pooling their money
and personnel, companies enhanced their chances of developing advanced technological methods
that would reduce exploration and production costs and increase profit margins. Joint ventures
became a favored method of doing business for such industries.

Joint ventures between American and international companies are increasingly common.
Estimates suggest that approximately one-quarter of American companies' direct investments,
i.e., the establishment of operating facilities in a foreign country, were in joint ventures. Ideally,
the partners contribute approximately equal amounts of resources and capital into each business.
The word "approximately" is important in foreign joint ventures, since some countries, such as
China, will not allow outside companies to own the majority of a domestic business (although
they do encourage joint ventures). In some countries, joint ventures are the only way companies
can engage in foreign business. For instance, Mexico requires that all foreign firms investing
there have Mexican joint venture partners. In addition to government regulations, other reasons
for multinational joint ventures include cutting the costs of doing business, sharing risks, and
acquiring technological information and management expertise from other companies.

International joint ventures have also been fostered by international financial institutions such as
the International Monetary Fund, the World Bank, and the World Trade Organization, who
have instituted policies to eliminate trade barriers and deregulate foreign ownership restrictions
and the international flow of capital. These policies have helped create a business climate in
which international investment and partnerships are an increasingly attractive, and often
necessary, means by which companies seek to expand profit margins and market share. In
addition, regional trade areas such as the North American Free Trade Agreement (NAFTA),
the European Union (EU), and the Association of South and East Asian Nations (ASEAN)
have created particularly favorable conditions for joint ventures within specific, relatively
localized regions.
Joint ventures are extraordinarily helpful to some companies in gaining access to foreign
markets. Neither party may really be interested in the primary project, but they participate simply
to gain access to the new market. Such projects generally represent a direct investment, which is
sometimes limited by laws in the country in which the operation takes place. One of the aims of
a partner in a joint venture is to have a majority interest in it; that way, it maintains control over a
project. This explains why some countries do not permit foreign companies to hold majority
interests in their domestic business ventures.

Companies seeking to cut the costs of doing business see joint ventures as a way to save money.
In effect, they are sharing the risks should a particular project fail. For example, if two oil
companies wish to produce a new drilling platform to search for oil in swamps or ocean areas,
and neither one can finance the project on its own, they might join forces. That way, they are
sharing the costs of the projects and reducing their individual risk should they find no oil. That is
a decided advantage to many business people.

TYPES OF JOINT VENTURES

Joint ventures fall into several categories. Among them are equity based operations that benefit
foreign and/or local private interests, groups of interests, or members of the general public. There
are also non-equity joint ventures, also known as cooperative agreements, in which the parties
seek technical service arrangements, franchise and brand use agreements, management contracts
or rental agreements, or one-time contracts, e.g., for construction projects. Quite often, non-
equity joint ventures are used simply to provide access for the participants into foreign markets.

Equity type arrangements involve two sides: one that provides the capital, and one that receives
it. Since there is money involved, there are also inherent risks, particularly with equity ventures
launched in less developed countries. The biggest risk is that the business will fail and the money
invested will be lost. There is also the risk that some foreign governments will nationalize certain
industries in order to protect their own domestic interests. For example, the Chilean government
nationalized its copper industry in the 1960s to prevent foreign companies from gaining control
over the ore. In 1988, Peru took over Perulac, a local milk producer owned by Nestle, because of
a national milk shortage. However, such risks are (or should be) included in both the cost of
doing business and in joint venture participants' contingency planning.

Participants do not always furnish capital as part of their joint venture commitments. There are,
for example, non-equity arrangements in which some companies are more in need of technical
services or technological expertise than they are of capital. They may want to modernize
operations or start new production operations. Thus, they limit partners' participation to technical
assistance. Such arrangements often include some funding as well, albeit limited.

There is also a growing prevalence of franchising joint ventures. American companies such as
McDonald's, Coca-Cola Co., and Stained Glass Overlay have opened foreign franchise
operations at an increasing rate. The emergence of new markets such as China and Vietnam have
made such operations lucrative and have attracted more and more businesses to joint venture
participation. A logical extension of franchising and brand-use agreements is the need for
managerial expertise. Consequently, companies in developed countries form joint ventures with
businesses in emerging countries in which they provide management expertise through
contractual agreements. Such arrangements benefit both parties immeasurably, which is one of
the goals of joint ventures.

Not all joint ventures involve private companies—some include government agencies. This is
most common in less developed countries, but there are notable exceptions. For example, the
British and French governments combined their resources in conjunction with privately owned
firms to develop a supersonic transport (SST) intended to revolutionize transatlantic flying
between the two countries and the United States. The project did not realize its financial goals.
The flights were too expensive for average flyers, costing as much as $3,368 one way between
London and Washington D.C. As a result, most flights were discontinued, although some
between European and New York City still exist. Such are the risks of joint ventures, whether
they involve private business or government agencies.

Generally, joint venture participants in the private sector furnish the capital, resources, and
management and technological expertise involved in the operation. In less developed countries,
however, government agencies are often active in business enterprises. They may provide or
arrange for funding; own or manage certain industries, such as utility companies and airlines; or
act as agents in attracting foreign investment or participation in businesses. They are no less
active than privately held businesses in joint ventures, however. The rules for all participants
remain the same, and strategies do not change.

JOINT VENTURE STRATEGIES

Businesses should not engage in joint ventures without adequate planning and strategy. They
cannot afford to, since the ultimate goal of joint ventures is the same as it is for any type of
business operation: to make a profit for the owners and shareholders. A successful company in
any type of business is often recruited heavily for participation in joint ventures. Thus, they can
pick and choose in which partnerships they would like to engage, if any. They follow certain
ground rules, which have been developed over they years as joint ventures have grown in
popularity.

For example, experience dictates that both parties in a joint venture should know exactly what
they wish to derive from their partnership. There must be an agreement before the partnership
becomes a reality. There must also be a firm commitment on the part of each member. One of the
leading causes for the failure of joint ventures is that some participants do not reveal their true
intentions in the partnerships. For example, some private companies in advanced countries have
formed partnerships with militant governments to supply technological expertise and develop
products such as chemicals or nuclear reactors to be used for allegedly peaceful purposes. They
learned later that the products were used for military purposes. Such results can be detrimental to
the companies involved and adversely affect their bottom lines and reputations, to speak nothing
of the direct victims of the military development.

Businesses should form joint ventures with experienced partners. If the partners do not have
approximately equal experience, one can take advantage of the other, which can lead to failure.
Joint ventures generally do not survive under this imbalanced dynamic. Nor do they survive if
companies jump into them without testing the partnership first.

Partners in joint ventures would often be better off participating in small projects as a way to test
one another instead of launching into one large enterprise without an adequate feeling-out
process. This is especially true when companies with different structures, corporate cultures, and
strategic plans work together. Such differences are difficult to overcome and frequently lead to
failure. That is why a "courtship" is beneficial to joint venture participants.

WHY JOINT VENTURES FAIL

Joint ventures fail for many reasons. In addition to those mentioned above, other factors include:
disappearing markets, lagging technology, partners' inability to honor the contract, cultural
differences interfering with progress, or governmental and macroeconomic de-stabilizing factors.
However, many of these reasons can be eliminated with careful planning.

Inconsistent government interference is a difficult problem to overcome. For example, the United
States government has long maintained restrictions against exporting certain technologies to
selected foreign countries, such as those utilized to produce jet engines and computers. These
restrictions place American companies at a competitive disadvantage, since other countries do
not place similar constraints on their businesses. Thus, American companies are unable to
engage in certain joint ventures.

Companies that engage in military-oriented joint ventures are often subject to unanticipated
risks. The federal government may allocate funds for the production of certain weapons, sign
contracts with manufacturers, and then discontinue the project due to changing needs, budget
restrictions, or election results. Such government actions are a common risk to these joint
ventures. They introduce an element of insecurity into the projects, which is something that
partners try to avoid as much as possible.

Another problem with joint ventures concerns the issue of management. The managers of one
company may be more adept at decision making than their counterparts at the other company.
This can lead to friction and a lack of cooperation. Projects are doomed to failure if there is not a
well-defined decision-making process in place that is predicated on mutual goals and strategies.

For example, if two auto manufacturing companies engage in a joint venture, it is imperative that
they be similar in their structures and approach to business. If one company relies heavily on
nonunionized workers who operate in an autonomous team-building environment, and the other
comprises a unionized workforce oriented toward assembly line production in which workers
specialize in narrow tasks, the chances of success are poor. The workers at the first plant would
be prone to making decisions and solving problems on their own, which would reduce the levels
of bureaucracy needed to manage production. Conversely, the workers at the second plant would
likely defer to higher-level managers to make decisions. The differences would be difficult to
overcome and would lead to higher costs and slower production. While the differences could be
alleviated through planning before the actual manufacturing process began, the time expended
might lead to technology gaps and other impediments to earning a profit. Most companies
engaging in joint ventures would prefer not to deal with such problems after a project was
implemented. Rather, they aim to eliminate them through careful planning. Doing so increases
profits in the long run, which is one of the many benefits of successful joint ventures.

BENEFITS OF JOINT VENTURES

Among the most significant benefits derived from joint ventures is that partners save money and
reduce their risks through capital and resource sharing. Joint ventures give smaller companies the
chance to work with larger ones to develop, manufacture, and market new products. They also
give companies of all sizes the opportunity to increase sales, gain access to wider markets, and
enhance technological capabilities through research and development (R&D) underwritten by
more than one party. In fact, funding for R&D today is often provided by government agencies
in a myriad of countries operating under all types of economies, ranging from capitalist to
socialist and hybrid. This is particularly true in the United States.

Until recently, U.S. companies were reluctant to engage in research and development
partnerships, and government agencies tried not to become involved in business development.
However, with the emergence of countries that feature technologically advanced industries (such
as electronics or computer microchips) supported extensively by government funding, American
companies have become more willing to participate in joint ventures. Likewise, the U.S.
government, along with state governments, has become more generous with its financial support.

Government's increased involvement in the private business environment has created more
opportunities for companies to engage in domestic and international joint ventures, although they
are still legally limited in what they can do and where they can operate. Nonetheless, more and
more companies are involving themselves in joint ventures, and the trend is to increase their
participation, since the advantages outweigh the disadvantages.

DISADVANTAGES OF JOINT VENTURES

The disadvantages of joint ventures include: potential financial losses if a project fails,
expropriation or nationalization, disagreements among partners, and less-than-anticipated results.
For instance, in the 1980s, American Motors Corp., which has since been acquired by Chrysler
Corp., entered a joint venture with the Chinese government to produce Jeeps in Beijing. The
Chinese government, which did not allow joint ventures before 1980, created many
complications that prevented American Motors from operating efficiently. The result was greatly
reduced profits for American Motors.

THE FUTURE OF JOINT VENTURES

It is almost certain that the number of joint ventures will continue to increase in the near future.
More and more companies are adopting the joint venture approach as a part of their growth
strategies, particularly in the international arena. Foreign companies can benefit mutually by
combining their technological and monetary resources and taking advantage of respective market
conditions. Thus, international joint ventures are becoming the norm rather than the exception—
and in more industries than ever before.

Joint ventures may grow in importance so much in the next few years that many companies
could lose their national identities. There could be a growth in the activities of multinational
corporations to the point where joint ventures will be virtually unrecognizable. In fact, some
companies, especially those in capital-intensive industries, have already lost sight of the fact that
they engage constantly in joint ventures because they have become so commonplace.

Finally, the wave of privatization, on a global scale, of state-owned industries and enterprises
promised an added catapult for joint venture formations. The estimated worth of world-wide
state-owned industry sales in 1995 reached $65 billion. This trend will make investment and
inroads by companies into previously closed, and still relatively unfamiliar and structurally
adverse, countries such as China and the former eastern bloc nations increasingly attractive.