Page 117 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes 6.6.1 reasons for Joint venture formation

There are mainly three reasons for JV formation and these are:
1. Internal Reasons: The internal reasons are:
(a) Build on company’s strengths,

(b) Spreading costs and risks,
(c) Improving access to financial resources,
(d) Economies of scale and advantages of size,
(e) Access to new technologies and customers, and
(f) Access to innovative managerial practices.

2. External Reasons: The external reasons are:
(a) Influencing structural evolution of the industry,
(b) Pre-empting competition,
(c) Defensive response to blurring industry boundaries,
(d) Creation of stronger competitive units,
(e) Speed to market, and
(f) Improved agility.

3. Strategic Reasons: The strategic reasons are:
(a) Synergies,
(b) Transfer of technology/skills, and
(c) Diversification.

6.6.2 When Joint ventures used?

Joint ventures are not uncommon in the oil and gas industry, and are often cooperations between
a local and foreign company (about 3/4 are international). A joint venture is often seen as a
very viable business alternative in this sector, as the companies can complement their skill sets
while it offers the foreign company a geographic presence. Studies show a failure rate of 30-
61%, and that 60% failed to start or faded away within 5 years. (Osborn, 2003) It is also known
that joint ventures in low-developed countries show a greater instability, and that JVs involving
government partners have higher incidence of failure (private firms seem to be better equipped
to supply key skills, marketing networks etc.) Furthermore, JVs have shown to fail miserably
under highly volatile demand and rapid changes in product technology.

Did u know? Many countries including our own India require foreign companies to form
JVs in order to enter domestic markets.

6.6.3 advantages of Joint ventures

1. First, a firm benefits from a local partner’s knowledge of the host country’s competitive
conditions, culture, language, political systems and business systems.
2. Second, when the development costs and/or risks of opening a foreign market are high, a
firm might gain by sharing these costs and/or risks with a local partner.

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