by Geoff Gravil
Much has been written about how joint ventures are good vehicles for
fostering corporate growth, particularly in overseas markets. In some
countries it is the only way of gaining access to a market. A host government
may discourage, or even prohibit, a totally owned foreign company operating
within its country in order to encourage domestic development. Many
companies see joint ventures as a means of rapidly expanding geographically
by using other companies' resources. By 'tapping' into existing skills,
knowledge and finance, as well as accessing existing customer groups,
it is possible for a firm to develop its foreign business more swiftly
and cheaply than if it has to rely solely on its own resources and efforts.
However, despite these benefits, there can be difficulties in operating
within joint ventures, particularly those involving foreign firms where
language, business culture and even different perspectives on business
ethics can generate misunderstanding and even mistrust between the partners.
It is advisable to clarify any potential for conflict as early as possible
and this might be better addressed at the initial contract stage.
Problems which can arise from joint ventures.
- There may be fundamental disagreements with the partners having
different objectives. One partner (often the newer and more local
party) may be more concerned with growing the business from its own
geographic base and may be wanting to see the profits re-invested
back into the enterprise. The older partner (often having sought a
foreign partner so as to access new markets) may be more concerned
with repatriating profits to distribute to its own shareholders.
- The local partner may be hoping to generate exports into other
geographical areas. This may not be in the interests of the more established
partner, who may already have export business in those targeted areas,
and is not willing to share this market with the new partner.
- There may also be concerns over transfer pricing arrangements.
The established partner may be transferring expertise, technology
and components to the newer local partner. It is probable that this
partner will be looking to charge the highest price possible. Any
profit will belong 100% to that partner. However the local partner
will prefer a low transfer price charge. This will enhance the profitability
of the joint venture, benefiting both partners. There is obviously
room for disagreement here.
- It is also possible that cultural differences in management between
the two partners may disrupt smooth working relationships. Attitudes
towards equal opportunities, commercial practice, short and long-term
planning are a few among many issues where disagreements may occur.
It is important that any differences should be reconciled as smoothly
and as swiftly as feasible.
- Joint ventures benefit where synergies can be created. This is
most prevalent where the knowledge, expertise and resources of the
partners are complementary. There is a danger that the partners may
have strengths in the same areas but possess the same weaknesses.
However it is fair to comment that joint ventures between foreign
partners do not generally suffer from this difficulty. The local partner
usually provides marketing knowledge along with an existing customer
base whereas the other partner brings technological expertise and
know-how to the partnership.
- Another difficulty which can occur with joint ventures is the problem
of ensuring smooth co-ordination and control. This results when there
is no clear pattern for decision making and stems from a lack of overall
leadership. Any partnership must allocate responsibilities for decision-making
so as to ensure that the venture does not suffer from management paralysis.
- Another issue where disagreements may occur is how profits are
to be allocated and distributed. This has already been touched upon
in discussing transfer payments and the re-investment of funds. It
is an avoidable problem if initial agreements have been made but all
too frequently many small to medium-sized joint ventures have disagreements
over this issue which only helps to destroy trust between the partners.
- It is also important to clarify who the partners are within the
joint venture. Difficulties can arise if one party chooses to use
sub-contractors. This can have a detrimental impact on areas such
as quality, service and even delivery, and again destroy the trust
and harmony between the partners.
Many of these issues which can so easily become contentious may be
avoided if the contract between potential partners was carefully drawn
up. There is the obvious danger, as with the pre-nuptial contracts now
so popular with Hollywood film stars, that the contract destroys romance,
or in the case of a joint venture - the flexibility and entrepreneurial
spirit. A contract should not be seen as a constraining influence but
as a guiding light.
Issues which should be addressed within a contract
The following are areas which should be made clear in the contract between
the partners. Careful preparation here can save innumerable problems
and disagreements later.
- There should be a clear indication as to the parties to the joint
venture. This should minimise the risk of lower quality suppliers
being brought into the chain as a result of uncontrolled sub-contracting.
- There also needs to be a clear specification of the purpose of
the joint venture. This ought to clarify the duties of and expectations
from each of the partners. This might minimise conflicts of interest
and avoid accusations of greed or short-termism being levelled at
one of the partners. Issue concerning transfer pricing and the supply
of components or expertise would be addressed in this clause of the
- There should be an unambiguous definition of territories to be
covered by the joint venture. This should prevent arguments as to
whether the newer local partner has the right to export joint venture
products which might compete in markets, already served by the longer-established
- There should, within the contract, be a precise statement as to
the merchandise and product areas to be covered within the joint venture.
The older company may not be willing to share technology over its
whole product range, whereas the newer local partner may be expecting
much broader co-operation. The scope of the agreement must be clear
to all parties.
- There should also be an agreement as to how profits are to be shared,
what proportion should be ploughed back into the company, and how
much should be re-patriated. This appears to be obvious but unfortunately
this issue can create more conflict and animosity than one might imagine.
- There should also be also some time-scale attached to the contract.
No party would want to be locked into a lengthy agreement, particularly
if the joint venture was not working well.
- It might also be advisable to set out in contractual format how
costs are to be shared. There are many costs which could be disputed
– promotional material, R&D, administration. It may be necessary
to itemise these costs and to allocate responsibility for their payment.
- There is a danger that where two companies come together as in
a joint venture there will be a lack of overall leadership. It is
probably sensible that one of the partners should be invested with
the responsibility for decision-making so that there is no paralysis
brought about by an inadequate command and reporting structure.
- Finally there should be some agreement as to arbitration if a dispute
between the partners cannot be amicably resolved.
Joint ventures can be viewed from both technical and emotional perspectives.
On the technical side there is the joint contribution of product technology,
corporate expertise and market knowledge. It is relatively easy to ensure
that these factors are complied with in contractual terms. It is less
easy to legislate for the emotional aspects. This is more concerned
with cultural issues, trust, style of management and expectations of
each partner. These factors are more intangible. However if there is
less cause for disagreement with the more quantitative aspects, considered
above, because of contractual clarity then the less precise and more
qualitative areas may become less contentious.
Many companies see joint ventures as a first step before acquiring
a company. With the development of a smooth and harmonious relationship
between the partners this could be a preliminary stage before an agreed
and beneficial acquisition strategy.