What Is a Joint Venture? Advantages and Disadvantages of JV Business

Joint Venture

What is a Joint Venture?


When two or more persons join together to carry out a specific business venture and share the profits on an agreed basis it is called a 'joint venture'. Each one of them who join as a party to the joint venture is called 'Co-Venturer'. No firm name is normally used for the joint venture business because its duration is limited to a short period. During this period, the co-ventures are free to carry on their own business as usual, unless agreed otherwise. The business relationship amongst the co-venturer comes to an end as soon as the venture is completed. Thus, a joint venture is some kind of a temporary partnership between two or more persons who have agreed to jointly carry out specific venture. The joint ventures are quite common in the construction business, consignment, sale, and purchase of property, underwriting of shares and debentures, etc. For example, A and B agreed to construct a college building for which they pooled their resources and skill. A provided Rs. 6 lakh and B Rs. 4 lakh as capital. They completed the building and shared the profits in the ration of their contributions to capital. In this example, joining hands by A and B to construct a building is a joint venture. A and B are co-ventures. They will share the profits in the ration of 6 and 6 (same as the ratio of their capitals).


From the above, the essential features of a joint venture can be listed as follows:

1. It is formed by two or more persons.
   
2. The purpose is to execute a particular venture or project
   
3. No specific firm name is used for the joint venture business.
   
4. It is of a temporary nature. Hence, the agreement regarding the venture automatically stands terminated as soon as the venture is completed.
   
5. The co-venturers share profit and loss in the agreed ratio. However, in the absence of any other agreement between the co-venturers, the profits and loss are to be shared equally.
   
6. During the tenure of the joint venture, the co-venturers are free to continue with their own business unless agreed otherwise.

The main advantages of a joint venture are:

1. Sufficient Resources: Since two or more persons pool their resources, there is sufficient capital available.
   
2. Ability and Experience: In a joint venture the different venturers may be having different skills and experience. The benefit of their common wisdom will be available to the venture.
   
3. Spreading of Risk: The co-ventures agree to share the profits and losses in a particular ratio. The implies that the risk is also borne by them in that ratio.

Advantages and disadvantages of Joint Venture form of Business

When two or more business joins together to carry out a business by providing expertise and resources, it is called a joint venture. The risk and rewards are shared as per the proportion of the investment by the parties concerned.

The main advantages of a joint venture are:

1. More resources: since two or more firms join together to form a joint venture, there is the availability of increased capital and other resources.

2. Access to new markets: by engaging with a foreign collaborator, the products and services can be marketed in a foreign country.

3. New and improved Technology: One partner may have new and improved technology but do not have the resources. Another partner may have resources like capital but do not have the technology. In such cases, the joint venture can fetch new and improved technology as well as great resources. By engaging a foreign partner, improved foreign technology can be availed from its foreign collaborator.

4. Use of existing marketing arrangements or existing distribution network of one of the party is possible.

5. Access to improved resources like experienced technicians, experienced staff, greater capacity, financial resources etc. are possible through joint venture business.

6. Sharing of costs and risks with partners.

7. Diversification of business by producing new products or a new area of business.

8. Increased productivity and greater profits.

9. Exchange of Products: Joint venture companies can offer their existing product to sell through the partner's network and share the profit. Both JV partners can do the same. By exchanging products and services of the partner, they can diversify the product basket and sell it to their existing customers and increase the profit.

There many disadvantages in the joint venture form of business. They are:
1. It takes time and efforts to form the right relationship.

2. The objectives of each partner may differ. The objectives need to be clearly defined and communicated to everyone involved.

3. Imbalance in the share of capital, expertise, investment etc., may cause friction between the partners.

4. The difference in the culture and style of business lead to poor co-operation.

5. Lack of assuming responsibility by the partners may lead to the collapse of the business.

6. Lack of communication between the partners may affect the business.

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