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  December 25th, 2017 | Written by

The Pros and Cons of International Joint Ventures

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  • The JV model is less risky than outright acquisition.
  • Capital investment is typically half or less for JVs vs. acquisitions.
  • Because JVs are often short-lived, providing for the end is important.

Successful international expansion offers promising opportunities, but how to enter those markets is key to your success.

There are seven basic approaches to reaching new foreign customers, each offering advantages and disadvantages:  ecommerce, distributors, strategic alliances, licensing, new foreign office, joint venture, and acquisition.

In this article, we look at forming a joint venture to expand into new markets.

What’s a Joint Venture (JV)?

Although JV’s can be formed for many reasons and take various forms, a common international structure is where you agree with a local company to share legal ownership and contribute resources to pursue business opportunities together. You could buy into the local company, or you might agree to create a brand-new, shared company – either way, there is joint legal ownership and guidance.

JV’s offer many benefits.  Chosen wisely, your partner gives you an immediate base of local customers, distribution capabilities to reach them, and experienced and knowledgeable local employees.

You leverage the partner’s brand to gain market credibility and compete on even footing with local competitors.  Your partner might also provide new manufacturing capabilities or products. In certain markets, a JV may be the only permissible or practical way to enter.

This model is less risky than outright acquisition—the capital investment is typically half or less.  JVs offer flexibility if local conditions change, or if the market or relationship proves unattractive. Typically, your JV interest can be sold back to the local partner, costing less than closing a local office or writing off an acquisition. Conversely, the market may prove to be so attractive that more investment makes sense. Many JVs provide for outright acquisition after a test period, which also lowers risk.

Companies considering JVs should consider many things, such as:

Strategy/objectives:  How much control do you want, and how should it be exercised?  What programs and processes must your partner have in place? How much oversight can you realistically provide? Will the J.V. have its own employees or simply “loaned” to the J.V.? What functions are essential that you provide, and how will you do that? Is it important for you to book the sales from the J.V.? On what operational decisions do you want a say, or the final say?

Partner fit:  How well does your partner’s business culture match yours?  What is their reputation locally? How risk-averse or risk-taking is your partner? What is their willingness to invest?

Operational clarity:  What investments will be made, and by whom? Who will the employees report to? How will success be measured, and rewards shared?  How will disputes and disagreements be resolved?

Disadvantages of Joint Ventures

Joint ventures are fragile. Clashes in corporate culture and disputes about control and operational decisions are common.  For example, which financial, ethics, or operational policies should the new joint venture follow?  If the parties disagree about strategies and investment, which has the ultimate say-so?

Finding balance is often difficult. Too little oversight can mean lack of direction, or damage to your company’s brand or reputation.  Too much oversight or control can result in frustration, and value destruction rather than creation.

Because of these challenges, JVs are often short-lived, and thus, providing for the end is therefore also important.  The technology and know-how shared with your local partner can result in a strong competitor when the JV dissolves, particularly in countries with weak intellectual property protection.

Good legal counsel is needed to draft effective crossborder JV agreements.  Because there are many complex employment, tax issues, financial, and compliance issues to be considered – as well as preparing for possible termination or acquisition — they can be costly to set up.

A joint venture could make sense if: (1) you’ve identified a high potential marketplace and a good prospect partner, or local markets require one; (2) you have substantial international expansion experience, as J.V.’s are seldom a good option for beginners; (3) you’re able to partner effectively, while balancing risk vs. control; (4) you can afford to provide the necessary capital and internal and external resources; (5) you’re seeking a lower-risk, albeit slower, way to make local acquisitions.

Next, we’ll look at acquisitions to reach new international customers.

Doris Nagel is CEO of Globalocity, and has over 25 years of hands-on global experience, focusing on strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks. Check out Globalocity’s free infographic summarizing the seven international expansion models discussed in this series.