International joint venture — BrandWiki

International joint venture — BrandWiki

Reasons for forming

There are many motivations that lead to the formation of a JV (joint venture). They include:

Risk sharing – Risk sharing is a common reason to form a JV, particularly, in highly capital intensive industries and in industries where the high costs of product development equal a high likelihood of failure of any particular product.
Economies of scale – If an industry has high fixed costs, a JV with a larger company can provide the economies of scale necessary to compete globally and can be an effective way by which two companies can pool resources and achieve critical mass.
Market access – For companies that lack a basic understanding of customers and the relationship / infrastructure to distribute their products to customers, forming a JV with the right partner can provide instant access to established, efficient and effective distribution channels and receptive customer bases. This is important to a company because creating new distribution channels and identifying new customer bases can be extremely difficult, time-consuming and expensive activities.
Geographical reason – When there is an attractive business opportunity in a foreign market, partnering with a local company is attractive to a foreign company because penetrating a foreign market can be difficult both because of a lack of experience in such market and local barriers to foreign-owned or foreign-controlled companies.
Funding constraints – When a company is confronted with high up-front development costs, finding the right JV can provide necessary financing and credibility with third parties.
Acquisition – When a company wants to acquire another but cannot due to cost, size, or geographical restrictions or legal barriers, teaming up with a company in a JV is an attractive option. The JV is substantially less costly and thus less risky than complete acquisitions, and is sometimes used as a first step to a complete acquisition with the JV. Such an arrangement allows the purchaser the flexibility to cut its losses if the investment proves less fruitful than anticipated or to acquire the remainder of the company under certain circumstances.[2]

Structure

International joint ventures are developed when two companies work together to meet a specific goal. For example, Company A and Company B first begin by identifying and selecting an IJV partner.[4] This process involves several steps such as market research, partner search, evaluating options, negotiations, business valuation, business planning, and due diligence.[4] These steps are taken on by each company. There are also legal procedures involved such as IJV agreement, ancillary agreements, and regulatory approvals.[4] Once this process is complete, the IJV Company is formed and during this final procedure the steps taken are formation and management.[2]

Structuring IJVs can pose a challenge when parties are from two different cultural backgrounds or jurisdictions[2] Once both parties have come to an agreement on fundamental issues such as commercial nature, scope and mutual objectives of the joint venture, the parties must decide on where, geographically, the venture will take place and what the legal structure for the venture will look like.[2] Most of the time, the structure agreed on will be between different types of corporations, partnerships, or some form of a limited liability company.[2]

Limited liability

Limited liability allows to limit debts and losses to the assets of the venture and protect the assets of the members themselves from being liable for the venture's debts.

In a limited liability partnership (LLP), the partners have limited liability and can be held liable only to the extent of their capital investments. In the U.S., in addition to limited liability partners, the law requires that every limited partnership have at least one general partner who has unlimited liability. The general partner can be held responsible for all the liabilities of the limited partnership. Many ventures resolve this problem by forming a special purpose entity, usually a limited liability company or a corporation, which then acts as the general partner.

A joint venture formed as limited liability company (LLC) offers protection to the partners by providing limited liability to all of its members. Unlike a limited liability partnership (LLP), there is no requirement to have a general partner who has unlimited liability and can be held responsible for all the liabilities.

Both limited partnerships and limited companies in the U.S. enjoy the advantage of being pass-through entities for U.S. tax purposes. The limited partnership does not pay taxes. Instead, the tax liability of the venture is allocated to the members of the LLP in proportion to their interests in the venture.

IJV in different countries

China

An IJV is an attractive way to get into Chinese market for businesses that are unfamiliar with the completed culture and the less open market. However, China is becoming more and more global and familiar to the world. As such, IJV is falling out of practice because of the practical difficulties in picking a proper partner, management, technology transfer, profit sharing and so on.

There are two main types of IJV in China: Equity Joint Ventures and Cooperative Joint Ventures.

Equity joint ventures (EJVs)

An equity joint venture is a partnership between an overseas and a Chinese individual, enterprises or financial organizations approved by the Chinese government.[8] Companies in an equity joint venture share both mutual rewards, risks and losses according to the ratio of investment.[8]

A minimum of 25% the capital must be contributed by the foreign partners, and no minimum investment for the Chinese partners.[9]

A joint venture is free to hire Chinese nationals without the interference from government employment industries by abiding Chinese Labor Law, and purchase land, build their own buildings, and privileges prevented to representative offices.[9]

Cooperative joint ventures (CJVs)

CJVs are a rather unevenly regulated form of IJV between Chinese and foreign-based companies. They are usually found in venture, which are both technology-based and have a substantial requirement for fixed assets, for example infrastructure and volume manufacturing.[10]

No minimum foreign contribution is required to initiate cooperative ventures, and the contributions made by the investors are not necessarily expressed in a monetary value. These contributions can include excluded in the equity joint venture process can be contributed such as labor, resources, and services.[11]

Greater flexibility in the structuring of a cooperative venture is also permissible including the structure of the organization, management, and assets.[11]

Equity joint ventures (EJVs)

An equity joint venture is a partnership between an overseas and a Chinese individual, enterprises or financial organizations approved by the Chinese government.[8] Companies in an equity joint venture share both mutual rewards, risks and losses according to the ratio of investment.[8]

A minimum of 25% the capital must be contributed by the foreign partners, and no minimum investment for the Chinese partners.[9]

A joint venture is free to hire Chinese nationals without the interference from government employment industries by abiding Chinese Labor Law, and purchase land, build their own buildings, and privileges prevented to representative offices.[9]

Cooperative joint ventures (CJVs)

CJVs are a rather unevenly regulated form of IJV between Chinese and foreign-based companies. They are usually found in venture, which are both technology-based and have a substantial requirement for fixed assets, for example infrastructure and volume manufacturing.[10]

No minimum foreign contribution is required to initiate cooperative ventures, and the contributions made by the investors are not necessarily expressed in a monetary value. These contributions can include excluded in the equity joint venture process can be contributed such as labor, resources, and services.[11]

Greater flexibility in the structuring of a cooperative venture is also permissible including the structure of the organization, management, and assets.[11]

Turkey

International joint ventures have played a significant role in the reform and liberalization of the laws governing foreign investors as part of Turkey's economic program adopted after 2001. Turkey lies on the borders between Europe and Asia and is used as a way to achieve strategic goals to enter into the Asian or European market, which is important for those wanting to enter EU market since Turkey signed the European Customs Union (ECU).[12] The Turkish Accounting Standards Board requires that all enterprises established under the Turkish Commercial Code in Turkey must prepare statutory financial statements in compliance with the Turkish Accounting Standards Board, which makes all accounting data transparent and more reliable for all parties involved.[12] Under Turkish Law, a joint venture may be formed under two ‘umbrellas’: Commercial Company, governed by the Turkish Commercial Code or Ordinary Company, Governed by the Turkish Code of Obligations.[12]

Examples of successful IJVs

Aera Energy

Aera Energy covers a large area of California. The state's leading oil and gas producer (accounting for 30% of California's total production), Aera Energy's properties extend from the Los Angeles Basin in the south to Coalinga in the north. It has daily production of 165,000 barrels of oil and 50 million cubic feet of natural gas and boasts proved onshore and offshore reserves of 800 million barrels of oil equivalent.[13] Aera Energy also has interests in real estate operations (in partnership with homebuilder Toll Brothers). The exploration and production company is a joint venture of affiliates of ExxonMobil and Shell.[13]

Omega Navigation Enterprises Inc. is an international provider of marine transportation services focusing on seaborne transportation of refined petroleum products.[14] One of the vessels, namely the Omega Duke, is owned through a 50% controlled joint venture with Topley Corporation, a wholly owned subsidiary of Glencore.[14] They have also formed an equal partnership joint venture company with Topley Corporation, namely Megacore Shipping Ltd.[14]

Japan Nuclear Fuel Co., Ltd. (JNF)

Japan Nuclear Fuel Co., Ltd. (JNF), the predecessor of Global Nuclear Fuel – Japan Co., Ltd. (GNF-J), started operation in Kurihama in 1967 as a nuclear fuel manufacturing joint venture among General Electric (US), Toshiba and Hitachi. Since it began supplying the first domestically produced nuclear fuel in 1971, GNF-J, a pioneer nuclear fuel manufacturer, has delivered more than 70,000 fuel bundles to various nuclear power plants across the country and contributed to the stable supply of energy in Japan.[15] On January 1, 2000, the sales, design and development operations were transferred from the three joint venture partners to JNF, and JNF made a new start as a GE group company, later changing its name to GNF-J, by offering core management services as well as handling MOX fuel design and quality control.[15]