We have heard of incorporated joint ventures before. Maybe you have read about this or that incorporated joint venture in the business section of the newspaper but have you ever really given thought about the reasons behind forming such an alliance? Here are some of the reasons why companies form incorporated joint ventures:
1) Spreading risks there are times when a business move can prove to be too risky for one company to handle. Although the returns are potentially larger than the risks, a company may not be willing to handle those risks on its own. Some companies approach other corporations with the proposal of sharing the profits, as well as the risks. Incorporated joint ventures of this type often make a huge amount of profit just by diversifying the risk.
2) Access to new customers The People’s Republic of China requires foreign companies to form incorporated joint ventures with local companies in order to enter the market. This is just one illustration of how an incorporated joint venture can open new opportunities to an established business.
Sometimes, taking a step backward is required so that a person can take two steps forward. There are also instances when an incorporated joint venture will be able to provide a product that the members of the alliance cannot provide on their own. By opening their doors to other companies, a corporation would be opening its doors to other sources of profit.
3) Influencing the evolution of the industry there are certain incorporated joint ventures which have given way to the evolution of the industry. Think of Sony Ericsson and the way that the incorporated joint venture has changed the way we look at mobile phones. Sometimes, a company anticipates a change in the industry and, instead of being left behind, forms an incorporated joint venture in order to instigate that change.
4) Access to better management sometimes, a company can form an incorporated joint venture with another company in order to obtain access to managerial practices which would help them improve the productivity of their own company. This could be considered as a fringe benefit to the actual goal of the incorporated joint venture. Because of the incorporated joint venture, the management practices of one company could “rub off” on the other company and thus, make it better.
5) Getting ahead of the competition two companies could form an incorporated joint venture with the purpose of competing against a third corporation. This is an application of the adage “two heads are better than one”. By joining their forces, two companies would be able to eliminate a big threat to their success.
6) Entry strategy there are times when a large foreign corporation needs guidance from a small local company in order to gain entry into the local market. In cases like these, the local company may resist attempts at a takeover. In order to make the market entry easier for both parties, an incorporated joint venture could be formed. This way, both companies still have the freedom they enjoy and yet, have the benefits that they can get from joining forces.
These are just some of the reasons that companies may have for forming incorporated joint ventures. Knowing these reasons will help you understand the behavior of various corporations better, and may help you make better investments in the future.