A joint venture is a new enterprise owned by two or more participants. It represents a combination of subsets of assets contributed
by two (or more) business entities for a specific business purpose and
a limited duration. It is essentially a medium to long-term contract which
is specific and flexible. Though, the joint venture represents a newly
created business enterprise, its participants continue to exist as separate
firms. A joint venture can be organized as a partnership firm, a corporation
or any other form of business organisation which the participating firms
choose to select. It generally has the following characteristics:-
- Contribution by partners of money, property, effort,
knowledge, skill or other assets to the common undertaking.
- Joint property interest in the subject matter of the
- Right of mutual control or management of the enterprise.
- Right to share in the property.
Thus, joint ventures are of limited scope and duration.
They involve only a small fraction of each participant's total activities.
Each partner must have something unique and important to offer the venture
and simultaneously provide a source of gain to the other participants.
However, the participants' competitive relationship need not be affected
by the joint venture arrangement.
Benefits of a Joint Venture
Joint ventures perform a useful role in assisting companies
in the process of restructuring. It can enable a firm to achieve market
penetration into new areas overtime, enter and develop new product markets,
expand into new geographic areas and participate in new technology driven
value activities. They can also be used by smaller firms protectively
as an element of long-range strategic planning. Thus, a small firm in
a highly concentrated industry can negotiate joint ventures with several
of the industry's dominant firms to form a self-protective network of
counterbalancing forces. Joint ventures are formed with several motives:-
- The main motive is to share the risks. It reduces the
risks in a number of ways as the activities can be expanded with smaller
investment outlays than if financed independently.
- The expressed purpose of most of the joint ventures is
knowledge acquisition. The complexity of the knowledge to be transferred
is a key factor in determining the contractual relationship between
the partners. One or more participants may seek to learn more about
a relatively new product market activity. This might concern all aspects
of the activity or a limited segment like R&D, production, marketing
or product servicing.
- A small firm with a new product idea that involves high
risk and requires relatively large amounts of investment capital may
form a joint venture with a large firm. The larger firm might be able
to carry the financial risks and be interested in becoming involved
in a new business activity that promises growth and profitability. In
addition, the larger firm might thereby gain experience in the new area
of activity that may represent the opportunity for a major new business
thrust in the future.
- Tax advantages are a significant factor in many joint
- It also helps in expanding the firm's operations into
foreign countries. The local partners contribute in the form of specialised
knowledge about local conditions, which are essential to the success
of the venture.
A joint venture may be subjected to several difficulties.
As circumstances change, the contract might be too inflexible to permit
the required adjustments to be made. The basic reasons for failure of
a joint venture are:-
- Inadequate preplanning for the joint venture.
- The hoped-for technology never developed.
- Agreements could not be reached on alternative approaches
to solving the basic objectives of the joint venture.
- People with expertise in one company refused to share
knowledge with their counterparts in the joint venture.
- Parent companies are unable to share control or compromise
on difficult issues.
A successful joint venture needs to fulfill the following
- Each participant has something of value to bring to the
- The participants should engage in careful preplanning.
- The agreement or contract should provide for flexibility
in the future.
- There should be provision in the agreement for termination
including buyout by one of the participants.
- Key executives must be assigned to implement the joint
- A distinct unit be created in the organisational structure
which has the authority for negotiating and making decisions.
Joint Ventures by Foreign Companies
A foreign company can invest in an Indian company through
a joint venture agreement (or as a wholly owned subsidiary) in the areas
which are otherwise not reserved exclusively for the public sector or
which are not under the prohibited categories such as real estate, insurance,
agriculture and plantation. Foreign investment into India is governed
by the Foreign
Direct Investment (FDI) policy and the
Foreign Exchange Management Act, 1999 (FEMA). The Government has set
up a Indian Investment
Centre in the Ministry of Finance as a single window agency for authentic
information or any assistance that may be required for investments, technical
collaborations and joint ventures. It advises foreign investors on setting
up industrial projects in India by providing information regarding investment
environment and opportunities, the Government industrial and foreign investment
policies, taxation laws and facilities and incentives and also assists
them in identifying collaborators in India.
For such foreign investments into India, a two tier approval
mechanism has been provided:-
- Automatic Approval Route:- FDI in sectors or activities
to the extent permitted under automatic route does not require any prior
approval either by Government of India or Reserve
Bank of India (RBI). The investors are only required to notify the
Regional office concerned of RBI within 30 days of receipt of inward
remittances and file the required documents with that office within
30 days of issue of shares to foreign investors.
- Foreign Investment Promotion Board (FIPB) Approval Route:-
FDI in activities not covered under the automatic approval route requires
prior Government approval and are considered by the Foreign
Investment Promotion Board (FIPB).The FIPB has been set up in the
Ministry of Finance to promote inflows of FDI into the country, as also
to provide appropriate institutional arrangements, transparent procedures
and guidelines for investment promotion and to consider and approve/recommend
proposals for foreign investment.
Approvals of composite proposals involving foreign investment
or foreign technical collaboration are also granted on the recommendations
of the FIPB. The companies having foreign investment approval through
FIPB route do not require any further clearance from RBI for receiving
inward remittance and issue of shares to the foreign investors. The
proposals to FIPB shall contain the following information:-
- Whether the applicant has any existing financial or
technical collaboration or trade mark agreement in India in the same
field for which approval has been sought; and
- If so, details thereof and the justification for proposing
the new venture or technical collaboration;
- Applications can also be submitted with Indian Missions
abroad who will forward them to the Department
of Economic Affairs for further processing;
- Foreign investment proposals received in the Department
of Economic Affairs are generally placed before the Foreign Investment
Promotion Board (FIPB) within 15 days of receipt.
Also, the Secretariat
for Industrial Assistance (SIA) has been set up by the Government
of India in the Ministry
of Commerce & Industry to provide a single window service for
entrepreneurial assistance, investor facilitation and receiving and processing
all applications which require Government approval. It also notifies all
Government Policy decisions relating to investment and technology and
collects monthly production data for select industry groups.