What Are the Primary Advantages of Forming a Joint Venture?

Joint ventures are advantageous because businesses pool resources and share risk, expertise, and expenses to make a project successful and profitable for all parties involved. It is a common business strategy used among companies seeking to achieve a common goal or reach a specific consumer market.

When a joint venture is successful, participating companies share in the profit as agreed upon in their contract. Likewise, a failure in a joint venture results in all participating companies realizing a portion of the losses.

key takeaways

• A joint venture is a temporary partnership between companies that dissolves at a specific future date or when a project is completed.
• A joint venture affords each party access to the resources of the other participant(s), reducing the possibility of incurring additional expenses.
• Each company can maintain its identity and easily return to normal business operations once the venture is complete.
• Joint ventures also provide the benefit of shared risk.

Joint Ventures Share Resources and Responsibilities

More often than not, a company enters into a joint venture because it lacks the required knowledge, human capital, technology, or access to a specific market that is necessary to be successful in pursuing the project on its own. Coming together with another business affords each party access to the resources of the other participating company without having to spend excessive amounts of capital to obtain it.

For example, let’s say that Company A owns the facilities and manufacturing production technology that Company B needs to create and ultimately distribute a new product. A joint venture between the two companies gives Company B access to the equipment without purchasing or leasing it, while Company A is able to participate in the production of a product it did not incur costs to develop. Each company benefits when the joint venture is successful, and neither is left to complete the project alone.

Joint Ventures Provide Flexibility

Unlike a business merger or an acquisition, a joint venture is a temporary contract between participating companies that dissolves at a specific future date or when the project is completed. The companies entering into a joint venture are not required to create a new business entity under which the project is then completed, providing a degree of flexibility not found in more permanent business strategies. Also, participating companies do not need to give up control of their businesses to another entity, nor do they have to cease ongoing business operations while the joint venture is underway. Each company is able to maintain its own identity and can easily return to normal business operations once the joint venture is complete.

Note

Joint ventures are most commonly used to expand into foreign markets by partnering with local businesses.

Joint Ventures Spread Risk

Joint ventures also provide the benefit of spreading risk among the participating companies. Creating a new product or delivering a new service carries a great deal of risk for a business, and many companies cannot manage that risk alone. Under a joint venture, each company contributes a portion of the resources needed to bring the product or service to market, making the heavy financial burden of research and development less of a challenge. The risk of the project failing and negatively impacting profitability is lower because the costs associated with the project are distributed among each participating company.

What Is the Main Purpose of a Joint Venture?

Joint ventures allow businesses to combine resources, which saves them both time and money.

What Is a Reason a Firm May Decide to Form a Joint Venture?

One reason to form a joint venture is to share resources to accomplish a specific task or goal at a reduced cost for all participants.

What Are the 4 Types of Joint Ventures?

There are several types of joint ventures: horizontal, where competitors join each other; vertical, where businesses involved at different levels of a product or services join forces; project-based, where businesses join for one specific project; and functional, where parties join to improve functions such as marketing or research and development.

The Bottom Line

Joint ventures involve two or more businesses joining forces to bring a product or service to market they each would not be able to launch on their own. These ventures work to the advantage of all entities involved, reducing the costs and risks involved for each participant while providing opportunities for growth.