Joint Venture

A strategic joint venture is a business agreement between two companies that make the active decision to work together, with a collective aim of achieving a specific set of goals and increase their respective bottom lines.

Through this arrangement, the companies effectively complement one another’s strengths, while compensating for one another’s weaknesses. Both companies share in the returns of the joint venture, while equally absorbing the potential risks involved. Strategic joint ventures may be seen as strategic alliances, though the latter may or may not entail a binding legal agreement, while the former does.

Unlike mergers and acquisitions, strategic joint ventures do not necessarily have to be permanent partnerships. Furthermore, both companies maintain their independence and retain their identities as individual companies, thus allowing each one to pursue business models outside the partnership mandate.

There is a multitude of reasons why two companies might choose to enter into a strategic joint venture. For one, strategic joint ventures let companies pursue larger opportunities than they could attempt autonomously. For example, such partnerships let companies establish a presence in a foreign country or gain competitive advantages in a particular market.

To cite a more specific example, strategic joint ventures have helped many companies enter emerging markets that would be otherwise difficult to break into, without the benefit of local intelligence and connections to on-the-ground operatives in the region.

In such arrangements, one company typically contributes more to the operational costs, while the other company contributes know-how and operational experience. The share of the venture owned by each company largely depends on their individual contributions. But the most successful strategic joint ventures are those where each founding member firm winds up with an equal stake.

Strategic joint ventures may also help companies achieve greater efficiencies of scale by combining assets and operations. They also may help companies access unique skills and capabilities that they would otherwise be unable to develop themselves. Joint ventures also let the companies involved mitigate the risks for investments or projects, while helping each one gain access to the other’s technology, increase revenues, expand their customer bases, and widening product distribution channels.

While strategic joint ventures can take a variety of structures, most are formally incorporated. Such partnerships exist as their own legal entities, in that they operate independently of the founding member companies.

Some strategic joint ventures are structured to dissolve when a project is completed or an objective is met. All strategic joint ventures have separate liability from their founding member companies and can be sued—or bring litigation against another party.