Advantages Of Joint Venture

Updated on May 22, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

What Are The Advantages Of Joint Venture?

The primary advantages of the joint venture include the generation of economies of scale as one entity’s strengths can be used effectively by others and bring about better innovation in the product and services. It also decrease competition and help in expansion and growth.

What Are The  Advantages Of Joint Venture

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In addition, access to more and better resources such as expert staff and latest technologies, competitive advantage and synergies in operations, lower cost of production, and efficient price of products. Here, we will discuss the most common advantages of forming a joint venture such as Penetrating new markets, synergy in M&A, Maximum flexibility and limited liability and decrease in go to market time.

Key Takeaways

  •  The advantage of joint ventures involving the economies of scale generation as others and better innovation in the product and services can effectively utilize one entity’s strengths.
  •  In addition, one may have an approach to better resources such as expert staff and advanced technologies, competitive advantage and synergies in operations, lower production cost, and effective product price.
  • The most common advantages of joint venture formation are carrying new markets, synergy in M&A, maximal flexibility and restricted liability, and reduced go-to-market time.
  • Although firms run as separate entities in a joint venture, their partnership assists in creating better products, eventually capturing more market share and offering a win-win situation with maximum profit and minimum commitment.

Advantages Of Joint Venture Explained

Joint venture is the process in which two or more commercial entities come together to for a single entity and use each other’s expertise, experience, assets, etc to grow and expand the entire business.

If proper and innovative strategies and implemented, then the venture is able to successfully handle tough competition. The entity may produce completely new service or product or may continue with the existence business.  

Even though firms operate as separate entities in a joint venture, the advantages of joint venture business is that their partnership helps build better products, eventually capturing more market share and providing a win-win situation with maximum gain and minimum commitment.

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Top 4 Advantages

#1 – Penetrating New Markets

The joint venture allows companies to enter new markets without legal hassles or regulatory restrictions. Moreover, the advantages of joint venture in international business is that it makes this process smooth as the local player already takes care of these challenges. The firm, in such circumstances, can focus on its core operating activities and invest in learning more about target customers, consumer behavior, and product positioning.

#2 – Synergy

Synergy is one of the implicit advantages of joint venture strategy. Both parties coming together has their strengths and weaknesses. The idea is to capitalize on these strengths. Two parties from different markets pool their resources and technical know-how to produce a better product.

#3 – Maximum Flexibility and Limited Liability

A advantages of joint venture strategy is that it creates an efficient and progressive collaboration between the two parties as it provides maximum flexibility and minimum liability. The two partners can focus on their core business and outsource their non-core activities, creating better products with limited risk. Also, the advantages of joint venture business  is that this provides this partnership provides a very flexible approach, as a legal contract does not bind the two firms. They can continue this partnership as long as they feel it benefits them. It is as easy to dissolve a joint venture as to start it. The advantage of the joint venture is that it promotes collaboration; the moment parties feel they are not gaining anything, they can come out of it. Thus, a joint venture can be of a limited lifetime, operational only till it benefits both parties. More than 80% of joint ventures end in a stake sale by one partner to another.

#4 – Decreases Go to Market Time

The advantage of a Joint venture is it helps firms in gaining access to new capacity, technological knowledge, and new markets in a reduced time frame without causing any detrimental effect on the quality. Most of the time, it helps firms make up for the lost time that might have given an edge to their competitors by getting into a joint venture. Thus, tackling competition with a better strategy and limited risk.

Examples

Example#1

The most outstanding example of a joint venture would be Maruti and Suzuki, started in 1981 and initiated by the government of India. For Maruti, it helped gain market share and access to the technical know-how of the superior Japanese technology, which helped it survive the competitor’s threats like Hindustan motors and their popular brand ambassador. On the other hand, Suzuki was a great opportunity to enter a large, growing auto market, especially in the pre-1990 era, when India was a closed economy. It was not easy for foreign firms to open their offices here. Many multinational companies like Coke and Pepsi would close their existing offices in India. Hence, it was a win-win situation for both parties. This joint venture has stood the test of time and has helped create a firm that has provided multifold growth to its investors and shareholders and provided employment to many. As of 2018, Maruti Suzuki has the largest share (more than 50%) in the fourth-largest auto market in the world. Thus, from this example, we understand what are the advantages of a joint venture.

Example#2

Advantages of Joint Venture IFB Bosch

source: economictimes.com

An example of such a collaboration is IFB and Bosch. Bosch, a German giant with superior German engineering, collaborated with an Indian-based engineering firm IFB. In this partnership, Bosch provided superior technical know-how and expertise. At the same time, IFB capitalized on its network of established distribution channels. Such collaboration has helped manufacture ideal automatic washing machines and reach the right customers through a well-established network channel. What happened is that each party has brought its strength to the table, leading to a much better, suited, and well-positioned product. Therefore, it should not be a surprise when this collaborated product boasts the largest market share in the washing machine segment of the Indian market. This example also shows what are the advantages of a joint venture.

Advantages Of Joint Venture Vs Disadvantages Of Joint Venture

Joint venture among two or more business has both advantages and disadvantages. They are as follows:

Advantages Of Joint VentureDisadvantages Of Joint Venture
Companies combine their assets, cash, synergy, experience, etc to expand,There is lack of co-operation and coordination in decision making.
Risk of both entities are combined and handled.Due to larger management, there may be higher risk of information leakage and lack of transparency.
Experience and expertise come together.There may be lack of commitment.
The business can diversify and spread.Too much diversification can lead to mismanagement.

Frequently Asked Questions (FAQs)

What are the advantages of corporate joint ventures?

The advantages of the corporate joint venture are increased capacity, risks and cost-sharing with the partner, and accessibility to new knowledge and expertise, including specialized staff and more significant resources, such as technology and finance.

What are the main advantages of the joint venture?

The main advantages of the joint venture are –
Economies of scale, Accessibility to new markets and network distribution.
Innovation, low cost of production, a separate brand name, and Technology accessibility. 

What are the three advantages of a joint venture quizlet?

Joint ventures have advantages like sharing the costs, opening a foreign market risk, and gaining local knowledge and political influence.

What are the advantages of international joint ventures?

The advantages of international joint ventures are that it facilitates faster and less costly foreign market access, availability of local reputation, know-how, distribution channels, consumer market, local marketplace knowledge, local production facilities, government contracts, limits the cost and risks in business operations, less risky than the acquisition in the foreign market, offers flexibility, and diminishes the chances concerning the political, legal, and controlled environment in the local market.

This article is a guide to what are the Advantages Of Joint Venture. We explain their differences with disadvantages and the top 4 advantages with examples. You can learn more about accounting from the following articles: –

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Comments

  1. Goitsemodimo Tsiape says

    Really appreciated the information shared…

    Thank uu

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