THE BLOG
07/29/2014 05:13 pm ET Updated Sep 28, 2014

Joint Venture: Business Agreement for International Trade

Internationalization brings indubitable advantages to companies in terms of profitability, performance, commercial growth, finance, human resources, corporate image, risk diversification, etc. hard to cope with alone for a SME given its limited resources and capabilities (EU Commission, 2007).

Thus, companies may opt for an internationalization strategy using a joint venture agreement with a local entity that complement their weaknesses.

A joint venture is a business agreement among two or more companies to co-operate in a specific and limited way sharing resources, capabilities, efforts, risks, liability, revenues, expenses and assets in order to gain access to new niche markets.

Types of Joint Ventures:

Corporate joint-ventures / equity joint-venture: it is a form of collaboration that sets up a new entity or a new corporation. This new element is under a high rigidity and complexity due to the different legal implications of each country.

Non-corporate joint-ventures: it is a contractual agreement that does not generate a new entity.

All joint venture members assume the losses in an agreed proportion and its obligations are limited to the obligations of the own joint venture.

Steps to constitute a Joint Venture

The constitution of a joint venture comprises signing stakeholder's agreements about strategic, organizational and financial aspects. All of those must be in accordance with the legal framework of the country where the business is set up in (tax address).

In addition, stakeholders draw up the articles of incorporation. Here, the terms of agreements are capture in a formal fashion. We recommend you to count on the help of a legal advisor at this stage. From now onwards, you will take some responsibilities and will have some rights.

A Joint Venture facilitates:

• Get over commercial frontiers, building new market niches into different cultures.
• Creating new product lines.
• Improve quality.
• Isolate each stakeholder's book keeping.
• Get access to new capital and foreign funding opportunities.
• Shorten production time.
• Cost-cuts and minimize investment risks.
• Higher specialization.

You must keep in mind that a joint venture is particularly aimed at obtaining the respective commercial benefits, but does not include all business or economic activities of the participating members.

To guarantee the success the joint venture should be followed up with effective communication of the business plan to the parties involved.