There are several benefits of joint ventures with foreign companies and many companies prefer to enter an international marketplace through an international joint venture
An international joint venture occurs when at least two companies which are based in different countries form a partnership in order to engage in an economic activity. In the case of a joint venture with foreign companies, each participant remains economically, geographically and legally independent of each other. The foreign company decides jointly with the local company to either establish a new legal entity to share profits, ownership, losses and other benefits of the business or to enter into an international joint venture agreement. This partnership with the foreign companies provides an easy route for transferring knowledge, technology and creates employment opportunities. The venture allows many of the benefits and rewards of a cross-border merger or acquisition with only a fraction of the risks, an option to rapidly exit, and limited consequences for the partner companies.
Joint ventures with foreign companies occur frequently in both developed and developing markets. The key benefits of joint ventures with foreign companies include:
- Participant companies can explore new growth opportunities that they would otherwise not, such as entering into a new market or accessing new technologies
- Supports growth in digital products and services by granting companies access to digital capabilities, develop new digital solutions or provide digital solutions
- Facilitates entry for multinational corporations into developing countries
- Allows developing countries to attract foreign direct investment and knowledge
- Creates employment opportunities in the local country (where the operations of the venture are or in the country where one of the partners is physically located) and grows the flow of foreign currencies
- Facilitates rapid transfer of technology, intellectual property, trademark and patents, marketing knowledge, managerial expertise, customer networks, local market knowledge
- Reduces the risk associated with conducting business in a new market, including political, legal and regulatory
- Offers flexibility to rapidly exit when local conditions change or if the market and relationship with the business partner is unattractive.
However, aside from all the benefits joint ventures with foreign companies provide, there are also challenges when the joint ventures are short-lived. For example, when the joint venture ends, the technology, intellectual property and knowledge the foreign company shared may be used by the local company, creating a strong competitor. This is especially true when there is weak intellectual property protection and a poorly drafted international joint venture agreement. To avoid such challenges, it is important to hire an experienced international business attorney to execute an effective cross border joint venture agreement and help with other contractual issues such as employment, financial compliance and joint venture termination or acquisition.
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