Entering foreign markets – Joint ventures

Joint venture is a very common strategy of entering the foreign market. In the widest sense, any form of association which implies collaboration for more than a transitory period is a joint venture. Such a broad definition encompasses many diverse types of joint overseas operations, namely,

1. Sharing of ownership and management in an enterprise.
2. Licensing \ franchising agreements
3. Contract manufacturing
4. Management contracts

Three of the above have already been discussed in the preceding sections. The following paragraphs are confined to the first category refereed above, i.e. joint ownership ventures. What is often meant by the term joint venture?

The essential feature of a joint ownership venture is that the ownership and management are shared between a foreign firm and a local firm. In some cases there are more than two parties involved. For example, Pepsi’s Indian joint venture involved Voltas and Punjab agro industries Corporation.

A joint ownership venture may be brought about by a foreign investor buying an interest in a local company, a local firm acquiring an interest in an existing foreign firm or by both the foreign and local enterprise jointly forming a new enterprise.

It is also a common practice to split the local interest between a partner and public participation. Such a strategy may enable the international firm to retain much control despite a minority holding as the power of the remaining shares is spread out. Further, equity holding by the public would help the enterprise get some public support. Partnership with government organization may help to obtain favorable treatment from the government.

In countries where fully foreign owned firms are not allowed or favored, joint ventures is the alternative if the international marketer is interested in establishing an enterprise in the foreign market. Many foreign companies entered the communist, socialist and other developing countries by joint venturing.

One important advantage of joint venturing is that it permits a firm with limited resources to enter more foreign markets than might be possible under policy of forming wholly owned subsidiaries.

In some cases, it is also possible to swap know how in forming joint venture as a means of securing ownership in foreign operations.

Partnership with local firms has certain specific advantages. The local partner would be in a better position to deal with the government and the publics. Further, there would not be much public hostility when there is a local partner; it would be much less when there is equity holding by the government sector and the public.

A right local partner for a joint venture can have a major impact on a firm’s competitiveness because such a partner can serve as a cultural bridge between the manufacturer and the market. For example, several successful foreign affiliated companies have demonstrated how the right partnership can strongly enhance a firm’s competitive edge and its ability to adapt to and cope with the idiosyncrasies of the Japanese market.

Here we are giving below some of the successful joint ventures,

Ford had set up a JV with Mahindra and Mahindra (M&M). It introduced the Escort and Fiesta models in India. The project involved a total outlay of Rs 2,700 crore. Ford’s own investment was to be in the range of $ 500-700 million. They project was to manufacture 20,000 vehicles initially and gradually increase its capacity. The cars were to be marketed both in India and abroad. Initially, the company manufactured vehicles using the production facilities of M&M. Ford purchased 5.87 percent of equity in M&M to begin with.

Honda Motor Company of Japan entered with SIEL of the Siddarth Shriram group as partner. The project was to manufacture 1500 cc cars to start with and add a small car later. The JV was named as Honda SIEL Cars India Ltd. Honda was to have 60% of the equity in the joint venture and SIEL the rest. The proposal envisaged an investment of Rs 860 crore over a seven year period. The equity base of the company was to be Rs 180 crore. The company was to manufacture 10,000 cars in the first year and increase to 30,000 units per annum by the third year. Honda-SIEL launched the Honda City a model, which was specifically developed for India.

Joint Ventures can be a mixed picture of success and failure. While some joint ventures are very successful, some face problems from the very beginning and in case of some others problems develop after a period of mutual benefit and success.

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