A Business Encyclopedia

Joint Venture

Definition: Joint Venture can be described as a business arrangement, wherein two or more independent firms come together to form a legally independent undertaking, for a stipulated period, to fulfil a specific purpose such as accomplishing a task, activity or project. In other words, it is a temporary partnership, established for a definite purpose, which may or may not uses a specific firm name.

For example, Maruti Ltd. of India and Suzuki Ltd. of Japan come together to set up Maruti Suzuki India Ltd.

The firms joining hands in a joint venture are called Co-venturers, which can be a private company, government company or foreign company. The co-venturers come to a contractual agreement for carrying out an economic activity, which has shared ownership and control. They contribute capital, pooling the financial, physical, intellectual and managerial resources, participating in the operations and sharing the risks and returns in the predetermined ratio.

Salient Features of Joint Venture

  1. Agreement: Two or more firms come to an agreement, to undertake a business, for a definite purpose and are bound by it.
  2. Joint Control: There exist a joint control of the co-venturers over business assets, operations, administration and even the venture.
  3. Pooling of resources and expertise: Firms pool their resources like capital, manpower, technical know-how, and expertise, which helps in large-scale production.
  4. Sharing of profit and loss: The co-venturers agree to share the profits and losses of the business in an agreed ratio. The computation of the profit and loss is usually done at the end of the venture, however, when it continues for the long duration, the profit and loss is calculated annually.
  5. Access to advanced technology: By entering into joint venture firms get access to various techniques of production, marketing and doing business, which decreases the overall cost and also improves quality.
  6. Dissolution: Once the term or purpose of the joint venture is complete, the agreement comes to an end, and the accounts of the coventurers, are settled, as and when it is dissolved.

The co-venturers are free to carry on their own business, unless otherwise provided in the joint venture agreement, during the life of the venture.

Objectives of Joint Venture

  • To enter foreign market and even new or emerging market.
  • To reduce the risk factor for heavy investment.
  • To make optimum utilisation of resources.
  • To gain economies of scale.
  • To achieve synergy.

Joint ventures are primarily formed for construction of dams and roads, film production, buying and selling of goods etc.

The type of joint venture is based on the various factors like, the purpose for which it is formed, number of firms involved and the term for which it is formed.

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