Joint Ventures and Strategic Alliances

There are times when businesses have opportunities within the global market that are better undertaken with a partner. Sometimes these projects are extremely large and costly or are so complex that it makes sense to include multiple businesses or even governments. These large-scale, global projects usually take one of two forms: joint ventures or strategic alliances.

joint venture

A joint venture establishes a new business that is jointly owned by two or more otherwise independent businesses.

The most common joint ventures involve two companies that are equal partners in the new firm, investing money and resources while sharing control of the newly formed firm. Often, the foreign partner provides expertise on the new market, business connections and networks, and access to other in-country aspects of business, such as real estate and regulatory compliance. For example, in 2012, Starbucks entered into a joint venture with Tata Consumer Products of India to open Starbucks stores in India. The company created in this joint venture is Tata Starbucks Private Limited and after 10 years, it has expanded to 233 outlets in 19 cities in India with a goal of opening 40 more stores in the next year.^[1]

Joint ventures require a greater commitment from firms than other global strategies, because they are riskier and less flexible. Joint ventures may provide tax savings in some countries. For example, in countries where foreign-owned businesses are taxed at higher rates than locally owned businesses, a joint venture with a foreign partner may be taxed as a local business. Some countries like China require all business ventures to be at least partially owned by domestic business partners.

A less permanent but equally effective way to enter the global market is through a strategic alliance.

strategic alliance

A strategic alliance is based on an agreement of two or more corporations, each based in their home country, to cooperate for a specified period of time. Unlike a joint venture, a new company is not formed.

Generally, strategic alliances are pursued when businesses find that they have gained all they can from exporting and want to expand into a new geographic market or a related business. This approach can be particularly useful when a government prohibits imports in order to protect domestic industry. The cost of a strategic alliance is usually shared equitably among the corporations involved, and it’s generally the least expensive way for all concerned to form a partnership. An example of this is the alliance between General Mills and Nestlé. Honey Nut Cheerios are manufactured in bulk by General Mills in the United States and then shipped to Nestlé Europe, where they are packaged and shipped to France, Spain, and Portugal.

Advantages of Joint Ventures and Strategic Alliances

The greatest advantage of joint ventures and strategic alliances is the knowledge and experience of the market offered by the local partner about everything from consumer preferences to cultural differences, language, and political/economic systems. Another advantage is that the risk of entering the market with a new product is shared by more than one firm, reducing each company’s exposure to potential losses.

Disadvantages of Joint Ventures and Strategic Alliances

However, these types of partnerships also have their drawbacks. When companies share their technology and proprietary information, they run the risk that the partner firm will take that technology or innovation and use it to become a competitor in the future. This was a primary concern when Boeing collaborated with Mitsubishi and was ultimately resolved in the legal details of the partnership agreement signed by both companies. Conflicts over control of these partnerships can also arise if the owners of the partner firms do not agree on key business decisions.

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