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A joint venture is a business undertaking consisting of two or more proprietors or organizations with an aim of sharing the cost of running the business and increasing profitability. Both local and international companies may want to benefit from joint ventures and they do this through either a formal agreement or a simple and informal mutual understanding. Joint ventures have become very popular over the recent years and most have shown great success in their operations (Johnson 2000).
According to Lynch (1989), joint ventures operate under similar concepts with alliances. The only distinction between the two is that alliances do not involve third parties and they are engaged for smaller projects than joint ventures.
Why international companies engage in joint ventures and alliances
Most international companies form joint ventures and alliances to save on expenses. They enable companies to implement strategies of sharing both costs and risks that are involved. Companies that aim at targeting international markets will find it easier to reach out to other nations more effectively when they have formed ventures and alliances than when they are accessing the markets individually. The international companies that have formed joint ventures and alliances are therefore able to gain access to broader global markets (Lane 1989).
They also form joint ventures in order to be able to advance their technological capabilities by engaging in research and development. According to Lickson (1994), most companies especially in the developed countries were normally reluctant to engage in research and development and the governments were not supportive either. However, with the recent existence of those countries with technologically advanced industries that are also fully supported by the government, most international companies have become willing to involve themselves in these countries through forming joint ventures with their companies.
Another major reason would be the fact that there have arisen various governmental and non-governmental agencies that encourage companies to form ventures and they also offer financial support to those companies that have come together. The governments of most countries have, for instance, involved themselves in the private business sector in order to support those firms that wish to form international joint ventures. This is unlike in the past years when the governments were reluctant to involve themselves in business development (Lickson 1994).
International companies engage in joint ventures also because they form a conducive environment for organizational learning and for sharing knowledge, experience, and skills with each other. According to Moeller (2000), companies intending to operate in the global markets will need to have the required knowledge of the market and this may greatly be enhanced through joint ventures because different companies have different levels of skills, knowledge, and experience in the business.
There is also the desire to enhance goodwill. A well-established and renowned company will more likely attract markets than that which is not. Major international companies that have been in the market for a relatively long period have created goodwill with their customers and other companies will create alliances and joint ventures to benefit from the goodwill. This way, they will be able to target larger markets and advance their activities (Lynch 1989).
Benefits of joint ventures and alliances
From the analysis above, it is clear that companies form joint ventures and alliances for a number of reasons. There are those companies that are well known as joint ventures and one major example is the Nokia Siemens Networks that is formed from two telecommunication companies, that is, Nokia Business Group and Siemens AG’s COM. The new company began its operations as a joint venture in 2007, having been formed in June 2006. It offers telecommunication solutions to its customers and it has seen a major development in its activities since it began its operations.
The Nokia Siemens Networks has been able to capture large markets through its activities. This is one major advantage of joint ventures and one of the major reasons why companies form them. Nokia Siemens Network has been able to access markets to over 150 countries all over the world. It has been able to enhance good relations with its customers who have gained its trust and through this, the company has gained a competitive advantage over a number of other smaller telecommunication companies.
Joint ventures also allow companies to gather enough capital and other facilities to benefit from economies of scale or make greater use of the available facilities and hence lower the production and operation costs (Lickson 1994). Nokia Siemens Network has come to be regarded as one of the largest makers of telecommunication equipment and this has enabled the company to greatly benefit from producing on a large scale. The variable costs of production are minimized while output is increased. This has been made possible by the accomplishment of the target set to combine revenue of over 15 billion euro.
They also enable companies to develop and incorporate technology (Lickson 1994). The companies that form ventures are able to improve technologically rather than those companies that are working independently. Nokia Siemens Network has, over the last two years been able to establish new products through the development of their technology. It has been able to establish broadband connectivity solutions that assist organizations to connect to the internet using telecommunication. It has also come up with new operations and enterprise software that enhance the operation of other businesses and hence diversify their activities through improved technology.
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