EID-372 Joint Ventures Information EID-372 -> Resources -> Joint Ventures 
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Joint Ventures Information:
A joint venture (J.V.) is a new corporation formed through the participation of 
two or more companies in an enterprise in which each party contributes assets, 
owns the equity (property of the J.V.such as equipment, buildings, capital, 
etc.) to some agreed upon degree, and shares the risks and benefits of the new 
enterprise. Joint ventures are not new. In 1879 Thomas Edison teamed up with 
Corning Glass Works to make his experimental incandescent light bulb. In the 
1880's railroads in the United States formed partnerships for large-scale 
projects. The key to a successful joint venture is sharing of a clearly defined 
common business objective.
Advantages of international joint ventures:
International joint ventures can be extremely advantageous for all partners 
since they provide participation to income and growth. Developing countries give 
joint ventures preferential treatment because they present the desired mix of 
foreign technological and capital involvement, they guarantee local management, 
and effect an efficient transfer of technology.
      Advantages of JV's for the international investing company:Advantages of 
      JV's for the host country and corporation:
      1) Chance to penetrate a new market1) Chance to gain up-to-date 
      technological and managerial know-how
      2) Chance to sell technology, processes, equipment, consulting services, 
      etc.2) Chance to create new industries, skills, training, etc.
      3) Chance to invest capital and get return streams for many years3) Chance 
      for increased employment
      4) Take advantage of the expertise in the local market of the host country 
      company4) Chance to get important return streams for many years
      5) Chance for growth5) Chance for growth

A joint venture may be the only way that a firm can participate in a certain 
market. For example India restricts equity participation by foreign firms in 
local operations to 40%. Many Western firms are using JV's to get access to 
Eastern European markets. In the former Soviet Union, 49% foreign equity 
ownership in JV's is now possible as a result of economic reforms.
An important commercial reason for participating in JV's is to minimize the risk 
of exposing long-term investment capital while at the same time maximizing 
leverage on the capital that is invested. In minimizing the risk, the partners 
in a JV must understand that economic and political conditions in many countries 
are volatile. Due to this, corporations tend to shorten their investment 
planning time span more and more by expecting higher return in the early years 
of the investment. The financial rationale therefore takes greater importance.
      Drawbacks of JV's for the international investing company:Drawbacks of 
      JV's for the host country and corporation:
      1) Rapid change in the host country political or economic situation can 
      create substantial losses for the investing corporation1) If the host 
      country is perceived as a difficult marketplace, foreign investors may 
      avoid doing business there
      2) Differences in culture and management style can create problems between 
      the partners over settlement of claims, valuation of assets and 
      liabilities, etc.2) The international partner might not deliver on all the 
      promises made
      3) Adverse publicity in local and international media can damage the image 
      and reputation of a company 

The financial structure of a JV:
Once the capital required to start a JV is established (based on the initial 
technology cost, licenses, equipment, buildings, transportation, cost of 
salaries, permits, etc.), this capital has to be raised in two forms:
  Equity:
  This is the total capital portion which represents the ownership in the JV of 
  its partners. Generally about 30 to 40% of the total capital is put as equity, 
  and is issued as stocks to the partners, proportional to their respective 
  share in the JV.
  Debt:
  The balance of required capital (70 to 60%) is borrowed from various 
  international banks, investment firms, or private investors. The JV issues 
  bonds which show its debt obligations.
For example:
If a JV with two partners needs 100 million dollars to start operations, the 
partners will put lets say 40 million as equity, and receive stock in the JV. If 
their ownership shares are 49 and 51% respectively, one will put in equity 19.6 
mil. and the other 20.4 mil., or other agreed upon amounts. JV stock will be 
issued for this money.
The rest of 60 mil. will be raised as debt of the JV from banks, private 
investors, etc. The JV will issue bonds corresponding to this sum.
The managerial structure of the JV:
The percentage ownership is extremely important, since it establishes which of 
the partners has the leadership role in a JV. That's why, in many international 
JV's, American firms insist to have at least 51% ownership, in order to control 
the Board of Directors (BOD) and the JV management. Of course this is a very 
political issue, and in many developing countries a foreign investor can own 
maximum 49% of a JV.
Generally, in function of its size, a JV can have a BOD of 9 to 13 directors, 
some employed by the JV and others from outside organizations. The Chief 
Executive Officer (CEO) of the JV is also a BOD member and is nominated by the 
BOD. The Head of the BOD is also chosen by the BOD.
The number of BOD members appointed by each partner is important, since they 
tend to agree with that particular partner in case of difficult policy issues.
Managerial control of the JV is extremely important since it sets the production 
norms and affects all productivity, labor, financial, etc. decisions.
In the GTK-V project you'll have to establish joint ventures and negotiate the 
ownership and management terms. A thorough understanding of how a JV operates 
will be essential to successfully complete the GTK-V project.
Responsibilities of the BOD:
The main responsibility of the BOD is to satisfy the stockholders of the 
corporation, to represent and uphold their interests and concerns to the best of 
their abilities. The BOD should set policies and oversee the corporation's 
management and its CEO. A second concern of the BOD is corporate social 
performance, that is the "good corporate citizen" concept. A third is corporate 
morality or the ethics of business practices.
Corporate governance models:
  The traditional model of corporate governance, prevalent in the U.S., holds 
  that the shareholders' rights are paramount. The shareholders own the 
  corporation, elect the BOD, which acts as an intermediary between the 
  shareholders and the management of the corporation. The BOD appoints the 
  officers who run the corporation on a daily basis. Management exercises its 
  authority over the firm's employees in order to achieve the corporate 
  objectives. In this type of organization the main emphasis is on stockholders' 
  interests. management is more concerned with production and and their own 
  rewards. Employees are concerned with wages and benefits. The model relies on 
  the ability of the CEO to run the company efficiently and effectively. 
  The codetermination model is a two-tiered system in which there is a division 
  between supervision and management. This system originated in Germany and has 
  spread in many European countries. the codetermination, or European model, 
  maintains that both capital (shareholders) and labor should be represented in 
  the process of corporate governance. Representatives of both ownership and the 
  employees comprise the BOD. One practical version of this model promotes a 
  two-tiered structure, with a supervisory board and a management board. The 
  supervisory board oversees the operation, and the management board is involved 
  in the daily operation of the corporation. The supervisory board has ultimate 
  authority in that it can select and dismiss members of the management board. 
  The major feature of this system is that it makes a clear distinction between 
  those who manage and those who monitor. this results in a system of checks and 
  balances which avoids conflicts of interest. 
  In the stakeholder model of corporate governance, all constituencies that have 
  a direct stake in the performance of a corporation are represented in the 
  governance process. The constituents include more than just the employees and 
  owners. The interests of all stakeholders such as employees, major customers, 
  major suppliers, major creditors, environmentalists, bankers,and other 
  affected parties are represented on the BOD. Objectives are achieved by 
  balancing the often-conflicting interests of the different constituents. The 
  participation of these various stakeholders groups in the governance process 
  ensures that a wide range of interests will be taken into account in corporate 
  decision making. 
The type of BOD and corporate governance chosen by an international JV depends 
on the following:
  The local legal, economic, and managerial conditions and customs of the host 
  country 
  The type of industry the company is involved in 
  The formal and informal structure of the parent companies 
The content of a JV proposal/agreement:
The difference between the initial proposal and the final JV agreement between 
partners is that in-between takes place the negotiation process that establishes 
the final format of the agreement.
A JV proposal/agreement should address, in sufficient detail to show competence 
and not to leave any important loose ends, all the requirements outlined in the 
Request for Proposal (RFP). The main areas that should be addressed are:
  The scope (purpose) of the JV: The exact, clear business reason(s) for 
  creating the JV should be defined. The input to the JV of each partner as far 
  as technology, assets, capital, expertise, goodwill, etc. should also be 
  stated. 
  The financial structure of the JV: The total start-up capital requirements and 
  the expected revenue streams for the next five years should be calculated. The 
  start-up capital should be calculated in such a way as to cover all the 
  expected expenses till the time when the revenues generated by the JV can be 
  utilized. The total equity and debt percentages should be established. The % 
  equity contributed by each partner, based on his ownership share, should also 
  be defined. 
  The managerial structure of the JV: The proposal/agreement should clearly 
  spell-out which of the partners will have the leadership role in the main 
  managerial decisions and for how long. Who will nominate the CEO, how many 
  directors will be nominated to the BOD, and how many by each partner. How the 
  head of the BOD will be elected. 
  The environmental impact of the JV: This important aspect of operations should 
  be addressed. If the impact is significant (i.e. liquid, gaseous, or solid 
  toxic or harmful wastes, depletion of the natural environment, etc.), a 
  separate environmental study to mitigate all the environmental effects is 
  required. 
  Technology transfer and worker training: The specific technology transfer of 
  the JV, its time frame, and the types of worker training to be undertaken 
  should be clearly discussed. 
  JV dissolution terms: If the JV dissolution or change in ownership is 
  contemplated at a later date, the terms under which one partner can buy the 
  other out should be mentioned. 
The essence of the JV proposal/agreement is to be a document as comprehensive as 
possible, and to prevent misunderstandings and future conflicts between the 
partners from the start.


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