Objections To Joint Ventures

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Objections to joint ventures

The two major objections to joint ventures are:

I. The acknowledged difficulty of mating two separate companies, whether of the same nationality or not in a commercial marriage bed. A disproportionate amount of time is likely to be spent on resolving disputes and the management of a jointly owned company is perhaps forced to adopt compromises and play each principal off against the other with resultant confusion of purpose.

2. They lack flexibility. Becoming a partner in a joint venture entails important tong-range implications. It is necessary to take into account a company's global marketing and investment strategies. Long-term profitability in the frequently changing conditions of international markets calls for flexibility. Joint ventures are inherently inflexible because they create difficulties in the integration or rationalization of multinational production, give rise to special problems of taxation, and may reveal that the corporate objectives of the partners are incompatible.

An example of the last-mentioned weakness in joint venturing would arise, for instance if a British company with a wholly-owned subsidiary in Holland and partnership in a joint venture in Italy, manufacturing the same product in both countries, were to receive an order for it from America. If the product could be supplied at the same price and the same profit margin from either source, the British company would be in a predicament. It may have excellent reasons for giving the business to its Dutch subsidiary, but its Italian joint venture partnejr is unlikely to be sympathetic.

Another dilemma would face a British manufacturer exporting products to distributors throughout the Middle East who then goes in for a joint venture in Iran to produce and market the same range under a different label. Such a company would be in competition with itself in the most uneconomic way. There may, of course, be strong reasons for such action, but great care is needed in such a delicate situation.

Another danger that confronts a partner in a joint venture is that he may be creating future competition for himself by introducing sophisticated management, manufacturing or marketing techniques into areas where they are unknown. He may find he has trained employees who will later set up their own companies and use these very techniques against him.

The conflict of interests between a joint venture in one country and the international operations of one of the partners in the venture becomes most serious when the latter sets out to regionalize production. This was the experience of an American company which had set up both majority- and minority-owned joint ventures in several European countries. None of these manufactured the complete product range, but each made a large segment of it. With the establishment of the EEC the American company found that in five of the member countries its joint ventures were competing with each other. Clearly, the solution was to rationalize production. The other shareholders in each of the countries concerned, however, refused to accept this: they were not concerned with what was best for the whole international operation of their American partner, but only with what was advantageous to themselves. In consequence, a European holding company had to be formed, and shares in this given in exchange for shares in the various European joint venture companies. Had the American company set up a wholly-owned operation in each market, in the first place, it would certainly have been able to allot production of different finished goods or components wherever it wished; but, in defence of the joint venture concept, it must be said that it would not have been able to enter so many markets so soon.

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