A Practical Approach to International Joint Ventures

With the rapid increase in globalization of world market, businesses are seeking to explore and develop opportunities to internationally source or distribute goods, services or intellectual property. Recent economic downturn has made taking advantage of strategic opportunities of international alliances even more attractive. Except large corporates other businesses lack in infrastructure, resources, experience to enter international market on their own. Therefore, business alliances give access to companies of the global market in a more economic and effective way. Differences in legal and regulatory structures along with cultural and language barrier makes partnering with local company in the form of international joint venture an appealing option.

Though international joint ventures are an effective way of entering a new market quickly but partnering with a local, sharing risks and using their resources and expertise can be an unstable undertaking if not done with proper planning and understanding.

What is an International Joint Venture?

An international joint venture is often defined as joining together of two or more business partners from different jurisdictions to pool resources, share risks and divide rewards from a joint enterprise. Most of the time, one of the partners has physical presence in the jurisdiction where the joint venture is formed. There could be different forms of a joint venture such as a foreign partner could buy into the local company, or they might agree to create a brand-new shared company, either way there is joint legal ownership and guidance. The contributions of joint venture partners often differ and are decided based on the capabilities of each partner and the nature of venture.

Although legal agreements are required to create and sustain an international joint venture but in order to have a successful venture international JVs should be a practical and evolving relationship. It is important to have a continued positive and open communication between the decision makers after the formation of the JV. Situations change and the management team should be capable of changing with them.

International Joint Venture amid COVID-19:

COVID-19 has presented uncertain challenges which nobody anticipated at the start of the year and it not only affected personal lives but also halted business operations. Though the lockdown has been eased the COVID cases are increasing rapidly in India and while India is struggling most of the foreign countries have passed the worst and are now in recovery mode. Businesses have started their operations aggressively and foreign markets are now gaining strength. Further, India being at peak of pandemic, domestic market is facing lot of financial constraint and also a dip in traditional consumption. However, we can see increase in demand for ‘Made in India’ products in overseas market especially in essential goods sector. Therefore, Indian entrepreneurs should seize these cross-border opportunities and the best and safest way to do that in current scenario is to partner with a local foreign company to enter the target market. It is cost effective and comparatively less risky.

Especially with travel limitations and sluggishness, instead of setting up a new business operation in foreign country and getting stuck with legal hurdles, it could be advantageous for Indian companies looking to expand their business overseas to partner with suitable local companies which will give them a ready base and also an entry point into the market.

Further, due to various political and other economic reasons, many foreign companies are considering to shift their manufacturing unit from China. Even foreign governments are also encouraging their respective companies to move their business out of China and are offering various relief packages in this regard. This has made India a top contender for foreign corporates to establish their operations. Indian government is also looking to capture this opportunity and has introduced various economic reforms & incentives for foreign companies to attract more FDI in India which could help in reviving the local business as well. Therefore, it could be an interesting opportunity for Indian entrepreneurs to collaborate with a suitable foreign company who is looking to enter Indian market or is willing to build a base in India especially in the high priority industries such as Auto parts manufacturers, Leather, Medical equipment suppliers, Textiles.

Every crisis is an opportunity. It is upto entrepreneurs to think outside the box, design their growth strategy and be ready to exploit the opportunities available.

Legal Structure:

A joint venture could be a contractual arrangement between two business partners in which the basis of understanding and governing terms are put together in a written agreement. Commonly today, the parties may create equity joint venture by forming an entity owned in pre-agreed proportions by the respective parties or specially funded subsidiaries or by purchasing equity in an already existing company. The new entity can be in form of limited liability partnership or a corporation or any other form available under the local laws of the said country.

The type of joint venture whether contractual or equity usually suggest the level of intensity with which the partners are pursuing the transaction. The equity joint venture is generally for close and long term collaboration where the investment level is comparatively higher. However, in either case, it is advisable that the relationship between both parties is governed by a definitive written agreement so as to avoid any sort of conflict. Other than the JV agreement, the parties may also enter into ancillary contractual agreements to address certain specific components of the JV.

Advantages of International JVs:

• Allows for comparatively faster and less costly access to overseas market than can be achieved by outright acquisition or starting a new venture in the jurisdiction.
• Provide quick access to channels of distribution and also the foreign partner can gain the knowledge and know-how of the local market which significantly increases the chances of success for the venture.
• The local partner often has existing relationships with suppliers and customers along with the proficiency in the local language and customs. These benefits are very important especially for small or medium-sized business that does not have enough capital, resources or expertise.

Disadvantages of International JVs:

• Various factors such as market developments, technology issues, regulatory changes and economic downturns are difficult to anticipate and can have a strong effect on a JV.
• Despite having a proper structure for dispute resolution, there could be management issues because of different mindset of the partners. The partners may also discover that they do not share similar expectations and are not flexible enough to change for the evolving needs of the business.
• Any joint venture whose management is dominated by either party or whose hands are tied up unless both parties agree on day-to-day operational issues, it is less likely to succeed.
• Unless an international JV is properly capitalized, its debt financing may have to be guaranteed (wholly or part off) by the joint venture partners which will increase the level of risk for them.
• There is the possibility of creating a potential competitor in the form of one’s own joint venture partner. However, this could be taken care off by drafting a secured joint venture agreement with non-competition, non-solicitation and confidentiality provisions.

International Joint Venture Mistakes:

• Too good deal: A joint venture is an alliance & it works well and rewards the partners best if it is structured as a ‘win-win’ scenario for both parties. The partners should focus on earning revenues from customers jointly instead of from each other as a result of unbalanced venture.
• Lack of exit strategy: Although it is difficult to plan the end of the partnership at the beginning itself, this is essential given the nature of joint venture as it is often for a limited period of time or project.
• Insufficient planning: In the rush to get the projects started or capture the potential market opportunity, only some joint venture partners think through the challenges and build a definitive strategic and tactical business plan. Even if such a plan is developed, the partners should keep attention on it as the business opportunity evolves.
• Talk to the people: While negotiating and structuring the joint venture, it is critical to first communicate with the operational managers and technicians as these people can provide valuable insight at initial stage itself and save the venture from any significant cost or possible failure.
• Preliminary joint venture management: Experienced management can be helpful to both partners in ensuring that all important business issues are cleared in negotiation and also in drafting of the JV agreement.
• Don’t chase the deal: Perhaps a biggest mistake that joint venture partner can make is not willing to move away from a bad deal. As in every transaction, there should be a deal breaker i.e. a point beyond which a partner will not go in respect to important business and legal issues.

International Joint Venture Agreements:

To avoid some of the common mistakes mentioned above, there are certain important matters that should be properly dealt with and some preliminary steps every prospective joint venture partner should follow. Firstly, start with a term sheet, an agreement in principal or a MOU. Anyone of these documents will serve as a base for assuring that all the critical business and legal issues are discussed and agreed to by the parties before a definitive joint venture agreement is drafted. This will force both parties to examine the basic components of the alliance related to the management, income and profits, and allocation of the risk to ensure there is a common understanding between the partners.

In the definitive international joint venture agreement, all the following principal matters should be dealt with comprehensively:

1. Management and Governance
2. Contribution of the Partners
3. Allocation of the risks and rewards
4. Dispute Resolution Provisions
5. Legal and Regulatory Issues
6. Governing Law
7. Ownership Transfer (especially in Equity JV)
8. Provisions for Termination
9. Non-Competition, Non-Disclosure and Non-Solicitation Provisions
10. Intellectual Property

Conclusion:

Striving for efficient and cost effective ways to enter a foreign market that allow businesses to share risks and reap benefits with partner companies continue to drive people towards international joint ventures. International JVs provide a access to business opportunities and new foreign markets that may not be otherwise available especially to small and medium size businesses. However, companies considering getting into an international joint venture should be aware of the limitations and risks involved. International JVs present unique opportunities but careful planning, a comprehensive structure and willingness to be flexible during the life of the venture is crucial to increase a chance of successful venture.

Having said that, if you need further information about entering a new foreign market through international joint venture our team of highly qualified advisors would be delighted to assist you.