What Is an International Joint Venture?

International joint ventures are a form of partnership between two or more companies from different countries that form a separate and independent legal entity. This form of collaboration allows the joint contribution of resources and know-how to improve entry into a different market. Collaboration implies deeper and more formal cooperation than a simple alliance. It aims to enter a specific market, develop a particular product, or achieve a specific business goal. This article is aimed at entrepreneurs and businesses interested in expanding operations globally. 

International Joint Venture Agreements Explained

But what is an international joint venture exactly? It is a cooperative agreement between two or more businesses located in different countries to create a distinct legal entity separate from the original firms. In this way, the organizations share property, know-how, technologies, legal risks, and resources for a common goal (e.g., access to the global supply chain).

Compared to other cooperative arrangements governed by law, a joint venture involves cooperation versus licensing (which does not include establishing an independent legal entity) and separates the entities from wholly owned subsidiaries. 

How International Joint Ventures Work

In order to establish an international joint venture (iJV), one or more foreign firms must be identified with which to start the collaboration. Here are the main steps: 

1. Identifying complementary legal partners: The compare must scout businesses that complement its goals with suitable resources and access to the desired market.
2. Establishment of common goals: Once the company has been identified, clear common goals should be established from the beginning. These may include developing a product, accessing a different market, or managing a specific project.
3. Structuring capital and managerial roles: Firms must then define the shareholding and governance model of the separate shared entity. 
4. Drafting legal agreements: The agreement should cover ownership and use of intellectual property (IP), governance and decision-making resources, dispute management, and exit strategies. 

Joint ventures must consider different laws in different jurisdictions. That is why getting business advisory consulting can be very helpful in setting up these forms of collaboration. 

Common Types of International Joint Ventures

In this section we will look at the three most common types of joint ventures under the law. There is no one-size-fits-all model that avoids disputes or litigation but must be adapted according to objectives.

• Equity Joint Venture: In this case, the partners contribute fresh capital and establish a different legal entity. This form is used for long-term projects with specific objectives (expansion into a market).
• Contractual Joint Venture: This type does not involve a separate entity but contractual agreements. Thus, all obligations are governed by contracts.
• Limited-Scope Joint Venture: This last type is aimed at a short-term goal or a single market. It provides flexibility and a low investment. It is usually used to test pilot products and potential markets. 

Type of JV	Legal Entity	Expected Duration	Typical Examples
Equity Joint Venture	Yes	Medium/long term	Joint manufacturing, international expansion
Contractual Joint Venture	No	Flexible	Research projects, local service delivery
Limited-Scope JV	Optional	Short/medium term	Product launch, market testing

Why Companies Form International Joint Ventures

The main reason firms establish an international joint venture is to facilitate access to foreign markets due to the future partner’s expertise. In addition, this collaboration allows for the reduction of operational and financial risk given the sharing of ownership and possible disputes caused by violation of the law.

Furthermore, some countries have restrictions on market access by foreign companies; therefore, creating a joint venture may prove to be the only way to operate on that foreign market in full compliance with the law and to avoid unwelcome disputes. Finally, joint ventures may also be formed to exploit complementary capabilities.

Starting a partnership is undoubtedly a safer method than acquiring another legal entity. It reduces the initial investment, allows market testing, and shares any law risks such as legal disputes.

Advantages and Disadvantages

As all partnerships have advantages and disadvantages, here are the main ones.

Advantages

• Sharing of financial and operational burdens: The parties share expenses and related risks (such as possible disputes and legal violations);
• Faster entry into foreign markets: Through collaboration, foreign markets can be entered easily;
• Predisposition to innovation: Bringing together different expertise facilitates development through more creative practices;
• Compliance with local laws: In many countries, iJV is the only legal way to operate without arbitration or legal disputes.

Disadvantages

• Complexity of the legal structure: Setting up such a partnership requires structure and legal knowledge;
• Management conflicts: Cross-cultural and operational differences can lead to conflicts;
• Difficulty maintaining common goals: Over time, partners’ strategies can diverge, making it impossible to operate;
• Complexity in exit: Dissolution of the partnership can be costly and accompanied by legal disputes.

International Joint Venture Examples

In this section we will look at three international joint ventures examples. 

1° Case: A European car manufacturer relies on a Chinese partner for battery production. Thanks to the collaboration, it can acquire advanced technologies to enter the electrical market. 

2° Case: A US medical technology company looking to enter the Middle East market through a partnership. Knowledge of the partner’s geographical area will enable the US company to overcome cultural barriers. 

3° Case: A global logistics company entering Latin America to improve local presence. The company will increase its logistics capacity by penetrating the market. 

Legal and Regulatory Considerations

JVs require careful due diligence at the start-up stage to avoid litigation and remain compliant. Some aspects to consider are:

• Foreign ownership restrictions that may limit equity participation.
• Antitrust and competition laws, particularly in sectors like technology or energy.
• Intellectual property (IP) protection, ensuring that trademarks, patents, or proprietary systems are safeguarded.
• Dispute resolution mechanisms may involve local court or international arbitration depending on the jurisdiction.

Rely on professional consultants like those at Ascot to deal with the growing complexity of the subject. 

Exit Strategies and Risk Management

Defining clear exit plans prevents litigation and law problems in case of a breach. The essential elements to address are:

• Termination clauses: The clauses shall define the conditions under which cooperation may be terminated;
• Buy-out options: They allow you to buy or sell shares to the partner to exit by purchasing your participation;
• Non-competition and confidentiality agreements: Following the dissolution of iJV, they protect confidential information by preventing future compacts.

Good governance models and strong contracts reduce litigation risk. This is why business advisory services are critical.

FAQs

What is an international joint venture?

A partnership between organizations from different countries that open a separate legal entity to achieve a common goal. 

How is an international joint venture different from a partnership?

JVs are more project-specific collaborations. Partnerships are more open-ended and managed differently. 

Why are joint ventures used in international business?

JVs are a common practice for international firms because of the ability to pursue common goals by sharing resources and knowledge.

Are international joint ventures legally binding?

Yes. They are made by written agreements and contracts and are subject to different jurisdictional laws. 

What happens if an international joint venture fails?

JVs may be terminated based on contractual arrangements, which often include financial arrangements, asset division, and contractual reviews.

References

Inkpen, A. C., & Beamish, P. W. (1997). Knowledge, bargaining power, and the instability of international joint ventures. Academy of Management Review, 22(1), 177–202.
https://www.jstor.org/stable/259228
Pan, Y., & Tse, D. K. (2000). The hierarchical model of market entry modes. Journal of International Business Studies, 31(4), 535–554.
https://www.researchgate.net/publication/5222916_The_Hierarchical_Model_of_Market_Entry_Modes
Geringer, J. M., & Hebert, L. (1991). Measuring performance of international joint ventures. Journal of International Business Studies, 22(2), 249–263.
https://www.researchgate.net/publication/5222550_Measuring_Performance_of_International_Joint_Ventures