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CENTRAL UNIVERSITY OF SOUTH BIHAR

SCHOOL OF LAW & GOVERNANCE

Merger and Acquisition


PROJECT

Joint Venture & Reason for failure of joint venture

Submitted By:- Submitted to:-

RAJEEV RAJ Mr. Mani Pratap

B.A.LL.B Assistant Professor

9th Semester

Enrolment- CUSB1513125033

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ACKNOWLEDGEMENT

During the course of writing this project, I have received the help, encouragement from my
teacher, colleagues, friends and others. I am very thankful to all of them.

I am practically very thankful to my “Merger and Acquisition” Assistant Professor Mr. Mani
Pratap for encouragement and support that he provided during the preparation of the project.

I am deeply indebted to the eminent legal experts and company law experts and other scholars of
repute whose valuable work has been highly useful in writing this project.

RAJEEV RAJ

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TABLE OF CONTENTS

Serial Number Topic Page Number

1. Research Title 4

2. Research Methodology 4

3. Research Questions 4

4. Introduction 5

5. Joint Venture 6

6. Purpose for establishing a Joint Venture 6-8

7. How to get a Joint Venture started 8-9

8. Characteristics of a Joint Venture 9

9. Advantage of Joint Venture 9-10

10. Disadvantage of joint venture 11

11. Forms of Joint Venture 12-15

12. Reason for the failure of Joint Venture 16

13. Reason for the failure of Joint Venture in India 17-18

14. Conclusion 19

15. Bibliography 20

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RESEARCH TITLE
An Analysis of: Meaning of Joint Venture and reason for failure of Joint Venture.

RESEARCH METHODOLOGY
This Research Work is basically based upon Doctrinal Method of research, basing upon the
research through Primary sources including contemporary literature review, Books, Journals,
Digests and Secondary Sources including websites, online articles and the data collected from
World Wide Web.

OBJECTIVES OF RESEARCH
 To understand the meaning of joint venture.
 To analyse advantage & disadvantage of joint venture.
 To study the characteristics and reason for failure of joint venture.

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Introduction
Joint Venture companies are the most preferred form of corporate entities for Doing Business in
India. There are no separate laws for joint ventures in India. The companies incorporated in
India, even with up to 100% foreign equity, are treated the same as domestic companies. A Joint
Venture may be any of the business entities available in India. The world is looking at India as
an attractive investment destination with strategic advantages and lucrative commercial
incentives1. Over the past few years, while numerous economies saw negative GDP growth rates,
India posted a growth rate of nearly 6%. The Indian economy, while not significantly affected
during the global recession, is preparing itself for another round of aggressive growth.
The basis of these lofty expectations is strongly grounded in the vast pool of untapped skilled
and unskilled human resources across most economic sectors in India. We have witnessed this
through the tremendous growth experienced over the last 10 years in India, in sectors ranging
from manufacturing to information technology and services industries. Beyond this, India offers
a vast internal market for various products and services. It is therefore apparent that India has a
lot to offer to anyone looking to do business here from both the producers’ and consumers’
perspectives.
In making a decision to enter India, to benefit from the inherent advantages offered by an
existing Indian partner in terms of market access, local knowledge or quick ramp-up, foreign
investors and companies should seriously consider forming Joint Ventures with Indian
businesses (hereinafter referred to as “Joint Ventures”). While India has progressed in leaps and
bounds, it still lacks cutting edge technologies and management processes. Foreign partners
possessing such technologies and processes can add significant value to Joint Ventures in India
and take advantage of local skills and markets2.
The process of establishing a Joint Ventures in India and commencing the business can be
relatively simplified if it is preceded by proper planning, market research and partner assessment.
Pulling off a successful Joint Venture requires setting specific and measurable objectives,
identifying and critically assessing potential partners and target market, and determining the right
mode and format of Joint Venture. In this paper, we examine how and why a Joint Venture is set
up, the legal framework involved in Joint Ventures and the nuances of Joint Ventures
documentation.

1
http://www.investopedia.com/terms/t/jointventure.asp
2
http://definations.uslegal.com/t/joint venture

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Joint Venture
A Joint Venture may be defined as any arrangement whereby two or more parties co-operate in
order to run a business or to achieve a commercial objective:-
1. This co-operation may take various forms, such as equity-based or contractual Joint
Ventures 3. It may be on a long-term basis involving the running of a business in
perpetuity or on a limited basis involving the realization of a particular project. It may
involve an entirely new business, or an existing business that is expected to significantly
benefit from the introduction of the new participant. A Joint Venture is, therefore, a
highly flexible concept. The nature of any particular Joint Venture will depend to a great
extent on its own underlying facts and characteristics and on the resources and wishes of
the involved parties. Overall, a Joint Ventures may be summarized as a symbiotic
business alliance between two or more companies whereby the complimentary resources
of the partners are mutually shared and put to use.
2. It is an effective business strategy for enhancing marketing, positioning and client
acquisition which has stood the test of time.
The alliance can be a formal contractual agreement or an informal understanding between the
parties. Global proliferation of business and commerce has given an international dimension to
Joint Ventures. Corporate entities across the globe seek cross-border alliances to share the
resources, opportunities and potential to deliver cutting edge performance. Such alliances are
designed to suit the commercial requirements of parties and vary from a mere transitory
arrangement for one partner to establish its presence in a new market to a calculated step towards
a full merger of the technologies and capabilities of the partners.

Purposes for Establishing a Joint Venture4


Joint Ventures are envisaged as alliances that yield benefits for the Joint Venture partners by
offering a platform to attain their business goals which would be difficult or uneconomical to
attain independently. Establishing a Joint Venture with an ideal partner provides a fast way to
leverage complementary resources available with the other partner, share each other’s
capabilities, access new markets, strengthen position in the current markets, or diversify into new
businesses.
India Inc. has come of age and is not just an investment destination but also an aggressive
investor. Indian companies have exhibited, in the recent past, their ambition to venture into the
quest for overseas expansion. The main stumbling blocks for Indian companies in achieving
expected levels of global presence are deficiencies in terms of product quality, 1. Joint Venture
Forms and Precedents, Butterworths, October 1997. 2. New Horizons Limited v. Union of India
(UOI) and Ors5. Provided upon request only technology, infrastructure and even management

3
http://www.legalservices.com/article/183-Joint ventures.html
4
http://ssm.com/abstract=1618272
5
(1995) 1 SCC 478.

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processes. These deficiencies can be negated by way of an alliance with a foreign counterpart
who is a strategic fit. Alliances between those possessing varying expertise and capabilities in
technology, marketing and distribution, etc. are necessary to meet the growing needs of modern
business.
A. Leveraging Resources
With the globalization, access to labor, capital and technological resources have become
driving forces for modern businesses to aim to achieve ‘economies of scale.’ Today, business
commitments are far too large to be executed by a single company. From a wider
perspective, the conduct of business mandates a huge pool of resources extending from
massive financial backup to plenty of skilled manpower. Cross-border business projects are
all the more demanding and the best solution is to either outright acquire or share them by
entering into a Joint Venture. Cooperation is a great way of reducing research and
manufacturing costs while limiting exposure.
B. Exploiting Capabilities and Expertise
Parties to a Joint Venture may have complementary skills or capabilities to contribute to the
JV; or parties may have experience in different industries which it is hoped will produce
synergistic benefits. The basic tenet of a Joint Venture is the sharing of capabilities and
expertise of both the partners on mutually agreed terms. Such sharing grants a competitive
advantage to the Joint Venture partners over other players in the market.
C. Sharing Liabilities
A JV also offers parties an opportunity to jointly manage the risks associated with new
ventures. Through a Joint Ventures they can limit their individual exposure by sharing the
liabilities. When the liabilities and risks are shared the pressure on each individual partner is
correspondingly reduced. It reduces the risks in a number of ways as the business activities of
the JV can be expanded with smaller investment outlays than if financed independently.
D. Market Access
JVs are the most efficient mode of gaining better market access. Companies utilize Joint
Ventures agreements to expand their business into other geographies, consumer segments
and product markets. In the case of a cross-border Joint Venture, the involvement of a
locally-based party may be necessary or desirable in countries where it is difficult for a
foreign company to penetrate the market or where the local law limits the ownership
structure by foreigners. For instance, in India, certain market sectors remain restricted for
foreign investment and a local partner with a certain shareholding in the company is a
regulatory necessity for commencing business and making investments. These restrictions
are discussed in further detail in a later section.

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E. Flexible Business Diversification JVs offer many flexible business diversification
opportunities to the partners.
A Joint Venture may be set up, as a prelude to a full merger or only for part of the business.
It offers a creative way for companies to enter into non-core businesses while maintaining an
easy exit option. Companies can also resort to v as a method to gradually separate a business
from the rest of the organization and eventually, sell it off. In certain circumstances, Joint
Ventures may be set up with strategic investors in the process of entering into a new market
so as to initially provide the foreign participant local infrastructure and guidance but with a
view to integrate the operations of the Joint Venture into the main company in the future. In
this situation, the foreign participant may choose to acquire the local participant’s interest
once the venture is up and running. This can be highly beneficial to both parties as the
foreign party is able to establish itself in the local market while the local party gets a liquid
exit.

How to Get a Joint Venture Started

 The first step to creating a joint venture is to set your goals and decide what you want
your joint venture to do. If you need help getting started with this, look at the four things a
joint venture can do that I've listed at the beginning of this article, pick one, and then develop
a goal that is as specific as possible.

 Then it's time to look for the like-minded - people or firms that might be interested in the
same goal or goals you want to pursue. Look in the business groups you already belong to,
both in person and virtually. Use your social networking connections. Study business listings
in the phone book or on Web sites to find those that might share your goals.

 And be open to being asked. Once you start talking to other people about what you might
do together, a joint venture idea you haven’t even thought of might pop up - one with a lot of
potential.

 Once you've found the people to share in a joint venture, be sure to have it all put into
writing in a joint venture agreement. I strongly recommend hiring a legal professional to do
this.

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So instead of dismissing an opportunity as out of your reach, start thinking instead about how
you could participate with a joint venture. Properly planned and executed, joint ventures can
help your small business go where it's never been able to go before.

Characteristics of a Joint Venture

1. Creates Synergy

A joint venture is entered between two or more parties to extract the qualities of each other. One
company may possess a special characteristic which another company might lack with. Similarly,
the other company has some advantage which another company cannot achieve6. These two
companies can enter into a joint venture to generate synergies between them for a greater good.
These companies can work on economies of large scale to give cost advantage.

2. Risk and Rewards can be shared

In a typical joint venture agreement between two or more organization, may be of the same country
or different countries, there are many diversifications in culture, technology, geographical advantage
and disadvantage, target audience and many more factors to overcome. So the risks and rewards
pertaining to the activity for which the joint venture is agreed upon can be shared between the
parties as decided and entered into the legal agreement.

3. No Separate Laws

As for joint venture, there is no separate governing body which regulates the activities of the joint
venture. Once they are into a corporate structure, then the Ministry of Corporate Affairs in
association with Registrar of Companies keep a check on companies. Apart from that, there is no
separate law for governing joint ventures.

Advantages of Joint Venture

1. Economies of Scale

Joint Venture helps the organizations to scale up with their limited capacity. The strength of one
organization can be utilized by the other. This gives the competitive advantage to both the
organizations to generate economies of scalability.

2. Access to New Markets and Distribution Networks

6
http://theunwillinglawyer.blogspot.com/2009/11/Jointventure

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When one organization enters into joint venture with another organization, it opens a vast market
which has a potential to grow and develop. For example, when an organization of United States of
America enters into a joint venture with another organization based at India, then the company of
United States has an advantage of accessing vast Indian markets with various variants of paying
capacity and diversification of choice.

At the same time, the Indian company has the advantage to access the markets of the United States
which is geographically scattered and has good paying capacity where the quality of the product is
not compromised. Unique Indian products have big markets across the globe.

3. Innovation

Joint ventures give an added advantage to upgrading the products and services with respect to
technology. Marketing can be done with various innovative platforms and technological up
gradation helps in making good products at efficient cost. International companies can come up
with new ideas and technology to reduce cost and provide better quality products.

4. Low Cost of Production

When two or more companies join hands together, the main motive is to provide the products at a
most efficient price. And this can be done when the cost of production can be reduced or cost of
services can be managed. A genuine joint venture aims at this only to provide best products and
services to its consumers.

5. Brand Name

A separate brand name can be created for the Joint Venture. This helps in giving a distinctive look
and recognition to the brand. When two parties enter into a joint venture, then goodwill of one
company which is already established in the market can be utilized by another organization for
gaining a competitive advantage over other players in the market.

For example, a big brand of Europe enters into a joint venture with an Indian company will give a
synergic advantage as the brand is already established across the globe.

6. Access to Technology

Technology is an attractive reason for organizations to enter into a joint venture. Advanced
technology with one organization to produce superior quality of products saves a lot of time, energy,
and resources. Without the further investment of huge amount again to create a technology which is
already in existence, the access to same technology can be done only when companies enter into
joint venture and give a competitive advantage.

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Disadvantage of Joint Venture

1. Suspicions as to liability implications

2. Duplication of Resources

3. Taxation- Profits could be subject to tax at the joint venture and shareholder levels.

4. A second significant tax disadvantage associated with corporations is that the shareholders
have less flexibility in transferring assets into and out of the corporation with minimal tax
effect than in the case of a partnership. Careful planning is required to deal with this problem.

5. To the extent a corporation intends to offer its securities to the public, the corporation may
be required to comply with the state securities ("blue sky") laws, as well as the federal
securities laws, at a substantial cost.

6. As compared to some other forms of organization, a corporation also is subject to greater


governmental regulation both at the state and federal level, and is subject to greater
difficulties in transacting business across state lines. A corporation must conduct its business
with greater formality than other forms of association. Such corporate formalities include
incorporation formalities, capitalization requirements, the maintenance of appropriate books
and records, the scheduling of meetings of shareholders and directors, notice requirements,
minutes and other record-keeping requirements, and the compliance with quorum and
majority rules. In the event these corporate formalities are not strictly followed, it is possible
that the corporate form will be disregarded. For example, state laws generally vest in the
board of directors the authority to manage the affairs and operations of the corporation. To
the extent the shareholders attempt to "usurp" control of the business operations, a court may
determine that the corporate form is merely a sham and "pierce the corporate veil," thereby
subjecting its shareholders to unlimited liability.

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Forms of Joint Ventures

Joint Ventures may be either contractual or structural, or both. They may be broad based or
narrowly defined and the main classification of JVs is as equity/ corporate JV and contractual
Joint Venture. An equity Joint Vebture is an arrangement whereby a separate legal entity is
created in accordance with the agreement of two or more parties. The parties undertake to
provide money or other resources as their contribution to the assets or other capital of that legal
entity.
This structure is best suited to long-term, broad based JVs. The contractual JV might be used
where the establishment of a separate legal entity is not needed or the creation of such a separate
legal entity is not feasible. This agreement can be entered into in situations where the project
involves a temporary task or a limited activity or is for a limited term.
The four most common structures employed to constitute a Joint Venture are:-
1. Company Joint Venture.
2. Partnership Joint Venture.
3. Limited Liability Partnership
4. Unincorporated Joint Venture.

A. Company Joint Venture


Here the parties to the JV would create a joint venture company under the Companies Act, 2013
(“Act”) and would hold the shares of such company in an agreed proportion. This arrangement
can also be termed as Equity/Corporate Joint Venture. The advantages of using a corporate
vehicle are: It is a universally recognized medium which gives an independent legal identity to
the JV;

■ It puts in place a better management and employee structure;

■ Participants have the benefit of limited liability and the flexibility to raise finance; and

■ The Company will survive as the same entity despite a change in its ownership. The three most
common ways of creating of joint venture companies may be described as follows:
i. Parties Subscribe to Shares on Agreed Terms
Parties to the Joint Venture incorporate a new company and subscribe to the shares of the
company in mutually agreed proportion and terms, and commence a new business. The benefit of
this route is that it allows structural flexibility in terms of creating an entity which is tailor-made
to suit the specifications of both the parties. The documents of incorporation, i.e. the
Memorandum of Association and Articles of Association of the Joint Ventures Company would
be suitably drafted so as to reflect the rights, intentions and obligations of the parties.
ii. Transfer of Business or Technology by one Party and Share Subscription by the Other

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A variation of the above model, would be where parties to the Joint Venture incorporate a new
company. One of the parties transfers its business or technology to the newly incorporated
company in lieu of shares issued by the company. The other party subscribes to the shares of the
company for cash consideration.
iii. Collaboration with the Promoters of an Existing Company
A proposed Joint Venture partner can acquire shares of the existing company either by
subscribing to new shares or acquiring shares of the existing shareholder(s). The MoA and the
AoA of the existing company would be amended accordingly to incorporate the JVA into it.

B. Partnership
A partnership firm created under the Partnership Act, 1932, is in many respects simpler than a
company, and may perhaps be regarded as a halfway house between a corporate joint venture and
a purely contractual arrangement. A partnership represents a relationship between persons who
have agreed to share the profits of business carried on by all Joint ventures Incorporated
Unincorporated Unincorporated Entity (Partnership etc.) Cooperation Agreement / Strategic
Alliances Company LLP for provided upon request only or any of them acting for all. A
partnership Joint Venture or hybrid models are unincorporated forms of JV which represent the
business relationship between the parties with a profit motive. This is reflected in the tax regime,
whereby partners are separately assessed even though the profits are computed as if the
partnership were a separate entity.7
This JV has inherent disadvantages including unlimited liability, limited capital, no separate
identity etc. Whilst tax and commercial factors may sometimes lead to the use of such
unincorporated vehicles, the majority of business ventures tend to use a corporate vehicle for
establishing a JV, the share capital of which is divided between the parties to the Joint Ventures
Joint Venture. As a result, partnerships are not normally used for major businesses except by
professionals such as solicitors and accountants or where there are specific tax advantages8.

C. Limited Liability Partnership


In 2008, the Limited Liability Partnership Act, 2008 (“LLP Act”) introduced limited liability
partnerships in India. An LLP is a beneficial business vehicle as it provides the benefits of
limited liability to its partners and allows its members the flexibility of organizing their internal
structure as a partnership based on an agreement. At the same time a LLP has the basic features
of a corporation including separate legal identity.

7
http://www.legalservices.com/article/183-Joint ventures.html

8
http://ssm.com/abstract=1618272

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The LLP Act permits the conversion of a partnership firm, a private company and an unlisted
public company into an LLP, in accordance with specified rules. As a consequence of the
conversion, all assets, interests, rights, privileges, liabilities and obligations of the firm or the
company may be transferred to the resulting LLP and would continue to vest in such LLP.
Foreign Direct Investment (“FDI”) is permitted in LLPs but only under the government approval
route. FDI can be made in LLPs operating in sectors where 100% FDI is allowed through the
automatic route and there are no performance linked conditions (such as ‘development of
townships, housing, builtup infrastructure and construction-development’ and Non-Banking
Financial Services etc.). An Indian company, having FDI, can make downstream investments in
an LLP only if both, the company and the LLP, operate in sectors where 100% FDI is allowed,
through the automatic route and there are no performance linked conditions.
LLPs can receive FDI only by way of cash consideration by inward remittance, through normal
banking channels or by debit to Non-Resident External account / Foreign Currency Non-
Resident account of the individual concerned, maintained with an authorized dealer or an
authorized bank.

D. Unincorporated Joint Ventures – Cooperation Agreements/Strategic Alliances


The most basic form of association is to conclude a purely contractual arrangement like a
cooperation agreement or a strategic alliance wherein the parties agree to collaborate as
independent contractors rather than shareholders in a company or partners in a legal partnership.
What qualifies such business relationships as an unincorporated joint venture is when such
business relationship between two or more parties is in furtherance of a common purpose or
action for a profitable venture, proceeds of which are to be shared in an agreed ratio.
This type of agreement is ideal where the parties intend not to be bound by the formality and
permanence of a corporate vehicle. Such alliances are highly functional constructs that allow
companies to acquire products, technology & working capital to increase production capacity
and improve productivity. Strategic alliances provide companies an opportunity to establish a de
facto geographical presence and aid in accessing new markets, increase market penetration, sales
& market share. Cooperation agreements / strategic alliances can be employed for the following
types of business activities:

■ Technology transfer agreements

■ Joint product development

■ Purchasing agreements

■ Distribution agreements

■ Marketing and promotional collaboration

■ Intellectual advice

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In such a joint venture the rights, duties and obligations of the parties as between themselves and
third parties and the duration of their legal relationship will be mutually agreed by the parties
under the contract. The contract will be binding on the parties and breach of it will entitle the
other party to seek legal recourse against the defaulter. Even though no corporate vehicle is
involved and the parties to the agreement are not partners in a legal sense, it is possible for them
to be exposed to claims and liabilities because of the activities of their participants on a
contractual or quasi-contractual basis. Therefore, an indemnity should be included in the
agreement under which one party will indemnify the other for any losses that are caused through
the Introduction
Joint Ventures in India actions of the co-participants. Additionally, an unincorporated joint
ventures may have significant tax issues if not structured properly as the Indian tax authorities
may qualify such contractual arrangements as an “association of persons”, a term not defined
under the Incometax Act 1961, and only interpreted in case laws. If a contractual arrangement
qualifies as an “association of persons”, then the Indian tax authorities could tax such association
of persons at the maximum marginal rate, which could be as high as 40% if any member of such
“association of persons” is a nonresident.

Two recent large Joint Ventures in India have ended in both parties being very
disgruntled. One is the Daichi-Ranbaxy Joint Venture and the other now is the Tata - NTT
Docomo Joint Venture.

1. Tata - NTT Docomo

On June 24, 2016 DoCoMo won a ruling by an international arbitration court that ordered Tata
Sons to pay it $1.3 billion to buy its stake in the mobile phone joint venture, Tata Teleservices.
Docomo which is Japan's largest telecom operator, said in a statement, the award was for Tata
Sons' breach of their shareholders' agreement after it was denied exit of the loss-making Tata
Teleservices at a pre-agreed price of half the original $2.7 billion investment.

2. Ranbaxy - Daiichi

The former promoters of Ranbaxy Laboratories Ltd Malvinder Mohan Singh and Shivinder
Mohan Singh were asked by an arbitration court in Singapore recently to pay damages to the
tune of Rs.2,562.78 crore, for concealing facts from Japan’s Daiichi Sankyo Co. Ltd when they
sold their 34.82% stake in Ranbaxy to the latter for $2.4 billion in 2008. The total deal value was
$4.6 billion.

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Reason for the failure of joint venture

Ravindra Chitoor, Professor of Strategy at Indian School of Business in Hyderabad once said,
“According to various studies, almost 60% to 70% of joint ventures fail. Failure can be due to
many factors. For instance, the objectives of the partnership may not have been thought through
or articulated clearly; lack of planning and lack of articulation leading to misunderstandings;
different leadership styles; information asymmetry leading to ideological and cultural differences
[or] HR issues.” So far many explanations have been given for a break up.

 Culture

A misfit of the Indian management culture and the culture of the JV partner has certainly been a
possible problem in the success of JV's flourishing. Different cultures bring different
management styles in a company. Different practices. Different systems. And all that discipline
might sometimes be stifling to the Indian company.

 Clash of Corporate Egos

Typically most Indian promoters come to the negotiation with large egos and perhaps rightly so.
After all a large portion of them are self-made men. They want to be treated more than well. If
there is disagreement on policy, the Indian partner is unlikely to come half way through to
achieve a compromise because his ego won't let him. Most Indian promoters look down on
CEOs as an inferior tribe. Often the officer negotiating on behalf of the foreign partner may be a
CEO rather than a promoter. So there is a tendency for the Indian partner to look down on the
executive in charge of the foreign partner.

 Bending Rules

Perhaps a more compelling reason for JV's might well be how Indian companies are willing to
bend the rules to meet financial goals as revealed by the latest 14th Global Fraud Survey by EY.

The EY report clearly states the problems with this commentary on the India region.

'Corruption continues to be a significant risk for companies working with government bodies.
Companies engaging with state-owned businesses and government departments need to have
strong compliance programs in place to mitigate these risks. Although 76% of companies have
anti-bribery and anti-corruption policies in place, they must realize that “paper-based
compliance” will not suffice.'

It does come through in the report that Indian executives are more willing to bend the rules to
enhance company performance than their global counterparts. But a more important offshoot of
bending the rules to enhance company performance might well be the consequent lack of trust in
dealings between the JV partners.

As the E & Y report says 'Our survey findings show that boards and audit committees continue
to face significant challenges in tackling the risks of fraud, bribery and corruption in their

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businesses. Many companies are failing to do enough. Meanwhile, boards struggle to effectively
absorb the large volume of compliance information they are presented with.'

It's a pity because Joint Venture are good for India


Whatever the reason India needs to build strong JVs for the future. Joint Ventures will help India
in many ways-

 Provide Indian companies with the opportunity to gain new capacity and expertise
 Allow India companies to enter related businesses or new geographic markets or gain
new technological knowledge
 Access to greater resources, including specialised staff and technology

For India to become a global player of the future it will have to depend on JVs to pave the way.

Reasons Joint Ventures fail in India

The joint venture is often considered the first option when the idea of doing business in
India arises. Nevertheless, the experience proves that these associations rarely reach the expected
goals and results. In most cases it turns out on traumatic experiences and failure for at least one
of the partners (usually the foreigner).
There are logical reasons why foreign companies consider advantageous to join local
Indian partners: lack of local knowledge –bureaucracy, market dynamics, business culture,
management styles, labour laws. quick access to the local market –due to distribution networks
and customer portfolio of the local partner, and immediate availability of starting infrastructure –
land, manufacturing plant, licenses and operation already going on-. For all this, the local partner
is expected to pave the way for an easier, quicker and safer or lower investment.

This approach may seem logical a priori, but instead, we eventually find out that in many
cases these assumptions prove wrong. We in INDOLINK, after years of helping foreign
enterprises to enter the Indian market, find the following main reasons that lead the joint ventures
to fail:

1. Lack of experience-: To the usual confusion when entering a new market add the fact
that often it is the first Joint Venture for both partners. The lack of previous experiences
and the need of consensus between the parties normally turn things around and create
difficulties to solve the conflicts and for correct decision-making, both vital for the
positive progress of the business.
2. Cultural differences-: Even if the business culture in India may be more similar to ours
than what we may expect beforehand, Indian values, customs, management style and
communication subtly differ from that of western cultures. The use of a non-mother
language is also an additional barrier. Even when the parties talk in similar English, huge
gaps stand between what one wants to say and what others may understand.

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3. As a natural consequence of the previous two points, a lot of communication problems
and misunderstandings arise, ingredients for a stew of mistrust.
4. Referring to operations, it is frequent to establish Joint Ventures between companies that
produce the same goods, leading to conflicts on strategic objectives. This may turn the
success of the Joint Venture on that to one or even both of the partners.
5. To this add the fact that still nowadays, it is difficult for both partners to think on win-
win terms and so both partners tend to look after oneself by trying to profit as much
as possible their part instead of the Joint Venture.
6. Sometimes, the Joint Venture is perceived as a business on itself for one of the partners,
who may focus on exploiting this relationship instead of focusing on the development of
the Joint Venture.

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Conclusion
India is presently one of the world’s fastest growing economies with one of the largest domestic
markets. Before 1991, India’s restrictive economic policies resulted in the unavailability of state-
of-the-art products and technologies in the country. While the situation has significantly
improved since then, the Indian market is lagging behind developed economies in terms of the
quality of products and services sold in the domestic market. In this context, joint ventures
between foreign partners and Indian companies are a great way to bridge this gap.
Joint ventures can utilize the best in technology and local market knowledge in order to take
advantage of India’s massive domestic market and, further, to use India as an attractive export
hub. Recent exchange control liberalizations on payments to foreign technology providers will
further spur JV activity in the country. In terms of the security of an investment into India, the
Bilateral Investment Agreement now underwrites investments made into India. Furthermore,
India has an excellent track record of upholding the various international treaties and trade
arrangements it is party to. Since 1994, India has entered into bilateral investment treaties with
over 70 countries, further strengthening its commitment to international trade. On a broader
level, India has a strong, democratic political structure with a well-rooted legal system based on
common law.
India has grown more or less unscathed through the worst of the global recession. It has beaten
all expectations and everyone is optimistic of its future as a global economic powerhouse.
Taking advantage of India’s low-cost operating environment and large domestic market, joint
ventures are a great way to participate in India’s incredible growth story. The Finance Minister
while concluding his budget speech laid down as follows “Any economist will tell us what India
can become. We are the tenth largest economy in the world. We can become the eighth, or
perhaps the seventh, largest by 2017. By 2025, we could become a $ 5 trillion economy, and
among the top five in the world. What we will become depends on us and on the choices that we
make. ”

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Bibliography
Books
1. S.Ramanujam, Merger et al, 2007, Tata McGraw Hill, New Delhi
2. H.R. Machiarju, Mergers, Acquisition and Takeovers, 2006, New Are International
Publishers, New Delhi.
3. Ch. Rajeshwar, Mergers and Amalgamation: new prospective, 2001, ICFAI Press,
Hyderabad.

Websites
1. www.sebi.gov.in
2. www. Capitalmarket.com
3. www.financelexpress.com
4. www.deloitte.com

Newspapers
1. Economic times
2. Financial Express
3. businessline

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