There are several reasons as to why a business may want to enter a joint venture overseas. Things like lower manufacturing costs, favorable monetary conversion rates, and lower taxes can all make international joint ventures beneficial. However, even though there are many advantages to entering an international joint venture, there are a considerable risks.
International joint ventures allow businesses to reduce their risk while extending their market reach to an entirely new area. Having access to a whole new customer base is enticing for businesses that are having trouble expanding domestically, and at the same time, their partner will share their valuable resources, such as technology, capital, and knowledge of the local market. Joint ventures can help a business grow accustomed to a new area, and the local business will benefit by also having access to their partner’s resources.
But depending on the country and industry, international joint ventures can be risky. In some countries, the government may have a particularly large interest in the ownership of businesses, and they may not be so keen to allow a foreign business in their country. This risk is particularly high for industries such as banking or defense, as opposed to cell phone accessory manufacturers.
Another risk of an international joint venture is the possibility of naturalization. A recent Quality Magazine article discusses international joint ventures and naturalization, and how it can ruin joint ventures and a foreign business’ operations:
“International ventures involve sovereign risks. Foreign governments often regulate businesses and can confiscate assets without fair compensation (i.e., nationalization). One should examine a nation’s business and political climate and history. If it has a history of nationalization, there is a substantial risk it will happen again. Foreign companies may be prohibited from participating in certain “critical industries,” such as banking or defense.”
Generally speaking, naturalization does not happen often and should not immediately deter a business from entering an international joint venture. However, if a business is considering entering an international joint venture, they should have a basic knowledge of the country’s history and customs, along with a comprehensive understanding of its government and its role in the formation of joint ventures.
If you’re interested in entering an international joint venture, contact us.
— by George Tyler