WHAT IS INTERNATIONAL BUSINESS? – ENTERING OVERSEAS MARKETS part 5 of the article on entering international markets
5. JOINT VENTURES: a cooperative between two or more organizations that share a common interest in a business enterprise or undertaking; is a popular mode for quick entry.
A. Example of International Company and Local Owners: General Mills teamed up with Nestlé to form Cereal Partners Worldwide in an effort to compete against Kellogg in the European cereal market.
General Mills brought strong cereal brand names, technology and expertise to the table while Nestlé brought European manufacturing facilities and a strong distribution system. Each separate company had something different to offer and the resulting combination allowed the joint venture to flourish.
As shown in the example, the local company, Nestlé, had existing business infrastructure in the proposed market and, therefore, had knowledge of the customs and tastes of the people. This advantage allowed General Mills to enter the market more quickly than if it had chosen to build a manufacturing facility from scratch. Some other advantages of such a joint venture include gained political contacts, lower tax rates on profits, fewer inspections and less government interference in daily operations, greater assurance of continuous electricity supplies, more local infrastructure such as roads and utilities and easier access to government controlled raw materials and supplies.
Joint ventures, like any other mode of entry, come with some associated drawbacks. Loss of effective management control can be a major disadvantage of the joint venture with a local owner. It is common for developing nations to require that the local owner hold majority ownership of a joint venture. In this instance, it is obvious that the local owner will have a greater say in business decisions and their lack of expertise could result in reduced profits, increased operating costs, inferior product quality, exposure to product liability or even environmental litigation and fines. Shared profits are another huge disadvantage of the joint venture. Neither General Mills nor Nestlé gets to keep all of the profits of Cereal Partners Worldwide. Finally, the loss of intellectual property is a drawback that should be considered before entering a joint venture with a local owner. As a result of forming Cereal Partners Worldwide, Nestlé now knows much more about producing the General Mills line than they did before the agreement. The pros and cons must be weighed before any joint venture should be established.
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