Joint Venture Failures

Topics: Joint venture, Risk, Finance Pages: 6 (2328 words) Published: April 18, 2011
A joint venture is a contractual agreement joining together two or more parties for the purpose of executing a particular business undertaking (InvestorWords, 2008). Some of the most significant benefits gained from joint venturing include, a reduced risk of both companies resulting from capital and resource sharing, the opportunity to increase sales, and enhance technological capabilities through research and development underwritten by one party (INC, 2009). Joint ventures also provide a mode for entering foreign markets because the partnering companies join complementary skills and knowhow with local firms (Qiu, 1984). Companies often jump into joint venture agreements blinded by these benefits and often fail to research the risks involved in joint ventures (Park, 1996). Research has shown that half of all companies that enter into a joint venture fail, and only forty four percent of joint ventures that remain operational report meeting profit expectations (Rod, 2009). To limit these risks a company considering entering into a joint venture should look at case studies of failed joint ventures which have similar circumstances as the joint venture the company is currently considering (Lyles, 1987). There are common patterns to joint venture failures (INC, 2009). The first pattern happens when the joint venture partner’s ownership and strategy of the joint venture, doesn’t represent their risk and contribution to the joint venture (Chalos, 2002). Another pattern in joint venture failure happens when companies enter into joint venture agreements without a good knowledge of the market they are entering into. This causes a lot of unforeseen risks in the joint venture project. Finally, another pattern of joint venture failure happens when companies neglect to higher skilled, experienced employees to oversee the joint venture. Because of the lack of skill and experience very large mistakes are often made in joint ventures (Lyles, 1987). For this paper, I am going to describe a case study of the failure of a joint venture company, Oriental Ltd, that failure between a Chinese company, Prosperity Ltd, and two Japanese companies, Tomiyama Construction Machinery Ltd, and Tagawa Crush Stone international Ltd. My description of the case study will explain the common mistakes made in the joint venture and how these mistakes led to its failure. I will then explain that, by examining case studies of joint venture failures, companies could greatly benefit and greatly reduce their chances of their joint venture failing. Joint ventures have long been a favored method for entering a foreign market however if a company does not understand the market it is entering into, the joint venture could face sever consequences. Other severe problems occure When the joint venture enters into a foreign market it doesnt understand, when the partnering companies ownership percentage doesn’t represent the risk and contribution of the joint venture, and when very low experienced and low skilled employees are overseeing the operations (Chalos, 2002). A joint venture company named Oriental Ltd made all of these mistakes and failed because of it. Oriental Ltd was a joint venture company started by Prosperity Ltd from Hong Kong, and two Japanese companies named Tomiyama Construction Machinery Ltd, and Tagawa Crush Stone Ltd. A government owned company called Tien Shan Ltd, from the Peoples Republic of China, was also involved in the joint venture. The joint venture was created in the hopes to utilize the combined resources of the partnering companies in order to extract high quality stone with the use of heavy machinery in Shanghai (Chalos, 2002). Each company in the joint venture would provide a resource to help complete this. Prosperity Ltd would be a major Financier and would control management and operations because they already had experience in quarry extraction, Tomiyama Construction Machinery Ltd would finance the purchase of...
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