Joint Ventures

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World Economy Joint Ventures 1

Joint Ventures
A joint venture is a mechanism for combining complementary assets owned by separate firms. These assets can be tangible, such as machinery and equipment, or intangible, such as technological know-how, production or marketing skills, brand names, and market-specific information. In an equity joint venture the partner firms transfer all or part of their assets to a legally independent entity and share the profits from the venture. Contractual arrangements that do not involve shared equity control are sometimes referred to as non-equity joint ventures; examples include licensing and management contracts, as well as supply and distribution agreements. Shared ownership and contractual arrangements are also frequently grouped together under the term “alliances”. In what follows the focus will be on equity joint ventures, specifically international joint ventures involving partners from different countries. From a world economy perspective there are at least two reasons for examining international joint ventures. First, international joint ventures represent a form of foreign direct investment (FDI). Multinational enterprises often have to decide whether to wholly own a foreign affiliate or to share equity control with a local partner. This decision is a key element of the foreign investment strategy. Second, the ownership structure of a foreign-investment project affects host country welfare. A direct effect comes from the sharing of profits between the multinational and the local firm. Indirect effects arise because ownership influences investors’ incentives to commit resources to the project, such as capital and technology. Some host countries impose local ownership requirements that limit the equity stake foreign investors can take in local companies. This raises the question of what the economic effects of such requirements are. Probably the most comprehensive data on international joint ventures come from the U.S....
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