International joint venture or contract to start your partnership?

International joint venture or contract to start your partnership?

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How to structure a collaboration formally?

A collaboration between two or more parties will eventually be laid down in an agreement. An important choice to make when fleshing out an alliance is whether it will be a contractual agreement or a shares transaction, which includes a joint venture. The various options can be structured like this:

Contract-JV

A joint venture can mean anything

The term Joint Venture is frequently used to describe a collaborative business. However, the term does not have a legal status in all countries. It can be a regular company with shareholders and limited liability, where the shares are distributed among the partners. In other countries it can be an entity without the possibility to hold assets, where the partners are both liable for losses incurred by the alliance.

Structure follows strategy

A good way to determine the optimal form (in this case for Company A) is to look at what kind of resources both parties bring in. The scholars Das and Teng contend that the preference for the type of collaboration depends on the type of resources contributed by the two parties. Are these:

  • material resources that cannot be copied, such as money, production means, personnel, distribution channels and patented knowledge; or
  • knowledge-based resources that can be copied, such as work methods, market information and databases?

TypeofCollaboration

Depending on these parameters, a preferred structure will come out.

The choice for a legal structure has practical impact

The choice of organisation form has a direct influence on the behaviour of both parties. If it is both parties' objective to develop a large amount of new shared knowledge, for example in a R&D project, then a joint venture would be the obvious choice, despite the fact that it implies greater overhead costs (notary, accountant, and so on) and will demand more time in terms of reporting and governance.

On the other hand, if a collaboration has a limited turnover and profitability, a simple standard contract could be the optimum choice. Though each alliance is unique, the underlying contractual provisions are often much less so.

Alliance experts has contract checklists available for all forms of collaboration, with or without a joint venture structure.

This entry in exports was updated on October 10, 2016 by Tanushka.