A joint venture (JV) is one of the best market entry strategies that a company can adopt when it looks to become international although it is clear that a foray into a foreign territory is a major risk. There are barriers in trade practices, unfamiliar laws, and a lack of understanding of local practices and culture in a new business environment that an investor will find daunting.
Forays into India
Foreign companies have the option to enter the local market by setting up a new company or a subsidiary, acquiring or entering into a JV with a local company. India has a corporate, legal and tax structure that has developed over more than a century and is based on the common law system. A majority of investors in Indian markets have civil law backgrounds and concepts in Indian law sometimes seem incomprehensible. Foreign investors and companies should therefore learn the nature of the market by partnering with companies that have a deep understanding of markets, law and culture as well as the pace of setting up a new business.
Foreign companies have made many mistakes such as:
- Setting expansion and cash burn rates too high in the early stages;
- Appointing officers and directors not always present locally though they are directly liable for labour and tax compliance;
- Choosing wrong locations and business territories to test markets or start production;
- Engaging ineffective advisers who fail to advise on the correct steps to take and fail to warn against company defaults; and
- Partnering with wrongly sized companies that do not match their objectives or growth plans.
By finding the right partners and entering the market through JVs, foreign companies can:
- Evolve business plans that are suitable for the market. These should be conservative and adopt steady investment gradients that help foreign companies to make their initial marks and then increase the cash burn to suit expansion needs;
- Find the correct test and final markets;
- Limit their legal and tax liability by letting local partners take the responsibility;
- Identify reliable advisers and professionals who are able to steer the business successfully; and
- Get the right sized partner. Choosing partners who are too small or too large is a major reason for failure in local markets.
JVs with foreign companies are also beneficial for local companies. They gain by:
- Getting access to the latest and most efficient technology. Upgrades and new technical developments become accessible when a partner is from an advanced country;
- Getting access to extensive and cheaper capital and funds. The reputation of the foreign partner is a great advantage for the local partner; and
- Becoming more credible. Companies that work well with reputable international partner companies in multiple jurisdictions and markets gain commercial reputation.
Forays out of India
In the same way that foreign companies benefit from having a local partner Indian companies gain considerably when they enter a foreign market with a local company as the JV partner. Local laws and business practices are different and the guidance and support of a partner in a foreign jurisdiction is most helpful.
Benefits of JVs in foreign markets:
- Have excellent opportunities to raise funds through capital, debt and stock markets overseas due to highly evolved finance mechanisms, extensive funds and ease of operation. Local presence plays a major role in raising funds;
- Can obtain licences to manufacture in locations such as the EU, the USA and Canada for open markets worldwide in JVs globally in such sectors as pharmaceuticals, engineering, food and other sensitive products; and
- Smaller companies have a better chance of finding state-sponsored subsidies as well as technology support when partnering with experienced local partners.
- Finding a partner in India enables the JV to quickly ramp up production when required due to abundant labour and innovative solutions;
- Partnering with local companies allows access to the market as a standard benefit with the assurance that the foreign company will be operating in potentially one of the largest markets in the future.
In the end, it is easy to conclude that a JV in an international expansion is a win-win solution for all involved.
Gautam Khurana is managing partner at India Law Offices.
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