Theories Of Joint Venture

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Narrowly defined, a joint venture occurs when two or more firms pool a portion of their resources, within a common legal organization. Conceptually, a joint venture is a selection among alternative models by which two or more firms can transact. Thus a theory of joint ventures must explain why this particular mode of transacting is chosen over such alternatives as acquisition, supply contract, licensing or spot market purchases. Three theoretical approaches in order to explain the motivation and choice of joint ventures. • Transaction cost theory, Williamson (1975, 1981) states that firms choice on how to transact is based on minimizing the sum of operation and transaction cost. A joint venture stride the border of two firms, administrated…show more content…
The motivations to joint ventures for strategic reasons are numerous. These motives primarily relate to amplifying of both the market power (Boyle, 1968; Fusfeld, 1958; Mead, 1967; Pate, 1969) and higher performance with competitive maximization (Backman, 1965; Berg & Friedman, 1977,1978; Stuckey, 1983). Vernon (1983), sees joint ventures as a defensive mechanism for firms to hedge against strategic uncertainty. Especially in industries of moderate concentration where collusion is difficult to achieve despite of the potential benefits of coordinating the interdependence among…show more content…
Strategic behavior theory claims that firms transact with the mode best maximize profits by improving their position against their rivals. Many joint ventures are motivated by strategic behavior to deter entry or erode competitor’s position. Vickers (1985) analyzes joint venture in research as a way to deter entry through preemptive patenting. In oligopolistic industries it might be optimal for the industry if one of the firms invested in patentable research in order to forestall entry. Having in mind the free-rider problem, participants tend to under invest in the absence of collusion. Vickers (1985) shows that, for small innovations, joint venture is an effective way to guarantee the entry-deterring investment in contrast with bigger innovations where it is their own interest to perform its own

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