Question

Task: A successful tech-based Australian firm is considering either to enter a foreign market through an international joint venture or to set up a wholly owned subsidiary. Explain the meaning of international joint venture as a foreign market entry mode and compare its benefits and risks against setting up a wholly owned subsidiary.            

Note: This part should be at least about 200 words but not more than 250 words.

Answer 1

Foreign market entry modes differ in the degree of risk they present, the control and commitment of resources they require, and the return on investment they promise. There are two types of market entry modes: equity and non-equity modes. The non-equity modes include export and contractual agreements, while the equity mode includes: joint venture and wholly owned subsidiaries.

An international joint venture occurs when two businesses based in two or more countries form a partnership. A company that wants to explore international trade without taking on the full responsibilities of cross-border business transactions has the option of forming a joint venture with a foreign partner. Such entry into a foreign market minimizes the risk that comes with an outright acquisition of a business to the firm. International joint venture aid companies to form strategic alliances, which allow them to gain competitive advantage through access to a partner’s resources, including markets, technologies, capital and people. International joint ventures are viewed as a vehicle for knowledge transfer, technology transfer from multinational expertise to local companies, and such knowledge transfer can contribute to the performance improvement of local companies.

The most significant difference between a joint venture and a wholly owned subsidiary is the ownership structure. A joint venture is a firm that is set up, owned and operated by two or more companies. A joint venture may be an equal partnership, or one of the partners may have a greater share of the business. A wholly owned subsidiary is a owned by a single company that maintains control over it. Wholly owned subsidiaries tend to be riskier than a joint venture. In a joint venture, the risk is spread out between more than one company. If the business fails, then the losses are divided between the companies. In the case of a wholly owned subsidiary, the parent firm absorbs any losses by itself. A joint venture also lessens risk by generally providing access to more resources, including personnel and capital. Likewise, they also differ in their potential benefits. The benefits tend to be greater in a wholly owned subsidiary, simply because the profits do not need to be shared. Wholly owned subsidiaries are generally used in a situation where the business is considered a low risk. It will be used if the firm possesses all the required skills and has good knowledge of the market. A joint venture will typically be used where the firm needs access to skills, knowledge or other resources and where the risk of failure is significant.