Joint Ventures & Licensing (CIE IGCSE Business)

• Two common strategies used by businesses to try and overcome the problems of entering new markets are global mergers and joint ventures
  
  • A global merger is an agreement between two businesses from two different countries to join together
  • A joint venture occurs when two businesses join together to share their knowledge, resources and skills to form a separate business entity 
    • E.g. The mobile network EE is a joint venture formed by the French mobile network, Orange and the German mobile network, T-Mobile
       
• These strategies may be more cost effective than exporting, licensing and franchising
  
  

Diagram of Reasons for Mergers or Joint Ventures
 

Key reasons for global mergers and joint ventures 

Spreading Risk

• Operating in more than one market helps to reduce reliance on one geographical market  
  

Entering new markets

• Entering a market or trade bloc using a merger/joint venture is a quicker method than using organic growth
  
  • In emerging economies, many governments insist that foreign businesses can only operate as a joint venture as this can benefit domestic businesses 
    
  • Forming a joint venture with a local company allows the joining business to gain knowledge and business of the local markets 
    

Acquiring national/international brand names/patents

• A patent is the legal right given by the government to an individual or business to make, use or sell an invention and exclude others from doing so
  
• The process of developing intellectual property can be a long and expensive process
  
  • Using a merger/acquisition is a method businesses can use to get access to intellectual property or a business with a strong reputation  
    

Securing supplies

• A joint venture with a supplier can ensure that scarce resources used in manufacture are more likely to be available
   

Evaluating Global Mergers & Joint Ventures

Benefits	Drawbacks
Economies of scale gained from costs being spread over larger output can lead to increased profit margins Diversifying risk due to having products in several markets so if there is a fall in sales of certain products, the business can still generate revenue from other products Opportunity to enter new markets which otherwise may be closed to the business	The initial costs of merging can be significantly highwith no guarantee a business will gain a return on their investment Diseconomies of scale can occur due to communication issues and a lack of control as the business expands  A culture clash between the two businesses can affect the quality of the business, leading to poor sales