What is a joint venture? Meaning, definition, and purpose

A joint venture is a form of strategic collaboration between two or more economic entities aimed at achieving shared objectives through the exchange of resources, skills, and know-how. This practice has traditionally been adopted primarily by large companies operating in sectors such as energy, automotive, or manufacturing. However, in recent years, even medium-sized companies are beginning to use this tool to address growing global competition and access new markets or technologies.

Let’s take a detailed look at how joint ventures work, their main characteristics, and the advantages and risks associated with this type of strategic alliance.

Meaning and Definition of Joint Venture

But what is a joint venture? Let’s provide a definition. A joint venture is a temporary association between two or more companies. They choose to share certain assets, through a contract, to achieve a common project.

Unlike other forms of collaboration, a joint venture does not have a rigid, predefined legal structure: it can take different forms based on the agreements between the parties, from the creation of a new joint company (corporate joint venture) to the signing of a contract (contractual joint venture). What all joint ventures have in common is the sharing of both the benefits and risks arising from the joint project.

There are different types of joint ventures, which differ based on the objective of the agreement: they may concern production, distribution, research and development, or access to new markets. Their flexibility makes them valuable tools for addressing the challenges of the contemporary economy, even if they require careful governance and a clear definition of roles to avoid conflict.

So, to put it simply, the main characteristics of a joint venture are:

• the presence of a common objective;
• the autonomy maintained by the entities involved, including the impossibility of representing each other. In fact, each entity can declare that it acts on behalf of the other entities only and exclusively within the scope of the joint agreement;
• the presence, always and in any case, of a beginning and end of the agreement;
• the need for careful planning, both before and during the agreement, to avoid risks;
• the sharing of results and risks.

Types of joint ventures: corporate and contractual

Joint ventures are divided into two main types.

• Corporate joint venture: This takes the form of a corporation and can include companies from different countries, called co-ventures. Expenses and profits are shared, and the co-ventures are liable only for the capital they contribute;
• Contractual joint ventures: In this case, agreements are designed with the aim of developing a joint project and sharing the profits.

Depending on the situation, co-ventures can participate in different ways, horizontally or vertically. Horizontal participation occurs when companies have similar production and manufacturing facilities, while vertical participation occurs when the activities are not identical but share the same purpose.

What is a joint venture for

As mentioned, a joint venture represents a strategic tool for reducing operational risks and accelerating the achievement of common objectives through targeted cooperation. Its primary purpose is to allow multiple companies to combine resources, skills, and knowledge to tackle projects that, alone, would be too costly, complex, or risky. The purpose of each joint venture varies based on the specific needs of the parties involved: it could be accessing a new market, developing advanced technologies, or optimizing production and distribution.

A typical case is expansion into foreign markets: an Italian company, for example, can enter into an agreement with a local partner in an emerging country to benefit from its knowledge of the regulatory, cultural, and commercial context. This approach, widely used today in the context of reshoring and the diversification of global value chains, minimizes the risks associated with internationalization while maintaining a good degree of strategic autonomy.

In other cases, joint ventures are used for research and development (R&D) purposes, especially in the green energy, artificial intelligence, and pharmaceuticals sectors. According to a 2024 World Economic Forum report, over 30% of transnational technology collaborations take the form of joint ventures. By pooling funds, infrastructure, and teams of experts, companies can innovate faster, containing costs and reducing development times compared to independent activities.

Joint Ventures: The Advantages

Forming a joint venture offers numerous strategic and operational advantages. Among the main benefits, we can highlight:

• Access to new markets and customers, thanks to the partner’s distribution network or local expertise;
• Cost and risk sharing, particularly useful in times of economic uncertainty or volatile markets;
• Resource optimization, which allows the combination of production assets, technological, or commercial expertise at lower costs than in-house development;
• Geographic expansion, without having to bear the costs and risks of a direct operation abroad alone;
• Contractual flexibility, as each joint venture can be structured tailored to the parties’ needs;
• Termination option, since results are generally measurable and the partners can decide to exit the agreement if objectives are not achieved;
• reduction of competition, if the agreement is made with a potential competitor, generating synergies rather than rivalry.

Furthermore, there are no legal limits on the number of joint ventures a company can create: a multiple strategy can allow for the diversification of collaborations, increasing resilience and competitiveness in the medium to long term.

Risks of Joint Ventures

Although joint ventures offer great opportunities, they also present several risks that are essential to carefully consider. The first concerns the complexity in managing relationships between companies, which are often very different in organizational culture, decision-making style, size, or geographic origin. According to a 2023 Deloitte study, over 40% of international joint ventures fail within the first three years due to governance, communication, or lack of strategic alignment issues.

For this reason, the preliminary phase of the agreement is crucial: it is necessary to conduct thorough due diligence, not only on the economic level, but also on the cultural and legal level, carefully assessing the compatibility between the parties. Differences in legal systems (for example, between EU and non-EU countries) can generate misunderstandings or conflicts, especially in the management of intellectual property and the distribution of profits.

Another significant risk is the protection of shared assets. In the absence of well-defined contracts, one party may gain a disproportionate advantage by appropriating knowledge, technology, or market share developed jointly. It is therefore essential that the joint venture contract include clear clauses on governance, intellectual property, confidentiality, and exit procedures.

Finally, it must be considered that a joint venture, while more flexible than a merger or acquisition, may entail operational constraints that limit the freedom of action of the companies involved, especially if interests begin to diverge over time. Effective management, based on transparency and shared objectives, is therefore the key to transforming a joint venture into a truly strategic success.

Original article published on Money.it Italy. Original title: Cos’è una joint venture? Significato, definizione e a cosa serve