Joint Venture Strategies

Joint Venture Strategies

Design, Bargaining, and the Law

Zenichi Shishido, Munetaka Fukuda and Masato Umetani

Although they have the potential to create synergies, joint ventures by their nature contain inherent risk. Therefore, each partner in a joint venture needs to incentivize each other in order to maximize their own payoff. Extensive pre-contractual and post-contractual bargaining is essential. This book provides successful bargaining strategies from the point of view of each partner company. Using game theoretical framework to analyze joint venture strategy, it describes practical and legal issues that arise when creating synergies and incentive bargaining in a joint venture. With a particular focus on intellectual property law, including analysis based on many real cases, the book covers issues relating to creating synergies, corporate law issues of conflicts of interest, and antitrust law issues relating to cooperation between independent companies.

Chapter 4: Bargaining over sharing total return

Zenichi Shishido, Munetaka Fukuda and Masato Umetani

Subjects: economics and finance, game theory, law and economics, law - academic, company and insolvency law, law and economics

Extract

The purpose of bargaining over sharing total return is to maximize synergies realized by each JV partner. Such synergies include three types of return: return on investment, return from transactions, and ancillary return. Whichever form the return from a joint venture takes, the joint venture is a success if the sum total of the three types of return is maximized for each partner and exceeds initially planned return. Bargaining over sharing of total return is the process of setting rules for sharing the three types of return between partners. In bargaining over sharing total return, partners first determine return on investment. Return on investment takes the form of profits derived from the joint venture and is shared in proportion to the partners’ respective ownership percentages. As such, it is generally not susceptible to disagreements during incentive bargaining. Partners can determine return on investment through a comparative analysis of the possible courses of action: (1) unilateral market entry, (2) market entry through a joint venture, and (3) forgoing market entry completely. Next, they should design an incentive framework and utilize return from transactions to rectify any imbalances.Lastly, individual partners should identify opportunities for capturing private gains, or ancillary return, from participation in the joint venture. If they follow this process, they should be able to rationally justify their decision to establish a joint venture to their shareholders and stakeholders (e.g., creditors, suppliers).

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