4-2-4-reasons-for-global-mergers-or-joint-ventures

Factors driving global mergers or joint ventures

• A global merger is a permanent agreement between two businesses from two different countries to join together

• A joint venture is when two businesses join together to share their knowledge, resources and skills to form a separate business entity for a limited period of time

  • E.g. the mobile network EE is a joint venture formed by the French mobile network Orange and the German mobile network T-Mobile

• Businesses may choose these methods of reaching a new market as they may be more cost-effective than exporting, licensing and franchising

Reasons for mergers or joint ventures

Spreading risk 

• Businesses operating in different markets spreads the risks associated with fluctuating economic conditions 

  • If there is an economic downturn in one market, a business may still gain sales in another market that is less affected

Entering new markets/trading blocs

• Entering a market using a merger/joint venture is a quicker method than organic growth

• In emerging economies, many governments insist that foreign businesses can only operate as joint ventures, as this can benefit domestic businesses 

• Forming a joint venture with a local company allows the joining business to gain knowledge of and establish business in 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 resources/supplies 

• One business can strategically merge or create a joint venture with another business that has access to resources, e.g. land and raw materials

  • This allows the business to quickly gain access to resources, which helps to speed up the production process

• Businesses have to be aware of any ethical issues concerning the resources, as this can damage the reputation of the business; e.g. a business might be unaware that the company they are joining uses child labour

Maintaining/increasing global competitiveness

• Businesses can increase their global dominance by merging or joining with another business

• By expanding, a business can benefit from economies of scale, which leads to lower costs

  • Businesses can reduce prices, which can increase sales, leading to a larger market share

Benefits and drawbacks of global mergers and joint ventures