Essay on Transaction Cost Theory of Equity Joint Ventures

This paper provides a discussion of the transaction cost theory of the equity joint ventures (JVs). It differentiates between link and scale joint ventures. Level joint occurs when parents try to understand a failing market, but indivisibilities because of scope or scale economies make complete ownership of the appropriate assets inefficient. On the other hand link, JVs arise from the constant failure of markets for services of either two or more asset in case these specific assets are firm-specific free products, and the acquisition of the organization holding them would require significant management costs.

The goal of this paper is to apply insights from the transaction cost theories in sketching a static theory of the equity joint ventures. Although, it cant be argued that minimization of transaction costs is the principal reason behind the joint ventures. For instance, collusion is a compelling motive mostly ignored by the transaction cost model. Similarly, no efforts will get made in critically evaluating assumptions underlying the transaction cost theory neither to try nor make a comparison of the explanatory powers of such type of a framework to those of alternative approaches.

The literature differentiates between non-equity and equity joint ventures. Equity JVs result when more than two sponsors bring particular assets to a particular independent legal institution and then get paid for a portion or full of their contribution from profits realized by the organization, or in situations where a firm acquires a partial ownership of a different company. On the other hand, non-equity JVs defines a broad range of contractual arrangements including licensing, and supply agreements. Therefore non-equity JVs are contracts.

Supporting evidence for this paper will be critiqued where available to strengthen the theory, and indicate that the argument is sound mind, but it should not be assumed to indicate full support. The transaction cost model attempts to define why the equity JVs gets selected as the first-best strategy: it usually may never be useful to equity JVs which get formed due to government pressure. It gives an account of both international and domestic equity JVs. However, a greater deal of the discussion focuses on internal equity JVs. Also, the paper provides a clear framework explaining various known features JVs and report of different types of JVs. Additionally, explanations why JVs transfer specific forms of know-how, reasons for their extensive use by firm diversification, and reasons as to why they are the best-preferred means to penetrate new industries and nations are discussed.

The primary limitation of this theory is that its static, whereas the process of JV is inherently dynamic, given the JV mean life is very short on an average. A single method of making it dynamic would entail focusing on predictability and speed of the rate of decomposition of a few benefits traded in JVs, specifically knowledge.

While this paper gives the advantages of JVs, a particular theory must also outline their costs which aren't discussed in this article. Because JV involves a contractual pooling of the complementary assets belonging to several parents, in most cases a contract will be laid to incorporate interests of the two parties. However, these arrangements avoid the conflicts of pricing of both outputs and inputs. Jvs are usually a result of various factors, and any particular theory must critically isolate from some of the various factors.

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