4.2.4 Reasons for Global Mergers & Joint Ventures

Question 1

What is a global merger?

Answer 1

• A permanent agreement between two businesses from two different countries to join together

Question 2

What is a joint venture?

Answer 2

• When two businesses join together to share their knowledge, resources & skills to form a separate business entity for a limited period of time

Question 3

What are the reasons for mergers or joint ventures?

Answer 3

• Spreading risk
• Entering new markets/trade blocs
• Acquiring national/international brand names & patents
• Securing resources/supplies
• Maintaing/increasing global competitiveness

Question 4

Why is spreading risk a reason?

Answer 4

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

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

Question 5

Why is entering new markets/trading blocs a reason?

Answer 5

• Entering a market using a merger/joint venture is quicker method than using 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 w local company allows the joining business to gain knowledge & business of the local markets

Question 6

Why is acquiring national/international brand names/patents a reason?

Answer 6

• A patent is the legal right given by government to an individual/business to make, use or sell an invention & exclude others from doing so

The process of developing intellectual property can be a long & 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

Question 7

Why is securing resources/supplies a reason?

Answer 7

• Businesses can strategically merge or create joint ventures w another business which has access to resources, e.g. land & raw materials
• This allows 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. perhaps being unaware that the company they are joining with uses child labour

Question 8

Why is maintaining/increasing global competitiveness a reason?

Answer 8

• Businesses can increase their global dominance by merging or joining w 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 higher market share

Question 9

What are the benefits of global mergers & joint ventures?

Answer 9

• Economies of scale gained from costs 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

Question 10

What are the drawbacks of global mergers & joint ventures?

Answer 10

• The initial costs of merging can be significantly high
• There is no guarantee business will gain a return on their initial investment if not successful
• Diseconomies of scale can occur due to communication issues & a lack of control as the business expands- growing too fast
• A culture clash between the two businesses can affect the quality of the business, leading to poor sales
• When two businesses join together, redundancies can occur
  This can affect the motivation of remaining workers