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JOINT VENTURE AGREEMENT IN INDONESIA PART I: WHAT IS JOINT VENTURE AND WHY?

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The term ‘Joint Venture’ is somehow familiar to our ears although it is not an Indonesian term. It is not surprising since Joint Venture is known world-wide as one of the universal business terms. However, in spite of that fact, there are still many questions regarding it. Thus, this article will try to answer some of the questions by giving a brief fundamental explanation about Joint Venture.

Legally speaking, the definition of Joint Venture is not clearly stipulated under any existing Indonesian law. Still, by way of definition, the term Joint Venture means a collaboration of two or more parties in doing business which based on a contractual relationship by forming a corporation or a partnership. In practice, Joint Venture in Indonesia is commonly associated with establishment of a Joint Venture Corporation and Foreign Investment, although actually in Joint Venture a foreign party is not always involved.

There are reasons why a Joint Venture has to be done. Some reasons are business- related and some are legal-related. Below are ten most common reasons behind a Joint Venture:

  1. Limited capital

The first reason is the easiest to understand. When someone wants to do a business but does not have enough money, then one of the options for him/her to do the business is by inviting others to participate in the business by contributing some of his/her money. Thus, the problem will be solved. This scenario also applies for corporations or other legal entities.

  • Splitting the risk of business

Sometimes handling a risk of business is too big for one person or one entity. Therefore, by doing a Joint Venture, the risk of business may be divided among the parties and will make it easier to handle.

  • The need for a broader market access

Some businesses need a broad market access in order to make the business more successful, for the sake of expansion, or to reach other goals. Forming a partnership between two or more people or entities may broaden the market access of a business.

  • The need of a certain technology or know-how

Usually, businesses have secrets for success. Those secrets may be in the form of technology, secret recipe/ingredient, or know-how on doing a particular thing. By way of illustration, a certain person needs the information to start a business and only has money to start it, while the other has the information but this guy (who knows the information) does not want to share unless it is beneficial. Through a Joint Venture, those two can work together by giving what they have for the sake of their business.

Read to : Joint Venture Profit Loss Sharing Dengan Musyarakah

  • Corporate restructuring

Joint Venture may be done due to a corporate restructuration such as acquisition, merger, consolidation, or business separation, which may cause a strategic partner to enter the restructured corporation.

  • Limitation of foreign investment in a certain business sector

Presidential Regulation Number 44 of 2016 regarding Lists of Business Fields which are Closed and Business Fields which are Open with Conditions to Foreign Investments (“PP 44/2016”) stipulates which business fields are closed and which business fields are open with conditions to foreign investments. This kind of regulation forces a foreign investor to do a Joint Venture with a domestic entity in order to comply.

  • Statutory partnership

Coming with a similar nature as PP 44/2016, some regulations regarding business also force a certain business entity to form a partnership with a small, micro, or medium enterprise in order to comply with the existing stipulations. Hence, Joint Venture is one of the ways to form the necessary partnership between the parties.

  • Mandatory divestment

Divestment is the opposite of investment, this means reducing the amount of investment in a business. Some regulations, such as the Government Regulation Number 1 of 2017 regarding Mineral and Coal Mining (“PP 1/2017”) stipulates a mandatory divestment or a divestment that has to be done in order to comply. Joint Venture may also be a solution in order to comply with a mandatory divestment under a certain regulation. For example, doing a Joint Venture with another domestic entity may reduce the amount of investment of a foreign entity, if under the related regulation; a divestment of a foreign investment has to be done.

  • Convenience in the matter of licensing and communication

In some cases, a foreign investor may do a Joint Venture with a domestic entity in order to obtain convenience in the matter of licensing and communication. A domestic entity, supposedly, know a lot more regarding domestic matters such as licensing rather than a foreign entity. It also has an easier access for communication since a domestic entity stands on the same ground as the domestic authorities.

  1. Avoiding mandatory divestment

Mandatory divestment under some regulations is avoidable in certain situations. For example, under Government Regulation Number 20 of 1994 jo. Government Regulation Number 83 of 2001 regarding Ownership of Shares in Terms of Foreign Investment, a divestment does not have to be done if within the corporation, there is a 5% domestic investment. Therefore, this condition can be achieved through a Joint Venture.

To be fair, there are more reasons behind a Joint Venture. Above are only some of them. And even though the definition of the exact term ‘Joint Venture’ cannot be found in any existing regulations in Indonesia, it is a familiar term and is a common practice within the state with different reasons behind it and different goals at the end of it.

Reference :
1. Presidential Regulation Number 44 of 2016
2. Government Regulation Number 1 of 2017
3. Government Regulation Number 83 of 2001

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