Joint Ventures In Mongolia: Benefits And Risks

Teamwork can sometimes really pay off. So a joint venture with another company in Mongolia may be an excellent opportunity to grow your own business without the complexities of making an outright purchase of another company.

In Mongolia, a joint venture is the structure permitted under Mongolian Law that enables Mongolian and foreign companies to combine their knowledge and resources to work as a single team. The joint venture gives partners the opportunity to leverage each other’s strengths while compensating for any weaknesses.

In one type of joint venture, both parties enjoy the benefits of remaining as independent businesses and choose to enter into a contractual agreement only to collaborate in a limited way over a pre-determined time span.

The other option is to create a separate joint venture company in order to complete a specific project or contract. In this option, both foreign and Mongolian partners own shares of the company and direct its management.

Established foreign businesses may identify opportunities to enter the Mongolian market through joint ventures. However, the success of a joint venture depends on a well-planned strategy, strong partners, equal contribution, effective execution of the agreement, and fast and efficient integration of work processes.

This involves commitment and respect for the other company’s work culture and a clear understanding of each one’s responsibilities and accountabilities in the partnership.

We encourage foreign companies considering entering a joint venture in Mongolia to seek external advice at an early stage.

Advantages of a Joint Venture

A successful joint venture can help both foreign and Mongolian companies gain access to new opportunities and is an effective strategy to grow and generate profits faster. Advantages of a successful joint venture are:

Access to knowledge and resources such as capital, staff and technology;
Access to new opportunities such as new markets or greater distribution reach; and
Shared exposure to risks, financial responsibility and workload.

An advantageous joint venture is one in which the strengths and weaknesses of one partner complements those of the other partner.

Risks for a Joint Venture

A large number of joint ventures fail because of the many risks involved and the complexity of integrating operations and work culture of two different companies. Here are some of the issues that may arise when entering into a joint venture in Mongolia:

Setting unrealistic objectives that may not be completely clear in advance and not aligned to a common goal;
Coping with differing cultures, management styles, and working relationships that prevail in each company;
Managing communication with senior managers and employees in both companies so there’s a consistent understanding of the objectives of the joint venture; and
Making poor tactical decisions caused by a misunderstanding of the roles of each company.

Building a successful joint venture with Mongolian partners can be challenging. It requires time, commitment and effort from both involved parties.

Before entering into a joint venture, both partners must have a clear understanding of the objective of collaboration. This understanding must be translated into a simple written agreement that defines each partner’s accountabilities in the joint venture.

Evaluating the strengths and weaknesses of the Mongolian partner company and your own can help in building on each other’s strengths. Building a strong alliance with the right partner can result in fast growth of the business and profitability.

Here are few legal considerations relevant to joint ventures in Mongolia:

Proper due diligence is critical: you should engage experienced external advisers who are able to advise on the legal risks associated with undertaking a proposed transaction in Mongolia. Navigating Mongolian law and legal documents, as well as Mongolian language, without the help of experienced advisers is risky.

Negotiation and execution: negotiating and executing a deal in Mongolia often takes longer than in the foreign, but, once a Mongolian counterpart agrees to do a deal, it will generally stick to its word. Legal documents can be negotiated in English, although it is not uncommon for bilingual or Mongolian-language only documents to be used.

Integration: integrating a newly acquired Mongolian business or newly founded Mongolian joint venture into a foreign company’s global business can be complicated by unique legal and cultural considerations, such as corporate governance and internal control structures. You should assume integration will be a long and occasionally painful process.