The paper "Hunan China Sun Pharmaceutical Machinery Co and ACIC Fine Chemicals Inc Agreement" is a perfect example of finance and accounting case study. This report looks at analyzing the joint venture agreement Hunan China Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc which are based in different countries. The report will look to analyze the joint venture with regard to the potential risk and return which the venture would provide. In addition to it, the report will also look to present the mode of payment which needs to be used to carry out the joint venture and based on it will look to provide recommendations so that steps can be taken accordingly.
This will help Hunan China Sun Pharmaceutical Machinery Co to take steps and decide the future course of action with regard to the joint venture. Joint Venture Joint Venture is one when two or more countries come together and put their different resources together so that different projects can be executed together as expertise and other skills help to carry out the projects in the most efficient manner (Agarwal and Ramaswami, 2012).
The China-based Hunan China Sun Pharmaceutical Machinery Co. and ACIC Fine Chemicals Inc which is a Canada-based firm is looking for a joint venture of CNY 25 million, of which Hunan China Sun Pharmaceutical will inject CNY 20 million, representing 80 per cent interest in the joint venture; ACIC will inject CNY 5 million, representing 20 per cent interest in the joint venture. Analyzing the different risk and reward will help them to take correct steps and reduce the risk which could be apparent in the future. Risk of the Venture The joint venture agreement would give rise to the following risk which needs to be properly addressed The difference in objectives: The venturing parties can have different objectives and not being clear and communicating the objectives clearly could lead to issues as the organizations will look to work in different directions.
This would lead towards wastage in resources and reduces the gain which is expected from a joint venture Imbalance in expertise: This will lead towards one party dominating the other as the organization with the required expertise will look to dominate.
This will create differences among the top management and working together will become difficult (Backman, 2005). In addition to it, the level of investment which partners have brought will also state the organization which will dominate and at times might make it difficult to carry on with the joint ventures due to ego issues Different culture and management style: Joint venture which takes place between different cultures raises doubts and questions regarding cultural integration. The lack of cultural integration would make it difficult for people to mix freely and would have an impact on performance.
In addition to it, the difference in the management style would also make the employees unclear about their roles and responsibilities. This would lead towards clashes within the organization and coming together and working as a common unit becomes difficult Country Risk: Different countries have different political, economic, and social risk associated with the manner in which they work. Dealing with the different country risk which the joint venture present is another issue which needs to be dealt in a proper manner so that the work culture doesn’ t get affected and the risk pertaining to different partners are marginalized (Quer, Claver and Rienda, 2007) Exchange Rate Risk: The venturing partners have to face risk associated with a change in the value of the currency in relation to the currency of another country.
This might thereby make the currency of one country cheaper or dearer meaning that the payout which has to be made while entering the agreement would be either more or less (Berg and Friedman, 2007). This could lead towards differences and would make it difficult for the venturing parties to come to an agreement with regard to the manner in which it will be dealt with. Geographical distance: The distance between the countries has an impact on performance.
The venture agreement is between China and Canada which are very far off which will thereby result in increasing the cost associated with the transfer of knowledge and information (Chan, Kessinger, Keown and Martin, 2007). This would mean additional cost for the business and sustaining the business despite the additional cost is an issue which needs to be addressed and dealt before the agreement.