ASSIGNMENT 5
International Journal of Global Business, 7 (1), 77-94, June 2014 77
Building Global Strategic Alliances and Coalitions for Foreign Investment Opportunities
Dr. Balarabe A. Jakada
Department of Business Administration and Entrepreneurship
Bayero University, Kano, Nigeria.
bajakada@yahoo.com
Abstract
Global strategic alliance and coalition is a diffuse way of effective combination of strengths of
companies aiming at entering new markets, exploring new technologies, bypassing government
entry restrictions and to learn quickly from the leading firm in the partnership, all in an effort to
exploit foreign investment opportunities. Strategic alliances are however, not easy to develop and
support. They often fail because of technical errors made by management of member firms. To
make it a success, a strong and efficient alliance agreement has to be in place to enable companies
to gain in markets that would otherwise be uneconomical. Building alliances requires considerable
time and energy from all parties involved with a detailed plan, expectations, limitations and scopes,
and the likely benefits drivable from the project. Alliances take a number of forms and go by
various labels. Alliances may be contracts, limited partnerships, general partnerships, or corporate
joint ventures, or may take less formal forms, such as a referral network. The paper is aimed at
exploring and educating prospective and allied businesses or firms the need and significance of
across border coalition, and how to go about it. It is a literature based paper and therefore, reviews
related literatures from journal articles, texts, seminar papers and some online sources for better
understanding of the concept. The paper looked into issues in building global strategic alliances
and coalitions, developing a global strategy, why the formation of alliances, issues in selecting
alliances partners, stages involved, and benefits drivable from such partnership. It further
highlights the conceivable types of strategic alliance and sighted examples of real life alliances. It
was found that global alliances had helped big firms explore new international markets and new
technological competencies. Thus the paper recommends that a firm, who really wants to have a
global touch, would have to start through alliances or coalition.
International Journal of Global Business, 7 (1), 77-94, June 2014 78
Key words: Strategic alliance, Globalization, Strategy, Coalition, Foreign Direct Investment
Introduction
Change is an ever present facet of business development. Businesses transfer ownership, for
example, and end up reformulating their entire business structures. Companies hire outside
consultants to advise restructuring during financial crises. Sometimes the fact that businesses go
global is the product of the inevitable ebb and flow of commerce. An overseas buyer may transfer
operations to the home country. The majority of an industry's business may shift overseas, making
global expansion all the more desirable. Competition may develop in regions or countries such
that it is unwise for a company not to follow.
Companies go international for a variety of reasons but the typical goal is company growth or
expansion. When a company hires international employees or searches for new markets abroad,
an international strategy can help diversify and expand the business. Economic globalization is the
process during which businesses rapidly expand their markets to include global clients. Such
expansion is possible in part because technological breakthroughs throughout the 20th century
rendered global communication easier. Air travel and email networks mean it is possible to manage
a business from a remote location. Now businesses often have the option of going global, they
assess a range of considerations before beginning such expansion.
During the last half of the twentieth century, many barriers to international trade fell and a wave
of firms began pursuing global strategies to gain a competitive advantage. However, some
industries benefited more from globalization than do others, and some nations have a comparative
advantage over other nations in certain industries when it comes to foreign investments. According
to Hornberger (2011) there are promising trends in global Foreign Direct Investment (FDI) flows
for developing and transition economies”. Each year more and more FDI is flowing not only from
developed into developing economies but also from one developing or transition economy to
another. UNCTAD (2009: 17) notably, since the mid-1980s, most developing countries have
become much more open to FDI, with a view to benefiting from the development contributions
which FDI (particularly high-quality FDI) can generate for host countries. In the same vein,
Todeva & Knoke (2005) highlighted the possibility of both firms and host countries reducing the
business risk of international operation, is by cooperation among firms in the form of alliances and
coalition. In other words, corporations that have aligned their business with others are seen to be
more efficient and effective on the international business scene (Todeva & Knoke, 2005).
With growth and development in sight, developing countries seek to make regulatory work for
FDI more transparent, stable, predictable, secure and thereby more attractive for foreign investors
(LJNCTAD 2003). Again this style of partnership trading should be replaced with strategic
alliances and mergers if developing countries have a chance of developing through the assistance
International Journal of Global Business, 7 (1), 77-94, June 2014 79
of the developed nations in the 21st century (Kinyeki and Mwangi, 2013). This is a critical issue
of economic development for the developing nations.
As this paper integrates three different issues that are pertinent in International Business, each of
them will be closely examined to have a better linkage on their interdependence. Objectively, this
paper seeks to explore every available opportunity in building a global strategic alliance or
coalition in exploring international business opportunities, how multinationals align, why they
align, stages involved and importantly strategize while doing business globally.
The Concept of Globalization and Foreign investment
Globalization is an ongoing process by which regional economies, societies and cultures have
become integrated. The term is used to describe the fact that the world becomes a global village
and that trade, production and finance are being conducted on a globe of scale. Economic
globalization is the process during which businesses rapidly expand their markets to include global
clients. Such expansion is possible in part because technological breakthroughs throughout the
20th century rendered global communication easier. Air travel and email networks mean it is
possible to manage a business from a remote location. Now businesses often have the option of
going global, they assess a range of considerations before beginning such expansion.
Foreign direct investment (FDI) is but an investment made by a company (parent company) into a
foreign company. Making an argument for why foreign direct investment plays an extra ordinary
and growing role in global business. Graham and Spaulding (2005) says “foreign direct investment
in its classic definition, is defined as a company from one country making a physical investment
into building a factory in another country”. They further maintained that “the sea change in trade
and investment policies and regulatory environment globally in the past decade, including the
policy and tariff liberalization, easing of restrictions on foreign investment and acquisition in many
nations, and the deregulation and privatization of many industries, has probably been the most
significant catalyst for FDI’S expanded role in recent time”.
Building a Global Strategy
Today, we live in a global economy in which time taken for people to move between continents
has been significantly reduced. The business response of large business organisations has to
recognise that they now operate in a global market place and to develop appropriate strategies.
Problems associated with global business management have been identified as factors that
negatively impact the performance and productivity of multinational corporations and in turn,
adversely affect regional and national economic growth. And the new global reality that
organizations and their leaders face is a rapidly changing international context. The intercultural
dynamics of increasing globalization demand strategic cultural thinking and a global mindset that
sees beyond national borders and is open to exchanging new ideas. Leaders of all organizations
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find themselves increasingly working in a fluid environment requiring flexible thinking to adapt
quickly to new and different intercultural environments (Dean, 2006).
Organizations are facing increased global competition, economic uncertainties, and changing
markets. Technology is changing the way we conduct business and manage information.
Outsourcing of significant functions within businesses and organizations complicates the
landscape of supplier relations. Suppliers and vendor partners may be located in the same city,
region or country. But they are just as likely to be located halfway around the world, adding new
challenges to business management.
Global strategy is considered to be an act of building a unique and sustainable ways by which
organization create value, a broad formula for how business is going to compete against another
business in the global market. Global strategy leads to a wide variety of business strategies, and a
high level of adaptation to the local business environment. The challenge here is to develop one
single strategy that can be applied throughout the world at the same time maintaining the flexibility
to adapt that strategy to the local business environment when necessary (Yip, 2002). A global
strategy involves a carefully crafted single strategy for the entire network of subsidiaries and
partners, encompassing many countries simultaneously and leveraging synergies across many
countries. The global strategy assumes that the centre should standardize its operations and
products in all the different countries, unless there is a compelling reason for not doing so (Zou
and Cavusgil, 2002). It is therefore important for the centre to offer a significant coordination its
subsidiaries activities ranging from product standardization, responsiveness to local business
environment and competition in the market.
Global Strategic Alliance and Coalition
Strategic alliances developed and propagated as formalized inter-organizational relationships,
particularly among companies in international business systems. These cooperative arrangements
seek to achieve organizational objectives better through collaboration than through competition,
but alliances also generate problems at several levels of analysis (Margarita, 2009). A strategic
alliance is a term used to describe a variety of cooperative agreements between different firms,
such as shared research, formal joint ventures, or minority equity participation (Campbell & Reuer
2001). Strategic alliance can be described as a process wherein participants willingly modify their
basic business practices with a purpose to reduce duplication and waste while facilitating improved
performance (Frankle, Whipple and Frayer, 1996). In simple words, a strategic alliance is
sometimes just referred to as “partnership” that offers businesses a chance to join forces for a
mutually beneficial opportunity and sustained competitive advantage (Yi Wei, 2007).
According to Dean (2006) in an increasingly globalized environment, organizations in different
nations can expand their reach and effectiveness by building global partnerships, transnational
partnerships and international strategic alliances with other organizations. The term global alliance
encompasses all of these. Dean (2006) explained that such arrangements are especially useful
International Journal of Global Business, 7 (1), 77-94, June 2014 81
where organizations are operating in highly fluid environments of increasing informational
complexity and cultural diversity”. Relationships built on mutual respect and trust hold significant
potential benefits, including increased confidence and security, reduced transactional costs and
better information exchange and creative synergies generated by cultural diversity. In the same
vein, the modern form of strategic alliance is becoming increasingly popular and has three
distinguishing characteristics as described by Jagersma (2005); they are usually between firms in
high - industrialized nations; the focus is often on creating new products and technologies rather
than distributing existing ones; they are often only created for short term durations. Technology
exchange is a major objective for many strategic alliances. The reason for this is that technological
innovations are based on interdisciplinary advances and it is difficult for a single firm to possess
the necessary resources or capabilities to conduct its own effective R&D efforts. This is also
supported by shorter product life cycles and the need for many companies to stay competitive
through innovation (Jagersma, 2005). Similarly Kotelnikov (2010) defined it as strategic alliance
where two or more businesses join together for a set period of time. The businesses, usually, are
not in direct competition, but have similar products or services that are directed toward the same
target audience. He also mentioned that, strategic alliances enable business to gain competitive
advantage through access to a partner’s resources, including markets, technologies, capital and
people.
Literally, coalition or alliance can simply mean conjunction or fusion between two or more
different phenomenon to form a unit, in most case for strategic reasons. Hence, partners may
provide the strategic alliance with resources such as product, distribution channels, manufacturing
capability, project funding, capital equipment, knowledge, expertise or intellectual property. In
other words alliance is a cooperation or collaboration which aims for a synergy where each partner
hopes that the benefit from alliance will be greater than those from individual efforts.
While many analysts regard strategic alliances as recent phenomena, inter-organizational linkages
have existed since the origins of the firm as a production unit. Some examples include firm and
entrepreneur ties to credit institutions such as banks; to trade associations such as the early Dutch
Guilds; and to suppliers of raw materials, such as family farms, individual producers, and
craftsmen (Todeva & Knoke, 2005). Meanwhile, the concept of coalitions has undergone differing
applications and meanings within organizational theory. The earliest uses focus on conflicts within
organizations and the presence of multiple goals within the same organization (Simon and March,
1958). They further emphasize that coalitions is between firms but not within organizations.
Another significant period of coalition research centered on James Thompson (1996), where he
coined the term “Dominant coalition”. Thompson (1996) concluded there were certain constraints
on coalition building, mainly the organization’s technology and environment. Thompson theorized
that the more uncertainty in organizations due to technology and environment, the more power
bases that exist. The coalition grows as the uncertainty increases. Thompson (1996) also used the
term, “inner circle” to describe the selected few within an organization whose connections provide
them with influence. Their role in coalition building is often one of leadership, but they seldom act
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alone in achieving goals. Thompson went further to say that. “Their power is enhanced as the
coalition strives to achieve a group goal: thus, the individual and coalition feed off each other”.
Carrying Thompson’s point one step further, interdependency in an organization creates a greater
likelihood for the formation of a coalition or coalitions.
Generally, building alliance or coalition would go a long way in assisting firms (particularly those
in strong alliance) gain more business advantage in their respective dealings over other (especially,
individual organization without ally). Potential coalition members must be persuaded that forming
a coalition would be to their benefit. To do this one needs to demonstrate that your goals are similar
and compatible, that working together will enhance both group’s abilities to reach their goals, and
that the benefits of coalescing will be greater than the costs (Spranger, 2003). The third point can
be demonstrated in either of two ways: incentives can be offered to make the benefits of joining
the coalition high or sanctions can be threatened, making the costs of not joining even higher. For
example, the United States offered a variety of financial aid and political benefits to countries that
joined its coalition against Iraq in 2003; it also threatened negative repercussions for those who
failed to join, and much worse for those who sided with Saddam Hussein. Another method that
can make joining the coalition appealing is to eliminate alternatives to the coalition. Once most of
one’s allies or associates have joined a coalition, it is awkward, perhaps dangerous not to join
oneself. Although people and organizations often prefer non-action to making a risky decision. if
they find themselves choosing between getting on board a growing coalition or being left behind,
getting on board is often more attractive.
Why form Global Alliance or Coalition
Many fast-growth technology companies use strategic alliances to benefit from more-established
channels of distribution, marketing, or brand reputation of bigger, better-known players. However,
more traditional businesses tend to enter alliances for reasons such as geographic expansion, cost
reduction, manufacturing, and other supply-chain synergies (Kinyeki and Mwangi, 2013). To
further support earlier view, Jacob and Weiss (2008) also maintained that companies forms across
border alliances in order to get instant endorsement that would add to the firm’s credibility thereby
gaining more customers at a lower marketing costs. To combine partner resources to develop new
businesses or reduce investment is a vital reason why businesses form alliances. Typical examples
include new business start-ups with parents contributing specific complementary capabilities that
constitute the basis for a new business. For instance, Airbus was a joint venture between French,
German, British and Spanish manufacturers that eventually became a single company. Each
national partner has specialized in one bit of aircraft manufacturing. The French became experts
in aircraft electronics and cockpit design, the British became world leaders in wing manufacturing,
the Germans concentrated on making fuselages and the Spanish focused on aircraft tails (Burdon,
Chelliah & Bhalla, 2009). Strategic alliance designed to respond to competition and to reduce
uncertainty can also create competitive advantages. However, these advantages tend to be more
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temporary those developed through complementary (both vertical and horizontal) strategic
alliances (Belal & Akhter, 2011).
A high degree of integration of specific parent resources is required to achieve goals and it is
desirable to create loyalty to a new business distinct from the parents because their interests might
otherwise prevent the success of collaboration (Kale and Singh, 2009). Toshiba and Motorola, for
example, created a semiconductor manufacturing alliance, even though the two parents competed
in downstream product areas. Direct parent-to-parent collaboration (often including licensing or
long-term contractual agreements) is appropriate when assets or resources are best kept in separate
parent organizations. Parent interests are competitive close parent control is required, and success
cannot be measured in terms of performance measures that apply to stand-alone businesses (for
instance, the main purpose is to learn). Learning may entail improving skills through working with
a partner or gaining access to countries. Turner Broadcasting, which is part of Time Warner, had
a deal with Philips, a Dutch electronics company, where Philips got the right to name a new sports
arena that TBS built in Atlanta. But TBS’s main motive was to find out more about European
consumers and about the digital communications hardware that is Philips’s stock-in-trade (Burdon,
Chelliah & Bhalla, 2009). In the same vein Margarita (2009) emphasizes that expertise and
knowledge can range from learning to deal with government regulations, production knowledge,
or learning how to acquire resources.
To eliminate business risks is another reason why alliances are formed. During the past few years,
Renault, General Motors and DaimlerChrysler have bought stakes in Nissan, Fuji Heavy Industries
(which makes Subaru brand cars), and Mitsubishi Motors, respectively (OECD, 2002). The idea
is that a stake in a Japanese carmaker, with a network of factories and dealerships in Asia, is a less
risky way to expand into the world’s fastest-growing automotive market than a full merger.
Also changing the name of the competitive game is of course one reason why firms form global
alliance. To manage industry rivalry, Star Alliance, which includes Lufthansa and United Airlines,
had a series of loose arrangements to share codes and direct passengers to partners’ flights; then it
began to look more like a quasi-merger, with shared executive lounges and pooled maintenance
facilities (Slywotzky and Hoban, 2007).
Types of Strategic Alliances
The strategic alliances can be mostly summarized into three dimensions: joint venture, equity
strategic alliance, and non-equity strategic alliance. This section reviews the literature on how the
three dimensions of strategic alliance may contribute to partner competitiveness and success in the
global business arena.
Joint Venture
A joint venture is an agreement by two or more parties to form a single entity to undertake a certain
project. When two or more firms form a legally independent firm to share their collaborative
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capabilities and resources to achieve competitive advantages in the market is termed as joint
venture in the form of strategic alliance. Joint ventures are effecting in establishing long-term
relationship and in transferring tacit knowledge. Because it cannot be codified, tacit knowledge is
learned through experiences (Berman et al, 2002) such as those taking place when people from
partner firms work together in joint venture. Expertise and experience in particular field foster the
sustainable competitive advantage. Tacit knowledge is an important source of competitive
advantage for many firms (Tiessen and Linton, 2000).In a joint venture project generally
participating firms share resources and participate in the operations management equally. “Sprint
and Virgin group’s joint venture, called Virgin Mobile USA, targets 15-to-30 years-old as
customers for pay-as-you-go wireless phone service. In another example, Sony Pictures
Entertainment, Warner Bros., Universal Pictures, Paramount Pictures, and Metro-Goldwyn-Mayer
Inc. each have a 20 percent share in joint venture to use the internet to deliver feature films on
demand to customers. According to Belal & Akhter, (2011) Joint ventures are optimal form of
alliances and different from any firm that independently does in the competitive market with own
resources by creating competitive advantages through sharing and combining resources and
capabilities of firms, and overall evidences support this statement. The coordination of
manufacturing and marketing allows ready access to new markets, intelligent data, and reciprocal
flows of technical information (Hoskinson and Busenitz, 2002).
Equity Strategic Alliance
Ownership percentage in equity strategic alliance is often not equal. Two or more firms own the
shares of newly formed company differently according to their contribution in resources and
capability sharing with ultimate goal of developing competitive advantages (Belal & Akhter,
2011). Internationalization of strategic alliances focuses on the linkages between two or more
different firms’ management capabilities and operations activities. The different corporate cultures
are matched into one goal in the strategic alliances when it crosses the boundaries of the country.
Many foreign direct investments such as those made by Japanese and U.S. companies in China are
completed through equity strategic alliances (Harzing, 2002).
Non-equity Strategic Alliance
A non-equity strategic alliance is less formal than a joint venture. To ensure competitive
advantages of two or more companies forming an alliance on a contract basis rather a separate
company and therefore don’t take equity shares (Belal & Akhter, 2011). They share their unique
capabilities and resources to create competitive advantages. Because of this, there is an informal
relationship built among the partners. Consequently, requires less formal relationship and partner
commitments than other forms of strategic alliances. So, the implementation process of non-equity
alliance is simple than other forms of alliances (Das et al, 1998). Since it is less formal relationship
in non-equity alliances, it does not need much of experience like others. In a complex venture
where success necessitates transfer of implied knowledge and expertise, non-equity strategic
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alliances are unsuitable because of their relative informality and lower commitment (Bierly and
Kessler, 2002).
However, firms today increasingly use this type of alliance in many different forms such as
licensing agreement, distribution agreements and supply contracts (Folta and Miller, 2002). The
external factors like uncertainty regarding technology and complex economic environment
motivate commitment in relationships. Competition from the rivals encourages the greater
commitments with partners. Strategic alliances in the form of cooperative strategies are increasing
practicing by the firms because of complexity in operations and high completive pressure. To be
successful in business and survive in the long run some sort of partnership is required in this age
of globalization. To manage the uncertainty and external complexity formation of strategic alliance
is an effective strategy (Inkpen, 2001). Partnership commitments assist to take the decision for
outsourcing. Outsourcing means acquiring value-creating primary or support activity from other
firms. And outsourcing decision helps to form non-equity alliances. To achieve competitive
advantages and less formality this form of alliances are becoming popular (Delio, 1999). Magna
International Inc., a leading global supplier of technologically advanced automotive systems,
components, and modules, has formed many non-equity strategic alliances with automotive
manufacturers who have outsourced by the awards honoring the quality of its work that Magna
has received from many of its customers, including General Motors, Ford Motor Company, Honda,
DaimlerChrysler, and Toyota (Magna, 2002).
Stages of Strategic Alliance Formation
Alliances evolve during their lifetime. The process and evolution of alliances underscore the
importance of the developmental stages. Although researchers agree that alliances evolve in stages,
there is no consensus on the specific stages that alliances go through. But before any other thing,
the intended firm has to develop its global strategy and this development would involve studying
the alliance’s feasibility, objectives and rationale, focusing on the major issues and challenges and
development of resource strategies for production, technology, and people. It requires aligning
alliance objectives with the overall corporate strategy Margarita, (2009). Following Das and Teng
(1999), this paper considers four stages to include: partner selection, structuring/negotiation,
implementation and performance evaluation. Specifically, each alliance is a repetitive sequence of
the four stages, and some stages may repeatedly occur as the alliance evolves (Ring and Van de
Ven, 1994; Doz, 1998; Arino and de la Torre, 1998). For example, after an alliance is formed, the
criteria for partner selection will be reconsidered when a new partner enters into the current
alliance. The initial alliance conditions (e.g., joint scope or division of labour) may have to be
renegotiated in the event of unforeseen changes in the environment and in the relationship status.
In some alliances, performance evaluation will recur regularly over time.
Partner selection
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Forming an alliance includes a series of choices and decisions. Selecting a good partner is a critical
first step. Partnering in international strategic alliance involves a thorough analysis of one’s own
organization in terms of current and potential future resources and capabilities required for its
success. This internal analysis – combined with a clearly defined set of strategic motives – can
help determine what additional resources and capabilities (both task-related and partner-related)
are necessary to ensure a high probability of a successful alliance or coalition (Nielsen, 2008).
Other scholars advocate factors concerning cultural (both corporate and national), strategic,
organizational, and financial traits of the partners (Yan and Luo, 2001).
Partner Selection emphasizes the desirability of a match between the partners' resource profiles,
goals, incentives and strategies (Das and Teng, 2003). Some studies propose that firms should
consider potential partners' reputation, experience, trustworthiness, capabilities and potential
contributions to the alliance as critical selection criteria (Jiang, Li, & Gao 2008; Brouthers,
Brouthers, Wilkinson, 1995; Gulati, 1995; Dyer, 1996). According to Nielsen, (2008) international
alliance experience is accumulated from prior engagements in international strategic alliances and
therefore when selecting a partner for an international strategic alliance, prior experience with
international collaboration on the part of the focal firm may influence the relative importance of
the selection criteria. Other studies highlight the importance of resource complementarities and
learning in the partner selection process (e.g., Lane and Lubatkin, 1998; Mowery, Oxley,
Silverman, 1998).
Generally, firms have either similar or diverse resource endowments. Researchers suggest that
firms should choose a partner with similar but complementary resources and capabilities (Murray
and Kotabe, 2005). On one hand, if firms are to effectively take advantage of the resources
involved in an alliance to achieve desired objectives (say, learning a new technology), the
resources must be complementary. If all partners have the same types of resources, there will be
little knowledge to share and also few benefits to receive. On the other hand, if firms are to
effectively understand, assimilate and absorb knowledge and skills involved in an alliance, they
must have already shared some basic knowledge relevant to the resources and capabilities. If such
overlap is lacking, firms may have incomplete information in identifying which ones can make
real contributions to the alliance and how to value and acquire knowledge from the partners.
The degree of resource complementarily will be a critical factor in determining an alliance's future
course and outcome. Kim and Inkpen (2005) argue that a tension exists between the need for
diverse resources and a need for similar resources. More specifically, excessive resource similarity
indicates that the partners have little to learn from each other, a situation that restricts the
development pace of the alliance. But excessive resource diversity makes it difficult for partners
to learn from each other. It requires utilizing coordination mechanisms across activities, and as a
result the alliance will become difficult to manage (Jiang, Li, & Gao 2008). Therefore, a careful
balance between resource similarity and diversity is at least in theory optimal for a positive alliance
outcome.
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Partner reputation matters allot, firms should also make clear whether this partner has a reputation
for dealing fairly and performing well (Das and Teng, 2001). In the same vein, Jiang, Li, & Gao
(2008) posit that a reputation for trustworthiness and competence is an important strategic asset
and tends to be cumulative overtime. A good reputation signals the quality of a firm and
encourages other firms to ally with it. Another important consideration in partner selection is prior
experience, despite conflicting views, Jiang, Li, & Gao (2008) posit that prior ties are positive
predictors of future strategic alliance relationship success by providing a wide range of advantages
and benefits for the partners (see Kim and Inkpen, 2005; Richards and Yang, 2007).
Structuring/Negotiation
In this stage, partner firms should decide on appropriate governance forms, moderated scope of
collaborative activities, effective division of labour, and so forth. Firms can choose from two
primary alliance governance forms: equity and non-equity alliances. Osborn and Baughn (1990)
point out that the governance mode within an alliance may indicate the motives of the partners and
have a large impact on alliance evolution. For the same reason, Hennart (2006) argues that
choosing an ex ante contractor an equity JV is an important decision for alliance managers, and
the chosen type can impact subsequent behaviours of the partners and predict the future alliance
development and performance.
Equity joint ventures are found to be prevalently more suitable for complex relations that are
exposed to greater risk of opportunism and behavioural uncertainty. For example, the “non-
recoverable investments” and the mutual commitments in Joint ventures create a mutual hostage
situation that helps align the strategic goals of partners. This situation reduces relational risks,
deters opportunistic behaviours and builds up high exit costs (Pisano, 1989; Parkhe, 1993). Joint
ventures are also found to be associated with more trust and confidence, higher levels of structural
embeddedness and higher possibility of dispute resolution (Das and Teng, 2001). In this sense,
joint ventures are an internally stable governance form. By contrast, non-equity alliances that
involve looser inter-connection and fewer commitments are more likely to go through instability
and be more prone to failure.
Firms must also decide on the area of the task or functional interface between them (Gulati, 1995).
Generally, an alliance agreement may involve three separate functional areas or joint activities:
R&D, manufacturing and marketing (Kogut, 1989; Oxley and Sampson, 2004). Alliance scope
refers to the number of joint activities involved in an alliance. The scope of the joint activities can
vary considerably in different alliances. For instance, some cooperative arrangements are limited
to only a single activity (e.g., either R&D or manufacturing or marketing) while others involve
more functional areas. The scope of the multiple-activity or mixed-activity alliance is broader than
that of the single-activity alliance.
The chosen scope has critical significance for the subsequent dynamics of the alliance. For
instance, Kogut (1989) finds JVs to be more unstable in highly concentrated industries, particularly
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when the functional scope extends to marketing and after-sales service. Reuer, Zollo, & Singh,
(2002) argue that it will be more difficult for firms to manage an alliance with broader scope,
because it is accompanied by more uncertainty and more complexity about the implementation of
the activities at hand. The increasing scope of an alliance is expected to require greater extent of
coordination, incur proportionally higher costs, and increase the potential hazards of the
cooperation (Gulati and Singh, 1998). The need for higher levels of cooperation, coordination and
integration is also likely to increase the problems relating to incompatible goals, systems,
procedures and strategies. Predictably, an increase in the scope of an alliance will reduce the
likelihood of the alliance's future success.
Reuer, Zollo, & Singh, (2002) emphasize the importance of division of labour as a major task
undertaken by partner firms. They argue that a clear division of labour and allocation of
responsibilities among partners can help decrease the governance changes of alliances. On one
hand, an express provision of division of labour is expected to lower the need of complex
coordination activities, decrease inter-partner disputes, and reduce the likelihood of relational
risks. On the other hand, a clear division of labour also encourages the partners to contribute more
resources to fulfil their responsibilities because the benefits the partners deserve may reasonably
be in accord with their contributions. It is reasonable to predict that alliances with a clear division
of labour may be more stable and successful than those with a blurry specification of responsibility
allocation.
Implementation
After the collaborative agreement is negotiated, partner firms will carry out the agreement and put
the cooperation into operation. Doz and Hamel (1998) argue that “managing the alliance
relationship over time is usually more important than crafting the initial formal design”. Among
the four stages, Jiang, Li, & Gao (2008) believe the implementation stage is possibly the most
pivotal one for alliance evolution and success. Accordingly, partners must take a variety of actions
to manage destabilizing factors and cope with disadvantageous conditions in due time.
As collaboration unfolds, various kinds of internal risks may emerge and become key factors
destabilizing the alliance. Das and Teng (1999 and 2001) categorize these risks into two primary
types: relational and performance. Relational risk is the probability and consequence of not having
satisfactory cooperation between partner firms. Performance risk refers to the factors that may
jeopardize the success of an alliance, even when the partners cooperate fully. Relational risks and
performance risks are ever-present in an alliance relationship. Relationships are also
acknowledged to be important and valuable, but they have also been considered complex and
difficult to manage (Dyer, 1996; Wong, Tjosvold, & Zhang, 2005). In an alliance context, inter-
partner relationships are a multi-faceted phenomenon which comprises the establishment,
development, maintenance and optimization of harmonious and reciprocal relationships shared by
all partners. Jiang, Li, & Gao (2008) posit that effective management of inter-partner relationships
International Journal of Global Business, 7 (1), 77-94, June 2014 89
constitutes the micro-foundation for strategic alliance success, and that it cannot be replaced by
such things as external factors.
Performance evaluation
After the alliance operates for some time, its performance can and should be evaluated with some
certain measures. Performance evaluation is the act of examining the extent to which the partners'
set objectives are met. When evaluated performance is better than one partner had expected, that
partner may try to maintain the collaborative relationship and invest more resources and
capabilities in order to benefit still more from the relationship in the future. But when the evaluated
performance is worse than expected, the partner may reduce its commitment and withdraw some
investments to limit future risks. Therefore, superior on-going performance of an alliance may
serve as a stabilizing force, while undesirable performance outcomes are likely to lead to instability
and partner exit (Gill and Butler, 2003).
In a complete sense, a firm's performance evaluation should consider two aspects, that is, the costs
it undertakes and the benefits it deserves. In practice, disagreement may arise about appropriate
performance measures among partners (Yan, 1998). Firms usually tend to overestimate their own
expenditures but underestimate their partners' contributions; they may also underestimate their
own benefits but overestimate those of the partners. Perceived inequity could therefore occur either
when a firm perceives itself to have contributed more into the alliance than it has received or if the
firm perceives its benefit–cost ratio is largely lower than that of its partners (e.g., Ariño and de la
Torre, 1998; Kumar and Nti, 1998). A firm's perception of inequity is related to the degree of its
satisfaction with the relationship. When a firm perceives the existence of inequity, it may feel
“unfair”, and it is “less willing to undertake an alliance or continue a particular alliance in the same
form” (White, 2005). If the perceived inequity cannot be eliminated over a long period of time,
the alliance will be either restructured or terminated (Das and Teng, 2002). Accordingly,
researchers suggest that a firm can minimize the perceived inequity either by increasing its
benefits/reducing the partner's benefits, or by reducing its costs/increasing the partner's costs.
Conclusion
From all the forgoing explanations and as the pace of global business accelerates, and customers
continually become more demanding and sophisticated, companies are finding the competitive
landscape dramatically changing. Markets are moving so quickly that is very difficult for one
company to stay current on all technologies, resources, competencies, and information needed to
attack, and be successful in those markets. Strategic alliances offer a means for companies to
access new markets, expand geographic reach, obtain cutting-edge technology, and complement
skills and core competencies relatively fast. Strategic alliances have become a key source of
competitive advantage for firms and have allowed them to cope with increasing organizational and
technological Complexities that have emerged in the global market. Nowadays, global strategic
International Journal of Global Business, 7 (1), 77-94, June 2014 90
alliances are a business concept that is changing the structure and dynamics of competition
throughout the world. Using a broad interpretation, strategic alliance is understood to be a
relationship between firms to create more value than they can on their own. The firms unite to
reach objectives of a common interest, while remaining independent.
It can therefore be concluded that companies really involve in foreign investment would have to
build or have an ally within the business scene; and they would have to as well build a strategy
applicable to every market they serve: reason being that, the atmosphere of international operation
is very broad and demanding and to survive the ‘heat’ optimum consideration must be given to
business coalition and strategy.
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