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Entry mode: Strategic Alliances

Learning Objectives
• Discuss the concept of Liability of Foreignness

• Waves of emerging market MNEs (EMNEs)

• What are SA and why the are formed

• Different forms of SAs

• Managing SA

• Impact on Performance
Overcoming the Liability of Foreignness
• The Liability of Foreignness - the inherent disadvantage foreign
firms experience in host countries because of their non-native
status

• Differences in formal and informal institutions govern the rules of


the game in different countries

• Foreign firms are often discriminated against (other times invited


to invest)

• Foreign firms deploy overwhelming resources and capabilities to


offset the liability of foreignness
History of the debate
• A huge part of understanding of FDI activities come from
the “Reading School” in the 1970s-1980s and Hymer from
MIT in the 1960s

• The main assumption is that MNEs has to have some form


of ownership advantage/FSA to be able to expand abroad

• Stronger home CSA or location advantages, the stronger


the domestic firms will be

• Thus the MNE has to have stronger FSA than the domestic
firms in the host country
History of Emerging Country MNEs
(EMNEs)
• The phenomenon of enterprises originating from
developing countries investing abroad is not a recent
development with examples of Argentinean firms going
multinational at the end of the nineteenth century (Lall,
1983).

• Moreover, there is literature on the field of MNEs from


developing countries, especially in Asia and Latin America,
since the 1970s to the early 1990s (e.g. Lecraw, 1977,
Wells, 1983; Lall, 1983; Tolentino, 1993).

• This research marked what is known as the “first wave” of


outward FDI from developing/emerging countries.
The first wave of EMNEs
• The first wave of EMNEs has similar patterns and
characteristics to MNEs from developed countries, such as
mainly internationalising to neighbouring and other
developing countries. Their main motivation for
internationalising was for resource and/or market seeking
motives.

• The earlier studies and edited books (e.g. Kumar and


McLeod,1981; Lall, 1983; Wells, 1983), all argued that the
main differences between traditional MNEs and EMNEs
were the latter has weaker institutions in their home
market, weaker ownership advantages and latecomer
status.
First wave EMNEs- Link to Reading
School
• Lot of the EMNEs in the first wave only held
fundamental ownership advantages. This was very
different to traditional MNEs from developed countries
that were internationalising on a global basis and their
main motivation was efficiency seeking, they also held
advanced advantages (Guillen and Garcıa-Canal, 2009).

• Because other developing countries domestic firms


held weak ownership advantages, these EMNEs could
compete in these countries. So a Nigerian firm, would
be able to compete in Angola, but not in the USA.
First wave of EMNEs- Link to Uppsala
Model
• The Uppsala Model in fact argues that
companies’ internationalisation process is
taken in incremental stages first to countries
that exhibited similar characteristics and then
venture into other countries once they acquire
international experience to able to compete in
other countries (Johanson and Wiedersheim-
Paul 1975; Johanson and Vahlne’s 1977).
Second wave of EMNEs
• Researchers started to see a change in some of the EMNEs
characteristics during the early 1990s.

• Many of the developing/emerging countries these MNEs


came from underwent “Washington consensus” type of
reforms

• These MNEs were mainly still regional but had started to


expand more globally and the home country advantages of
where the EMNEs originate were also improving.
Therefore, ownership advantages - by virtue of being a
function of location advantages -were also improving.
Second Wave of EMNEs
• The location advantages of their home country
had improved due to the increase in globalisation
and thus these MNEs had access to more
superior ownership advantages. However, not all
the countries had seen a shift in the
characteristics of EMNEs, in fact most didn’t.

• So only a few countries experienced the second


wave of EMNEs
New type of EMNEs?
• Since 2002, we have seen a rise of EMNEs who
are aggressively expanding abroad. This new
phase has been coined the “Going Global Era”.

• These are firms that are expanding mainly


through M&A into developed countries

• Strategic Asset Seeking FDI

• Are late movers to the global market


What is the difference between
EMNEs and conventional MNEs?

Guillen and Garcıa-Canal, (2009: 27)


The debate for a new theory
• How is it possible that countries with weaker CSA
are able to produce firms that are competing
against firms from developed countries?

• On the face of it, Emerging MNEs have weaker


FSAs compared to Western MNEs

• Some new theories have been developed such as


the LLL Model (Matthews, 2006) and the
springboard theory (Luo and Tung, 2007)
Strategic Alliances
 A preferred business strategy because of the
globalization of industries and organizations

 A more effective diversification strategy than the


traditional conglomerate approach
Definition
• Strategic alliances are “voluntary agreements between
firms”
• Strategic alliances are compromises between pure
market transactions and mergers and acquisitions
• Alliances fall into two broad categories: contractual
(non-equity) and equity-based
• Strategic networks are strategic alliances formed by
multiple firms to compete against other networks and
singular firms
Strategic alliance (SA)
• When two or more firms decide to share/
exchange resources to leverage their firm
specific FSAs

• The sharing could be complementary


(developed country MNE entering in emerging
country) or scaling up (MNEs joining to share
R&D)
The Choice of Entry Modes: A Decision Model
The Variety of Strategic Alliances
• Strategic Alliances

– A compromise between short-term, pure market transactions (e.g.,


spot transactions) and long-term, pure organisational solutions (e.g.,
mergers and acquisitions)

Mergers
Market and
Transactions Acquisitions
The Variety of Strategic Alliances (M&A)
Structuring of Alliance
Benefits of SA
• Share risk and costs, especially where
investments are high but outcome is uncertain
– E.g. innovation activity where R&D is an input
• Quicker development of capabilities to deliver
products and services
• Access to complementary resources, which
then allows focus on core competence
development rather than spread investments
ADVANTAGES DISADVANTAGES

Reduce costs, risks, and Possibilities of choosing the


uncertainties wrong partners

Gain access to complementary assets and Costs of negotiation and coordination


capabilities;

Opportunities to learn from Possibilities of partner opportunism


partners

Quicker development to deliver to market Risks of helping nurture


competitors (learning race)

Possibilities to use alliances networks as


real options
Alliance Formation
• Stage one: To cooperate or not to cooperate

• Stage two: Contract or equity?

• Stage three: Positioning the relationship


A Three-Stage Decision Model of
Strategic Alliance and Network
Formation

Source: Adapted from S. Tallman & O. Shenkar, 1994, A managerial decision model of international cooperative venture formation
(p. 101), Journal of International Business Studies, 25 (1): 91–113.
Stage One: To Cooperate or Not?
 Can the firm enter the new market and DO IT
ALONE?
 That is, compete and survive on pure market
transactions?

– Consider:
 Competitors,
 Market costs and liabilities,
 Liability of foreignness
Stage One: To Cooperate or Not?
 Can the firm enter the new market and DO IT ALONE?
 That is, compete and survive on pure market
transactions?

– Considerations:
 Competitors, reduce competition by joining with them
 Market costs and liabilities, share costs and risks
 Liability of foreignness - joining with a reputable local company
removes the liability of foreignness
An alliance can
SA in emerging markets
• Becomes necessity due to entry barriers in
emerging markets

• Issue- whom to choose as a partner


– Partner should be able to secure access to
markets
– Local partner substantive contribution results
from FSAs in government relations and
other location-bound FSAs allowing national
responsiveness
“Four C’s” Framework for Evaluating
Alliance Opportunities
• Complementarity. Do the potential
partners offer complementary resources?
• Congruent goals. Do the potential partners
have common goals for the venture?
• Compatibility. Are the firms compatible in
terms of culture & organization?
• Change. How will the other three C’s change
over the course of an alliance?
Stage Two: Contract or Equity?
EQUITY-BASED NON-EQUITY-BASED
DRIVING FORCES ALLIANCES/NETWORKS ALLIANCES/NETWORKS

Nature of shared High Low


resources
(degree of tacitness
and complexity)

Direct monitoring High Low


and control
High (for possible
Potential as real High (for possible
upgrading to
options upgrading to M&As)
equity-based
(stepping stones)
relationships)
Influence of formal High (when required or High (when required
institutions encouraged by or encouraged by
regulations) regulations)
Stage Three: Positioning the
Relationship
• What are the long-term implications of the
relationships you make today?
• Consider alliances portfolio
Partnership
Relationship
Growth Relationship
Stage End
Early
Interaction
Stage
Pre-Relationship
Stage
Termination
Partnership
Relationship
Growth Relationship
Stage End
Early
Interaction
Stage
Pre-Relationship
Stage

Termination