An investigation of U.S. multinational firms

Patterns in domestic vs. international strategic alliances: An investigation of U.S. multinational firms

Murray, Janet Y

INTRODUCTION

In an era of globalization, the nature and the intensity of competition among companies has changed drastically; companies must now compete against domestic as well as foreign counterparts. This intense global competition has shaped the way businesses proact or react to the following challenges: maintaining a shorter lead time for new product development, recovering huge R&D investments quicker due to product obsolescence, reducing risks of product failure, and obtaining easier access to foreign markets (Harrigan 1987). Therefore, we have been witnessing a surge in strategic alliances among competing companies located in the same country or among those across national boundaries.

Strategic alliances often represent a variety of collaborative agreements among competing firms, which are in nature more than a standard customer-supplier relationship or venture capital investment but falling short of an outright acquisition (Business International 1987; Terpstra and Simonin 1993). The reasons for strategic alliances range from resource seeking and technology development to market access and capital formation, with the primary objectives being to reduce business risks and utilize resources efficiently. We have also observed that a substantial amount of strategic alliances are formed by companies in developed countries with those from developing/ underdeveloped countries.

LITERATURE REVIEW

Adler, in his seminal paper entitled “Symbiotic Marketing,” was the first to recognize the possibilities of forming strategic alliances to take advantage of the “harmonious living together of dissimilar organisms in a mutually beneficial relationship” (Adler 1966, p. 59). Since then, we have witnessed an explosion in domestic and international strategic alliances formed by non-service and service industries, especially in the last decade. Furthermore, there have been a multitude of studies, mainly conceptual in nature (Crouse 1991; Harrigan 1987; Jain 1987; Lorange and Roos 1991; Ohmae 1989, among others), investigating the role of strategic alliances, their potential costs and benefits, and factors influencing their success or failure.

Recognizing the importance of strategic alliances, several studies utilized secondary data in examining the patterns/trends of these relationships. The patterns of strategic alliances were first examined by Ghemawat, Porter and Rawlinson (1986), using secondary data published in the Wall Street Journal for the period 1970 – 1982. Their study identified the following characteristics of international strategic alliances (ISAs): (1) country/region: the parent companies of ISAs formed were overwhelmingly concentrated in developed countries (87%), (2) company size and experience: U.S. companies that formed ISAs tended to be larger and more experienced internationally than those that did not, (3) company market position: U.S. companies tended to form ISAs in industries in which they held relatively strong domestic positions, (4) industry: the percentage of ISAs in chemicals, computers, and other electronic products (all of which are very R&D intensive) had drifted upward during 1970 – 1982, (5) form: 57 percent of all ISAs in the sample were either joint ventures or licenses, (6) purpose: ISAs located in LDCs overwhelmingly involved upstream value activities, whereas those in DCs were more heavily slanted toward the downstream value activities of marketing, sales, and service; ISAs in Eastern Europe predominantly involved operations and logistics.

Another study that investigated the trends in international strategic alliances was performed by Morris and Hergert (1987), using a similar data collection procedure with The Economist and the Financial Times from 1975 – 1986. The results yielded conclusions concerning: (1) company size: strategic alliances were most likely formed between large corporations that were already multinational in nature, (2) country/region: a majority of the strategic alliances were formed between partners within the European Community or between U.S. and European firms, and there were far more strategic alliances formed between U.S. and European than between U.S. and Japanese firms, (3) type: a high percentage (81%) of strategic alliances were between two partners, and over 71% were between two competitors in the same market, (4) industry: on an aggregate level, strategic alliances were mainly formed in automobile, aerospace, telecommunication, computer, and electrical industries; however, U.S. firms were most active in aerospace and telecommunication, European firms were most prone to computer and aerospace, and Japanese firms were leaning toward electrical and automobile industries, (5) purpose: on an aggregate level, the largest number of strategic alliances were in joint product development (38%); however, U.S. and European firms engaged more in joint product development, while Japanese firms were not very active in forming strategic alliances for joint product development; rather, they were more likely to form strategic alliances for marketing or production.

Using data from the Japanese Economic Journal and the Asian Wall Street Journal from 1984 to 1986, Osborn and Baughn (1987) studied the new patterns in U.S./Japanese strategic alliances. They concluded the following: (1) type: a high percentage (89%) of all U.S./Japanese strategic alliances were formed between two firms, (2) industry: the strategic alliances were mainly formed by firms in chemicals computer, metal/metal product, telecommunication, auto parts, and electric/electronics; approximately 30% were in service industries, (3) purpose: the emerging trend was more emphasis on research and development, which accounted for approximately 20% of all strategic alliances; finally, they found that (4) firms with similar characteristics (comparable R&D expenditures and assets) were more likely to form strategic alliances.

Recently, Terpstra and Simonin (1993) investigated strategic alliances formed in the Triad during 1983 – 1987. Using secondary data from sources that ranged from the Wall Street Journal to The Economist, Terpstra and Simonin (1993) reported on: (1) form: equity participation consisted of 38% of all strategic alliances formed, while contractual agreement, joint venture, and consortium represented 33%, 20%, and 9%, respectively, (2) purpose: joint product development represented 44%, followed by manufacturing arrangements (20%), and (3) industry: 50% of the strategic alliances were formed by firms in computer, semiconductor, software, and telecommunication industries.

Although previous studies provide us with some knowledge of the patterns of strategic alliances on an aggregate level, two limitations are observed. First, the most recent two studies focused on strategic alliances formed between developed countries/regions only. Osborn and Baughn (1987) examined U.S./Japanese strategic alliances, and Terpstra and Simonin (1993) investigated those in the Triad. Therefore, we do not have knowledge of, on an aggregate level, the characteristics of strategic alliances formed between developed and developing/ underdeveloped nations. Second, because strategic alliances are greatly driven by business environmental factors, up-to-date studies are needed. With recent drastic political and economic changes in many countries, new patterns in strategic alliances may have emerged, which may be different from those reported in earlier studies.

The potential new patterns in strategic alliances lead us to pose the following questions: first, with the collapse of communism in Eastern Europe and the former Soviet Union, coupled with the movement toward a market economy in China, can a new breed of strategic alliances in the global arena (notably collaborations formed by companies from western industrialized nations with those from former or existing communist nations) be identified? Second, with a high proportion of GNP generated by service industries in industrialized nations, is the proportion of strategic alliances in non-service vs. service industries the same between different countries/regions? Third, a recent study by Ernst & Young showed that countries with low hourly wages accounted for less than a third of the joint ventures reviewed. This indicates that, contrary to popular belief, companies investing overseas are seeking market access and new technology, not cheap labor (Lanier and Chawla 1993). If this is the case, will we observe differences in the purpose of strategic alliances formed in different countries/regions? The present study addresses all these issues.

DATA

As recognized by Doz and Shuen (1987) and Ghemawat, Porter and Rawlinson (1986), databases on recently emerged strategic alliances are based mainly on observations in the business press. The limitations of using these secondary data are potential problems of incompleteness, misinterpretation, and bias toward large domestic firms. Nevertheless, this approach is often the only feasible way to examine the broad phenomenon of strategic alliances (Terpstra and Simonin 1993). This study employed a similar data collection procedure as those used in previous studies examining patterns of strategic alliances (Hergert and Morris 1988; Osborn and Baughn 1987; Porter and Fuller 1986; Terpstra and Simonin 1993). However, steps were taken to address the potential problems of utilizing the data.

The database for this study consisted of all public announcements of strategic alliances (i.e., joint venture, equity participation, contractual agreement, and consortium) reported in the Wall Street Journal between 1989 – 1992. There were in total 953 strategic alliances reportedly formed, disregarding the country of the companies involved. Of the 953 strategic alliances identified, 778 were formed by U.S. firms with either U.S. or foreign firms; the remaining 175 represented relationships formed among foreign firms. The relatively small number of strategic alliances formed among foreign firms, as compared to those formed among U.S. firms or by U.S. with foreign firms, was consistent with the potential problem of the bias of reporting strategic alliances formed by U.S. firms, as discussed earlier. Therefore, only those that involved U.S. firms were included in this study.

Two judges (a business researcher with a Ph.D. degree and a DBA student in marketing) independently completed the coding instrument for the strategic alliances public announcements reported in the Wall Street Journal between 1989 – 1992. The interjudge agreement was 93.37 percent, which compares favorably with past interjudge reliability of 60 – 97 percent (Kolbe and Burnett 1991; Zimmer and Golden 1988).

COUNTRIES/REGIONS OF STRATEGIC ALLIANCES

Of the 778 strategic alliances formed by U.S. firms, 39% were among U.S. firms (i.e., domestic strategic alliances–DSAs), and the remaining 61% were among U.S. and foreign firms (i.e., international strategic alliances–ISAs). When the ISAs were categorized by countries/regions, approximately 57% involved firms from the U.S. with those from either Western Europe or Japan, split roughly half and half between them. This phenomenon was quite different from that observed during the mid 1970’s to mid 1980’s, when many more collaborations were formed between the U.S. and Western Europe than between the U.S. and Japan (Morris and Hergert 1987). This suggests that American companies realize that forming strategic alliances with the Japanese will enable them to acquire superior Japanese manufacturing skills and penetrate its relatively closed market. Also, the Japanese, having overcome the psychological barriers of teaming up with companies from the western nations, have been very active in utilizing ISAs as a viable global competitive strategy.

Of the 136 ISAs formed by companies from the U.S. with Western Europe, approximately 24% were with France, 21% each with Germany and UK, 13% with Switzerland, 9% with Italy, and the remaining 12% with other Western European nations. Of the ISAs other than those with Western Europe and Japan, one striking phenomenon was that approximately 10% of ISAs were between the U.S. and Russia, and 2% and 1% were with China and Hungary, respectively. These arrangements began to take place after the aforementioned countries abandoned communism and/or moved toward market economies. Table 1 (omitted) shows a breakdown of strategic alliances between countries/regions. Regardless of the nature (i.e., DSAs or ISAs) or the countries/regions of the strategic alliance, a large majority (87%) were between two firms, except for those from the Triad region that consisted of three or more firms.

NATURE OF INDUSTRY

Since 70% of the U.S. economy is dominated by service industries, it is not surprising to witness that slightly more than 50% of the DSAs were among firms in the service sector. A significantly different phenomenon for ISAs was observed, with approximately 35% in service industries (chi sup 2 = 18.79, p

On an aggregate level, companies that formed strategic alliances were mainly from the following industries: (a) non-service industries–computer (7.3%), pharmaceuticals (6.8%), mining (5.9%), automotive and auto parts (5.4%), food and beverages (4.6%), aerospace (4.1%), and metal products (4%), and (b) service industries–telecommunication (8%), entertainment (6.2%), finance (5.3%), software (2.6%), and utility (1.9%). The relative concentration of strategic alliances on computers, pharmaceuticals, automotive and auto parts, aerospace, telecommunication and entertainment was consistent with that observed in the mid 1970’s to mid 1980’s. These industries typically have high entry costs, high tariff/non-tariff barriers, rapidly changing technologies, and huge operating risks (Morris and Hergert 1987).

As stated earlier, most non-service industries that had DSAs or ISAs were computers, pharmaceuticals, mining, automotive and auto parts, and metal products. It is noted that ISAs formed with Western Europe, as opposed to those formed with Japan, have some distinctive differences. ISAs with Japan, in addition to the industries cited above (i.e., computers etc.), included substantial alliances among companies in semiconductor and chemicals industries. This may result from a sequence of semiconductor agreements negotiated between the U.S. and Japan. The first agreement was passed in November 1982, the only concrete result being that a system for collecting statistics on chip shipments was established (Prestowitz 1988). However, as a side letter of the September 1986 Agreement, “… the Japanese said that they understood, welcomed, and would make efforts to assist the U.S. companies in reaching their goal of a 20-percent market share within five years” (Prestowitz 1988, p. 65). Consequently, foreign share accounted for 20.2% during the fourth quarter of 1992, with U.S. companies supplying most of the foreign semiconductors in Japan (Hamilton 1993). This success was attributed to both the opening of the Japanese semiconductor market and the substantial ISAs formed by U.S. with Japanese companies to capitalize on this opportunity.

On the other hand, ISAs with Western Europe were mainly in pharmaceuticals and mining; in addition, aerospace, consumer products, food, and industrial equipments constituted nearly 25 % of all alliances between the U.S. and Western Europe, which was not typical of ISAs with Japan. ISAs in aerospace accounted for approximately 7.4%, which may be interpreted as a reaction by U.S. companies toward increased competition from Airbus (a consortium formed by Britain, Germany, France, and Spain) .

In terms of service industries, most DSAs and ISAs were formed by companies in the telecommunication, entertainment, software and finance industries. Notable exceptions were the ISAs formed with either Canada or Mexico; in addition to telecommunication and finance, construction, retailing, and utility also constituted high percentages of ISAs formed by the U.S. with either one of these two countries. Also, prominent differences were observed between ISAs with Western Europe and those with Japan. Whereas ISAs with both Western Europe and Japanese concentrated on telecommunication, finance, and entertainment, telecommunication represented the highest proportion of ISAs with Western Europe, while finance and entertainment constituted a substantial number of ISAs with Japan. This may serve to reinforce the notion that Japan has a relatively closed market in telecommunication, while entertainment receive similar treatment in Western Europe, especially in France.

Interestingly, a high percentage of ISAs formed with Russia were in mining (14.3%), indicating U.S. companies’ desire to utilize Russia’s rich resources. Also, by being in close proximity to the vast supply of important raw materials, companies such as Reynolds have set up facilities to manufacture foil and other aluminum products and market these products to Western customers in Russia, Ukraine, and the other former Soviet republics. Reynolds, by entering Russia and being a ruble-based supplier, provides a new service to these Western customers by shielding them from Russian inflation and exchange-rate shocks (McDonald 1994). Other than mining, substantial amount of alliances were in service industries: entertainment (8.2%), transportation (8.2%) and telecommunication (6.1%), which reflect the urgency of building physical and social infrastructures in moving the country toward a market economy.

FORMS OF STRATEGIC ALLIANCES

In this study, the forms of strategic alliances are classified as contractual agreements, equity participation, joint ventures, and consortia, as identified by Terpstra and Simonin (1993). Contractual agreements consist of cooperation between two companies, for which no legal entity is created; for example, IBM and Motorola agreed to market a wireless communications service for computers. Equity participation involves the acquisition of equity in one firm by another firm, with no new entity being created; for example, Canal Plus Productions–a wholly owned unit of the French pay-TV company, Canal Plus SA–acquired a 5% stake in Los Angeles-based Carolco Picture Inc. Joint ventures are established by forming new and separate legal entities, resulting from the cooperation between two companies; for example, GEC Alstom SA and General Electric Co. of the U.S. formed European Gas Turbine NV to serve the gas turbine market. A consortium is a collaborative arrangement among three or more firms, regardless of the equity structure; for example, in March 1990, the Lucky Development Co., a unit of Lucky-Goldstar Group, signed an agreement with Bechtel Group of the U.S. and Izhorsky-Zabod of the former USSR to jointly pursue construction projects in the former Soviet Union. Table 3 (omitted) reports the forms of strategic alliances between countries/regions. The result showed that the forms of strategic alliances were significantly different between DSAs and ISAs (chi sup 2 = 10.07, p

As for ISAs with Russia, Canada, or Mexico, the Triad, and the rest of the world, joint ventures consisted of a much higher percentage than that of contractual agreements. This phenomenon may be due to foreign government regulations (especially those by developing nations) imposed on U.S. companies, when making foreign direct investments. Quite often, these governments require U.S. companies to form joint ventures with local companies to fulfill objectives that range from technology transfer to profit sharing. In return, U.S. companies gain access to their market. It is noted that consortia represented a higher percentage of both DSAs and ISAs than those reported by Terpstra and Simonin (1993). In industries such as telecommunication and aerospace, it is increasingly difficult and inadequate for only two companies to pool their capabilities and resources together. Thus, although joint participation of many companies involves more complex planning and coordination, this may be the only viable strategic option in handling extremely large and technological projects.

PURPOSES OF STRATEGIC ALLIANCES

The purposes for nearly all the DSAs and ISAs were either R&D, production, marketing/ distribution, or production/marketing, Table 4 (omitted) shows the purposes of strategic alliances between countries/regions. The result showed that the purposes of strategic alliances were significantly different between DSAs and ISAs (chi sup 2 = 52.44, p

CONCLUSION

Due to economic and technological necessities, forming strategic alliances among domestic and international partners remains a popular competitive strategy for survival in the global market. The results of this study reflect several patterns. First, we observed a drastic increase in international strategic alliances with China and former Soviet Union and Eastern European countries, signalling new opportunities in these foreign markets. Joint ventures were the most prevalent form of strategic alliances with these former or existing communist countries because joint ventures are often required by host governments .

Second, on an aggregate level, a higher proportion of strategic alliances were formed by companies from non-service industries. When DSAs and ISAs were compared, there were significantly more strategic alliances in service industries in DSAs than those in ISAs. This lends credence to the notion that the U.S. is a service economy, thereby influencing the extent of strategic alliances formed in service industries. In addition, the extent of ISAs with Russia in service industries, as opposed to those formed with the rest of the world (i.e., excluding Western Europe, Japan, Canada, and Mexico) reflects the need of physical, economic, and social infrastructure developments in Russia. On the other hand, ISAs with Western Europe and Japan focused more on non-service industries, exhibiting U.S. companies’ desire in capitalizing in these countries’ manufacturing ingenuity .

Third, in analyzing the purposes of forming strategic alliances between different countries/regions, a distinctive difference was observed between DSAs and ISAs. DSAs focused more on R&D and production, while ISAs were mostly for production, and marketing/distribution, These results suggest that strategic alliances among companies from different countries/regions place more emphasis on immediate objectives, such as: acquiring manufacturing skills and market access. Those strategic alliances formed between domestic firms focus more on long-term objectives, such as: R&D, which are far more difficult to manage and involve high potential risks.

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Copyright College of Business Administration. University of Detroit Mercy Fall 1995

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