International Alliances in Home AppliancesFOR THEIR INTERNATIONALIZATION STRATEGIES, COMPANIES DECIDE TO PARTNER WITH FOREIGN COMPANIES WITH CONTRACTS, JOINT VENTURES, AND CROSSHOLDING AGREEMENTS. WHAT FACTOR DETERMINES ONE CHOICE OVER THE OTHER?
International corporate alliances are essential tools for companies that want to expand their business abroad, but they involve complexities related to the delicate relationship with foreign partners. These alliances have become increasingly important in recent years, due to the desire of companies to extend their global value chains, and profit from comparative advantage available in emerging countries. There are several cases of successful corporate alliances next to other instances which have delivered much less successful results, leading to the termination of the international partnership, and the subsequent exit from the foreign market in question.
In our research study conducted with Steve Tallman (Robins School of Business), we focused on the home appliance sector, which is characterized by the presence of several international producers seeking to maximize geographical reach, and reap economies of scale and scope in manufacturing. The white goods industry has a long history of business alliances. Our dataset accounts for 261 international alliances made by appliance manufacturers based in 46 different countries between 1986 and 2012.
Thanks to painstaking archival research, we distinguished the alliances that had as their aim activities upstream in the supply chain (production and logistics), from activities that dealt with downstream activities (distribution and sales), and R & D, corresponding to the three main strategic reasons for companies to enter a foreign partnership. The purpose of the research was to investigate how these motivations affect the choice between spot alliances and joint ventures and other agreements involving buying equity into the partner company.
Product type also influences such choice, since domestic appliances significantly vary in terms of technical complexity, size and purpose of use, as well as in terms of the differences in bargaining power between partners, something which imposes to distinguish between alliances made between global market leaders, and those struck between global brands and national or regional brands.
Our results indicate that international alliances that follow an offshoring logic (delocalization of upstream activities or R & D) tend to be governed by mere contractual agreements, while those aimed at expanding sales abroad (market-seeking logic) tend to be governed by joint ventures. The reason is to be found in lower costs of coordination and in lower risks of opportunistic behavior in offshoring relationships, where it is easier to put in writing the expected performance or legally protect the technological know-how provided by partners. In the case of offshoring, the preference for contractual agreements is particularly evident in countries with more advanced institutional systems. On the other hand, alliances that focus on distribution and sales need the strategic flexibility offered by joint ventures, given the tacit nature of knowledge assets involved in the commercial relationship with customers in foreign markets.
Although market-seeking internationalization is often seen solely as the attempt to increase sales abroad, the study shows that companies are turning to foreign customers for other and more important objectives, such as market knowledge, organizational learning, and product innovation opportunities. Such objectives encourage companies to oversee their presence abroad with injections of capital and direct involvement, which are conversely less frequent in offshoring operations. Further research is needed to understand how strategic motivations, risk of foreign direct investment, and governance of foreign operations are linked to each other in the actual internationalization moves made by companies.
by Gabriella Lojacono and Nicola Misani
Translated by Alex Foti