Partner_selection_for_international_stra.pdf

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Author's personal copy ARTICLE IN PRESS Scand. J. Mgmt. (2008) 24, 308–319

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Partner selection for international strategic alliances in emerging economies Dan Lia,, Manuel Portugal Ferreirab,c,1 a

Kelley School of Business, Indiana University, Bloomington, IN 47405-1701, USA Escola Superior de Tecnologia e Gesta˜o, Instituto Polite´cnico de Leiria, Morro do Lena-Alto Vieiro, 2411-911 Leiria, Portugal c globADVANTAGE — Center of Research in International Business & Strategy, 2411-911 Leiria, Portugal b

KEYWORDS International strategic alliance; Partner selection; Emerging economy; Transaction costs

Summary Repeated partnerships in international strategic alliances (ISAs) should mitigate the effects of an under-established institutional framework, lower transaction costs, and create the conditions for the exploitation of firm-specific capabilities by multinational corporations (MNCs). However, to the best of our knowledge, no research has investigated MNCs’ preference about prior partners for ISA projects in emerging economies. This is surprising, given the high risks characterizing ISAs and the potential for reducing transactional hazards by engaging repeatedly with the same partner. Our analyses of 286 ISAs between a US MNC and a local firm in emerging economies reveal that US MNCs forming ISAs requiring higher extent of technological commitments are more likely to select their prior partners. Equity-based governance structure is a substitutive mechanism of alliancing with prior partners for MNCs to address potential opportunisms in ISAs. We also find that US MNCs are more likely to select prior partners for ISAs when there is a larger institutional distance between the partners’ countries of origin. & 2008 Elsevier Ltd. All rights reserved.

Introduction Partner selection is the first difficult but critical decision that multinational corporations (MNCs) encounter when deciding to enter a new international strategic alliance (ISA) (Geringer, 1991; Ireland, Hitt, & Vaidyanath, 2002). Extant research on partner selection has been largely confined to the analysis of whether partners have compatible and complementary skills, resources, procedures and Corresponding author. Tel.: +1 812 855 5967; fax: +1 812 855 4246. E-mail addresses: [email protected] (D. Li), [email protected] (M.P. Ferreira). 1 Tel.: +11 351 244 843317; fax: +11 351 244 820310.

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policies to form a successful alliance (e.g., Beamish, 1994; Hitt, Dacin, Levitas, Arregle, & Borza, 2000; Lane & Beamish, 1990). In spite of the potential benefits accruing from forming new alliances with prior alliance partners (e.g., Gulati, 1995a, 1995b; Saxton, 1997), to the best of our knowledge no study has investigated the factors that explain why MNCs may prefer to select prior alliance partners for their ISAs in emerging economies. Our understanding of the conditions for repeated partnerships in emerging economies is rather limited, which is surprising given the high risks featuring ISAs in emerging economies and the potential for reducing transactional hazards by engaging repeatedly with the same partner. Emerging economies are ‘‘low-income, rapid-growth countries using economic liberalization as their primary

Author's personal copy ARTICLE IN PRESS Partner selection for international strategic alliances engine of growth’’ (Hoskisson, Eden, Lau, & Wright, 2000, p. 249). The processes and extent of economic liberalization are qualitatively different across emerging economies (Hoskisson et al., 2000; Newman, 2000). For instance, countries such as Poland and Russia have been shifting away from a centrally planned economic system through shock therapies; whereas other countries, such as China and Vietnam, are pursuing gradual policies in moving away from central planning. Notwithstanding these inter-country differences, foreign MNCs face one common denominator when entering an emerging economy: a highly complex, unstable and largely unknown business environment undergoing rather profound and rapid changes. The rapid and widespread institutional changes in emerging economies raise important issues for MNCs operating in these markets. In this paper we examine why, and under which conditions, MNCs select prior alliance partners for ISAs in emerging economies. Specifically, this study investigates how the technological commitments required by the ISA, the governance structure, and the institutional distance between the home and host countries may affect an MNC’s preference for prior partners when forming ISAs in emerging economies. We argue that repeated partnerships benefit technology transfer and protection, particularly when the technological commitments required by the ISA are high. We further argue that equity-based governance structures are a substitutive mechanism for repeated partnerships in addressing partner firms’ concerns on opportunism. Finally we posit that the institutional distance between the home and host country increases the likelihood of ISAs between prior partners. Transaction cost economics and institutional theory are the theoretical foundations for the issues we examine. Our work is framed within the context of partner selection as one of the important decisions firms make when forming strategic alliances. Transaction cost economics theory informs our work in that partner selection is a transactional feature of strategic alliances (Reuer, Zollo, & Singh, 2002); institutional theory informs our work in that firm behaviors, such as alliance formation, are embedded in the broader political, economic, and social context (Dacin, Ventresca, & Beal, 1999; Stinchcombe, 1965). Our paper is structured as follows. We first review relevant literature on partner selection and risks associated with ISAs in emerging economies. We then develop our hypotheses on the factors that may impact MNCs’ preference of prior partners for ISAs in emerging economies. Our empirical analysis follows. Results based on a sample of 286 ISAs formed between a US MNC and a local firm in emerging economies show that the conditions that drive the formation of alliances with prior partners are specific to the alliance and the host country characteristics.

Determinants of prior partner selection for ISAS in emerging economies A strategic alliance refers to any cooperative arrangement that uses resources and governance structures from more than one existing organization. A strategic alliance can take the form of shared equity or not involve any equity stake of the partners—in this latter form an alliance resembles

309 cooperative agreements. An ISA refers to a strategic alliance involving partner firms from different countries. ISAs have become a preferred strategy to enter foreign markets (Lane & Beamish, 1990; Tallman & Shenkar, 1994) to speed entry, obtain economies of scale and rationalize production, access complementary technologies (Contractor & Lorange, 1988), and acquire knowledge regarding the host market (Madhok, 1997). Partner selection is strategically critical because the choice of a partner will drive the ‘‘overall mix of available skills and resources, the operating policies and procedures, and the short- and long-term viability’’ (Geringer, 1991, pp. 55–56) of an alliance. Thus, appropriate partner selection may prevent future conflicts and reduce the traditional hazards involving alliance partners, such as management and coordination disagreements, instability (Hennart & Larimo, 1998; Inkpen & Beamish, 1997), and incongruent objectives. Establishing relationships with prior partners has been recommended as a manner to ease knowledge transfer between partners and reduce potential transaction hazards stemming from opportunism. Knowledge exchange between alliance partners is eased by a history of prior interactions that increases partners’ absorptive capacity (Kogut & Zander, 1992; Mowery, Oxley, & Silverman, 1998; Szulanski, 1996). Absorptive capacity refers to the ability of a firm to recognize the value of new external information, assimilate it, and apply it to commercial ends to enhance the firm’s innovative capabilities (Cohen & Levinthal, 1990). In fact, extant research has shown that prior cooperation between technology-transferring partners improves the efficiency and effectiveness of the transfers (Reed & DeFillippi, 1990; Szulanski, 1996; von Hippel, 1994; Zahra & George, 2002). Moreover, through prior alliances, the shared social capital may affect exchanging partners’ managerial philosophies. As such, partner firms’ decisions and behaviors will conform to trustworthy and expected standards because they have been internalized as principles and values (Barney & Hansen, 1994). In emerging economies, relying on prior business partners for new ISAs is a manner for MNCs to reduce both internal and external risks. Internal risks in ISAs arise from the partners’ opportunistic activities. Repeated ISAs with the same partner reduce the risk of partners’ opportunistic behaviors (Khanna, Gulati, & Nohria, 1998; Kogut, 1989), such as that of ‘‘freeriding’’ on the partners’ knowledge or of inappropriately capturing proprietary technologies. Minimizing internal risks is even more important for ISAs in emerging economies because the institutions in place are ineffective in protecting alliance partners’ resources/knowledge. Extant research on inter-organizational exchange dynamics has identified the importance of trust in developing and sustaining long-term relationships. Through repeated interactions, partner firms are able to develop trust, understand each other’s goals better, and manage their cooperative efforts more effectively (Doz, Hamel, & Prahalad, 1989; Gulati, 1995a). The social capital built over prior cooperative experiences offers the mutual confidence that no party will exploit the other’s vulnerabilities (Sabel, 1993). The reliance on trust developed through prior interactions is particularly salient for MNCs’ alliances in emerging economies where the assessment of potential partners’ intents and capabilities is costly and difficult, and the ineffective institutions further

Author's personal copy ARTICLE IN PRESS 310 increase the costs of enforcing contracts. Therefore, selecting a trustworthy ‘‘old friend’’ lowers the risk that partners will intentionally misbehave. Barkema, Bell and Pennings (1996) referred to ‘‘double layered acculturation’’ to highlight that when MNCs operate in a foreign environment they not only learn about the markets and businesses but also about firms and, within these, about potential partner firms for future projects. It seemed likely that the knowledge held about a successful prior alliance partner would increase the likelihood of a new alliance with the same partner. For instance, Maurer’s (1996) investigation of Sino-US international joint ventures found that the majority of these new ventures were formed with prior partners. However, while some partners were former joint venture partners, others were only customers or suppliers. Axelsson and Johanson (1992) have also revealed that international exchange partners are frequently selected on the basis of prior social ties. Forming ISAs with ‘‘old friends’’ can effectively lower miscommunication between ISA partners and reduce internal risks associated with the ISAs. The external risks in ISAs stem essentially from the host country environment. Environmental shifts, economic and political instability, and weak institutions (Delios & Henisz, 2000; Hoskisson et al., 2000; Mudd, Grosse, & Mathis, 2002) in emerging economies change the competitive landscape of ISAs and/or the cooperative intentions of either, or both, partners. These changes may make redesign or dissolution of the alliance inevitable. The social capital between potential partners is likely to partially dispel the external risks of alliances and be instrumental for both the formation of new alliances and the partner selection. In higher risk, higher uncertainty environments, it is more efficient for MNCs to limit the search for partners to those familiar firms, probably prior partner, that they already know (Podolny, 1994), rather than trying to evaluate the entire pool of firms in search for an ideal partner. Therefore, it seems reasonable that MNCs may rely more on their prior relationships for ISA partner selection to minimize transaction costs and external risks in emerging markets, probably more so than in developed countries. In the following sections, we examine three factors that are likely to determine whether MNCs prefer to ally with a prior partner or to search for a new partner for new investment projects in emerging economies. These factors comprise the technological commitment involved in the ISA, the governance structure and the institutional distance between the home and host countries.

Technological commitments ISAs differ in partner firms’ technological commitments. For instance, research and development (R&D) alliances typically require partner firms to pool their valuable technological resources to develop something new while marketing alliances generally do not. Actually, even R&D alliances themselves differ in the degree of technological commitment required. For example, there are at least two types of innovations that R&D alliances may develop—radical and incremental (Dewar & Dutton, 1986; Sheremata, 2004). Radical innovations are based on new design concepts that

D. Li, M.P. Ferreira break existing paradigms, whereas incremental innovations are based on minor changes or improvements in the current technology. Partner firms in R&D alliances developing radical innovations share more technologies and engage in more frequent contacts than those in R&D alliances developing incremental innovations. However, technological commitments to a new foreign investment project, particularly when it requires the use of proprietary knowledge, are especially sensitive to transactional hazards and losses of value. In these instances, the selection of a prior partner for an ISA adds efficiency to the technology-transfer process and to the protection of core technologies. Through repeated interaction, prior partners enhance their absorptive capacity (Cohen & Levinthal, 1990; Kogut & Zander, 1992), which smoothes the alliancing process. A common theme in previous literature on absorptive capacity is that prior interactions between partner firms are likely to reduce the causal ambiguity surrounding knowledge transfer and therefore facilitate more efficient and effective flows of technology from one party to the other (e.g., Cohen & Levinthal, 1990; Kale, Singh, & Permutter, 2000; Kogut & Zander, 1992). Through repeated interaction between the knowledge source and the recipient, the stickiness and causal ambiguity of the knowledge can be reduced, or even overcome (Szulanski, 1996; von Hippel, 1994). Hence, by selecting a prior partner, MNCs assure effective transfer and complete understanding of the knowledge transferred, and foster more committed cooperative relationships. Repeated partnering in emerging economies is particularly relevant because it allows firms to overcome the technology-transfer barriers imposed by firm and country differences. In the context of technology protection, one of the major concerns for firms entering alliances is the predictability of partners’ behavior. Behavioral codes defining the core activities for each party are difficult to specify, typically incomplete, and costly to enforce (Contractor & Wonchan, 2002). The formal protection of intellectual property rights varies across countries and is typically weaker in emerging economies than that in developed countries such as the US and Western European countries. A clear solution to overcome these hazards, at least to some extent, may well be deepening the relationship with already known firms (i.e., repeated partnerships). Note that when the assets are specific and cannot be easily (re)deployed to alternative uses, or users, without sacrificing some productive value (Bello & Williamson, 1985), MNCs face the risk of ex-post opportunistic recontracting with opportunistic partners (Henisz, 2000). In these instances, trust is necessary for the parties to make a good-faith effort toward achieving mutual goals and not to take excessive and unilateral advantage of each other, even when the opportunity to do so is available (Sabel, 1993). Hypothesis 1. The greater the technological commitments required by an investment project, the more likely the MNC will select a prior partner for the ISA in an emerging economy.

Governance structure ISAs may assume different ownership structures. An ISA may take a non-equity-based form, such as international

Author's personal copy ARTICLE IN PRESS Partner selection for international strategic alliances franchising, long-term supply agreements, co-production, and co-marketing, or an equity-based form such as international joint ventures (Luo, 2002). The equity participation is not trivial because the ‘‘legal ordering’’ incentives such as shared ownership of specific investments can be used to restrain opportunism to safeguard future profits yielded by cooperation (Axelrod, 1984; Heide & Miner, 1992; Williamson, 1975). Hennart (1982, 1991) and Teece (1986) also suggested that equity partnerships offer ‘‘mutual hostage’’ positions that guarantee performance and mitigate opportunistic behaviors. Recent research by Heiman and Nickerson (2002, 2004) found that equity-based governance is typically adopted to deal with the potential opportunistic behaviors resulting from knowledge management practices that are designed to facilitate the transfer of tacit knowledge between partners. Each form of ISA involves a social and an economic dimension (Blau, 1964). The presence of trust is expected to obviate the need for expensive governance structures (such as equity-based structures) because each partner can expect the other will fulfill their promises (e.g., Dyer & Singh, 1998; Gulati & Singh, 1998; Uzzi, 1997). In ISAs, trust permits partner firms to overcome the insufficiencies imposed by a weak institutional framework, which is unable to protect properties and enforce agreements. Different from hierarchical arrangements such as shared ownership, trust can be used to maintain good working relationships between business partners (Barber, 1983; Killing, 1988; Lorenz, 1988). Prior interactions provide information about a partner’s behavior, creating expectations of future behavioral patterns. The ability to predict behavior (e.g., abiding by the informal agreement or contract between partners in an alliance) affords the focal firm an opportunity to trust prior partners. Prior research has posited that equity-based hierarchical arrangements (or formal governance) can function as a substitute of trust (or informal governance) in alliances (e.g., Dyer & Singh, 1998; Gulati & Singh, 1998; Larson, 1992; Li, Eden, Hitt, & Ireland, 2008; Malhotra & Murnighan, 2002; Reuer, Arino, & Mellewigt, 2006; Uzzi, 1997). That is, MNCs that prefer/plan equity-based ISAs will have a lower need to form their alliances with prior partners which generally2 are more trustworthy than new partners; i.e., equity ownership lowers the likelihood of repeated partnership in ISAs. In contrast, MNCs forming non-equity-based ISAs will find it more important to team up with prior partners whom they can trust. Actually, the benefits of relying on trust have been found to be more significant when the equity-based governance is absent (Zollo, Reuer, & Singh, 2002). Therefore, we hypothesize the following. Hypothesis 2. It is less likely for the MNC to select a prior partner for the ISA in an emerging economy when equity investment is involved in the ISA.

Institutional distance Firm behavior is embedded in the broader political, economic, and social context that shapes actions (Dacin 2 We recognize that the preference for prior partners over new partners may revise under different situations as discussed in Li et al. (2008).

311 et al., 1999; Kostova, 1999; Stinchcombe, 1965). The home and host country characteristics determine the extent of uncertainty that MNCs will have to handle in their ISAs, and therefore the usefulness of selecting a prior partner. The home country determines a set of competitive advantages that the firms may exploit abroad (Porter, 1990), but it also influences possible divergences between partner firms’ organizational practices and goals. Although some studies have pinpointed the general effect of the host country’s environment on firm foreign entry decisions (Contractor, 1990; Davis, Desai, & Francis, 2000; Kostova, 1999; Westney, 1993), little is still known on specifically how the institutional environment influences partner selection decisions for international alliances. Institutions matter and differ between countries, underlining the importance of institutional distance, which refers to the degree of difference between regulatory, cognitive and normative institutions of the two countries (Kostova, 1999). Scholars have used the concept of institutional distance to explain establishing and maintaining organizational legitimacy in a host country (Kostova & Zaheer, 1999), diffusion of practices within an MNC (Nelson & Winter, 1982; Kostova & Roth, 2002), as well as location and entry mode decisions (Xu & Shenkar, 2002). In general, it has been argued that institutional distance between the home and host country increases the pressure on a multinational to be locally responsive to the host country, and increases the degree of difficulty in achieving legitimacy in the host country (Kostova & Zaheer, 1999). Institutional distance has been viewed with respect to three main dimensions: cognitive, normative, and regulatory (see, for example, Kostova, 1999; Scott, 1995; Xu & Shenkar, 2002). The cognitive dimension comprises the perceptions, memories and assumptions about how the social world operates, and thus eases communication among social actors (Markus & Zajonc, 1985). The normative component reflects the values, beliefs, norms, and assumptions about human nature and human behavior held by the individuals in a given country. The regulatory component focuses on ‘‘setting, monitoring, and enforcing of rules’’ (Xu & Shenkar, 2002, p. 610). Because laws are formalized in rules and procedures, this pillar is easiest to observe and understand for multinationals. Inter-country differences in these dimensions are partly responsible for how and why firms act in a certain manner. For example, MNCs take on the ‘‘home hurdle’’ of norms and assumptions about human behaviors when they go abroad. The beliefs and norms developed in their home institutional environment (normative pillar) may determine how MNC subsidiaries interpret and handle the same event differently from their ISA partners. Because the normative pillar ‘‘specifies how things should or should not be done’’ (Eden & Miller, 2004), conflicts may arise as a result of different norms and values between ISA partners, leading to miscommunication and mistrust and perhaps, even, to the termination of the alliance. This is even more salient for ISAs in emerging economies where markets are unstable and mutual understanding between ISA partners is critical in dealing with suddenly arising issues such as dramatic change of the competitive landscape or policies. Thus, selecting partners with which MNCs have established trust and mutual understanding accelerates decision-making and reduces termination hazards between partners.

Author's personal copy ARTICLE IN PRESS 312 Hypothesis 3. The institutional distance between the partners’ countries of origin is positively related to the likelihood the MNC will select a prior partner for a new ISA in an emerging economy.

Method Sample We compiled a sample of 286 ISAs in emerging economies involving US MNCs in the telecommunication, energy, and computer programming and data processing industries from 1994 to 2003. Data on ISAs was retrieved from the Securities Data Corporation Platinum (SDC Platinum), supplemented by information from the Lexis-Nexis Academic database and the RDS Business Reference Suite. The information included in the SDC Database is compiled from publicly available sources such as SEC filings and their international counterparts, trade publications, wires, and news sources. The SDC database is a useful data source on international alliances and has been used to address related issues (see, for example, Porrini, 2004). The sample alliances were formed between a US MNC and a local firm in an emerging economy. The list of emerging economies was obtained from the World Development Indicators of the World Bank.3 Moreover, the sample alliances are two-party alliances. Further information on each of the databases used is described below. The resulting dataset structure can be best characterized as a cross-sectional time-series panel in which the unit of analysis is individual ISA.

Measures Dependent variable The dependent variable prior partner is a dummy variable assessing whether a US MNC selected a prior alliance partner for an ISA in an emerging economy. This variable takes the value of 1 if the ISA is formed with a prior partner, and 0 otherwise. Therefore, in our random-effects logistic regression analysis, the latent variable is the likelihood that the MNC selects a prior alliance partner for an ISA in an emerging economy. There are two possible approaches for identifying an MNC’s prior partners: first, whether there is any alliance activity that has taken place until the given year and, second, whether there is any alliance activity that has taken place in a given moving window (Gulati, 1995a). We used a 5-year moving window for this study given that several scholars have suggested that alliances often have a lifespan shorter than 5 years (e.g., Kogut, 1989). The dependent variable was coded from the SDC alliance records between any pair of companies in the preceding 5 years. To test the sensitivity of our results to the span of this moving window, we also used a 7-year moving window and the results were virtually unchanged. It is worth noting that the mean of this variable, prior partner, is 0.15, meaning that only 15% of the ISA were 3

The emerging economies covered by our sample include Argentina, Brazil, China, Colombia, Czech Republic, India, Indonesia, Israel, Malaysia, Mexico, Philippines, Poland, Russia, Slovakia, South Africa, South Korea, Thailand, Turkey, Taiwan, and Venezuela.

D. Li, M.P. Ferreira formed between prior partners. Although this does not present any threats to our econometric analyses below, the low percentage of ISAs between prior partners may indicate the possible unavailability of prior partners in the international business arena. Independent variables Technological commitment. This variable assesses the extent to which partner firms need to commit (or involve) their knowledge-based assets to the ISA. The information on technological commitments required by an ISA was collected from the synopses of alliance announcements recorded by the SDC, and news clippings on the sample alliances by Lexis-Nexis database and the RDS Business Reference Suite. Using the scale of 1 (not much at all) 7 (very much), two independent coders evaluated the degree to which an alliance required the partners to contribute their technologies to the collaboration. We employed the Cohen’s Kappa to evaluate the inter-rater reliability. The Cohen’s Kappa has been considered to be an improvement over using percentage agreement to evaluate inter-rater reliability. Kappa has a range from 0 to 1.00, with larger values indicating better reliability. The Kappa for our study was 0.85; disagreements were discussed and resolved by the two raters. In addition, to eliminate the industry bias we standardized the coding by industry. Governance structure. We used a dummy variable equitybased to capture the governance structure of an ISA. Equity-based equals to 1 if the ISA is equity-based; 0 if contract-based. This variable was retrieved from the SDC Platinum database. Institutional distance. Following Jensen and Szulanski (2004), we measured the normative pillar of institutional distance between home and host countries by the cultural distance index (Kogut & Singh, 1988). This index has been extensively used in the international business literature (e.g., Barkema, Bell, & Pennings, 1996; Luo, 2000; Morosini, Shane, & Singh, 1998; Park & Ungson, 1997) and has been proved to be robust. The index is derived from Hofstede’s (1991) indices of cultural dimensions: i.e., power distance, individualism, uncertainty avoidance, and masculinity/femininity. The scores for each country on the four dimensions were obtained from Hofstede (1991) and the website http://www.geerthofstede.com/hofstede_dimensions.php. To measure the regulatory institutional distance between the US and the host emerging economy, we computed the absolute value of the difference of the POLCON V index (Henisz, 2000) between the home and host countries. The index per se ranges between 0 and 1, identifies the number of independent governmental branches with veto power over policy change in each country, thus considering the alignment across these branches. The computed distance of regulatory pillar ranges from 0.095 to 0.763; the higher the value is, the greater the regulatory institutional distance between the home and host countries. The data were obtained from the POLCON web.4 4

http://www-management.wharton.upenn.edu/henisz/POLCON/ ContactInfo.html

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1.000 0.094 0.070 0.069 0.016 1.000 0.389 0.034 0.143 0.059 0.011 1.000 0.051 0.003 0.157 0.200 0.010 0.067 1.000 0.343 0.189 0.068 0.002 0.032 0.044 0.004 1.000 0.318 0.001 0.134 0.029 0.021 0.277 0.047 0.026 1.000 0.327 0.286 0.022 0.121 0.021 0.045 0.223 0.026 0.003 1.000 0.051 0.089 0.003 0.005 0.070 0.087 0.314 0.190 0.105 0.230 0.347 0 1 0.499 0 1 0.431 0 1 4.225 0.008 13.713 1.621 0 6.463 0.472 0 1 0.255 0 1 1.000 1.881 4.408 0.495 0 1 1.300 0.020 6.317 0.421 0.095 0.763 Notes: N ¼ 286.  po0.05.

0.150 0.462 0.245 5.938 1.351 0.668 0.070 0.000 0.573 1.490 0.314 Prior partner Industry: energy Industry: telecommunication Log(total assets) Log(international alliance experience) Region: Asia Region: CEE Technology commitment Equity-based Institutional distance—normative Institutional distance—regulatory

Mean Variables

Descriptive statistics. Table 1

Table 1 presents the descriptive statistics and the correlation matrix for all the variables. We carefully explored the potential for multicollinearity. The variance inflation factor (VIF) for each individual variable is below 5, lower than the generally accepted level of 10 in tests of multicollinearity, and the average VIF for each regression model is below 2. Therefore, we concluded multicollinearity did not threaten the coefficient estimates. Table 2 shows the results of the hypotheses testing from the random-effects logistic regression models for crosssectional time-series dataset. The Hausman test was conducted and the w2 was 75.19 (po0.001), indicating the appropriateness of a random-effects model over a fixedeffects model. Hypothesis 1 argues that an MNC is more likely to select its prior partner for ISAs in emerging economies when the collaboration requests a higher degree of technological commitment. The coefficient on the variable technological commitment was positive and statistically significant

S.D.

Results

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Min

Max

1

2

3

4

5

6

7

8

9

10

Control variables We included two industry dummy variables as controls because MNCs in different industries may have different risk preferences. Variations in risk taking, or tolerance, may affect partner selection. The computer programming and data processing industry served as the comparison baseline in our analyses. To control for firms’ characteristics we included firm size measured by total assets. It is likely that firm size correlates positively with the ability to raise the resources needed for investment projects, the ability to leverage across countries and industries, and the ability to plan and act on a long-term basis. Because larger firms are in a better position to maintain a wide network of cooperative partners (Child & Faulkner, 1998), it is important to control for this potential alternative explanation. Furthermore, it is possible that firms with larger resources will need to partner with another firm less often. We obtained firm size data from the Compustat database. The logged format of this variable was used for analyses. Because firms with frequent international alliance activities may be more experienced with ISAs in general, we control for the international alliance experience of the US MNC. It is likely that more experienced US MNCs have a large pool of prior partners to choose from than less experienced ones have. The proxy used is the total number of international alliances formed by the MNC during the past 5 years prior to the sample alliance announcement, in logged format. The same coding was repeated with 7 years; the analysis yielded similar results. Alliance experience information was collected from the SDC database. Finally, we included the variables of alliance location to control for possible differences in potential location-specific hazards across regions. Three dummy variables were generated to represent the ISAs in Asia, Central and Eastern Europe (CEE), Latin America and others. The category of Latin America and others was adopted as the comparison baseline in the analyses.

1.000 0.005 1.000 0.117 0.068 1.000 0.032 0.055 0.180

Partner selection for international strategic alliances

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Table 2

D. Li, M.P. Ferreira

Random-effects logistic regression models.

Prior partner

Model 1

Model 2

0.637 (0.771) 1.388 (0.603) 0.105 (0.083) 0.037 (0.050) 1.012y (0.529) 1.673 (0.734)

0.626 (1.133) 3.163 (1.371) 0.121 (0.109) 0.034 (0.074) 1.255y (0.706) 1.604 (0.973)

Independent variables Technology commitment

–

Equity-based

–

Institutional distance—normative Institutional distance—regulatory

–

2.310 (0.463) 0.160 (0.082) 0.037 (0.019) 0.152 (0.078)

Intercept

2.730 (0.625)

3.087 (1.114)

N Wald Chi(2) Log likelihood

286 10.81 109.72

286 32.17 72.89

Control variables Industry: energy Industry: telecommunication Log(total assets) Log(international alliance experience) Region: Asia Region: CEE

Notes: standard errors in parentheses. y po0.10.  po0.05.  po0.01.  po0.001.

(b ¼ 2.310; po0.001 in Table 2); therefore, Hypothesis 1 is supported. Hypothesis 2 suggests the substitutive relationship between the selection of prior partner and equity-based governance structure. The coefficient on equity-based is negative and statistically significant (b ¼ 0.160; po0.05 in Table 2) indicating that it is less likely for an ISA to be formed between prior partners when the equity-based governance structure is present. That is, it is less likely for an MNC to select a prior partner for its ISA in an emerging economy when equity investment is involved. Thus, Hypothesis 2 is also supported. Hypothesis 3 claims that the institutional distance between home and host country is positively associated with the selection of prior partners for ISAs in emerging economies. We found empirical support for this hypothesis as well, as evidenced by the positive and statistically significant coefficients on institutional distance-normative (b ¼ 0.037; po0.05 in Table 2) and institutional distance—regulatory (b ¼ 0.152; po0.05 in Table 2).

Discussion In this paper we sought to understand the conditions that lead MNCs to select prior partners for ISAs in emerging economies. The rapid and widespread institutional changes in emerging economies heighten business and market risks, making contracts more difficult to enforce and proprietary assets harder to protect. Considering the potential for reducing transactional hazards by engaging repeatedly with the same partner, we examined the impact of three determinants of prior partner selection for ISAs in emerging economies—technological commitments, the governance structure, and the institutional distance between the partners’ countries of origins. Our analyses of 286 ISAs in emerging economies show that the technological commitment required by the ISA is a major predictor of prior partner selection. The findings confirmed a substitutive relationship between the selection of prior partner and equity-based governance structures. The results also show that the higher the institutional distance between the home and host country (in our paper the host country is the home country of the local partner firm), the more likely it will be that MNCs form alliances with prior partners. Although not hypothesized, two findings on the control variables are worth noting. The coefficient on the telecommunication industry is negative and statistically significant, indicating that MNCs in the computer programming and data processing industry are more likely to form ISAs in emerging economies with their prior partners than those in the industry of telecommunication. This finding may imply (1) a greater concern of potential leakage of knowledge by MNCs in the computer programming and data processing industry and hence the reliance on prior relationships, and (2) the greater importance of absorptive capacity for successful collaboration in this industry. Moreover, although marginally significant (po0.10 for coefficients on region variables in Model 2, Table 2), it seems that MNCs are more likely to form ISAs with prior partners in Asian and CEE countries than in Latin American countries. Such a finding is interesting and deserves more scholarly attention in future research. It is possible that MNCs find Asian and CEE countries riskier and prior partner selection may be an attempt to reduce risk. Our study contributes to the literature on ISAs by theoretically and empirically investigating partner selection for ISAs in emerging economies. First, this research extends our knowledge regarding the application of transaction cost economics and institutional theory to partner selection decisions when firms form ISAs. While previous research on partner selection for ISAs has mainly focused on the economic dimension of alliances, the importance of the social dimension for successful international collaboration in emerging economies, featured by rapid institutional changes, has been neglected. By filling such a research gap in the literature, our research contributes to a more comprehensive understanding of alliance management in the international context. Second, this study has implications for the debate on informal and formal governance functioning as complements or substitutes. Several scholars have argued that formal governance (such as contracts) can enhance trust (e.g., Lorenz, 1999; Mayer & Argyres, 2004; Poppo & Zenger, 2002;

Author's personal copy ARTICLE IN PRESS Partner selection for international strategic alliances Sitkin, 1992). This perspective posits that contracts improve trust because the contracting process helps to clarify each party’s roles and responsibilities, promotes expectations of cooperation and generates commitment to the relationship. To the contrary, other scholars argue that informal and formal governance are substitutes for one another (e.g., Dyer & Singh, 1998; Gulati & Singh, 1998; Li et al., 2008; Reuer et al., 2006; Uzzi, 1997). This view argues that the presence of trust is expected to obviate the need for formal governance because each partner can expect the other will fulfill its promises. The introduction of formal governance can be taken as a signal of lack of trust by partners. Our findings are consistent with this second perspective and show that the substitutive relationship between the formal and informal governance exists for ISAs in emerging economies. Third, the present study continues the stream of research pointing out opportunities to extend institutional theory to the complex environments faced by multinational enterprises. Our findings indicate that a larger institutional distance between the home and host country leads MNCs to the selection of prior partners for ISAs in emerging economies. Such a finding enriches our understanding of institutional theory by advancing the argument that MNCs ally with local partners to achieve legitimacy in the local market. MNCs form alliances with the same local partner after legitimacy has been achieved in order to address concerns of partner opportunism and probably to reinforce the legitimacy. The present study has several limitations, some of which warrant promising future research avenues. First, some limitations emerge from the data used. In this paper we included three industries, which may impose a generalizability problem when applying the results to other industries. While the telecommunications and energy industries may involve large pools of capital which would seemingly lead to higher rates of alliance formation, the data processing industry is likely to be more knowledge intensive than capital intensive. Nevertheless, all new investment projects are likely to require some transfers of technology to the alliance, which would presumably reinforce a tendency to select prior partners, as we hypothesized. Future research may extend our sample to other industries and projects of varying sizes in both more and less developed countries. Second, while we deal with the normative pillar of institutional distance using the cultural distance as a proxy following prior research, and the POLCON index as a proxy for the regulator pillar, other detailed measures that would better distinguish the institutional pillars (regulatory, cognitive, and normative) may be employed for theoretical and methodological purposes. Disaggregated measures permit the assessment of differentiated effects. For example, it seems reasonable to argue that the regulatory pillar of the institutional environment presents far less complexity and ambiguity than the cognitive and normative pillars. MNCs could be more likely to select prior partners to face the cognitive and normative facets of the institutional environment. Also, we did not include a separate measure of the cognitive pillar. The cognitive and normative pillars frequently overlap and are not analytically and operationally distinct; therefore, they have often been hypothesized

315 as a combined construct (Gaur & Lu, 2007; Hoffman, 1999). That is, these two theoretically distinct constructs have often been empirically combined; we call for future empirical research endeavor in the operationalization of the cognitive pillar. We employed Hofstede’s cultural dimensions to calculate the cultural distance from the US to the host countries (see Kogut & Singh, 1988), and used this distance as a proxy of the normative pillar of institutional distance between countries (Jensen & Szulanski, 2004). Arguably, these proxies have some limitations. The empirical validity of Hofstede’s framework has been critiqued because of the limited generalizability of the findings, given that the sample was drawn from a single multinational US-based corporation (Triandis, 1982; Yoo & Donthu, 1998). In this instance, it might be that some country differences are reduced by one umbrella corporate culture (Schwartz, 1994). The static nature of the measurements requires frequent upgrades to entail the gradual cultural evolution that countries undergo (Yoo & Donthu, 1998). Moreover, the cultural values relate to work values. Notwithstanding, the importance and relevance of Hofstede’s taxonomy is well accepted as a comprehensive framework of national cultural values, and the correlation with economic, social, and geographic indicators is clear (Kogut & Singh, 1988). Third, the time duration of prior relationships is assumed in the present study. While some alliances barely survive the honeymoon stage, others may last over many years (Levinthal & Fichman, 1988). The success or failure of prior relationships can have significant implications on partner selection for future alliances. For instance, one failed alliance may lead the firm to identify its partner as the ‘‘devil you know.’’ However, companies typically do not report negative events such as alliance ‘‘divorce’’ unless lawsuits are involved. A lack of adequate data prevented us from further investigation. Nevertheless, the topic of divestment, dissolution, exit and survival for FDIs in general, and international joint ventures and alliances in particular, has been an active research arena. For instance, some studies have reported no difference between international joint ventures and wholly owned subsidiaries (e.g., Benito, 1997) while others have reported a higher failure rate for international joint ventures than wholly owned subsidiaries (e.g., Barkema et al., 1996). Yet, there is also research confirming the higher failure rate of international joint ventures but attributing the higher failure rate to sell-offs rather than business failures (e.g., Hennart & Larimo, 1998). Further research is needed to enrich our understanding of relevant topics regarding the duration of ISAs. Fourth, we took the alliance project selection as given in the current study. That is, we made the assumption that alliance project decision has been made before the MNC considers and decides on alliance partners. However, it is possible that project selection is considered simultaneously with the alliance formation decision. Additionally, the different types of alliance motives that firms have had in prior alliances are likely to affect the current project. In our study, we focused on how the current ISA features can affect partner selection while taking the project as given. The consideration of project decisions may add another challenge to alliance formation and management and thus warrants future research.

Author's personal copy ARTICLE IN PRESS 316 Fifth, the endogenous relationship between formal and informal governance structures is not tackled in this study but worth scholarly attention. In our research, we argued for the effect of equity-based governance structure on the selection of prior partners. There have been a couple of research studies (namely, Li et al., 2008; Oxley & Sampson, 2004) investigating the endogeneity of alliance decisions such as governance structure, alliance scope and partner selection. Further consideration of the endogeneity of alliance decisions in the context of ISAs will be fruitful. Finally, while we relied on the SDC dataset to collect prior alliance information between a pair of partners, it is possible that our data understate the number of instances where a prior history of partnerships existed. In particular, it is possible that a trust-building effect similar to the instances of prior alliances included in the SDC dataset might be built through different forms of interactions not captured by the SDC database. This is a possible avenue for further studies employing, for example, survey instruments. Several additional avenues for future research emerge as we delve into the intricacies of forming alliances (particularly with prior partners) in emerging economies. First, in our analyses we controlled for the MNC’s international capability (prior international alliance experience) because it may influence the pool of its potential partners and its alliance management capability. While no significant results were found based on the current sample, we believe relevant research topics deserve in-depth investigation and call for more academic effort in this regard. Second, while we focused specifically on ISAs formed between a foreign firm and a local firm in the host market (e.g., a US firm forms an alliance with a Chinese firm in China), ISAs can be formed by two foreign firms from the same home country (e.g., two US firms form an alliance in China), or even by two foreign firms from different home countries (e.g., a US firm forms an alliance with a Japanese firm in China). Indeed the impact of different configurations in terms of the nationality of the partner firms and the location of the ISA on partner selection may prove an interesting avenue for additional research. Another possible avenue for future research consists of distinguishing horizontal from vertical alliances and assessing whether one type has more recurrent prior partner selections. The complexity is increased when we distinguish the ISAs into the different types of cooperation: horizontal, vertical upstream, and vertical downstream (Rowley, Behrens, & Krackhardt, 2000). Horizontal alliances are formed between firms in approximately the same stage of the industry, or the product value chain, and are generally used as market risk sharing and market power enhancing mechanisms. It might be reasonable to expect that given the complexities and uncertainties of operating in emerging economies, horizontal ISAs will be common since even the exploitation of MNCs’ capabilities is likely to require a partner operating in a similar (even if not identical) market segment. Vertical upstream alliances put together an MNC with a firm at an earlier stage of the value chain (e.g., research & development, supplier); conversely, a vertical downstream alliance seeks to capture skills closer to the market (e.g., distribution). Future research may assess whether the risks of unintended diffusion of knowledge, or the misappropriation of proprietary technologies, are lower

D. Li, M.P. Ferreira in horizontal and vertical downstream than in vertical upstream alliances. Future research may also observe if the changing markets in emerging economies may turn MNCs’ upstream partners obsolete more quickly, and whether the composition of the alliance for exploration purposes requires more frequent adjustment. In other words, to remain technologically advanced, MNCs need to search for new partners that can provide better and more updated technologies and market information. Finally, it is important to note5 that, while the formation of ISAs has been explained by firms’ attempt to learn novel knowledge from the partner, several scholars (see, for example, Grant & Baden-Fuller, 2004; Zeng & Hennart, 2002) have argued that often the primary motivation is merely to gain access to that knowledge. Indeed, Zeng and Hennart (2002) refer to this process as cooperative specialization, evidencing that firms with complementary capabilities team up but continue focusing on further developing their own capabilities rather than acquiring those of the partner. This perspective on alliances is somewhat distinct from the perhaps more current perspective on the knowledge transfer-based motivation for building up an alliance and should shed light on future research on partner selection. To conclude, MNCs still rely very little on prior partners for new investment projects. While partner selection may be a core factor in ISA formation, and poor partner selection may be at the root of short-lived alliances, little is still known on prior partner selection as a mechanism to reduce risks and improve congruence between the partners’ objectives and strategies. Alliancing with prior partners reduces informational needs, speeds alliance formation facilitating market entry, and mitigates transaction hazards. Additional research on the benefits and perils of prior partner selection may help us formulate the conditions under which prior partner selection is actually the most appropriate governance mechanism to ensure alliance success in emerging economies.

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We are indebted to a reviewer for this observation.

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