Do International Partnership Help Firms Share Resources, Costs and Risks?

Firms can use international strategic alliances to gain access to external resources and also to spread costs and risks. Companies regard both of these as major motives for them to forge international partnership

By Fang Ying, Senior Writer, China Business Knowledge @ CUHK

According to the study conducted by Gongming Qian, Associate Professor at the Department of Management at the Chinese University of Hong Kong Business School, and his collaborators from York University and Xiamen University, low-tech firms use international strategic alliances to share resources, costs and risks. But high-tech firms use international strategic alliances to mitigate environmental dynamism. Partners may share resources, costs and risks to a limited extent in high-tech industries, but the main purpose of these partnerships is to mitigate environmental dynamism through such sharing.

In other words, sharing resources, costs and risks is not the main strategic intent of international alliances in high-tech industries.

According to the researchers, the traditional international business literature posits that firms use international strategic alliances to share resources, costs, and risks, while their study finds that this is only tenable in low-tech industries and does not apply to firms in high-tech industries, particularly when these firms experience hostile environmental dynamism.

The Study

The study collected data from a sample of 425 international strategic alliances in three Eastern costal provinces (Guangdong, Jiangsu and Zhejiang) and two municipalities (Beijing, Shanghai) of China. Two sets of questionnaires were mailed to the chief executive officers or the highest-ranking officers of the international strategic alliances selected; these included high-tech industries in biotechnology, software, and telecommunications; whereas the low-tech industries selected to receive the questionnaires included footwear, plastic toys and textiles. The researchers selected these six industries because they are the major industries in which international strategic alliances were concentrated in China.

With examining the roles of international strategic alliances in different environment settings, the findings show that international strategic alliances can help companies in low-tech industries share their resources, and spread costs and risks in overseas markets.

However, in high-tech industries, such sharing may occur but not to a substantial degree. By contrast, in high-tech industries, sharing resources, costs and risks may expose firms to high costs, including coordination costs, administration costs, control costs, and monitoring costs. Firms have to cover high costs to evaluate, monitor and control partners.

Why is that the case? In low-tech industries, market power is usually associated with the resources owned by firms. Revolutionary innovations are infrequent. Market needs and firms’ positioning strategies are relatively stable. Firms can predict market changes with relative accuracy and are thus reasonably confident about their control over partners’ opportunism. Environmental stability makes it possible for partners to obtain sufficient information, clarify mutual responsibilities, control the process of partnership implementation, and evaluate the outcomes of agreements. Therefore, in low-tech industries, internationalizing firms are willing to make partner-specific commitments and share resources, costs, and risks.

In contrast, high-tech industries frequently experience hostile environmental dynamism, such as discontinuous innovations. Firms that operate in such highly dynamic environments confront enormous market-related uncertainties, while sharing resources, costs and risks implies a high degree of commitment. If partners act opportunistically, firms may not be able to recover such commitment. Consequently, in such an unstable situation, partners are not willing to share resources, costs and risks because they have little control over the returns from such sharing.

Practical Implications

As such, the results of the study offer several practical implications for firms that are planning to seek international strategic alliances.

International strategic alliances can be an effective means for internationalizing firms to manage their risks and limited resources. However, managers should realize that such strategy works only in low-tech industries.

In high-tech industries, where firms experience rapid changes in the marketplace, sudden new opportunities are more likely to happen. Therefore, managers should devote their limited resources to the management of the uncertainties. In order to survive the changes, high-tech firms have to adapt to frequent environmental changes. However, internal adaptation is slow and can be fatal. International strategic alliances provide an efficient and safe approach for these firms to mitigate the changes.

“In light of this, managers in high-tech industries have to take advantage of the important benefits provided by international strategic alliances,”Prof. Qian says.“In particular, managers have to use these alliances to protect their existing stated goals, core technologies, authority structure and marketing strategies. Interruptions in these core structures may be harmful for their firms.”