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ARTICLE IN PRESS
Scand. J. Mgmt. (2008) 24, 308–319

Available at www.sciencedirect.com

http://www.elsevier.com/locate/scaman

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
b
Escola Superior de Tecnologia e Gestão, Instituto Politécnico de Leiria, Morro do Lena-Alto Vieiro, 2411-911 Leiria, Portugal
c
globADVANTAGE — Center of Research in International Business & Strategy, 2411-911 Leiria, Portugal

KEYWORDS Summary
International strate- Repeated partnerships in international strategic alliances (ISAs) should mitigate the
gic alliance; effects of an under-established institutional framework, lower transaction costs, and
Partner selection; create the conditions for the exploitation of firm-specific capabilities by multinational
Emerging economy; corporations (MNCs). However, to the best of our knowledge, no research has investigated
Transaction costs 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 policies to form a successful alliance (e.g., Beamish, 1994;


Hitt, Dacin, Levitas, Arregle, & Borza, 2000; Lane &
Partner selection is the first difficult but critical decision Beamish, 1990). In spite of the potential benefits accruing
that multinational corporations (MNCs) encounter when from forming new alliances with prior alliance partners
deciding to enter a new international strategic alliance (e.g., Gulati, 1995a, 1995b; Saxton, 1997), to the best of our
(ISA) (Geringer, 1991; Ireland, Hitt, & Vaidyanath, 2002). knowledge no study has investigated the factors that explain
Extant research on partner selection has been largely why MNCs may prefer to select prior alliance partners for
confined to the analysis of whether partners have compa- their ISAs in emerging economies. Our understanding of the
tible and complementary skills, resources, procedures and conditions for repeated partnerships in emerging economies
is rather limited, which is surprising given the high risks
Corresponding author. Tel.: +1 812 855 5967; featuring ISAs in emerging economies and the potential for
fax: +1 812 855 4246. reducing transactional hazards by engaging repeatedly with
E-mail addresses: lid@indiana.edu (D. Li), the same partner.
portugal@estg.ipleiria.pt (M.P. Ferreira). Emerging economies are ‘‘low-income, rapid-growth
1
Tel.: +11 351 244 843317; fax: +11 351 244 820310. countries using economic liberalization as their primary

0956-5221/$ - see front matter & 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.scaman.2008.05.001
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Partner selection for international strategic alliances 309

engine of growth’’ (Hoskisson, Eden, Lau, & Wright, 2000, cooperative agreements. An ISA refers to a strategic alliance
p. 249). The processes and extent of economic liberalization involving partner firms from different countries. ISAs have
are qualitatively different across emerging economies become a preferred strategy to enter foreign markets (Lane
(Hoskisson et al., 2000; Newman, 2000). For instance, & Beamish, 1990; Tallman & Shenkar, 1994) to speed entry,
countries such as Poland and Russia have been shifting away obtain economies of scale and rationalize production, access
from a centrally planned economic system through shock complementary technologies (Contractor & Lorange, 1988),
therapies; whereas other countries, such as China and and acquire knowledge regarding the host market (Madhok,
Vietnam, are pursuing gradual policies in moving away from 1997). Partner selection is strategically critical because the
central planning. Notwithstanding these inter-country dif- choice of a partner will drive the ‘‘overall mix of available
ferences, foreign MNCs face one common denominator when skills and resources, the operating policies and procedures,
entering an emerging economy: a highly complex, unstable and the short- and long-term viability’’ (Geringer, 1991,
and largely unknown business environment undergoing pp. 55–56) of an alliance. Thus, appropriate partner
rather profound and rapid changes. The rapid and wide- selection may prevent future conflicts and reduce the
spread institutional changes in emerging economies raise traditional hazards involving alliance partners, such as
important issues for MNCs operating in these markets. In management and coordination disagreements, instability
this paper we examine why, and under which conditions, (Hennart & Larimo, 1998; Inkpen & Beamish, 1997), and
MNCs select prior alliance partners for ISAs in emerging incongruent objectives.
economies. Establishing relationships with prior partners has been
Specifically, this study investigates how the technological recommended as a manner to ease knowledge transfer
commitments required by the ISA, the governance struc- between partners and reduce potential transaction hazards
ture, and the institutional distance between the home and stemming from opportunism. Knowledge exchange between
host countries may affect an MNC’s preference for prior alliance partners is eased by a history of prior interactions
partners when forming ISAs in emerging economies. We that increases partners’ absorptive capacity (Kogut &
argue that repeated partnerships benefit technology trans- Zander, 1992; Mowery, Oxley, & Silverman, 1998; Szulanski,
fer and protection, particularly when the technological 1996). Absorptive capacity refers to the ability of a firm to
commitments required by the ISA are high. We further argue recognize the value of new external information, assimilate
that equity-based governance structures are a substitutive it, and apply it to commercial ends to enhance the firm’s
mechanism for repeated partnerships in addressing partner innovative capabilities (Cohen & Levinthal, 1990). In fact,
firms’ concerns on opportunism. Finally we posit that the extant research has shown that prior cooperation between
institutional distance between the home and host country technology-transferring partners improves the efficiency
increases the likelihood of ISAs between prior partners. and effectiveness of the transfers (Reed & DeFillippi,
Transaction cost economics and institutional theory are 1990; Szulanski, 1996; von Hippel, 1994; Zahra & George,
the theoretical foundations for the issues we examine. Our 2002). Moreover, through prior alliances, the shared social
work is framed within the context of partner selection as capital may affect exchanging partners’ managerial philo-
one of the important decisions firms make when forming sophies. As such, partner firms’ decisions and behaviors will
strategic alliances. Transaction cost economics theory conform to trustworthy and expected standards because
informs our work in that partner selection is a transactional they have been internalized as principles and values (Barney
feature of strategic alliances (Reuer, Zollo, & Singh, 2002); & Hansen, 1994).
institutional theory informs our work in that firm behaviors, In emerging economies, relying on prior business partners
such as alliance formation, are embedded in the broader for new ISAs is a manner for MNCs to reduce both internal and
political, economic, and social context (Dacin, Ventresca, & external risks. Internal risks in ISAs arise from the partners’
Beal, 1999; Stinchcombe, 1965). opportunistic activities. Repeated ISAs with the same partner
Our paper is structured as follows. We first review reduce the risk of partners’ opportunistic behaviors (Khanna,
relevant literature on partner selection and risks associated Gulati, & Nohria, 1998; Kogut, 1989), such as that of ‘‘free-
with ISAs in emerging economies. We then develop our riding’’ on the partners’ knowledge or of inappropriately
hypotheses on the factors that may impact MNCs’ pre- capturing proprietary technologies. Minimizing internal risks
ference of prior partners for ISAs in emerging economies. is even more important for ISAs in emerging economies
Our empirical analysis follows. Results based on a sample of because the institutions in place are ineffective in protecting
286 ISAs formed between a US MNC and a local firm in alliance partners’ resources/knowledge.
emerging economies show that the conditions that drive the Extant research on inter-organizational exchange dy-
formation of alliances with prior partners are specific to the namics has identified the importance of trust in developing
alliance and the host country characteristics. and sustaining long-term relationships. Through repeated
interactions, partner firms are able to develop trust, under-
stand each other’s goals better, and manage their coopera-
Determinants of prior partner selection for ISAS tive efforts more effectively (Doz, Hamel, & Prahalad, 1989;
in emerging economies Gulati, 1995a). The social capital built over prior cooperative
experiences offers the mutual confidence that no party will
A strategic alliance refers to any cooperative arrangement exploit the other’s vulnerabilities (Sabel, 1993). The reliance
that uses resources and governance structures from more on trust developed through prior interactions is particularly
than one existing organization. A strategic alliance can take salient for MNCs’ alliances in emerging economies where the
the form of shared equity or not involve any equity stake of assessment of potential partners’ intents and capabilities is
the partners—in this latter form an alliance resembles costly and difficult, and the ineffective institutions further
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310 D. Li, M.P. Ferreira

increase the costs of enforcing contracts. Therefore, select- break existing paradigms, whereas incremental innovations
ing a trustworthy ‘‘old friend’’ lowers the risk that partners are based on minor changes or improvements in the current
will intentionally misbehave. technology. Partner firms in R&D alliances developing radical
Barkema, Bell and Pennings (1996) referred to ‘‘double innovations share more technologies and engage in more
layered acculturation’’ to highlight that when MNCs operate frequent contacts than those in R&D alliances developing
in a foreign environment they not only learn about the incremental innovations.
markets and businesses but also about firms and, within However, technological commitments to a new foreign
these, about potential partner firms for future projects. It investment project, particularly when it requires the use of
seemed likely that the knowledge held about a successful proprietary knowledge, are especially sensitive to transac-
prior alliance partner would increase the likelihood of a new tional hazards and losses of value. In these instances, the
alliance with the same partner. For instance, Maurer’s selection of a prior partner for an ISA adds efficiency to the
(1996) investigation of Sino-US international joint ventures technology-transfer process and to the protection of core
found that the majority of these new ventures were formed technologies.
with prior partners. However, while some partners were Through repeated interaction, prior partners enhance
former joint venture partners, others were only customers their absorptive capacity (Cohen & Levinthal, 1990; Kogut &
or suppliers. Axelsson and Johanson (1992) have also Zander, 1992), which smoothes the alliancing process. A
revealed that international exchange partners are fre- common theme in previous literature on absorptive capacity
quently selected on the basis of prior social ties. Forming is that prior interactions between partner firms are likely to
ISAs with ‘‘old friends’’ can effectively lower miscommuni- reduce the causal ambiguity surrounding knowledge transfer
cation between ISA partners and reduce internal risks and therefore facilitate more efficient and effective flows of
associated with the ISAs. technology from one party to the other (e.g., Cohen &
The external risks in ISAs stem essentially from the host Levinthal, 1990; Kale, Singh, & Permutter, 2000; Kogut &
country environment. Environmental shifts, economic and Zander, 1992). Through repeated interaction between the
political instability, and weak institutions (Delios & Henisz, knowledge source and the recipient, the stickiness and
2000; Hoskisson et al., 2000; Mudd, Grosse, & Mathis, 2002) causal ambiguity of the knowledge can be reduced, or even
in emerging economies change the competitive landscape of overcome (Szulanski, 1996; von Hippel, 1994). Hence, by
ISAs and/or the cooperative intentions of either, or both, selecting a prior partner, MNCs assure effective transfer and
partners. These changes may make redesign or dissolution of complete understanding of the knowledge transferred, and
the alliance inevitable. The social capital between potential foster more committed cooperative relationships. Repeated
partners is likely to partially dispel the external risks of partnering in emerging economies is particularly relevant
alliances and be instrumental for both the formation of new because it allows firms to overcome the technology-transfer
alliances and the partner selection. In higher risk, higher barriers imposed by firm and country differences.
uncertainty environments, it is more efficient for MNCs to In the context of technology protection, one of the major
limit the search for partners to those familiar firms, concerns for firms entering alliances is the predictability of
probably prior partner, that they already know (Podolny, partners’ behavior. Behavioral codes defining the core
1994), rather than trying to evaluate the entire pool of firms activities for each party are difficult to specify, typically
in search for an ideal partner. Therefore, it seems reason- incomplete, and costly to enforce (Contractor & Wonchan,
able that MNCs may rely more on their prior relationships for 2002). The formal protection of intellectual property rights
ISA partner selection to minimize transaction costs and varies across countries and is typically weaker in emerging
external risks in emerging markets, probably more so than in economies than that in developed countries such as the US
developed countries. and Western European countries. A clear solution to over-
In the following sections, we examine three factors that come these hazards, at least to some extent, may well be
are likely to determine whether MNCs prefer to ally with a deepening the relationship with already known firms (i.e.,
prior partner or to search for a new partner for new repeated partnerships). Note that when the assets are
investment projects in emerging economies. These factors specific and cannot be easily (re)deployed to alternative
comprise the technological commitment involved in the ISA, uses, or users, without sacrificing some productive value
the governance structure and the institutional distance (Bello & Williamson, 1985), MNCs face the risk of ex-post
between the home and host countries. opportunistic recontracting with opportunistic partners
(Henisz, 2000). In these instances, trust is necessary for
the parties to make a good-faith effort toward achieving
Technological commitments mutual goals and not to take excessive and unilateral
advantage of each other, even when the opportunity to do so
ISAs differ in partner firms’ technological commitments. For is available (Sabel, 1993).
instance, research and development (R&D) alliances typi-
cally require partner firms to pool their valuable technolo- Hypothesis 1. The greater the technological commitments
gical resources to develop something new while marketing required by an investment project, the more likely the MNC
alliances generally do not. Actually, even R&D alliances will select a prior partner for the ISA in an emerging economy.
themselves differ in the degree of technological commit-
ment required. For example, there are at least two types of Governance structure
innovations that R&D alliances may develop—radical and
incremental (Dewar & Dutton, 1986; Sheremata, 2004). ISAs may assume different ownership structures. An ISA
Radical innovations are based on new design concepts that may take a non-equity-based form, such as international
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Partner selection for international strategic alliances 311

franchising, long-term supply agreements, co-production, et al., 1999; Kostova, 1999; Stinchcombe, 1965). The home
and co-marketing, or an equity-based form such as interna- and host country characteristics determine the extent of
tional joint ventures (Luo, 2002). The equity participation is uncertainty that MNCs will have to handle in their ISAs, and
not trivial because the ‘‘legal ordering’’ incentives such as therefore the usefulness of selecting a prior partner. The
shared ownership of specific investments can be used to home country determines a set of competitive advantages
restrain opportunism to safeguard future profits yielded by that the firms may exploit abroad (Porter, 1990), but it also
cooperation (Axelrod, 1984; Heide & Miner, 1992; William- influences possible divergences between partner firms’
son, 1975). Hennart (1982, 1991) and Teece (1986) also organizational practices and goals. Although some studies
suggested that equity partnerships offer ‘‘mutual hostage’’ have pinpointed the general effect of the host country’s
positions that guarantee performance and mitigate oppor- environment on firm foreign entry decisions (Contractor,
tunistic behaviors. Recent research by Heiman and Nick- 1990; Davis, Desai, & Francis, 2000; Kostova, 1999; Westney,
erson (2002, 2004) found that equity-based governance is 1993), little is still known on specifically how the institu-
typically adopted to deal with the potential opportunistic tional environment influences partner selection decisions for
behaviors resulting from knowledge management practices international alliances.
that are designed to facilitate the transfer of tacit knowl- Institutions matter and differ between countries, under-
edge between partners. lining the importance of institutional distance, which refers
Each form of ISA involves a social and an economic to the degree of difference between regulatory, cognitive
dimension (Blau, 1964). The presence of trust is expected to and normative institutions of the two countries (Kostova,
obviate the need for expensive governance structures (such as 1999). Scholars have used the concept of institutional
equity-based structures) because each partner can expect distance to explain establishing and maintaining organiza-
the other will fulfill their promises (e.g., Dyer & Singh, 1998; tional legitimacy in a host country (Kostova & Zaheer, 1999),
Gulati & Singh, 1998; Uzzi, 1997). In ISAs, trust permits partner diffusion of practices within an MNC (Nelson & Winter, 1982;
firms to overcome the insufficiencies imposed by a weak Kostova & Roth, 2002), as well as location and entry mode
institutional framework, which is unable to protect properties decisions (Xu & Shenkar, 2002). In general, it has been
and enforce agreements. Different from hierarchical arrange- argued that institutional distance between the home and
ments such as shared ownership, trust can be used to maintain host country increases the pressure on a multinational to be
good working relationships between business partners (Barber, locally responsive to the host country, and increases the
1983; Killing, 1988; Lorenz, 1988). Prior interactions provide degree of difficulty in achieving legitimacy in the host
information about a partner’s behavior, creating expectations country (Kostova & Zaheer, 1999).
of future behavioral patterns. The ability to predict behavior Institutional distance has been viewed with respect to
(e.g., abiding by the informal agreement or contract between three main dimensions: cognitive, normative, and regula-
partners in an alliance) affords the focal firm an opportunity to tory (see, for example, Kostova, 1999; Scott, 1995; Xu &
trust prior partners. Shenkar, 2002). The cognitive dimension comprises the
Prior research has posited that equity-based hierarchical perceptions, memories and assumptions about how the
arrangements (or formal governance) can function as a social world operates, and thus eases communication among
substitute of trust (or informal governance) in alliances social actors (Markus & Zajonc, 1985). The normative
(e.g., Dyer & Singh, 1998; Gulati & Singh, 1998; Larson, component reflects the values, beliefs, norms, and assump-
1992; Li, Eden, Hitt, & Ireland, 2008; Malhotra & Murnighan, tions about human nature and human behavior held by the
2002; Reuer, Arino, & Mellewigt, 2006; Uzzi, 1997). That is, individuals in a given country. The regulatory component
MNCs that prefer/plan equity-based ISAs will have a lower focuses on ‘‘setting, monitoring, and enforcing of rules’’
need to form their alliances with prior partners which (Xu & Shenkar, 2002, p. 610). Because laws are formalized in
generally2 are more trustworthy than new partners; i.e., rules and procedures, this pillar is easiest to observe and
equity ownership lowers the likelihood of repeated partner- understand for multinationals. Inter-country differences in
ship in ISAs. In contrast, MNCs forming non-equity-based ISAs these dimensions are partly responsible for how and why firms
will find it more important to team up with prior partners act in a certain manner. For example, MNCs take on the
whom they can trust. Actually, the benefits of relying on ‘‘home hurdle’’ of norms and assumptions about human
trust have been found to be more significant when the behaviors when they go abroad. The beliefs and norms
equity-based governance is absent (Zollo, Reuer, & Singh, developed in their home institutional environment (normative
2002). Therefore, we hypothesize the following. pillar) may determine how MNC subsidiaries interpret and
handle the same event differently from their ISA partners.
Hypothesis 2. It is less likely for the MNC to select a prior Because the normative pillar ‘‘specifies how things should or
partner for the ISA in an emerging economy when equity should not be done’’ (Eden & Miller, 2004), conflicts may arise
investment is involved in the ISA. as a result of different norms and values between ISA
partners, leading to miscommunication and mistrust and
Institutional distance perhaps, even, to the termination of the alliance. This is
even more salient for ISAs in emerging economies where
Firm behavior is embedded in the broader political, markets are unstable and mutual understanding between ISA
economic, and social context that shapes actions (Dacin partners is critical in dealing with suddenly arising issues such
as dramatic change of the competitive landscape or policies.
2
We recognize that the preference for prior partners over new Thus, selecting partners with which MNCs have established
partners may revise under different situations as discussed in Li trust and mutual understanding accelerates decision-making
et al. (2008). and reduces termination hazards between partners.
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312 D. Li, M.P. Ferreira

Hypothesis 3. The institutional distance between the formed between prior partners. Although this does not
partners’ countries of origin is positively related to the present any threats to our econometric analyses below, the
likelihood the MNC will select a prior partner for a new ISA in low percentage of ISAs between prior partners may indicate
an emerging economy. the possible unavailability of prior partners in the interna-
tional business arena.
Method
Independent variables
Technological commitment. This variable assesses the ex-
Sample
tent to which partner firms need to commit (or involve) their
knowledge-based assets to the ISA. The information on
We compiled a sample of 286 ISAs in emerging economies technological commitments required by an ISA was collected
involving US MNCs in the telecommunication, energy, and from the synopses of alliance announcements recorded by
computer programming and data processing industries from the SDC, and news clippings on the sample alliances by
1994 to 2003. Data on ISAs was retrieved from the Securities Lexis-Nexis database and the RDS Business Reference Suite.
Data Corporation Platinum (SDC Platinum), supplemented by Using the scale of 1 (not much at all) 7 (very much), two
information from the Lexis-Nexis Academic database and the independent coders evaluated the degree to which an
RDS Business Reference Suite. The information included in the alliance required the partners to contribute their technol-
SDC Database is compiled from publicly available sources such ogies to the collaboration. We employed the Cohen’s Kappa
as SEC filings and their international counterparts, trade to evaluate the inter-rater reliability. The Cohen’s Kappa
publications, wires, and news sources. The SDC database is a has been considered to be an improvement over using
useful data source on international alliances and has been used percentage agreement to evaluate inter-rater reliability.
to address related issues (see, for example, Porrini, 2004). Kappa has a range from 0 to 1.00, with larger values
The sample alliances were formed between a US MNC and indicating better reliability. The Kappa for our study was
a local firm in an emerging economy. The list of emerging 0.85; disagreements were discussed and resolved by the two
economies was obtained from the World Development raters. In addition, to eliminate the industry bias we
Indicators of the World Bank.3 Moreover, the sample standardized the coding by industry.
alliances are two-party alliances.
Further information on each of the databases used is
described below. The resulting dataset structure can be best Governance structure. We used a dummy variable equity-
characterized as a cross-sectional time-series panel in which based to capture the governance structure of an ISA.
the unit of analysis is individual 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.
Measures

Dependent variable Institutional distance. Following Jensen and Szulanski


The dependent variable prior partner is a dummy variable (2004), we measured the normative pillar of institutional
assessing whether a US MNC selected a prior alliance partner distance between home and host countries by the cultural
for an ISA in an emerging economy. This variable takes the distance index (Kogut & Singh, 1988). This index has been
value of 1 if the ISA is formed with a prior partner, and 0 extensively used in the international business literature (e.g.,
otherwise. Therefore, in our random-effects logistic regres- Barkema, Bell, & Pennings, 1996; Luo, 2000; Morosini, Shane,
sion analysis, the latent variable is the likelihood that the & Singh, 1998; Park & Ungson, 1997) and has been proved to
MNC selects a prior alliance partner for an ISA in an be robust. The index is derived from Hofstede’s (1991) indices
emerging economy. There are two possible approaches for of cultural dimensions: i.e., power distance, individualism,
identifying an MNC’s prior partners: first, whether there is uncertainty avoidance, and masculinity/femininity. The
any alliance activity that has taken place until the given scores for each country on the four dimensions were obtained
year and, second, whether there is any alliance activity that from Hofstede (1991) and the website http://www.geert-
has taken place in a given moving window (Gulati, 1995a). hofstede.com/hofstede_dimensions.php.
We used a 5-year moving window for this study given that To measure the regulatory institutional distance between
several scholars have suggested that alliances often have a the US and the host emerging economy, we computed the
lifespan shorter than 5 years (e.g., Kogut, 1989). The absolute value of the difference of the POLCON V index
dependent variable was coded from the SDC alliance records (Henisz, 2000) between the home and host countries. The
between any pair of companies in the preceding 5 years. To index per se ranges between 0 and 1, identifies the number
test the sensitivity of our results to the span of this moving of independent governmental branches with veto power
window, we also used a 7-year moving window and the over policy change in each country, thus considering the
results were virtually unchanged. alignment across these branches. The computed distance of
It is worth noting that the mean of this variable, prior regulatory pillar ranges from 0.095 to 0.763; the higher the
partner, is 0.15, meaning that only 15% of the ISA were value is, the greater the regulatory institutional distance
between the home and host countries. The data were
3
The emerging economies covered by our sample include obtained from the POLCON web.4
Argentina, Brazil, China, Colombia, Czech Republic, India, Indone-
4
sia, Israel, Malaysia, Mexico, Philippines, Poland, Russia, Slovakia, http://www-management.wharton.upenn.edu/henisz/POLCON/
South Africa, South Korea, Thailand, Turkey, Taiwan, and Venezuela. ContactInfo.html
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Partner selection for international strategic alliances 313

Control variables
We included two industry dummy variables as controls

0.180
0.117 0.068 1.000
because MNCs in different industries may have different risk

10
preferences. Variations in risk taking, or tolerance, may
affect partner selection. The computer programming and

0.005 1.000

0.032 0.055
data processing industry served as the comparison baseline
in our analyses.

9
To control for firms’ characteristics we included firm size

1.000
measured by total assets. It is likely that firm size correlates
positively with the ability to raise the resources needed for

8
investment projects, the ability to leverage across countries

1.000
0.094
0.070
0.069
0.016
and industries, and the ability to plan and act on a long-term

7
basis. Because larger firms are in a better position to
maintain a wide network of cooperative partners (Child &

0.389

0.143
0.034

0.011
Faulkner, 1998), it is important to control for this potential

1.000

0.059
alternative explanation. Furthermore, it is possible that

6
firms with larger resources will need to partner with another

1.000
0.051
0.003
0.157
0.200
0.010
0.067
firm less often. We obtained firm size data from the
Compustat database. The logged format of this variable

5
was used for analyses.

0.189
0.068
0.002
0.032
0.044
0.004
Because firms with frequent international alliance activ-

0.343
1.000
ities may be more experienced with ISAs in general, we

4
control for the international alliance experience of the US
MNC. It is likely that more experienced US MNCs have a large

0.134
0.001

0.029
0.021

0.047
0.026
0.318

0.277
pool of prior partners to choose from than less experienced

1.000
ones have. The proxy used is the total number of
3

international alliances formed by the MNC during the past

0.327

0.121

0.223
5 years prior to the sample alliance announcement, in

0.026
0.286
1.000

0.022

0.021
0.045

0.003
logged format. The same coding was repeated with 7 years;
the analysis yielded similar results. Alliance experience
2

information was collected from the SDC database.

0.190
0.089

0.314

0.230
Finally, we included the variables of alliance location to
1.000
0.051

0.003
0.005
0.070
0.087

0.105
control for possible differences in potential location-specific
1

hazards across regions. Three dummy variables were


generated to represent the ISAs in Asia, Central and Eastern
0.008 13.713
6.463

1.000 1.881 4.408

0.020 6.317
0.095 0.763
Max

Europe (CEE), Latin America and others. The category of


1
1
1

1
1

Latin America and others was adopted as the comparison


baseline in the analyses.
Min

0
0
0

0
0
0

0
0.347
0.499
0.431
4.225
1.621
0.472
0.255

0.495
1.300
0.421

Results
S.D.

0.150
0.462
0.245
5.938
1.351
0.668
0.070
0.000
0.573
1.490
0.314

Table 1 presents the descriptive statistics and the correla-


Mean

tion matrix for all the variables. We carefully explored the


potential for multicollinearity. The variance inflation factor
Log(international alliance experience)

(VIF) for each individual variable is below 5, lower than the


generally accepted level of 10 in tests of multicollinearity,
Institutional distance—regulatory
Institutional distance—normative

and the average VIF for each regression model is below 2.


Industry: telecommunication

Therefore, we concluded multicollinearity did not threaten


Descriptive statistics.

the coefficient estimates.


Technology commitment

Table 2 shows the results of the hypotheses testing from


the random-effects logistic regression models for cross-
sectional time-series dataset. The Hausman test was
Log(total assets)
Industry: energy

conducted and the w2 was 75.19 (po0.001), indicating the


Prior partner

Equity-based
Region: Asia
Region: CEE

appropriateness of a random-effects model over a fixed-


Notes: N ¼ 286.
Variables

effects model.
 po0.05.

Hypothesis 1 argues that an MNC is more likely to select


Table 1

its prior partner for ISAs in emerging economies when the


collaboration requests a higher degree of technological
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

commitment. The coefficient on the variable technological


commitment was positive and statistically significant
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314 D. Li, M.P. Ferreira

Table 2 Random-effects logistic regression models.


Discussion

Prior partner Model 1 Model 2 In this paper we sought to understand the conditions that
lead MNCs to select prior partners for ISAs in emerging
Control variables economies. The rapid and widespread institutional changes
Industry: energy 0.637 0.626 in emerging economies heighten business and market risks,
(0.771) (1.133) making contracts more difficult to enforce and proprietary
Industry: 1.388 3.163 assets harder to protect. Considering the potential for
telecommunication (0.603) (1.371) reducing transactional hazards by engaging repeatedly with
Log(total assets) 0.105 0.121 the same partner, we examined the impact of three
(0.083) (0.109) determinants of prior partner selection for ISAs in emerging
Log(international alliance 0.037 0.034 economies—technological commitments, the governance
experience) (0.050) (0.074) structure, and the institutional distance between the
Region: Asia 1.012y 1.255y partners’ countries of origins. Our analyses of 286 ISAs in
(0.529) (0.706) emerging economies show that the technological commit-
Region: CEE 1.673 1.604 ment required by the ISA is a major predictor of prior
(0.734) (0.973) partner selection. The findings confirmed a substitutive
relationship between the selection of prior partner and
Independent variables
equity-based governance structures. The results also show
Technology commitment – 2.310
that the higher the institutional distance between the home
(0.463)
and host country (in our paper the host country is the home
Equity-based – 0.160
country of the local partner firm), the more likely it will be
(0.082)
that MNCs form alliances with prior partners.
Institutional – 0.037
Although not hypothesized, two findings on the control
distance—normative (0.019)
variables are worth noting. The coefficient on the tele-
Institutional 0.152
communication industry is negative and statistically sig-
distance—regulatory (0.078)
nificant, indicating that MNCs in the computer programming
Intercept 2.730 3.087 and data processing industry are more likely to form ISAs in
(0.625) (1.114) emerging economies with their prior partners than those in
the industry of telecommunication. This finding may imply
N 286 286 (1) a greater concern of potential leakage of knowledge by
Wald Chi(2) 10.81 32.17 MNCs in the computer programming and data processing
Log likelihood 109.72 72.89 industry and hence the reliance on prior relationships, and
Notes: standard errors in parentheses. (2) the greater importance of absorptive capacity for
y
po0.10. successful collaboration in this industry. Moreover, although
 po0.05. marginally significant (po0.10 for coefficients on region
 po0.01. variables in Model 2, Table 2), it seems that MNCs are more
 po0.001.
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
(b ¼ 2.310; po0.001 in Table 2); therefore, Hypothesis 1 is attempt to reduce risk.
supported. Our study contributes to the literature on ISAs by
Hypothesis 2 suggests the substitutive relationship be- theoretically and empirically investigating partner selection
tween the selection of prior partner and equity-based for ISAs in emerging economies. First, this research extends
governance structure. The coefficient on equity-based is our knowledge regarding the application of transaction cost
negative and statistically significant (b ¼ 0.160; po0.05 in economics and institutional theory to partner selection
Table 2) indicating that it is less likely for an ISA to be decisions when firms form ISAs. While previous research on
formed between prior partners when the equity-based partner selection for ISAs has mainly focused on the
governance structure is present. That is, it is less likely for economic dimension of alliances, the importance of the
an MNC to select a prior partner for its ISA in an emerging social dimension for successful international collaboration in
economy when equity investment is involved. Thus, Hypoth- emerging economies, featured by rapid institutional
esis 2 is also supported. changes, has been neglected. By filling such a research
Hypothesis 3 claims that the institutional distance gap in the literature, our research contributes to a more
between home and host country is positively associated comprehensive understanding of alliance management in
with the selection of prior partners for ISAs in emerging the international context.
economies. We found empirical support for this hypothesis Second, this study has implications for the debate on
as well, as evidenced by the positive and statistically informal and formal governance functioning as complements
significant coefficients on institutional distance-normative or substitutes. Several scholars have argued that formal
(b ¼ 0.037; po0.05 in Table 2) and institutional distan- governance (such as contracts) can enhance trust (e.g.,
ce—regulatory (b ¼ 0.152; po0.05 in Table 2). Lorenz, 1999; Mayer & Argyres, 2004; Poppo & Zenger, 2002;
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Partner selection for international strategic alliances 315

Sitkin, 1992). This perspective posits that contracts improve as a combined construct (Gaur & Lu, 2007; Hoffman, 1999).
trust because the contracting process helps to clarify each That is, these two theoretically distinct constructs have
party’s roles and responsibilities, promotes expectations of often been empirically combined; we call for future
cooperation and generates commitment to the relationship. empirical research endeavor in the operationalization of
To the contrary, other scholars argue that informal and the cognitive pillar.
formal governance are substitutes for one another (e.g., We employed Hofstede’s cultural dimensions to calculate
Dyer & Singh, 1998; Gulati & Singh, 1998; Li et al., 2008; the cultural distance from the US to the host countries (see
Reuer et al., 2006; Uzzi, 1997). This view argues that the Kogut & Singh, 1988), and used this distance as a proxy of
presence of trust is expected to obviate the need for formal the normative pillar of institutional distance between
governance because each partner can expect the other will countries (Jensen & Szulanski, 2004). Arguably, these
fulfill its promises. The introduction of formal governance proxies have some limitations. The empirical validity of
can be taken as a signal of lack of trust by partners. Our Hofstede’s framework has been critiqued because of the
findings are consistent with this second perspective and limited generalizability of the findings, given that the
show that the substitutive relationship between the formal sample was drawn from a single multinational US-based
and informal governance exists for ISAs in emerging corporation (Triandis, 1982; Yoo & Donthu, 1998). In this
economies. instance, it might be that some country differences are
Third, the present study continues the stream of research reduced by one umbrella corporate culture (Schwartz,
pointing out opportunities to extend institutional theory to 1994). The static nature of the measurements requires
the complex environments faced by multinational enter- frequent upgrades to entail the gradual cultural evolution
prises. Our findings indicate that a larger institutional that countries undergo (Yoo & Donthu, 1998). Moreover, the
distance between the home and host country leads MNCs cultural values relate to work values. Notwithstanding, the
to the selection of prior partners for ISAs in emerging importance and relevance of Hofstede’s taxonomy is well
economies. Such a finding enriches our understanding of accepted as a comprehensive framework of national cultural
institutional theory by advancing the argument that MNCs values, and the correlation with economic, social, and
ally with local partners to achieve legitimacy in the local geographic indicators is clear (Kogut & Singh, 1988).
market. MNCs form alliances with the same local partner Third, the time duration of prior relationships is assumed
after legitimacy has been achieved in order to address in the present study. While some alliances barely survive the
concerns of partner opportunism and probably to reinforce honeymoon stage, others may last over many years
the legitimacy. (Levinthal & Fichman, 1988). The success or failure of prior
The present study has several limitations, some of which relationships can have significant implications on partner
warrant promising future research avenues. First, some selection for future alliances. For instance, one failed
limitations emerge from the data used. In this paper we alliance may lead the firm to identify its partner as the
included three industries, which may impose a general- ‘‘devil you know.’’ However, companies typically do not
izability problem when applying the results to other report negative events such as alliance ‘‘divorce’’ unless
industries. While the telecommunications and energy lawsuits are involved. A lack of adequate data prevented us
industries may involve large pools of capital which would from further investigation. Nevertheless, the topic of
seemingly lead to higher rates of alliance formation, the divestment, dissolution, exit and survival for FDIs in general,
data processing industry is likely to be more knowledge and international joint ventures and alliances in particular,
intensive than capital intensive. Nevertheless, all new has been an active research arena. For instance, some
investment projects are likely to require some transfers of studies have reported no difference between international
technology to the alliance, which would presumably joint ventures and wholly owned subsidiaries (e.g., Benito,
reinforce a tendency to select prior partners, as we 1997) while others have reported a higher failure rate for
hypothesized. Future research may extend our sample to international joint ventures than wholly owned subsidiaries
other industries and projects of varying sizes in both more (e.g., Barkema et al., 1996). Yet, there is also research
and less developed countries. confirming the higher failure rate of international joint
Second, while we deal with the normative pillar of ventures but attributing the higher failure rate to sell-offs
institutional distance using the cultural distance as a proxy rather than business failures (e.g., Hennart & Larimo, 1998).
following prior research, and the POLCON index as a proxy Further research is needed to enrich our understanding of
for the regulator pillar, other detailed measures that would relevant topics regarding the duration of ISAs.
better distinguish the institutional pillars (regulatory, Fourth, we took the alliance project selection as given in
cognitive, and normative) may be employed for theoretical the current study. That is, we made the assumption that
and methodological purposes. Disaggregated measures alliance project decision has been made before the MNC
permit the assessment of differentiated effects. For considers and decides on alliance partners. However, it is
example, it seems reasonable to argue that the regulatory possible that project selection is considered simultaneously
pillar of the institutional environment presents far less with the alliance formation decision. Additionally, the
complexity and ambiguity than the cognitive and normative different types of alliance motives that firms have had in
pillars. MNCs could be more likely to select prior partners to prior alliances are likely to affect the current project. In our
face the cognitive and normative facets of the institutional study, we focused on how the current ISA features can affect
environment. Also, we did not include a separate measure of partner selection while taking the project as given. The
the cognitive pillar. The cognitive and normative pillars consideration of project decisions may add another chal-
frequently overlap and are not analytically and operation- lenge to alliance formation and management and thus
ally distinct; therefore, they have often been hypothesized warrants future research.
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ARTICLE IN PRESS
316 D. Li, M.P. Ferreira

Fifth, the endogenous relationship between formal and in horizontal and vertical downstream than in vertical
informal governance structures is not tackled in this study upstream alliances.
but worth scholarly attention. In our research, we argued Future research may also observe if the changing markets
for the effect of equity-based governance structure on the in emerging economies may turn MNCs’ upstream partners
selection of prior partners. There have been a couple of obsolete more quickly, and whether the composition of the
research studies (namely, Li et al., 2008; Oxley & Sampson, alliance for exploration purposes requires more frequent
2004) investigating the endogeneity of alliance decisions adjustment. In other words, to remain technologically
such as governance structure, alliance scope and partner advanced, MNCs need to search for new partners that can
selection. Further consideration of the endogeneity of provide better and more updated technologies and market
alliance decisions in the context of ISAs will be fruitful. information.
Finally, while we relied on the SDC dataset to collect prior Finally, it is important to note5 that, while the formation
alliance information between a pair of partners, it is of ISAs has been explained by firms’ attempt to learn novel
possible that our data understate the number of instances knowledge from the partner, several scholars (see, for
where a prior history of partnerships existed. In particular, it example, Grant & Baden-Fuller, 2004; Zeng & Hennart,
is possible that a trust-building effect similar to the 2002) have argued that often the primary motivation is
instances of prior alliances included in the SDC dataset merely to gain access to that knowledge. Indeed, Zeng and
might be built through different forms of interactions not Hennart (2002) refer to this process as cooperative
captured by the SDC database. This is a possible avenue for specialization, evidencing that firms with complementary
further studies employing, for example, survey instruments. capabilities team up but continue focusing on further
Several additional avenues for future research emerge as developing their own capabilities rather than acquiring
we delve into the intricacies of forming alliances (particu- those of the partner. This perspective on alliances is
larly with prior partners) in emerging economies. First, in somewhat distinct from the perhaps more current perspec-
our analyses we controlled for the MNC’s international tive on the knowledge transfer-based motivation for build-
capability (prior international alliance experience) because ing up an alliance and should shed light on future research
it may influence the pool of its potential partners and its on partner selection.
alliance management capability. While no significant results To conclude, MNCs still rely very little on prior partners
were found based on the current sample, we believe for new investment projects. While partner selection may
relevant research topics deserve in-depth investigation be a core factor in ISA formation, and poor partner selection
and call for more academic effort in this regard. may be at the root of short-lived alliances, little is still
Second, while we focused specifically on ISAs formed known on prior partner selection as a mechanism to reduce
between a foreign firm and a local firm in the host market risks and improve congruence between the partners’
(e.g., a US firm forms an alliance with a Chinese firm in objectives and strategies. Alliancing with prior partners
China), ISAs can be formed by two foreign firms from the reduces informational needs, speeds alliance formation
same home country (e.g., two US firms form an alliance in facilitating market entry, and mitigates transaction hazards.
China), or even by two foreign firms from different home Additional research on the benefits and perils of prior
countries (e.g., a US firm forms an alliance with a Japanese partner selection may help us formulate the conditions
firm in China). Indeed the impact of different configurations under which prior partner selection is actually the most
in terms of the nationality of the partner firms and the appropriate governance mechanism to ensure alliance
location of the ISA on partner selection may prove an success in emerging economies.
interesting avenue for additional research.
Another possible avenue for future research consists of
distinguishing horizontal from vertical alliances and asses-
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