Alliances Increasingly Important in Internationalisation

Document Sample
Alliances Increasingly Important in Internationalisation Powered By Docstoc
					078           THE FINNISH ECONOMY AND SOCIETY 205

Alliances Increasingly Important in
Internationalisation Strategies of Finnish Firms
The internationalisation of firms is a salient
feature of ongoing globalisation. Traditionally
firms have primarily internationalised through
foreign direct investments (FDI), of which
mergers and acquisitions have played a major
role. Nonetheless, barely a day goes by now           CHRISTOPHER               MIKA
without the announcement of a major interna-          PALMBERG                  PAJARINEN
tional strategic alliance in the press. The recent    Researcher,               Researcher,
increase of international alliances is also well      Etlatieto Ltd.            Etlatieto Ltd.
documented in the research literature, and
undoubtedly indicates that alliances are be-
coming important in the internationalisation
strategies of firms. In this context an interna-
tional strategic alliance might be defined as a       international alliances to a major part has been
publicly announced collaborative agreement            due to looser non-equity based alliances.
between firms from different countries of origin,     Further the increase is foremost concentrated
which is characterised by a bilateral commit-         to high-technology fields which are character-
ment to reach a common strategic goal in the          ised by higher technological and market uncer-
field of R&D, production or marketing. Defined        tainties, and hence also higher costs of collab-
in this way, alliances delimitate a subset of         oration. Typical examples of such technological
inter-firm collaboration that excludes buyer-         fields include ICT, biotechnology and new
seller relationships, subcontracting agree-           materials (see Hagedoorn (2002)).
ments, licensing, franchising, and buyback
agreements where the partners often have              In this article we focus on the internationalisa-
opposing goals.                                       tion of Finnish firms as viewed through allianc-
                                                      es. Previous research has largely taken the
In the theoretical literature alliances are usually   perspective of FDI and shows that these types
interpreted in terms of transaction cost eco-         of investments have grown significantly
nomics, whereby the focus is on equity-based          throughout the 1990s and early 2000s. This is
joint venture as a specific type of alliances.        also reflected in the rising share of turnover,
Through joint ventures firms partially internalise    employment and R&D that Finnish firms have
their collaboration with other firms and thereby      generated abroad (see e.g. Ali-Yrkkö et al.,
have better possibilities to monitor and reduce       2004 and Lovio, 2004). These developments
the costs associated with various uncertainties       have recently sparked a broader discussion on
embedded in such collaboration. These costs           the threats and opportunities associated with
might for example relate to uncertain out-            the related partial relocation of production and
comes, opportunistic behaviour of the partner,        R&D to multiple geographical sites abroad. Far
or lack of mutual trust more generally (Caloghir-     less, however, is known about the develop-
ou et al., 2003). Empirical research has none-        ment, nature and challenges of internationali-
theless shown that the recent increase in             sation of Finnish firms through alliances.
                                      Alliances Increasingly Important                                        079
This article relates to ongoing research on the       agreements, cross-licensing, second sourcing
position of Finland in the globalisation of inno-     or joint marketing agreements.
vative activities. It draws on a new database on
alliances of 22 large Finnish firms.1 The data-       Despite the dominance of Nokia in these
base contains information on the extent to            figures, the number of international alliances
which these firms have been involved in alli-         has also grown significantly in many other
ance since 1995, on the nature of the alliances       more traditional sectors, such as the forest-
and the partner firms. It enables analyses on         based, metals/engineering and chemicals
various issues pertinent to alliance activity, and    sectors. Sectoral differences in the extent and
it has also been complemented with in-depth           nature of alliances activity is usually explained
interviews. In this article we will report and        by the characteristics of the related technolo-
discuss some first insights based on economet-        gies and markets. In the ICT sector the role of
ric analysis of 417 international alliances con-      standardisation is paramount and explains the
tained in the database. The data, the defini-         pervasiveness and particular mode of alliances.
tions and methodologies used, are described in        Another feature of many newer high-technology
greater detail in a recent ETLA discussion            sectors is a high degree of uncertainty due to
paper (Palmberg and Pajarinen, 2005).                 discontinuous technological change, shorter
                                                      product life cycles and rapidly changing com-
NOKIA DOMINATES BUT INTERNATIONAL ALLIANCES           petitive landscapes. In these contexts alliances
ARE ALSO COMMON IN TRADITIONAL SECTORS                can contribute to facilitating technological
Information and communication technology              complementarities between firms, to risk
(ICT) is a good example of a sector in which          pooling, and to shortening development times
the compatibility between technologies and            of innovations. In the more traditional sectors
products are of crucial importance to firms and       alliances typically contribute to cost reductions
consumers alike. As a consequence firms very          through product rationalization or other mutual
often have strong incentives to collaborate in        arrangements, and thereby also reduce risks.
order to standardize technological and product        Alliances often also offer new avenues for
interfaces, even though they might be outright        market access, which reduce the need of firms
competitors. This type of inter-firm collabora-
tion is, by necessity, bilateral and strategic, and
thereby contributes to the increase in the
alliance activity of firms over time. Largely due             The Growth in the Number of Newly
to these same reasons Nokia has, already in                   Formed International Alliances
the early phases of standardisation of the GSM                of Large Finnish Firms
mobile telecommunications system, been                  No.
actively involved in international alliances,            60         Equity
especially with US and European partners
(Palmberg and Martikainen, 2005). From the
viewpoint of Finland, the alliance activity of           40
Nokia also shows up in a rapid increase in the           30
number of newly formed alliances over time. A
further general observation is that the lion’s
share of all international alliances comprise of         10
looser non-equity-based alliances. This obser-            0
vation is in line with available research on                  1995 96      97    98    99 2000 01        02    03
alliances found abroad. Looser non-equity                     Source: The Etlatieto database of international
                                                              alliances (SAFIF).                     ETLA S05.2/f203
based alliances typically comprise of R&D

to commit themselves to extensive longer term         which this task was undertaken. Towards this
investments into new production and sales             end we classified the alliances into three pri-
units. Still, it appears that equity-based allianc-   mary types, differentiating between R&D,
es are relatively more common in the more             production and marketing alliances. In R&D
traditional sectors when compared to high-            alliances firms develop a certain technology or
technology. As suggested earlier, these types         innovation together by exchanging R&D inputs
of alliances are usually considered as an exten-      and other resources. In production alliances
sion of FDI, and thus can be taken to represent       the collaboration centres on coordinated, or
internationalisation in its traditional mode.         joint, production of individual, components,
                                                      products or complete product systems. Market-
Apart from characteristics of technologies and        ing alliances cover joint promotion or market-
markets, many firm level features will also           ing efforts. This might, for example, concern
affect the extent and nature of their alliance        products which might be functionally connect-
activity. It can partially be understood as a type    ed to each other.
of strategic game in which firms weigh the
advantages and disadvantages of the conceiv-          According to the results firms have a higher
able outcomes of alliances against each other         propensity to organize R&D- and marketing-
based on their respective position in technolo-       related collaborative tasks through looser non-
gies, markets and value chains. For smaller           equity alliances when compared with produc-
firms non-equity based alliances might offer a        tion. This can be interpreted to indicate that as
flexible means to align themselves with larger        the international R&D and marketing activities
firms in order to enter new markets abroad due        of firms have grown in importance the related
to their comparatively lesser financial resources     uncertainties have driven firms more frequently
to engage in equity-based joint ventures. Firms       into alliances as a new avenue in internationali-
also differ in terms of their technological com-      sation. This interpretation assumes that uncer-
petencies and patent portfolios, and these            tainty is higher in R&D and marketing-related
differences might influence the behaviour vis-à-      tasks, when compared with production where
vis alliances. Broader cultural and societal          the input and output configurations of products
traits of firms with an origin from different         already should be well-known and relatively
countries might also have their effects in this       stable. Conversely, the results show that the
context.                                              preference of firms to opt for traditional equity-
                                                      based alliances in production-related tasks and
THE DETERMINANTS OF INTERNATIONAL ALLIANCE            suggest that alliances contribute less to their
ACTIVITY                                              internationalisation efforts when compared with
In the empirical part of the analysis we focused      traditional, equity-based, modes.
on explaining the reasons behind the prefer-
ence of large Finnish firms to choose looser          We also classified alliances according to the
types of non-equity alliances, and thus also          technology fields that they covered to take into
seek to interpret the recent surge in interna-        account different technological and market
tional alliances that we observe. Our starting        characteristics. The preference for looser types
point was in the various types of collaborative       of non-equity alliances in the ICT sector was
tasks that firms undertake in alliances under         confirmed further, and assumedly relates to
the assumption that they embody different             broader environmental characteristics of this
trade-offs between specific uncertainties relat-      sector. In the more traditional forest-based, and
ed to the particular task as the subjects of the      engineering sectors firms tend to prefer equity-
alliance, as well as to uncertainties general         based alliances. These sectoral differences are
characterising the broader environment in             also compatible with available research from
                                      Alliances Increasingly Important                         081
abroad. Further, we attempted to measure the          this reasons it also raises new challenges in the
differing technological position of the partners      internationalisation strategies of the firms.
– as measured by the number of granted
patents at the US patent office – under the           Perhaps the most significant challenges relate
assumption that this should affect their alliance     to the sharing of the outcomes of the alliances.
behaviour. A general result was that firms with       In vertical alliances, where the division of
asymmetrically differently sized patent portfoli-     labour between firms of necessity is clearer, it
os tend to prefer looser non-equity alliances         is often easier to come to a mutually beneficial
over equity ones. This could be interpreted as        agreement on this issue. However, in horizontal
an indication that such asymmetries repel firms       alliances between competitors in the same
from dedicating irreversible equity-investments       sector the challenges are far greater. This
in the face of the risks associated with collabo-     concerns especially alliances that aim for the
ration with a technologically stronger partner.       collaborative developments of new technolo-
                                                      gies or innovations. In these cases the firms
In order to account for broader cultural and          often have to engage in extensive and de-
societal traits of firms, we assigned country         manding negotiations over the distribution of
codes to each alliance partner based on its           possible intellectual property rights (IPRs)
primary country of origin by the location of          which arise during collaboration. Accordingly,
headquarters. The results point towards the           an important topic for further research is how
importance of such factors in the preferences         well positioned Finnish firms are in such negoti-
of firms vis-á-vis alliances. Specifically, non-      ations; there are some publicised cases in
equity alliances are more common with Euro-           which the Finnish partner firm has drawn the
pean or US firms, while equity-based alliances        shorter straw.
are more common with Asian firms. This holds
true especially in the case of Chinese partners.      The management and appropriation of alliance
                                                      activity is also challenging in many other re-
CHALLENGES IN THE MANAGEMENT AND                      spects. Even though alliances often are moti-
APPROPRIATION OF ALLIANCE ACTIVITY                    vated by attempts to mitigate risk and add
From a broader vantage point the increasing           flexibility in the strategic intent of firms, the
alliance activity of large Finnish firms is in line   combination of competition and collaboration
with the growth in their R&D expenditures, as         might be irresolvable in many instances. Firms
well as internationalisation in general. Through      have to increasingly carefully analyse their
international alliances these firms have, above       competitive position in the value chain of
all, sought to establish new commercialisation        different technologies and product groups in
opportunities and avenues on the global mar-          order to identify areas and tasks in which this
kets. This is also reflected in the content of        type of inter-firm collaboration is viable. This is
their alliance agreements. Finnish firms often        true especially in the ICT sector where firms
offer their technological competencies in             are driven into increasingly multilateral and
exchange for market access and global retail          complex alliance constellations. In this sector it
channels, which tend to be controlled by large        seems that the locus of competition, to a
foreign multinational firms. It is also noteworthy    growing extent, is shifting from the firm-level
that both our statistical analysis and comple-        toward such larger constellations of alliance
mentary interviews point to the fact that most        networks. This trend is especially clear in the
firms perceive international alliance activity as     battle for next generation standards, and this
a new and distinct activity, which appears to be      battle also involves powerful national interests
relatively unrelated to their FDI and associated      due to the significance of the rapidly develop-
mergers and acquisitions of foreign firms. For        ing markets in countries like China and India.

FOOTNOTE                                                         REFERENCES
    The database also covers alliances of the most important     Ali-Yrkkö, Jyrki – Hermans, Raine – Hyytinen, Ari – Lindström,
smaller firms in the ICT sector, based on a slightly different   Maarit – Paija, Laura – Pajarinen, Mika – Ylä-Anttila, Pekka
methodology.                                                     (2004): Suomi ja Eurooppa kansainvälisessä työnjaossa –
                                                                 Analyysi toimialojen ja klustereiden kilpailukyvystä. Valtioneu-
                                                                 voston kanslian julkaisusarja 20/2004.

                                                                 Caloghirou, Yannis – Ioannides, Stavros – Vonortas, Nicholas
                                                                 (2003): Research joint ventures. Journal of Economic Surveys,
                                                                 vol. 17, no.4, 541-570.

                                                                 Hagedoorn, John (2002): Inter-firm R&D partnerships: an
                                                                 overview of major trends and patterns since 1960. Research
                                                                 Policy 21, 477-492.

                                                                 Lovio, Raimo (2004): Globalization of Finnish corporations –
                                                                 Similarities and differences in their current profiles. Teoksessa
                                                                 Ali-Yrkkö, J., Lovio, R. and Ylä-Anttila, P (eds.): Multinational
                                                                 Enterprises in the Finnish Innovation System. ETLA Sarja
                                                                 B:208. Taloustieto Oy.

                                                                 Palmberg, Christopher – Martikainen, Olli (2005): The GSM
                                                                 standard and Nokia as an incubating entrant. Innovation:
                                                                 management, policy & practice, vol. 7, issue 1, 61-78.

                                                                 Palmberg, Christopher – Pajarinen, Mika (2005): Determi-
                                                                 nants of internationalisation through strategic alliances –
                                                                 Insights based on new data on large Finnish firms. ETLA
                                                                 Keskusteluaiheita nro. 966.

Shared By: