Strategic Alliances within Economically Integrated Regions: Environmental Factors
Influencing Alliance Structures and Patterns
Hadi Alhorr
Boeing Institute of International Business
John Cook School of Business
Saint Louis University
Saint Louis, MO 63108
Kimberly Boal
Rawls College of Business
Texas Tech University
Box 42101
Lubbock, Texas 79409
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Strategic Alliances within Economically Integrated Regions: Environmental Factors
Influencing Alliance Structures and Patterns
ABSTRACT
While regional economic integration has been a major area of research in the field of
international economics and international trade, theoretical and empirical research addressing
their impact on multinational cooperative strategies has not been fully uncovered. In this paper,
we extend the study of international alliance and alliance structures by examining the effects of
the environmental changes, resulting from economic integrations at the country level (e.g.,
market and currency commonality, economic community membership) on the patterns and
structures (Equity-based and Non-equity-based) of alliance relationships among multinational
firm. By building on the organization-environment relationship paradigm and using the European
Union as the region of study, findings demonstrate that broad scale economic integration policies
do influence the structure and pattern of alliance relationships among firms within the
economically integrated region.
Key words: regional economic integration; international alliances; equity-based alliances,
environmental change
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INTRODUCTION
Regional economic integration has been a major area of research in international
economics and economic trade literature. Although economic integration, as a world wide
phenomenon, has been accelerating in numbers and has been happening in many regions
attempting to reduce trade barriers, it has gained little attention in the field of international
strategy and among strategic management scholars. Additionally, while an abundant amount of
research and theoretical literature has been developed on organizational adaptation, especially in
strategic management (Porter, 1980, Kraatz, 1998), the broad application of the environmentorganization perspective has not been adequately incorporated in the cross border cooperative
strategy literature to account for the implications of economic integrations on the patterns and the
structures of international strategic alliances. Research on international strategic alliances has
been centered around the on-going debate about precisely how, when, and why these practices
can be used to build long-run competitive advantage (Das et al., 1998; Koh and Venkataraman,
1992; Glaister and Buckley, 1996). Although the governance structure of an alliance
relationship plays a major role in the success of the alliance (Osborn and Baughn, 1990), this
stream of research has lacked the adequate application of the organization-environment
paradigm. Therefore, making the existing explanations on alliance structures appear to be
incomplete (Goshal and Moran, 1996; Tyler and Steensma, 1995).
The main objective of this paper is to look at the specific environmental changes that
result from regional economic integrations at the country level and how these changes affect the
pattern and the structure of international strategic alliances within these integrated nations. This
study addresses how multinational organizations choose among a set of alternative strategies to
operate in the global arena when their nation states undergo economic, monetary and political
integration. Precisely, we treat the European Union as a valid illustration of nations’ attempts to
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form an economically integrated region. Thus, we look at the specific environmental changes
accompanied with the European Union and how these changes affect the pattern and the structure
of these international alliances (ISA) within the European nations. The European Union
integration (EU) has been an attractive research phenomenon in the international economic trade
literature; however, very few studies in international management research have addressed the
EU implications on organizational strategies. Therefore, in this study, we look at how the
European nations’ attempts to create an economically integrated region change the context
within which multinational firms operate and within which they form and choose among
different alternatives of alliance governance structures.
The paper proceeds in five sections. First, we introduce the European Union as the
empirical context. Then, we introduce the existing arguments about international strategic
alliances, alliance structures and regional economic integrations and we introduce the research
questions that the paper addresses. From here, we present our hypotheses. We report the
research design, data, and research methods used in this study. We report the results of mixed
model regression analysis of economic integration effects for patterns and structures of
international alliances. Last we discuss these findings and present implications for theory.
LITERATURE REVIEW AND RESEARCH QUESTIONS
Regional Economic Integration
Economic integration is happening in general and in particular among different set of
nations around the world (Hill , 2002). Graph 1 shows the notable trend in the global economy of
the accelerated movement toward regional economic integration between the year 1948 and
2002.
---------------------------------------------
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Insert Graph 1 Here
---------------------------------------------Economic integration falls on a spectrum and occurs on several stages that have been
addressed and studied heavily in international macro-economics. In theory, several levels of
economic integration are possible; from the least integrated to the most integrated, they are a free
trade agreement such as NAFTA, common markets, a common union, an economic union and
finally, a full political union (Hill, 2002). With differences in the levels of integration, these
different stages of a fully integrated union impose different levels of institutional forces and
changes to the environment within which organizations in different nations operate. By removing
trade barriers and promoting regional trade, economic, monetary and political integration of
nation states boosts competition as well as growth potentials within certain industries and among
existing organizations (Ricardo, 1817). Economic, monetary and political integrations also drive
firms to change and implement different types of strategies to compete in the international
market (Hill, 2002).
Scholars of international economics and trade, along with researchers in sociology such
as Fligstein and Sweet (2002), have looked at economic integration and the emergence of free
trade blocks to examine how polities and markets are constructed. Existing theory on regional
economic integration has been mainly concerned with the different levels and types of such
phenomena and their implications the country’s overall economy. Stone and Caporaso (1998)
suggest the path that nations follow as they move from free trade agreements towards a bigger
supranational polity or integration. Additionally, consistent with the suggestions of international
trade scholars, particularly the theory of comparative advantage among different nations, the
theory on regional economic integration has mainly addressed the reasons why nation states
engage in such integrations (North, 1989; Sharpf, 1996). A country’s costs and benefits from
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joining a fixed-exchange economically integrated area depend on how integrated its economy is
with those of its potential partners (Mundell, 1961). In fact, Mundell’s theory of optimum
currency also purports that fixed exchange rates are most appropriate for areas closely integrated
through international trade and factor movements, both of which are characteristics of
economically integrated regions. These theories have been mainly concerned with the macro
economic and sociological level of such phenomena exclusively without ties to micro
organizational variables.
As countries move toward a greater regional economic integration, consumers and
organizations within these nations are faced with a new set of challenges and benefits (Hitt,
2002). When nation states sign agreements to facilitate trade and to remove tariff and non-tariff
barriers to free flow of goods, services and factors of production, they bring new institutional
regulations and policies that reshape and redefine the competitive scope of industries. In fact,
there has been statistical evidence of industry consolidations within the continent of Europe after
January 1, 1993, when the Single European Act became law among the member states of the
European Union (Hill, 2002). These changes will directly affect organizations’ attempts to
sustain their competitive edge or to gain a larger market share of the newly integrated unified
market. In fact, the scale of the new integrated market and the free movement of goods, services
and sources of production will encourage firms to exploit new areas in such markets and attempt
to achieve economies of scale. Additionally, as the scope of competition intensifies among
organizations, these organizations shift their competitive strategies more towards price
competitive and low cost strategies (Hill, 2002). Therefore, organizations adjust their strategies
and implement new strategies that help them achieve economies of scope and allow them to have
a bigger share of the newly integrated markets
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In general, international alliance strategies have been dealt with as phenomena at the firm
level, even though it is apparent that there is a need to examine these cross cooperative strategies
as patterns on the country or nation level. The paper attempts to bridge gaps between
international economics and trade research on regional economic integration and international
strategy literature on international alliance strategies. Attempting to explore the environmental
changes associated with regional economic integrations, we address the changes that the
European Union (EU) policies and regulations introduce to the organizational environment as
countries adapt to these changes. We direct our attention in this paper on the effects of two major
changes associated with the EU on the patterns and structures of international alliances. These
changes are: the adoption of a single currency, the adoption of a common market for goods,
services and labor.
Therefore, the major tenet of this study is that international alliance strategies cannot be
studied in vacuum as most existing studies have done. While past research has looked at
international strategic alliances at the firm level, we extend this stream of research to look at the
strategies as a pattern with a frequency and direction at the country level. In addition, the role of
the macro-environment and the changes it imposes on organizational strategies cannot be
ignored. With the regional economic integration being the macro-environmental change in this
study, we look at the direct link between the changes on the country level and changes at the
organizational strategy level. We look at how factors such as the adoption of common currency,
the establishment of a common market, and the adoption of a single foreign trade affect the
pattern and the choice of structure of international alliances within an economically integrated
region. Therefore, we ask:
How do economic and market integrations impact the pattern of international strategic
alliances of multinational firms within these nation states?
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This paper addresses the changes that organizations implement to their cross border
alliance strategies as a result of economic integration of the nations within which these
organizations operate. Economic trade theories emphasize the benefits of economic integration
for national economies and for growth of industries (Ricardo, 1817; Hill 2002). As firms
recognize these opportunities, they tend to change and adjust their strategies to achieve
economies of scale and scope necessary to compete in such integrated markets. The primary
objective for this question is to shed light on the linkage between a country’s membership to an
economic integration and the changes to the strategic choice at the organizational level.
Is there a particular structure of international strategic alliances action that will be used
more than others associated with regional economic integration?
Following up on the first question, it becomes necessary to look at the integrated
environment created and the emerging changes that make such an environment more conducive
for one governing form (Structure) of international alliances than for other forms. Specifically, in
this question we attempt to examine and explain the spread of equity-based alliances as
compared to non-equity based alliances after European nations become members of the EU.
Motivations, Associated Risks and Likelihood of Success of International Strategic
Alliances
The literature on ISAs addresses several motivations, economic and non-economic, that
are driving multinational organizations to engage in such cooperative strategies (Contractor and
Lorange, 2002; Buckley and Casson, 2002). Technology exchange, R&D, and marketing
collaboration are major motives behind many of the strategic alliances formed among
international firms (Koh and Venkataraman, 1992; Glaister and Buckley, 1996). Additionally,
alliances and joint ventures are viewed as a more conservative or defensive investment in a
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foreign market to hedge against the risk and uncertainty associated with entering new markets
(Vernon, 1983). In addition, strategic alliances allow firms to gain the advantages of scale
economies or learnings. The ability to realize synergetic benefits can be captured by independent
firms when they form strategic alliances (Anderson and Narus, 1990). There is empirical
evidence that ISAs have been found to affect firm’s technological position, innovative
capabilities, information exchange and reflexivity (Aulakh, Kotabe, and Sahav 1996; Chikudate,
1999; Stuart and Podolny, 1996).
Some empirical and theoretical works have addressed the issues and risks associated
with international strategic alliances. Reich and Mankin (1986) argue that alliances and
collaborative relationships between competitors could be risky and firms have to be careful in
these decisions because they may eventually end up losing their competitive advantage more
than the benefits they can gain from an alliance. The effects of country or national variables on
the success and survival of international alliance have been discussed under partner selection
literature of strategic alliances. The commitment of the partners to transfer knowledge, expertise,
resources and capabilities to the alliance is a key issue for the success of joint ventures and
strategic alliances; however, it has its share of risk as well (Ikpen and Beamish, 1997; Isobe,
Makino and Montgomery, 2000).
A number of environmental, firm and alliance factors have been found to affect various
aspects of the strategic alliance relationships (Pan, 1997). Some of these aspects include trust
between partners of the alliance (Dyer and Chu, 2000; Griffith, Hu, and Ryans, 2000),
reciprocity and governance (Kashlak, Chandran, and Di Benedetto, 1998), negotiation tactics
(Money, 1998), stability of the alliance formed between multinational organizations of different
nationalities (Celly, Spekman and Kamauff, 1999), and competitive and industry structure
(Kogut and Singh, 2002). Additionally, networks of alliances among multinational corporations
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have been found to relate to value creation, greater profits, and price and cost fluctuations (Holm,
Erikson & Johanson, 1996; Holm, Erikson and Johanson, 1999).
The Choice of Alliance Structures
Companies cooperate by sharing control, technology, management, financial resources,
and markets by organizing themselves into various forms, such as joint ventures, contractual
programs or consortia, technology transferor licensing agreements, and management services and
franchising agreements (Contractor and Lorange, 2002). Alliance forms range from informal
cooperatives governed by simple agreements to highly formalized equity-based alliances
(Lorange and Roos, 1991). Although differentiating between alliances structures has been
problematic, differentiating between alliance structures involving some form of equity
investment and alliance structures that are based on agreements with no equity involvement has
been a major differentiation criterion (Gulati, 1995). Therefore, in this paper and consistent with
the existing theory, we differentiate between two types of alliance structures: non-equity
agreements or equity-based relationships.
Tallman and Shenkar (1994) argue that organizations, when choosing among the different
governance forms of alliances, choose the alliance structure that reduces uncertainty and
improves organizational performance. Equity-based alliances are utilized, according to Gulati,
“When the transaction costs associated with an exchange are too high to justify a quasi-market,
non-equity alliances” (1995:89). Although existing research, such as transaction cost economics
(Williamson, 1985) and resource dependency theory (Pfeffer and Salancik, 1978), provide
powerful explanations for the choice of alliance structures, these explanations do not address
changes in the environment and how these changes affect the choice of alliance structures ( Tyler
and Steensma, 1985). Transaction costs economics offers a link between environmental
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uncertainty and the choice of alliance structures through the agency of perceived transaction
costs. Williamson (1985) argues that the more uncertain the firm’s environment the greater the
perceived transaction costs. With this high perceived transaction costs, decision makers within
the firm choose highly structured equity based alliances when forming alliances.
In general, past research has addressed the emergence of strategic alliances (SAs) as a
response to changes in the global environment and the different perceived benefits associated
with internationalization (Ghoshal 1987, Hitt , Hoskinson, and Kim , 1997, Ghosal, 1987) and
under different sets of economic variables such as emerging economies (Hitt et al, 2000;
Steensma et al, 2000; Weaver and Dickson, 1999); However, it is apparent that the existing
research on international strategic alliances has not fully embraced the increasing number of free
trade blocks and the economic integration of several sovereign nation states. Scholars of
international management realize that free trade agreements and market integration among
countries constitute major changes to the global arena that have major effects on managers of
multinational firms’ strategies; however, there is little theoretical and empirical research on their
implications on multinational strategies such as international strategies.
The European Union: Demonstration of Regional Economic Integration
Although the idea of the ‘États-Unis d’Europe’[United States of Europe] was first
imagined by Victor Hugo in 1851, it was not until the 1945, the end of World War II, that the
idea had been taken seriously. By the end of World War II, the European continent was in
turmoil. Looking at the United States and its economical growth, the European leaders
remembered the famous words of the French writer; and with those words, a new concept was
born: a concept, which sixty years later, became a reality.
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The European Union is the most current illustration of a region attempting to
economically integrate. To many, the EU is an emerging economic and political superpower of
the same order as the United States and Japan, and it is reshaping the direction of international
trade and FDI as it has become the fourth addition to the old international trade triad (Ball and
McCulloch, 1999).
Whether the European integration is a positive development for continental Europe
remains a steamy fertile debate. Even though there still exist some confusion about how it works
and about what it means among the 373 million people that live under its jurisdiction, the
European Union has evolved considerably since its creation in 1958 and will go down in history
as one of the most remarkable achievements of the twentieth century. According to the
international economic theories that address on the different levels of regional economic
integration, the current status of the EU fits the category of an economic union, which by
definition involves the free flow of products and factors of production between member
countries and the adoption of a common external trade policy and a common currency (Hill,
2002). However, The EU is still not a perfect economic union since not all members of the EU
have adopted the common currency “Euro” and differences in tax rates across countries still
remain (Hill, 2002). The EU is designed to promote peace and economic cooperation in Western
Europe and is seen as a complex blend of supranational and intergovernmental modes of
governance that varies across time and policy arenas (Fligstein and Sweet, 2002) and that will set
new rules for many of Europe’s old institutions and organizations. The Treaty of Rome
(established the European Community in 1957 but later became the European Union in 1991
after the Maastricht Treaty) has resulted in the establishment of a set of organizations with the
capacity to produce, apply and enforce market rules in order to promote economic exchange
across national borders of Western Europe nation-states (McCormick, 1999).
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Therefore, these institutional, political, monetary and economic changes create a new framework
within which organizations exist. As these organizations see new opportunities for growth within
the unified integrated region, they adjust their strategies to capitalize on these opportunities.
Implications on Organizations
Within the field of international economics and trade, there is a stream of research that
has long advocated the benefits of economic integration and common currency blocks (Krugman
and Obstfeld, 2000) on national economies. Economic integration and the adoption of a common
currency among a set of countries has been associated with a positive increase in intra-trade
among member nations. Rose and Wincoop (2001) suggest that the true effect of the euro is
close to 50 percent increase in intra-European trade. Rose (2000), using data on 186 countries,
dependencies, territories and colonies, set out to test the hypothesis that economic and monetary
unions promote trade. One innovation in his study is that he looked at the average effects of a
common currency not only across time but also across different countries. Additionally, his study
incorporated other determinants of trade other than currency union- including incomes, distance
between trading partners, and so on. Rose (2000) concludes that on average, two countries that
are members of the same currency union trade three times as much as with each other as
countries that do not share a currency. Rose also finds significant trade-creating effects of
reduced exchange-rate volatility even when it occurs without currency union; however, those
effects are much smaller than those of the adoption of a common currency.
Fiscal federalism is another aspect that economic theories have addressed as benefits of
part of an economic integration (Krugman and Obstfeld, 2000). Being part of the ‘Euro zone’
makes it possible for the EU to transfer economic resources from members with healthy
economies to those suffering economic setbacks. Therefore, improving the aggregate economic
situation of the overall integrated area in the long run; hence, creating growth opportunities for
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organizations to grow and expand. Unfortunately, due to limited taxation powers, the European
Union can only practice fiscal federalism only on a very small scale (Krugman and Obstfeld,
2000).
A larger, homogenous market of goods, services and labor offers new trade and
investment opportunities and reduces unemployment levels. In an econometric study comparing
unemployment patterns in U.S. regions with those of in EU countries, Eichengreen (1990)
suggested that differences in regional unemployment rates are smaller and less persistent in the
United States than are differences between national unemployment rates in the European Union.
The European economic integration removes various trade barriers and allows goods, services,
capital, labor, and technology to move freely between member countries. European integration
also promotes regional trade, and enhances economic growth. All businesses are free to access
the rest of the European Union, hence creating bigger market opportunities for growth within this
homogenous market. Businesses that have entered the European Union have been able to
achieve the economies of scale, foster specialization, attract more investment, and find new
customers. The 2004 enlargement of the EU added 75 million citizens to the existing 378
million (Hill, 2002). This chance presents the EU, individual countries, and businesses with
enormous opportunities, especially in the countries that have little experience as market
economies- Countries associated with the former Soviet Block.
There are few disadvantages to the European economic integration. At times, the
European Union’s regulations have put the nonmember country businesses at a disadvantage.
Since not all member countries of the EU are part of the ‘Euro Zone’, price differentials still
exist in different European locations (Krugman and Obtsfeld, 2000).
In addition to member nations, A few things can be addressed about those countries on
the EU’s waiting list. Since businesses are not sure when the accession to the European Union
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will take place, the businesses are weary of foreign direct investment (Krugman and Obstfeld,
2000); they either choose less costly methods of entering the country, or opt out for different
business strategies. Keeping the countries on the waiting list only hurts the EU in the long run.
Slower accession also affects companies’ ability to export to each other’s markets. In addition,
applicant countries may be spending too much time and capital on attempting to improve the
overall infrastructure of the country that they completely neglect the prospective business clients.
--------------------------------------------Insert Figure 1 Here
--------------------------------------------Figure 1 aids in visualizing the effects of changes in the external environment on
organizational level strategies. As discussed in earlier sections of the paper, the European Union
integration constitutes the change in the framework within which European firms exist. On the
other hand, changes in the pattern and structure of international alliances among European firms
in EU member nations constitute the adaptive behavior that organizations implement as a result
of environmental changes.
--------------------------------------------Insert Figure 2 Here
---------------------------------------------Figure 2 is a model that links the changes resulting from the European integration to the
changes in the pattern and structure of alliance relationships among European firms. The market
integration among EU members, the adoption of a common currency (Euro), and the adoption of
a single foreign trade constitute the major changes in the environment for European firms. These
changes and the institutionalization of the emerging EU policies and regulations among member
15
nations will impact both the pattern and the structure of organizational alliance relationships
among European firms within EU members (Stearns and Allan, 1998).
HYPOTHESIS DEVELOPMENT
To address the research questions of this paper, we look at the percentage of international
alliances among firms in EU members rather than the total volume of alliances, since our study
addresses the pattern of international alliances within EU members rather than the total volume
of alliances with a country. While the volume of alliances might not change after a country joins
the EU, the composition of the total volume if international alliances changes as more firms form
alliances with other EU based firms and less alliances with foreign firms.
Membership to the EU
Economic theories, specifically comparative advantage theory, suggest that the
establishment of an economically integrated region in Europe increases overall production of the
region, and creates market and economic growth (Hill, 2002). With economic growth boosting in
Europe, European multinationals are among the first to capitalize on such growth opportunities,
seeing this as an opportunity to grow internally within the new boundaries of the EU, and later
growing internationally in the global environment. Therefore, European firms tend to form
alliances with other European firms as they try to attain the scale economies necessary to
compete on a larger European playing field and capture the benefits of the economic growth
among member nations. Although the EU is still not considered a truly single European market,
pan-European firms will emerge as a result of this economic integration of European nations.
Therefore, we propose:
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Hypothesis 1: A country will experience a higher percentage of international alliances
between its firms and firms of other EU members, after the country becomes a member of
the EU than before becoming a member.
Hypothesis 2: A country will experience a higher percentage of international equity
based alliances between its firms and firms of other EU members, after the country
becomes a member of the EU than before becoming a member.
Adoption of a Common Market
International trade theories argue for tariff and non-tariff trade restrictions; advantages of
trade barriers include protection of infant industries, protection of jobs from cheap foreign labor
in the domestic market within the geographic boundaries of a nation (Ball and McCulloch,
2002). However, these trade restrictions often cause less competition and price discrepancies for
end consumers (Hill, 2002). In many cases, trade restrictions constitute entry barriers to
multinational firms as they go into new foreign markets (Hill, 2002). As European countries join
the supranational integration and agree to remove trade barriers between member nations,
multinational organizations in European nations that join the EU perceive this as a barrier
removal and an incentive for them to explore new market opportunities. European multinationals
within the geographic boundaries of the EU are now protected against international competition
from nations outside the EU. Additionally, they form alliances with other organizations in EU
nations, treating these alliances as local branches of their operations.
In addition, the integration of markets will facilitate and promote transactions between
firms in the EU-member nations. As a result, European firms will favor other European firms
that are operating in the same integrated market to form alliances with, instead of forming
alliances with foreign partners that have no access to such markets. Dewenter (1995) cautions
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that investors experience greater costs when pursuing business transactions across different
markets. Therefore, we propose:
Hypothesis 3: The emerging institutionalized environment of a common market among
EU members resulting from the European integration is positively associated with an
increase in the percentage of international SAs among firms of EU countries.
Additionally, the homogeneity of regulations within the common market created across
all members of the EU reduces the risks associated with going to foreign markets. Perceiving
growth opportunities within this integrated market, firms tend to invest more equity in their
alliance relationships with other European firms in EU members.
Hypothesis 4: The emerging institutionalized environment of a common market among
EU members resulting from the European integration is positively associated with an
increase in the percentage of equity based alliances, as compared to non-equity based,
among firms of the EU countries.
Common Currency
Transaction cost economics links environmental uncertainty to the choice of alliance
structures through the agency of perceived transaction costs (Weaver and Dickson, 1999).
Environmental uncertainty leads organizations to be doubtful about the success of their
international alliance activities in addition to the greater potential transaction costs, as
Williamson (1985) purports. These two factors are assumed to lead organizations going through
alliances with international partners to form alliances that minimize their investments; hence,
reducing risk in case the alliance failed.
Exchange rate risk is a major economic force affecting the operations of multinationals;
multinational firms often assess this risk as part of their environmental scanning of the country
prior to their international expansion (Ball and McCulloch, 2002). With the European nations’
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attempts to create a Euro zone that uses one single currency across most of the European Union
nations, exchange rate risk and the associated cost with the internationalization transactions
become insignificant. This will lead multinationals within Euro zone nations to expand their
operations to other Euro zone nations. In addition, they tend to invest more equity in their cross
border activities as one of the environmental uncertainties disappears. Therefore, we propose:
Hypothesis 5: A country’s adoption of the Euro will increase the percentage of
international SAs between firms in this country and other countries that use the Euro.
Hypothesis 6: A country’s adoption of the Euro will increase the percentage of equitybased SAs, as compared to non-equity alliances, between firms in this country and other
countries that use the Euro.
DESIGN, DATA, AND METHODS
This study uses primary and secondary data. The data base contains data pertaining to
strategic alliances occurring between 1985 and 2002. The data set developed for this study
contains all strategic alliance transactions that were unconditionally completed and where the
activity crossed the geographic boundaries of each of the countries included in this study. In
other words, alliance transactions that occurred between two domestic (within the same country)
are not included in this data base.
The purpose of this study is to examine the effect of a nation’s membership to an
economically integrated region, specifically the European Union, on strategic alliance patterns
and structures within member nations. Therefore, the data set developed for this study contains
all unconditionally completed alliance transactions in 29 countries, 15 of which are existing EU
members, 10 are recently admitted members and 4 are not members of the EU.
The data was collected for each of these countries for the period between 1985 and 2002.
This eighteen-year period is pivotal for the empirical context of this study since it represents the
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period during which major changes to the EU took place whether in terms of the level of
integration or in terms of the number of members. The unit of analysis in this study is at the
country level.
All information collected about unconditionally completed strategic alliances was
acquired from SDC Platinum database, developed by Thompson Financial Corporation.
Additionally, all other information used in this study was collected from data compiled by the
World Bank, the World Trade Organization the International Monetary Fund and the statistical
office of the European Union. The original sample size is N = 522.
Dependent Variables
Percentage of European Strategic Alliances
This variable is measured as the total number of international alliances that took place
between a country’s organizations and other EU organizations during a specific year divided by
the total number of international alliances in that country during a specific year.
Percentage of European Equity Alliances
In this paper, we use Varadarajan and Cunningham’s (1995) classification of strategic
alliances which specify only two types of alliances, namely joint ventures and interorganizational entities that involve non-equity alliances. Hence, this variable is measured as the
total number of joint ventures that took place between a country’s organizations and other EU
organizations during a specific year divided by the total number of international alliances that
took place between a country’s organizations and other EU organizations during a specific year.
Independent Variables
Membership to the EU
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This measure is coded as a dummy variable with a country being a member of the EU
during a specific year as (1) and a country that is not a member of the EU during a specific year
as (0). During the period of study, a measure can change in value from 0 to 1 starting with the
year that the country is admitted to the EU.
Adoption of a common market for goods, services and factors of production.
This variable indicates whether a country is part of the single market for goods, services
and factors of production that the European Union infused among the European community. It
indicated whether a country has removed the tariff and non-tariff barriers to trade with the rest of
the EU members. It is coded as a dummy variable where (1) is assigned for countries that share
the single market with the rest of the EU members and (0) for countries that are not part of this
single market of goods and services.
Adoption of the Euro
This variable indicates whether a country has agreed to adopt the Euro as it is formal
currency after the Maastricht treaty in 1992, since not all EU members belong to the Euro zone.
This variable is coded as a dummy variable with (1) for nations that have adopted the Euro at a
specific year and (0) for the nations that have not adopted the Euro.
Control Variables
There are five variables in our models that control for the overall differences between
countries in terms of economic growth, political regime and overall business environment. To
control for the wealth of a country compared to the other countries, we include The gross
domestic product (GDP) of each of the 29 countries included in this study over the period 19852002. This variable measures the overall economic wealth of each of these nations and by
controlling for it, we are isolating the effect of economic wealth of any two countries on the
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pattern of cross border cooperative strategies between their organizations. We considered using
the per capita gross domestic product as well, but the correlation between per capita GDP and
GDP was .XX and we decided to drop per capita GDP to minimize collinearity issues.
Additionally, macro economic theories suggest that high levels of inflation encourage borrowing
since the real interest rate is calculated by subtracting the inflation rate from the nominal interest
rate. This borrowing incentive suggests that countries with high inflation levels might experience
more foreign organizations borrowing money from the country’s banks to establish cooperative
entities in these countries. Therefore, we use inflation rate as a control variable. We also use
foreign direct investment and the balance of payment figures (both stated in US dollars) of a
nation indicate the amount of international activities of the nation use these two variables as
control variables to isolate the effect of the intensity of a country’s involvement in international
trade and investments, as these two activities suggest that organizations within a country that is
highly involved with international activities to form more international cooperative relationships,
namely cross international strategic alliances. The last control is the political regime within a
country. As more countries are admitted to the European Union, there is diversity in the political
regime among the member countries, especially with the admission of the Eastern European
nations. Among the countries included in this study, there are various political regimes ranging
from Post-Communist, Democratic, Monarchy, Republic and others. As of the current stage of
the European Union integration, there is no obligation to adopt a single political regime among
all members of the EU since the EU is still far from becoming a political and economic
integration. In addition, political regimes do have an effect on the forms and patterns of
cooperative strategies exercised by organizations under these political regimes (Hyder and
Abraha, 2003).
Method
22
ANALYSES AND RESULTS
In models where data is collected on the same sample of subjects over a
period of time, consideration must be given to the fact that observations on the
same subject are expected to be correlated. In fact, “repeated measures” is a term
that refers to situations where the same characteristic is observed on the same
subject at different times or different locations. This study is characterized by
repeated measures where the subjects are the 29 countries that are included in this
study and the different variables collected are the characteristics observed over the
period of 1985-2002. In cases similar to this application, linear mixed models are
the best choice for analyses since the model assumes that the same covariance
matrix (∑) holds for each country. Linear mixed models expand the general linear
model so that data are permitted to exhibit correlated and non-constant variability.
The mixed linear model, therefore, provides the flexibility of modeling not only
the means of the data but also their variances and covariances.
The general form for a mixed model is:
Y = X + Zu + e.
Where X denotes the fixed effects part, Z is a fixed design matrix, u is a
random unobservable vector of random effects with E(u) = 0 and Cov(u) = G, and
e denotes the random unobservable vector of errors, with E(e)= 0 and Cov(e)= R.
In this study, since the data collected is cross sectional time-series data,
there are several assumptions regarding the correlations between observations. The
study is conducted across 29 countries and for a period of 18 years. Hence, the
data is characterized by repeated measures both in terms of year and in terms of
23
countries. For a specific country, observations about the dependent variables are
collected over a period of 18 years, and for a specific year, observations of the
dependent variables are collected across 29 countries. Observations collected over
one country are expected to exhibit time series correlations and observations
collected for a specific year, are expected to exhibit cross-sectional correlations.
The mixed model that is used in this study assumes three types of correlations. The
first type of correlation is the time-series correlation based on common country
effect, where observations in a country share a vector countryi. The second type
of correlations is the cross-sectional correlations between countries, where
countries in the same year share a vector yearj. The third type of correlation is the
additional time series correlation, which decays over time (AR (1)).
Therefore the general form for the mixed model of this study is:
Yij = 0 + 1Xij + countryi + yearj + ij
Where 0 + 1Xij denotes the fixed effects, countryi induces correlation
between years, and yearj induces correlation between countries.
RESULTS
Table 1 summarizes the descriptive statistics and correlations for the variables used in the
analysis. We began our analysis by conducting tests of collinearity by checking the variance
inflation factor, VIF, which should be smaller than 10 for all variables (Belsey et al., 1980). Or
models meet this criterion, except for two of the control variables that we initially planned to
include in our models. These variables are GDP and Percentage increase in GDP. We decided to
use only one of the two control variables (GDP) since GDP alone captures the economic wealth
of the country.
Results for the Pattern of International Alliances
24
Table 2 presents the parameter estimates from the mixed regression analyses for the
percentage of European strategic alliances, which measures the direction and pattern of alliances
in a specific country. Model 1 is a baseline model that includes the control variables of country’s
wealth, international activity, inflation and political regime. Some of the control variables have
predicted the positive effects: The accumulated wealth and the international trade activities of a
country are incentives for firms within these firms to form international alliances with
geographical neighbors. Model 2 tests Hypothesis 1. This model shows that a country’s
membership to an economically integrated area is a significant factor in determining the pattern
of strategic alliances that companies exercise within member countries. It suggests that firms
within an economically integrated region tend to form international alliances with firms from
other member nations, rather than with firms from outside the integrated region (p 0.001).
Model 3 displays the results for Hypothesis 3, showing that the adoption of a common market for
goods and services and the removal of tariff and non-tariff barriers of trade induces firms to form
alliances with other firms within this tariff free region. Model 4 presents the results from
arguments about adoption of a common currency. The model suggests that adoption of a
common currency by a group of countries constitutes a motive for firms within these countries to
form more alliances with other firms of these countries rather than with firms from outside this
common currency zone (p < 0.001).
Model 5 presents the results from the fully specified model that includes all the variables.
The general pattern of results remains the same. The change of note is that some of the country
level control variables become insignificant. As a country becomes a member of an economically
integrated region, the country’s specific economic profile becomes less of a factor for firms
trying to internationalize their activities to this country since the country’s profile becomes a
micro economy of the supra economically integrated region.
25
Results for the Structure of International Alliances
Table 3 presents the parameter estimates from the linear mixed regression analyses for
the percentage of European joint ventures. As mentioned earlier in the paper, we only
differentiate between two structures of alliances: equity based alliances (Joint ventures) and nonequity based alliances. Model 6 presents the results from the control variables. The only
significant control variable for the structure of alliances is the GDP, a wealth indicator. Model 7
presents the results from Hypothesis 2. The data shows that a country’s membership to an
economically integrated region increases the likelihood of firms within this country to form
equity based alliances with other firms from within this integrated region. Thus, Hypothesis 2 is
supported. Model 8 presents results for Hypothesis 4 and shows that the adoption of a common
market does increase the likelihood of firms engaging more in equity based alliances with other
firms within the integrated region rather than non-equity based alliances (p < 0.001). Thus,
Hypothesis 4 is supported.
Model 9 presents the results from the arguments of about common currency. The data
shows that the adoption of a common currency is not a factor in determining the structure of an
alliance. Therefore, hypothesis 6 is not supported and the results suggest that firms’ decision on
the governing structure of their alliances is not influenced by the type of currency that is adopted
within the countries of the alliance.
Model 10 presents the results from a fully specified model that includes all the variables.
The results suggest that while a country’s membership to an economically integrated region
increases the likelihood of equity based alliances among firms of the region, and while the
removal of trade barriers associated with the integration increase the likelihood of equity based
alliances, the adoption of a common currency is not a significant factor in determining the
26
structure of alliances among firms of the integrated region. In addition, only the GDP of a
country is a significant control variable.
DISCUSSION
Our models investigate one aspect of how organizations change their international
strategies in response to environmental changes. The pattern of empirical results provides
support to our arguments about how environmental change, specifically economic integrations
influence organizational strategies, in terms of patterns and structures. The findings in this paper
suggest that economically integrated region brings changes to the organizational environment
within which organizations choose on different alternatives to internationalize. The two main
changes that have been discussed in this paper are the adoption of a common market and the
adoption of a common currency. Results of this research suggest that when countries integrate
into a common market, firms within this integrated region tend to form alliances among each
other, and tend to invest more equity in their alliance practices. On the other hand, while the
adoption of a common currency constitutes an external incentive for firms within the common
currency zone to form alliances with other firms in this zone, there is little support that the
adoption of a common currency influences the structure of alliances formed and the firms
decision on how much equity to invest in their alliance practices.
CONTRIBUTIONS
We believe that any study that attempts to bring two or more fields of research together
adds value and contributes to the existing knowledge in each of these realms of research. This
paper lies at the intersection of international economics and international strategy. The major
contribution of this study is that it attempts to further apply the organization-environment
paradigm to the study international alliances and the alliance structures; hence, suggesting that
27
international alliances and other cooperative strategies can be looked at as pattern on a country
level, not only at the firm level.
A very notable trend in the global economy in recent years has been the accelerated
movement regional economic integration. Therefore, by linking economic integration of nation
states to international alliance literature, a major contribution of this research design becomes its
the ability to predict the adoption of a specific cooperative strategy when such nation state
phenomena occurs. By 2001, nearly all of the WTO’s 136 members had participation of more
than one or more regional trade agreement, and more countries are expected to undergo such
integration as new regions attempt to boost their economies and as new countries join the WTO.
Therefore, the study offers a major contribution to the field of international strategy by
explaining the expected trend in alliance strategies within specific regions as they attempt to
integrate.
A third contribution of this study is that it sheds the light on the factors within
economically integrated regions that matter and favor equity-based alliance structures. The paper
offers multinational practitioners a theoretical justification for implementing equity alliances as
opposed to non-equity alliances as they attempt to expand within economically integrated
regions. Such an implication is essential for a global arena where competition is piling up in
intensity and where economies of scale, accelerated R&D, and efficient resource allocation are
not the only ways to sustain competitive advantage in a global market.
In general, international alliance strategies and the different governing structures of these
strategies have received a major share of the international management stream of research.
However, regional economic integration on the nation level has not been adequately incorporated
in multinational strategy literature. This study does so by exploring the environmental changes
that make such integrated areas conducive to specific types of alliances.
28
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Graph 1
Evolution of Regional Trade Agreements in the world, 1948-2002
Numberof
RTAs
Source: WTO Secretariat
33
FIGURE1: Organization- Environment framework
Changes in the
Environment
European Union
Integration
Organizational
Adaptation
(Changes in
strategy and
structure
Adaptive
international
alliance strategies
34
FIGURE 2:
External Changes Translate to Changes in International
Alliances
Common
Market
International
Alliance pattern
/frequency
Common
Currency
International
Alliance structure
(Equity vs. nonequity)
35
Table 1 Descriptive Statistics and Correlations
Variable
European alliance
1 percentage
European joint
2 venture percentage
3 Membership
4 Common market
5 Common currency
6 GDP
7 GDP per capita
8 Balance of payment
9 FDI
10 Inflation
11 Political Regime
Count
Avg.
Std. Dev.
1
2
3
4
5
6
8
9
10
11
36
Table 2 Results of Mixed Models Analyses for The Effects of Economic Integration on Alliance Patternsa
Independent Variables
1
Membership
2
Common market
3
Common currency
4
GDP
6
GDP per capita
7
Balance of payment
8
FDI
9
Inflation
10
Political Regime
11
Constant
Model (1)
Model (2)
Model (3)
Model (4)
Model (5)
-0.009***
(0.002)
0.00
(0.00)
0.14
(0.19)
-0.04
(0.004)
-0.03**
(0.01)
8.77***
3.28
20.27***
(2.11)
0.395
13.91***
(3.51)
-0.003
(0.002)
0.00**
(0.00)
0.254
(0.21)
0.001
(0.05)
-0.028*
(0.01)
6.39**
(3.37)
21.36***
(2.18)
0.31
0.61**
(4.93)
16.88***
(5.08)
8.51**
(3.49)
-0.008***
0.03
0.00
0.00
0.217
(0.19)
-0.008
(0.04)
-0.03*
0.01
8.76**
(3.3)
20.24***
2.18
0.42
7
7
9
14.98***
(2.61)
18.04***
(2.62)
-0.003***
(0.002)
0.000
(0.000)
0.13**
(0.20)
-0.05
(0.04)
-0.02*
(0.01)
5.86
(3.34)
21.74***
(2.22)
0.243
0.008***
(0.003)
0.00
(0.00)
0.13
(0.19)
-0.04
(0.04)
-0.025*
(0.01)
9.53***
(3.36)
18.96***
(2.19)
0.359
R-square
-2 Log Likelihood
AIC
Degrees of freedom
6
7
Standard errors in parentheses.
* p0.05; ** p<0.01; ***p<0.001
a n= 522 ( 29 countries over a period of 18 years from 1985 to
2002)
37
Table 3 Results of Mixed Models Analyses for the Effects of Economic Integration on Alliance Structures
Independent Variables
1
Membership
2
Common market
3
Common currency
4
GDP
6
GDP per capita
7
Balance of payment
8
FDI
9
Inflation
10
Political Regime
11
Constant
Model (6)
Model (7)
Model (8)
Model (9)
4.93***
(4.6)
15.46***
(4.66)
Model (10)
29.80***
(8.70)
42.16***
(8.96)
-3.32
(6.15)
0.008*
(0.004)
0.00
(0.00)
0.011**
(0.04)
0.00
(0.00)
0.01*
(0.003)
0.00
(0.00)
0.006
(0.004)
0.00
(0.00)
1.79
(6.10)
0.01**
(0.004)
0.00
(0.00)
0.33
(0.34)
0.09
(0.07)
0.13
(0.02)
-3.97
(5.84)
48.85***
(3.79)
0.34
(0.34)
0,09
(0.07)
0.15
(0.02)
-2.76
(5.95)
47.94***
(4.61)
0.34
(0.34)
0.10
(0.07)
0.015
(0.019)
-1.47
(5.82)
47.59***
(3.76)
0.39
(0.34)
0.09
(0.08)
0.01
(0.02)
-3.98
(5.85)
48.81***
(3.79)
0.32
(0.34)
0.09
(0.07)
0.11
(0.02)
-4.5
(5.82)
51.03***
3.85
0.24
0.18
0.29
7
7
9
R-Square
0.17
0.19
-2 Log Likelihood
AIC
Degrees of freedom
6
7
Standard errors in parentheses.
* p0.05; ** p<0.01; ***p<0.001
a n= 522 ( 29 countries over a period of 18 years from 1985 to
2002)
38