Summary – International Strategic Alliances
#1 – Firm resources and Sustained Competitive Advantage
Most research on sources of sustained competitive advantage has focused either on isolating a firm’s
opportunities and threats, describing its strengths and weaknesses, or analyzing how these are
matched to choose strategies, with little emphasis on the idiosyncratic firm attributes on a firm’s
competitive position. These models have assumed that firms within an industry are identical in terms
of the strategically relevant resources they control and the strategies they pursue and that
heterogeneity will be very short lived because those resources are highly mobile. Under those
assumptions, no firm can enjoy a sustained competitive advantage, there are no first-mover
advantages, and there cannot be any entry/mobility barriers. This paper eliminates those
assumptions and assumes heterogeneous firms within an industry and not perfectly mobile
resources.
Firm resources include all assets, capabilities, organizational processes, firm attributes, information,
knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies
that improve its efficiency and effectiveness. They can be classified into physical capital resources
(physical technology, equipment, and access to raw materials), human capital resources (training,
experience, etc. of individual workers), and organizational capital resources (formal reporting
structure, planning, controlling systems).
A firm is said to have a sustained competitive advantage when it is implementing a value strategy not
simultaneously being implemented by any current or potential competitors and when these other
firms are unable to duplicate the benefits of this strategy.
To have the potential of a sustained competitive advantage, a firm resource must be
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Valuable: resources are valuable when they enable a firm to conceive of or
implement strategies that improve its efficiency and effectiveness.
Rare: resources must be rare among potential and current competitors.
Imperfectly imitable: firms that do not possess these resources should not be able to
obtain them. Firms resources can be imperfectly imitable based on unique historical
conditions, causal ambiguity, or socially complex.
Not substitutable: there must be not strategically equivalent valuable resources that
are themselves either not rare or imitable, as a competitor may then be able to
substitute a similar resources that enables it to conceive of and implement the same
strategies.
2# - The Relational View: Cooperative Strategy and Sources of Interorganizational Competitive
Advantages.
A firm’s critical resources may extend beyond firm boundaries. Productivity gains in the value chain
are possible when trading partners are willing to make relation-specific investments and combine
resources in unique ways. This indicates that firms who combine resources in unique ways may
realize an advantage over competing firms who are unable or unwilling to do so. Thus, idiosyncratic
interfirm linkages may be a source of relational rents and competitive advantages.
Arm’s length market relationships are incapable of generating relational rents because there is
nothing idiosyncratic about the exchange relationship that enables the two parties to generate
profits above and beyond what other seller-buyer combinations can generate.
Competitive advantages of partnerships fall in the following categories
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-
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Interfirm relation-specific assets: A firm may choose to seek advantages by creating
assets that are specialized in conjunction with the assets of an alliance partners.
Productivity gains in the value chain are possible when firms are willing to make
relation/transaction-specific investments. There are three types of asset specificity,
being site specificity (successive production stages are located close to one another),
physical asset specificity (e.g., customized machinery), and human asset specificity
(know-how accumulated by transactors through longstanding relationships. There
are two subprocesses that influence the ability of partners to generate relational
rents: the length of the governance arrangement designed to safeguard against
opportunism, and the ability to substitute special-purpose assets for general
purpose-assets, which depends on the total volume and breadth of transactions
between the alliance partners..
Interfirm knowledge-sharing routines: alliance partners can generate rents by
developing superior interfirm knowledge sharing routines, being regular patterns of
interfirm interactions that permit the transfer, recombination, or creation of
specialized knowledge (information, explicit & know-how, tacit). The ability to exploit
outside resources of knowledge is a function of prior related knowledge or the
absorptive capacity of the recipient of knowledge. Absorptive capacity is a function of
the extent to which partners have developed overlapping knowledge bases and the
extent to which partners have developed interaction routines that maximize the
frequency and intensity of sociotechinal interactions. Finally, the greater the
alignment of incentives b partners is to encourage transparency and reciprocity and
to discourage free riding, the greater the potential will be to generate relational rents
through knowledge sharing.
Complementary resource endowments: Sometimes, a firm’s ability to generate rents
may require that its resources are utilized in conjunction with the complementary
resources of another firm. Conditions are that relevant resources must not be
available in a secondary markets and are indivisible. The combination can be more
valuable, rare, and difficult to imitate than before. A challenge is to find each other
and recognize the potential value of combining resources. This depends on prior
alliance experiences, internal search and evaluation capabilities, and the ability to
acquire information.
Effective governance mechanisms: An important objective for transactors is to
choose a governance structure that minimizes transaction costs, thereby enhancing
efficiency. There are two classes of governance: third-party enforcement of
agreemenets (legal contrects) and self-enforcing agreements (formal safeguard
(financial and investment hostages) and informal safeguard (goodwill trust and
embeddedness)). Effective governance can generate relational rents by lowering
transaction costs or providing incentives for value-creating initiatives. Transaction
costs are lowever under self-enforincing agreements because contracting costs are
avoided, monitoring costs are lower, costs associated with complex adaption are
lower, and there are no recontracting costs. Finally, formal safeguards are much
easier for competitors to imitate. However, they are subject to two key liabilities:
they require substantial time to develop and are subject to the paradox of trust
(provide opportunity to abuse other partner).
A relational rents is defined as a supernormal profit jointly generated in an exchange relationship
that cannot be generated by either firm in isolation and can only be created through the joint
idiosyncratic contributions of the specific alliance partners. They are preserved as a result of causal
ambiguity and time compression diseconomies, interorganizatonal asset interconnectedness, partner
scarcity, resource indivisiliby, and a socially complex institutional environment.
#3 – Economic perspectives
Within the market-based view, a cooperative strategy may offer a mutually advantageous
opportunity for collaborating firms to modify the position that they occupy within their industry and
increase market power. Offensive coalitions are intended to develop firms’ competitive advantages
and strengthen their position by diminishing other competitors’ market share. Defensive coalitions
are intended to construct entry barriers in order to secure and stabilize a firms’ position. The marketbased view does not take trust into account and does not accommodate the way in which evolving
relationships can alter the rationalities and strategic visions of policy makers. Porter’s value chain
analysis may help a firm in identifying in which area it needs an ally.
The perspective on strategic alliances offered by TCE views them as potentially cost-reducing
methods of organizing international business transactions. Williamson identified five factors that are
relevant for the choice between internalizing the governance of transactions within firms as
opposed to market exchanges, being opportunism, bounded rationality, small numbers, uncertainty
and complexity, and information impactedness. Under the last three factors, he argues that a firm
should internalize the activity. One-off nonspecific, short-term transactions should be done in the
market, whereas recurrent, uncertain, transaction with transaction-specific investments should be
conducted within organizations (hierarchies).
The concept of Agency theory argues that there may be differences between the two parties of a JV
or any other cooperational form. Both parties should place a combination of incentives and
monitoring techniques to ensure that an agent’s behavior remains consistent with the principal’s
objectives.
With regards to the RBV, alliances are considered to be critical sources of both strategic assets and of
complementary resources for organizations. A firm may want to consider a JV or alliance in order to
tap into the partner’s knowledge assets without committing to a single market price or buying the
partner in whole or part.
The transaction-value theory propose that the real issue is joint value maximization for the
collaborative transaction. A cooperative venture should be allowed to bear higher transaction costs if
these added expenditures increase revenues to a greater degree by creating a unique asset bundle.
TCE would argue that investing in value-enhancing assets increases transaction costs. The
transaction-value theory would argue these activities will increase the expected value of the
relationship and will reduce the risk of opportunism.
The real-options theory looks at the call options on the opportunity to invest in a foreign market. For
a small charge, the company can buy the right to acquire part of the equity of a target company,
without all too much risks. In equity JVs, the less familiar the acquirer is with the business or market
of the target, the greater the uncertainty and the more difficult the job of assigning a meaningful
value to the investment A JV, which is why a call option would be appropriate.
The theory of increasing returns argues that companies with a high market share might be able to
lock in their consumers and dominate the market, resulting in increasing returns on the long run.
Forming alliances in order to create critical mass and dominate the market can lead to those
increasing returns.
#4 - Instabilities of Strategic Alliances; An Internal Tensions Perspective
Internal tensions account for the inherent instabilities of strategic alliances. Alliance instabilities refer
to major changes or dissolutions of alliances that are unplanned from the perspective of one or more
partners. Previous explanations of alliance instabilities derive from TCE (opportunistic behavior),
relational contracting theory (trust ensures smooth operations), game theory (payoffs are higher
when cheating), the RBV (control and minimize dependence), shifting bargaining power, agency
theory (agents pursue own goals and must be monitored), strategic behavior theory (unrealistic goal
expectations and overlap of goals).
There are three pairs of competing forces:
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Cooperation vs. competition: Cooperation is the pursuit of mutual interests and
common benefits in alliances, whereas competition is defined as pursuing one’s own
interest at the expense of others. Both are required form a sustainable and
successful alliance, since cooperation ensures a smooth working relationship and
competition protects a partner from losing its FSAs through inattention. There must
be balance between the two, since too much competition will result in dissolution
and too much cooperation will lead to one partner having reached its learning goal
and terminates or renegotiates the agreement.
Rigidity vs. flexibility: Rigidity refers to the characteristics of mutual dependence and
connectedness, whereas flexibility enhances the ability of partners to adapt,
unencumbered by rigid arrangements. When flexibility is given too much emphasis,
the alliance will tend to evolve into a new system that will require very little control,
eventually weakening the bond between partners and making the alliance
vulnerable. A system that is dominated by rigidity will restrain the partners from
adapting to environmental changes.
Short-term vs. long-term: short-term orientation views strategic alliances as
transitional in nature, with a demand for quick and tangible results, whereas long-
term orientation regards alliances as at least semi-permanent entities, so that more
patience and commitment are exercised. Interfirm learning (long-term) tends to
balance the needs for short-term orientation and long-term orientation, it stabilizes
the alliance. A dominating short-term view will transform the alliance into a gold
rush, whereas a dominating long-term view tends to ignore short-term, tangible
performance.
Cooperation
Competition
Rigidity
Flexibility
Short-term
Long-term
Emphasis on
goodwill
Opportunistic
behavior
Collective
interest
Zero-sum game
Relationspecific
investment
Commitment to
relationship
Private benefits
Adapt to
changing
conditions
Potential to
avoid risks
(easy exit)
Low
involvement
(limited
resources)
Exploitation
(prompt
results)
No burden on
partners
Common
benefits
Cannot adapt to
changing
conditions
Increasing
incentives and
commitment
Aligning partner
interest
Learning
opportunities
(balances)
Learning
opportunities
(balances)
Smooth
relationship
Protects FSAs
Deters
opportunistic
behavior
Aligns
incentives
Shadow of the
future effect
(discourages
opportunistic
behavior)
Characteristics of competing forces
The first tension is behavioral, the second one structural, and the last one psychological. The levels of
rigidity and cooperation will be positively related when the partners have a short-term orientation in
strategic alliances, whereas at a high level of rigidity, cooperation and rigidity will be negatively
related when the partners have a long-term orientation in strategic alliances.
Hierarchies will be created when the alliances exhibit high cooperation with low competition (M&A),
when rigidity sacrifices strategic flexibility, or when an alliance is dominated by a long-term
orientation (neglect of short-term performance, or a change from short-term to long-term
orientation). A movement towards the dominance of competition, flexibility, and a short-term
orientation is likely to lead to dissolution of the alliance because these forces have a lot in common
with market transactions.
Competitive
Cooperative
Short-term
Flexible
Rigid
Arm’s
length Joint R&D
contracts
Joint Marketing
Funded research
Joint bidding
Long-term
Flexible
Rigid
Licensing
JVS
Joint Production
Minor Equity Allia
Dealership
JVs
Shared
distribution
Product bundling-
Joint R&D
Joint marketing
Franchising
Licensing
Joint Production
Long-term
sourcing
Minor Equity Allia
Wholly own subs.
Alliance Structures and Internal Tensions
#5 - The Dynamics of learning Alliances: Competition, Cooperation, and Relative Scope.
Learning alliances, associations in which the primary objective of the partners is to learn from each
other, constitute an important class of interfirm alliances. Private and common benefits are those
that accrue to individual firms within the alliance and collectively to all participants in the alliance.
Private benefits are those that a firm can earn unilaterally by picking up skills from its partners and
applying them to its own operations in areas unrelated to the alliance activities. Common benefits
are those that accrue to each partner in an alliance from the collective application of the learning
that both firms go through as a consequence of being part of the alliance; these are obtained from
operations in areas of the firm that are unrelated to the alliance. The greater the overlap between
alliance scope and firm scope, the higher are the common benefits and the lower are the private
benefits.
A higher ratio of private to common benefits leads to greater departures from cooperative and
toward competitive behavior. The concept of the relative scope measures the extent to which
activities in markets unrelated to the alliance are in proportion to all activities conducted by the
firms. Different firms in the alliance and the same firm in different alliances have different relative
scope values. The smaller the relative scope, the greater the ratio of private to common benefits. The
extent to which markets are related to the scope of the alliance and the extent to which the firm has
the skills to accomplish the transfer of learning together can be summarized in a transferability
factor.
A firm earns private benefits as soon as it has learned enough to apply this learning to its operations,
whereas common benefits will only be available once both partners have learned enough to be able
to creatively synthesize their knowledge bases. In alliances with only common benefits, resource
allocation decisions are best made jointly and are fairly predictable(no budget -> stage allocation,
fixed budget -> split resources). In an alliance with only private benefits, a learning race is expected.
The firm that completes the first stage first will increase its allocation, while the rival will lower its
allocation. If the lagging firm then finishes the first stage before the leading firm finishes the second
stage, both firms alter their resource allocation to equal values. Key factors influencing the
differences are the incentives to race, the appearance of asymmetries in incentives, and the
additional source of uncertainty in the case of pure private benefits.
The presence or absence of equity stakes between partners can alter private and common benefits in
a variety of ways. Moreover, some critical amount of learning must transpire before benefits begin to
accrue.
Several scenarios appear. In case of the three-legged fallacy, the partners fail to recognize that they
are in a learning race. In case of the reluctant loser, the lagging partner fails to reduce its allocation,
even though the leader partner has increased its allocation and seems likely to secure its private
benefits. Finally, the hesitant winner sketches a situation where the leading partner fails to capitalize
on its learning advantage, even though the lagging partner has reduced its resource commitments.
#6 - The Interorganizational Learning Dilemma: Collective Knowledge Development in Strategic
Alliances
The interorganizational learning dilemma is that being a good partner invites exploitation by partners
attempting to maximize their individual appropriation of the joint learning, and such opportunistic
learning strategies undercut the collective knowledge development in strategic alliances.
The authors develop a framework for understanding the dilemma through consideration of tradeoffs between how collective learning is developed in alliances and how the joint learning outcomes
are divided among the partners. Within the developed matrix, the joint outcome is maximized by two
organization with collaborative strategies that enable high mutual transfer as well as high creation of
knowledge. Combinations between compromise and collaboration strategies are expected to result
in moderate levels of mutual transfer and creation of knowledge. Combinations involving one
accommodating or competitive strategy are proposed to lead to asymmetric outcomes consisting of
merely one-way transfer and appropriation of new knowledge.
There are other factors that are likely to make the interorganizational dilemma a very real one. First,
receptivity is constrained by the organization’s availability of organizational slack as well as its
absorptive capacity. Moreover, receptivity is also limited by the strength of the intent to learn.
Transparency might be more difficult than simply opening up; essential knowledge might be tacit and
socially embedded in context-specific relationships. Organizational members are seldom rewarded or
culturally motivated to have as much concern about another organization as for their own. Finally,
power dynamics are very important, since beating a partner in the learning race if likely to lead to a
change in bargaining power and the dimension of time should not be overlooked.
Strategies:
-
Collaboration (highly receptive and highly transparent)
Competition (highly receptive and nonstransparent)
Compromise (moderately receptive and transparent)
Accommodation (nonreceptive and highly transparent)
Avoidance (neither transparent nor receptive)
#7 – Between trust and control: developing confidence in partner cooperation in alliances
Given that it is often impossible to identify who is likely to act opportunistically, the interesting
question is what enables alliances partners to garner enough confidence in partner cooperation so
that they are not overwhelmed by the potential hazards in alliances. Confidence in partner
cooperation is defined as a firm’s perceived level of certainty that its partner firm will pursue
mutually compatible interests in the alliances, rather than act opportunistically. This sense of
confidence comes from the supplementing factors of trust an control.
Partner cooperation is the willingness of a partner firm to pursue mutually compatible interests in
the alliance rather than act opportunistically, with opportunism being defined as self-interest seeking
with guile. Corporation may include two particular dimensions: veracity (being truthful) and
commitment (making efforts).
Control is a key source of confidence, as firms tend to be more confident about partner cooperation
when they feel they have an adequate level of control over their partners. Whereas control
mechanisms are the organizational arrangements designed to determine and influence what
organization members will do, level of control is the direct outcome of the controlling process, being
the degree to which one believes that proper behavior of the other party is ensured. Firms may want
to use control mechanisms to either routinize their activities or to promote nonroutine activities,
such as learning, risk taking, and innovation. Finally, partner control in alliances can be seen as a
regulatory process by which the partner’s pursuit of mutually compatible interests is made more
predictable.
Trust is a second source of confidence. Organizations develop close bonds over time and form a
positive attitude regarding each other’s reliability. The benefits of interfirm trust in strategic alliances
seem wide ranging in character, including lowering transaction costs, inducing desirable behavior,
reducing the extent of formal contracts, and facilitating dispute resolution. Trust relates to
expectations about the motives of the trustee. Confidence, however, deals with the perceived level
of certainty that the partner will behave in a desirable manner. Thus, the key difference s that
whereas trust refers to expectations about positive motives, confidence refers to certainty about
cooperative behaviors. Second, trust is a contributor to confidence.
Trust itself it not a control mechanism, but is a substitute for hierarchical control in organization. A
supplementary relationship seems to describe the dynamics realistically. The trust level and the
control level jointly and independently contribute to the level of confidence in partner cooperation.
Alliance Types
Joint Ventures
Minorty Eq. Alliances
JV and partner
Partner
Hierarchical
control Ownership control
and ownership control
Manifestation of trust
Delegation and JV Using equity share a
autonomy
distribution
over
voting mechanism
Requisite confidence High
Moderate
level
Dimensions
Object of control
Type of control
Nonequity Alliances
Partner
Contractual control
Contractual flexibility
Low
Trust, control, and confidence in differen alliance types.
Trust level
High
Low
Control level
High
High confidence
Joint ventures
Moderate confidence
Minority Eq. Alliances
Low
Moderate confidence
Minority Eq. Alliances
Low confidence
Nonequity alliances
Requisite Confidence Levels in Different Alliance Types
Formal control and social control are different in that formal control is more of a strict evaluation of
performance while social control is about dealing with people. Formal controls may create stress,
thereby affecting mutual trust. Social control mechanisms are likely to enhance the level of trust
among partners. In strategic alliances the trust level will exert a moderating effect in a manner so
that control mechanisms will achieve a greater level of control in high-trust situations than in lowtrust situations. Finally, a high level of trust tends to encourage partners to tolerate short-term
inequity or mutual forbearance.
#8 - Effective interfirm collaboration: how firms minimize transaction costs and maximize transaction
value
A central premise of transaction cost theory is that transaction costs increase as transactors make
greater asset-specific investments. The standard reasoning is that as asset specificity increases, more
complex governance structures are required to eliminate or attenuate costly bargaing over profits
from specialized assets. However, studies of dyer indicate that firms can simultaneously achieve the
twin benefits of high asset specificity and low transaction costs.
Transaction costs can be decomposed into four separate costs related to transacting, being search
costs, contracting costs, monitoring costs, and enforcement costs.
To protect against the hazards of opportunism, transactors may employ safeguard, being control
mechanisms which have the objective of bringing about the perception of fairness or equity among
transactors. Allthough contracts are viewed as the primary means for safeguarding transaction,
alternative means in the form of self-enforcing agreements/private ordering/trusts are offered.
These include informal safeguards (relational or goodwill trust, reputation) and formal safeguards
(financial hostages, specialized investment hostages). Different safeguards are likely to have different
set-up costs and result in different transaction costs over different time horizons. Even in situations
in which the level of asset specificity is identical, the transaction costs may differ.
Japanese transactions are characterized by higher asset specificity (in all three forms), but also have
lower transaction costs. One can argue that the relationship between asset specificity and
transaction costs will only hold if environmental and other factors are held constant. Furthermore,
one can argue that Japanese transactors have simply chosen more efficient safeguards than US
transactors, and thus minimized transaction costs by more effectively aligning transactions with
governance structures.
Finally, Japanese automakers have lower transaction costs than their US counterparts due to:
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Repeated transaction with a small set of suppliers (increases costs of opportunism for
the supplier and provides the opportunity to correct for transaction inequities)
Economies of scale and scope in transacting with that small supplier group (high
volume of exchange between transactors)(reduces costs of sharing information and
bargaining costs)
Extensive interfirm information sharing which reduces asymmetric information
the use of noncontractual, self-enforcing safeguards which are effective for an
indefinite time horizon.
Investments in cospecialized assets.
#9 – Relation-specific Capabilities and Barriers to Knowledge Transfers: creating advantage through
network relationships.
Interfirm knowledge-sharing routines are one of four possible sources of relational rents, which are
superprofits generated in an exchange relationship that cannot be generated by either firm in
isolation. An interfirm knowledge-sharing routine is a regular pattern of interfirm interactions that
permits the transfer, recombination, or creation of specialized knowledge.
Explicit (codifiable) knowledge is relatively easy to transfer with little cost, while tacit knowledge is
more difficult and costly to transfer. A supplier’s newly acquired knowledge assets must be at least
somewhat specific to the relationship (network).
Major barriers to intra-frm transfer of knowledge include the lack of absorptive capacity on the part
of the recipient, lack of credibility on the part of the source of knowledge, lack of motivation of the
part of the source or recipient, arduous relationship between the source and recipient, and causal
ambiguity. Finally, the context (environment) may also work as a barrier to replication. The
difficulties of adopting a complete bundle of routines represent a key piece in the puzzle of why
network resources are not easily imitated.
This paper tests whether knowledge transfer to a supplier leads to higher productivity and higher
quality. Both hypotheses are confirmed. In addition, it was shown that not only are suppliers better
performing, the result is also sustainable.
It can be concluded that networks are a critical unit of analysis for explaining firm performance, even
when networks appear to be similar, firms can achieve competitive advantages by exploiting
knowledge assets with a supplier network, and network constraints represent a potential barrier to
knowledge transfer within firms, especially within a value chain producing a customized, complex
product.
#10 – The determinants of trust in supplier-automaker relationships in the U.S., Japan, and Korea
Trust in supplier-buyer relations may be an important source of competitive advantage because it
lowers transaction costs, facilitates investment in relation-specific assets, and leads to superior
information sharing routines.
A trustworthy partner is known to reliably make good faith efforts to behave in accordance prior
commitments, makes adjustments in ways perceived as fair by the partner, and does not take
excessive advantage of an exchange partner even when the opportunity is available. Thus, interfirm
trust relies on reliability, fairness, and goodwill.
Trust is produced through social relationships and embedded ties (relation-ship based trust (length &
intensity)), institutionalized processes or routines for fairly and reliably dealing with a partner
organization (process-based trust), or an alignment of economic incentives (hostage-based trust).
Duration, intensity of interaction, repeated transactions, the provision of assistance, and ownership
of supplier stock, all are argued to have a positive impact on trust.
Supplier trust is higher in Japan than in Korea and the US, with also the highest length of relationship
and more face-to-face contact (maybe due to proximity differences). There is only a significant
relationship between length and trust in Japan. Intensity didn’t seem to matter anywhere. Repeated
transactions and the provision of assistance (except for USA) had a significant positive effect on trust,
whereas stock ownership was found not to have a significant impact.
The different outcomes indicate that the institutional environment is of key importance in estimating
the level of trust in a buyer-supplier relationship, even though it may be less important than firmlevel practices in influencing trust, since Japanese companies also build higher levels of trust in the
USA.
Although Japanese automakers get a return on their investment in the form of more efficient
suppliers, they still must incur the expense of maintaining a large staff of qualified individuals to
assist suppliers. The cost of maintain continuity includes the opportunity cost of not taking advantage
of one’s suppliers and the loss of the opportunity to use lower cost suppliers if they came along.
#11 – Determinants of trust in supplier relations: Evidence from the automotive industry in Japan and
the US
Trust is said to promote suppliers willingness to invest in customer specific and general assets and is
defined as an expectation held b an agent that its trading partner will behave in mutually acceptable
manners. There are three types of trust, being contractual trust (will the other party carry out its
contractual agreements?), competence trust (is the other party capable of doing what is says it will
do?) and goodwill trust (will the other party make an open-ended commitment to take initiatives for
mutual benefit while refraining from unfair advantage taking?
The higher the general level of trust, the less need there is for vertical integration. Trust may
complement, rather than substitute for, hierarchy or market governance modes.
Cooperation may emerge where no trust exists and cannot be equated with trust. Also, trust is a
subjective state of mind and may not have a straightforward linear relationship to cooperation or
trust as manifested in behavior.
Suppliers’ trust and perception of customer opportunism are not affected by the degree to which
they are vertically integrated by their consumer.
Long-term contracts may reduce the expectation of opportunistic behavior, but may not necessarily
enhance trust. The authors argue that contracts are a partial safeguard against opportunism only and
are almost always incomplete due to uncertainty and complexity.
Both previous transactions (untrue) and the expectation of future transaction have a positive effect
on suppliers’ trust of its consumer.
A two-way flow of information is essential for creating and sustaining trust. Information asymmetry
resulting from one-way flow of information gives much scope for opportunistic behavior.
A deliberate strategy of locking oneself into a relationship, thus raising switching costs, may facilitate
the creation and maintenance of trust. (untrue)
To the extent that the customer demonstrates knowledge and skills by providing technical assistance,
it enhances supplier´s competence trust of the customer. However, technical assistance provides no
protection against opportunism.
The greater the degree of environmental uncertainty, the greater the benefit from being able to trust
a trading partner, because trust facilitates decision making in unanticipated circumstances, though a
distinction should be made between behavioural uncertainty, and environmental uncertainty.
Environmental uncertainty predisposes agents to behave opportunistically when there are relationspecific investments.
Finally, the level of trust is to a certain extent path-dependent, and depends on the institutions
within a country.
#12 – The governance of Global Value chains
Two of the most important new features of the contemporary economy are the globalization of
production and trade, which fueled the growth of industrial capabilities in a wide range of developing
countries, and the vertical disintegration of transnational corporations, which are redefining their
core competencies to focus on innovation and the highest value-added segments.
TCE offers various reasons why firms internalize activities; the more customized the good, the more
likely it is to involve transaction-specific investments and inter-firm relationships require greater
coordination. This does not mean that this is always the case, as network actors in many instances
control opportunism through the effects of repeat transactions, reputations, and social norms, which
makes inter-firm trade viable.
History, institutions, geographic and social contexts, the evolving rules of the game, and path
dependence matter and many factors will influence how firms and groups of firms are linked in the
global economy with regards to governance systems. Gereffi used the term ‘buyer-driven global
commodity chain’ to denote how global buyers used explicit coordination to help create a highly
competent supply-base upon which global scale production and distribution systems could be built
without direct ownership. However, variety of network forms were not adequately specified. Recent
work uncovered three types of supply relationships: the commodity supplier that provides standard
products through arm’s length market relationship, the captive supplier that makes non-standard
products using machinery dedicated to the buyer’s need, and the turn-key supplier that produces
customized products for buyers and uses flexible machinery to pool capacity for different customer.
Market-based relationships among firms and vertically integrated firms make up opposite end of a
spectrum of explicit coordination and network relationships comprise and intermediate model of
value chain governance.
Five basic types of value chain governance are identified
-
Markets: Low switching costs, arm’s length relationships
Modular value chains: typically, adjusted products based on turn-key services
Relational value chain: mutual dependence and high asset specificity
Captive value chains: small suppliers are dependent on large buyers, high switching
costs, high degree of monitoring and control of lead firms.
Hierarchy: vertical integration.
Conditions that will lead to a certain typology concern the complexity of information and knowledge
transfer required to sustain a particular transaction, particularly with respect to product and process
specifications, the codifiability of information and therefore be transmitted efficiently without
transaction-specific investments, and the capability of actual and potential suppliers.
Governance type
Complexity
transactions
Market
Modular
Relational
Captive
Hierarchy
Low
High
High
High
High
of Ability to codify Capabilities in the Degree of explicit
transactions
supply-base
coordination and
power asymmetry
High
High
Low
High
High
Low/Medium
Low
High
Medium
High
Low
Medium/High
Low
Low
High
Key determinants of global value chain governance
Value chain governance patterns are not static or strictly associated with particular industries . The
governance mode based on the three factors may chance as a result of new requirements to the
supplier, the tension between codification and innovation, and chancing suppliers’ competences as a
result of learning. Moreover, standards that enable the codification of product and process
specifications are different across industries and are constantly evolving and the standards can
become obsolete as technologies change.
Mundane transactions costs are costs involved in coordinating activities along the value chain.
#13 – Global sourcing: insights from the global clothing industry- the case of Zara, a fast fashion
retailer
Until recently, Zara, a major international clothing retailer and pioneer of ‘fast fashion’ principles,
kept almost half of its production in Spain and Portugal, earning the reputation of being one of the
exceptions to globalization. Since the 1980s, the existence of such exceptions has been fueling an
expectation that the production of high-quality fashion garments and tailored suits would remain in
the industrialized core. Here, the authors revisit this expectation in the light of the current seminal
change in the culture of fashion from ready-to-wear to fast fashion, and report that the increased
variety and fashionability associated with fast fashion have tilted the balance of competitive
advantage towards, rather than away from, firms in partially industrialized countries. As a number of
supplier firms in countries such as Morocco, India and Turkey have gained the competence to
manufacture intricately worked high-quality garments with the required flexibility and speeds, Zara
has turned to sourcing from these countries. It appears that instead of Zara changing the geography
of jobs, the geography of competencies and jobs has changed Zara.
#14 – Asymmetrical power relations and upgrading among suppliers of global clothing brands: Hugo
Boss in Turkey
Business ties between lead clothing firms and their suppliers are characterized by asymmetrical
power relationships, which concerns the asymmetrical degree to which one party can influence the
conduct of others. In the clothing industry, manufactures are motivated to upgrade within
production but face discouragement when it comes to moving to the high end of the value chain
(functional upgrading), as it has been viewed as encroaching on the core competence of the lead
firms (brand bullies). Due to high entry barriers such as lavish marketing budgets, lead firms can
protect their position
However, there is an Anglo-American bias in those observations, there is no consensus on the
influence of country-of-origin on firms’ behavior, and the emphasis on the buyer-drivenness of the
clothing industry simplifies the richness and varying spectrum of intra-sectoral power relationships
and interconnections between firms. Finally, asymmetrical power relationships are dynamic and fluid
and are constantly constituted, transformed, and reproduced by firms with strategic intent.
Relationships may change over time as a result of learning or innovation. Learning involves the
accumulation and development of a basic knowledge or competence. A second factors concerns the
long-term development of a capability for learning and continuous improvement – learning to learn.
Learning is a reciprocal process and creates not only opportunities for upgrading among contract
manufacturers as they learn from their lead firms, but also generates prospects for lead firms. A
more important variant occurs when the motivation for learning for manufacturers ceases to be the
sense of shared purpose with the lead firm and supplier firms start learning for themselves.
#15 Managing indirect supplier relations – how firms implement sustainability in the extended supply
chain.
The extended supply chain refers to both the direct and indirect relations that a buying firm has with
its suppliers for a given product.A buying firm should not only strive to implement sustainability
practices (the consideration of social and environmental issues) at its direct suppliers, but also
manage indirect buyer-supplier relations. This is a challenging task because of the lack of a direct
business relationship, the huge amount of possible second tier suppliers, and oftentimes unknown
second tier suppliers. An alternative to this direct form of involvement could be a mixed approach
where few, core second-tier suppliers for critical parts are managed directly and the remaining ones
will be managed indirectly through the first-tier supplier. Another option could be the cascading
strategy, in which the buyer delegates and passes ideas and policies downwards to its supplier, who
do the same in turn, which may lead to lower transaction costs for the focal firm (full delegation
archetype). The second archetype, being the mixed delegation model, is characterized by delegation
of sustainability implementation to the first-tier supplier, which is complemented by direct
monitoring of second-tier suppliers through the buyer or a third party. Finally, in the zero delegation
model, the buying firm takes full responsibility for monitoring sustainability compliance of its indirect
tiers, leading to high transaction costs.
#16 – A Configural Analysis of International Joint Ventures
Both capital and non-capital investments can be made in a company, hereby increasing the
dependence of the IJC and hence of the other company on the parent(s) that provide them. Equity
share (capital investment) is a stronger predictor of strategic control than is non-capital investments,
whereas non-capital investment (as it includes the appointment of key personnel as a control
mechanism) is more predictive of control in the operational areas to which it is normally directed.
Joint ventures having a dominant control by one partner will be more successful because they
approximate to a unitary firm and are easier to manage. Moreover, dominant control offers an ability
to determine the most effective use of whatever strategic resources that company shares with an
IJV. Finally, the exercise by a parent company of control over some or all of an IJV’s activities helps to
protect it from the risk of prematurely exposing its technological or other proprietary assets to other
parents and the threat of an IJV partner gaining a future competitive advantage through a superior
ability to learn from collaboration also increases the need to control activities and information flows
in the IJV. However, a dominant control may damage a partner’s willingness to contribute to what it
regards as an unequal partnership and may also limit the dominant partner’s receptivity to advice
and information offered by the weaker partner. As such, IJVs with 50-50 ownership achieved superior
goal and system performance.
A sharing of control with local partners will lead to a greater contribution from them which can assist
in coping with circumstances that are unfamiliar to the foreign partner, and therefore result in a
higher return on investment. Chinese partners are thought to contribute too little, leading to a
conclusion that foreign firms should take control of their IJVs, which is received with greater
satisfaction for both parties in a Chinese-foreign alliance.
Path analysis suggested that the higher the level of operational control a parent company exercises
in the joint venture relative to its partner, the greater the extent to which that parent is perceived to
be achieving its objectives. The configuration of ownership investment, control and performance
among the IJVs suggest a degree of path dependence based on the three initial condition of degree
of partner choice, partner investment capacity, and partner expectations. It was found that the
primary configurational variables – equity share, non-capital investment or control – had any
relationship to the economic performance of IJVs. However, IJVs with strong foreign ownership and
control, a combination of strong resource support with sensitivity to local conditions will assist the
achievement of good performance.
With majority foreign equity investments, the configuration is denoted as a surrogate subsidiary,
since the IJV is managed as if it was a subsidiary. The 50-50 approach is termed a balanced
partnership, where the minority equity investment configuration is called a junior partner.
It can be concluded that IJV performance derives from the combination of ownership, resourcing and
management factors rather than ownership perse and is highly dependent on institutional
differences. Finally, trust is found to always be an important requirement for good performance.
#17 – Knowledge, Bargaining Power, and the instability of international Joint ventures
The primary knowledge contribution of foreign partners generally involves technology, management
expertise, and global support, whereas the local partner contributes some local knowledge.
Factors causing instability (unplanned equity changes or major reorganizations) are changes in
partner’s strategic missions, changes in importance of the JV to the parents, increases in the
competitive rivalry between partners, the foreign investment climate of the host country, and the
existence of prior relationships between the partners. The authors argue that the main factor
contributing to instability, and a factor that can be controlled by firms in IJVs, is a shift in partner
bargaining power associated with the acquisition of knowledge and skills that allows a firm to
eliminate a partner dependency. A stable JV is one in which the partners believe the benefits to the
relationship exceed the costs of termination.
The bargaining power perspective states that the possession or control of key resources by one
entity may make other organizations dependent on that entity. A firm that has the option to
contribute or withhold important resources or inputs can use that option as leverage in bargaining
with its partner. The acquisition of knowledge and skills can shift an IJV partner’s bargaining power
and may enable the firm to eliminate its dependency on its partner.
As the foreign partner’s local knowledge increases, he can covert alliances to subsidiaries or can
choose to withdraw from the market. As the local partner’s knowledge increases, the JV may be
dissolved since there is no more need to cooperate for at least one party.
Valuation of knowledge involves two stages, the first being the research to which information you
want to get access, and the second stage occurring when the partner has received the information
and has to decide whether access is sufficient or the knowledge should be acquired.
When a foreign partner has a strategic objective of acquisition and proprietary control over local
knowledge, the speed of knowledge acquisition that is necessary to shift bargaining power will be
influenced by two key factors: (a) the foreign partner’s effectiveness in acquiring local knowledge
and (b) the initial resource contributions of the partners.
The greater the individual or structural attachment between the IJV partners, the lower the
likelihood of IJV instability and the lower the effect of shifts in bargaining power on the likelihood of
IJV instability (dormant instability).Finally, changes in individual and structural attachment between
IJV partners will lead to updating of the foreign partner’s valuation of local knowledge and the
greater the number of foreign managers at the IJV, the greater the foreign partner’s access to local
knowledge.
#18 – After the Ink dries: the interaction of trust and control in US-based international joint ventures
The purpose of control in IJVs is to attain predictability through some regulatory means. Such
predictability promotes confidence that the other partner will behave in a way that is consistent with
mutual benefits. Presuming both partners possess such confidence, they are much more likely to
collaborate in governing their joint creation that will in turn improve IJV performance.
Formal control mechanisms can be cybernetic (post-hoc mechanisms) or those aimed directly at
protecting the assets of the partner firms. In contrast, social control mechanisms are designed to
permit the evolution and inculcation of norms and values through structured personal interaction
and training. Formal control mechanisms mitigate opportunism especially in younger IJVS, but have a
negative impact on older IJVs. Social control mechanisms increase the potential for opportunistic
behavior and should be supplemented by affect-based trust (which can be derived from earlier
success). As such, the relationship between the use of social control mechanisms and IJV
performance will be positive when affect-based trust is high and negative when affect-based trust is
low.
Both social controls and affect-based trust had a positive influence and formal controls and cultural
distance has a negative influence. IJV age moderates the relationship between formal control and
parents’ perceptions of IJV performance.
#19 – Predicting the performance of international joint ventures: an investigation in china
Learning, quality of resourcing, and control are potential ways of addressing the risks presented to
IJVs by an emerging economy environment like China.
There are two main perspectives on IJV performance. The first takes as its criterion the extent to
which the goals expressed in the parent companies objectives for the venture are met. The second
perspective takes as its criterion the health of the IJV in respect of its viability as an operation system.
This study looks at three different sources of learning. First, learning from experience is a transfer to
a new IJV of relevant knowledge acquired by parent company personnel from their previous
experience of joint ventures and international business. Second, formation learning, takes places in
the process of seeking and negotiating terms with new partners; the more extensive and thorough
that process is, the greater the learning opportunity it provides. Third, operational learning, which is
learning how to work effectively with one or more partners in the subsequent operation of an IJV.
Quality of resourcing, based on the resource-based view, predict that the higher the quality of
resources provided by foreign parent companies, the higher will be IJV performance. Moreover, IJVs
which transact their inputs and outputs directly with their parent companies are expected to have
higher levels of performance. If the quality of resourcing is poor, it seems to be more critical for the
foreign partner to compensate for this through exercising a higher level of control.
Strong management within an alliance has more benefits than strong management over an alliance.
Moreover, foreign partner rights to key managerial appointments in joint ventures were associated
with greater satisfaction JV performance among both foreign and Chinese managers.
Firm-level variables are consequential for IJV performance and indicate the value of adopting a broad
theoretical approach with respect to such variable. They uncover subtleties in the relationship
between IJV control and performance and demonstrate the utility of distinguishing between goal and
system perspectives on IJV performance. Finally, they suggest qualification to international business
theory as applied to developing and transition economy contexts.