Internationalization - Strategic Alliance : Joint Ventures, Equity Alliance, Short-Term, Contractual Agreements, Collaboration

Once a firm decides to enter a particular market after a thorough macro analysis, the company is faced with the decision of how to enter that particular market. Firms usually have 6 ways of entering a market; these are exporting, turnkey projects, licensing, franchising, joint ventures, and wholly owned subsidiaries. During the process of internationalization, it can be said that exporting is the starting element of globalization. This paper will discuss 2 of the ways to enter a foreign market - Joint Ventures and Wholly Owned Subsidiaries.

Joint Ventures usually involve setting up of an independent company through an agreement with the local company. The new company is jointly owned by the foreign company and a local company. The ownership stake can range from 50/50, to a minority or a majority stake. Some examples of joint ventures include MSNBC, HULU, and Wal-Mart-Bharati Enterprises Ltd.

There are numerous advantages in being part of a joint venture. A joint venture allows a firm to benefit from the local partner's knowledge about the country's culture, language, political system, and business systems. For example, in Wal-Mart-Bharati Enterprises Ltd joint venture, Wal-Mart can benefit from the knowledge Bharati Enterprises has of India's culture, business opportunities, and other issues that only a local firm would be familiar. Since a joint venture usually entails a 50/50 stake, both companies invest significant resources, talents, and commitment to the new firm. This provides both companies advantages in terms of sharing development costs and risks. Another advantage of joint-venture is that it allows a foreign firm to enter a domestic market which it otherwise would have faced restrictions. For example, in the case of Wal-Mart - Bharati joint venture, Wal-Mart cannot enter the Indian retail market on its own because of government regulations which bar foreign firms from entering the retail industry. As such, the only way Wal-Mart could enter the Indian retail industry was through a joint-venture. Additionally, joint-ventures are less prone to being nationalized or being targeted as a foreign firm since the local company has a significant stake in the joint-venture as well. As such joint-ventures provide a good opportunity for firms to enter markets where otherwise they would not have been able to enter.

Although there are numerous advantages, joint-ventures can also bring with them a number of disadvantages. A firm entering a joint venture risks gives the local firm the control of its technology. For example, in Wal-Mart - Bharati joint venture, Wal-Mart risks giving Bharati Enterprises some of its key competencies that give it a competitive advantage over other firms. Bharati Enterprises, a large conglomerate with no experience in retail industry would learn the operations, skills, and other competencies that give Wal-Mart an advantage, and in turn become a potential threat to Wal-Mart not only in the Indian market, but also in other foreign markets as well. If the joint-venture is a 50/50 partnership, it may be possible that both companies differ on the strategic intent of joint venture, management style, which could lead failing of the joint-venture. It might also be possible that at the formation of the joint venture, both companies might have similar goals, but changing competitive environment or other economic and political variables might change the objectives of the companies regarding the purpose of the joint venture.

As mentioned earlier, wholly-owned subsidiaries are another way a foreign company can enter a foreign market. A company can set up a wholly owned subsidiary either through a Greenfield venture or through acquisition. In a Greenfield venture, the firm creates the wholly owned subsidiary from scratch, while in an acquisition a firm buys out a domestic firm.

The primary advantage of a wholly-owned subsidiary is that it gives the foreign company a 100% stake in the ownership of the firm. This allows the firm complete freedom in the direction the company is going, the organizational structure of the firm, and all the profits the subsidiary generates. A company that sets up a new wholly subsidiary has complete control over the type of employees it recruits, thereby giving it control over the corporate culture the new firm eschews. It is a lot easier for a firm to build create a new corporate in a new firm than it is to change the corporate culture of an existing firm. A wholly owned subsidiary also prevents the transfer of technology, as the company's core competencies are kept in-house. For example, a lot of technology companies open wholly subsidiaries in foreign markets - Microsoft and Apple.

As with joint-ventures, wholly owned subsidiaries also carry with them numerous disadvantages. Entering a foreign market through a wholly owned subsidiary can be a costly affair as the firm has to bear all the burden of capital investment, and risk. The new company also has to learn inner workings of the new country; as such there is a learning curve. The company can also be a target for foreign governments and other political organizations which might see the foreign company as appropriating the country's resources.
Strategic Alliances can be described as agreements between two companies that seek to gain knowledge in areas that they are deficient in. As described in the lectures, strategic alliances can be described as a live-in relationship as opposed to a full-blown marriage which brings with it, its own set of problem. Although there are contractual agreements in alliances, unlike a joint-venture there are no messy after-effects like one would experience from a divorce, like what would happen to the child or the jointly owned subsidiary.

There are many theories on why alliances are formed by companies; we will be discussing two such theories which explain the reasons why firms pursue alliances. According to the learning race theory, firms pursue alliances to gain knowledge they are deficient in. According to this theory, firms in an alliance are in a race to gain as much knowledge as they can from their partner. The idea is that firms purse alliances for purely selfish reasons, and as such, once a company has gained the knowledge it lacks from its partner company, it can dissolve the alliance and use the gained knowledge to further its own competitive advantages. For example, Prashant Kale, Harbir Singh, and Howard Perlmutter argued that strategic alliances between Japanese and American firms allowed the Japanese firms to gain project engineering and production skills that underlie the competitive success of many U.S. companies. These strategic alliances according to them allowed the Japanese firms to build their competitive at the cost of American Corporations. The evolution of blu-ray discs is another example where companies come together to gain knowledge from each other. The basic elements of blu-ray technology was started by Sony, but because of the risks in implementing entering such a venture by itself, the firm formed an alliance with movie studios and other technology companies that would allow it to benefit from the skills of these various corporations. The blu-ray strategic alliance was called Blu-Ray Disk Association, and had companies from Fox Studios, Sony Corporation to LG Electronics and Samsung Electronics. This strategic alliance allowed the companies to pool their talents, skills, resources, and influences to ensure that their product would gain acceptance once the project is publicly distributed. Although the idea is to gain knowledge where they are deficient in, which would ultimately serve all the members of the alliance, the alliance members - particularly the technology companies are also in a race against each other to gain the knowledge from others as quickly as possible. For example, if companies like Samsung were quickly able to learn and internalize the basic knowledge of blu-ray from Sony and other partners, they would be able to use that appropriated technology to build factories that would give them a first mover advantage and eventually cost and location economies that would give them a upper hand in the new blu-ray disc industry.

Resource based theory of the alliance on the other hand believes that no contractual agreement is perfect, and as such companies have to trust each other, and exhibit voluntary behaviors or social exchanges that would result in benefitting all the companies in an alliance. According to this theory, for a firm to be successful in a strategic alliance, they have to develop trust in their partners, foster greater cooperation or reciprocity, avoid blatant opportunistic behavior, and show an understanding of the requirements or the needs of other partners. Examples of resource based theory can include the alliance of Apple with AT&T in production and launching of the Iphone, or Google's Alliance with HTC and T-Mobile in building, manufacturing, and launching of Google Android phones. The above two alliances require that partners have trust in each other. For example, Apple needed to trust AT&T that it would not share Apple's key technologies with other mobile manufacturers and undermine Apple's competitive advantage. AT&T on the hand needed to trust Apple that once the Iphone was created, it wouldn't disband the alliance, and launch its phones with another subscriber.

As stated earlier, firms choose to enter into alliances for a variety of reasons. These reasons include trying to gain knowledge and skills that they are deficient in, to leverage the size and influence of the alliance to ensure market acceptance of a product, as was the case with Blu-Ray Disc Association. As stated in lectures, national and organizational culture can have a huge impact on how firms approach strategic alliances. For example, it was stated that the Japanese firms acted like students, and American firms acted like teachers. What this meant was that the Japanese firms were able to gain knowledge from the American peers - as they were more readily interested in teaching the Japanese firms their skills and competencies, while the American peers were only interested in teaching and not learning any skills from their Japanese counterparts. This allowed the Japanese firms to appropriate American skills, competencies, internalize that knowledge, which was then utilized against the very same companies that taught them those competencies in the first place.

I believe that the application of resource based views or learning race hypothesis depends on the nature of strategic alliance, and the nature of the company's position within the alliance. For example, when Microsoft enters in a strategic alliance with other PC manufacturers, its relationship with the PC manufacturers is mostly resource based as opposed to learning race hypothesis. It would be in the interest of Microsoft and other alliance partners to ensure that there is a significant trust, reciprocity, and lack of opportunism in ensuring that a launch of a new operating system, such as Windows 7 is successful. Even though the product belongs to Microsoft, its success would ensure that hardware manufacturers would reap benefits in terms of new computer sales. Within the same strategic alliance, PC manufacturers are in race to gain to knowledge that would ensure them a competitive advantage. For example, HP would be in a race with Dell and other pc manufacturers in ensuring that it learns all it can about the intricacies of the operating system from Microsoft and how it behaves with different hardware from other manufacturers. With the appropriated knowledge HP would attempt to ensure that its products are the most successfully integrated with the new operating system and thus ensuring its place as the most desired PC system.

I believe that being part of a strategic alliance where the core competency is technology would be one of the most challenging parts in managing an alliance. Since the primary reason for formation of such an alliance is accumulation of technology, firms and managers need are placed with the task of ensuring enough access that would further the technology, which would ultimately benefit all the firms within the alliance, but at the same time ensure that the core competencies aren't leaked to competitors which would end up creating a strong competitor in the future.

As firms face increasing pressure to globalize in order to realize location economies, economies of scale, experience effects, and cost reductions, they are presented with a variety of decisions including the strategy they would be pursuing globally, the structure of the firm that would complement their adopted strategy, and how these strategies would attain the firm a competitive advantage for the firm. In addition firms are also faced with decisions on how they would approach strategic alliances and the risks they would face by sharing their competencies and skills with potential and actual competitors.