The ultimate goal of MNE is expansion and profit. The business expansion requires forming alliances with other corporations. The corporations have usually been exploitative towards other corporations and competitors focusing only on the benefits. However, such an endeavor is dangerous in the globalized market. More hostility in a virtually connected world would cause harm to the corporations more than helping them in gaining profits. Therefore, corporations focus on the strategic alliances to gain benefits and expand their businesses. The strategic alliances help the corporations in forming social networks, enhance trust, sharing knowledge, negotiation, innovations, increasing momentum, understanding cultural, language, and social perspectives and merging the economic and geographical distances. As these all matter in expanding businesses and earning profits. The coordination assists the companies to develop together instead of growing apart. It helps them fight the threats and risks together with understanding. Some might argue the alliances enhance risks of betrayal and dishonesty but with defined boundaries might be helpful. Moreover, the strategic alliances do not suggest to avoid proper planning and enter a venture. It rather means the venture benefits both the parties such as providing a competitive advantage. For instance, for a computer company it might be difficult to enter into a new market of furniture but partnering with IKEA or any other furniture company would assist the computer company to enter in the business easily. Therefore, the MNE strategic alliances assist the MNEs in expansions, collaborations, security, understanding, productivity, and performance although it might have some problems.
Through the strategic alliances the companies “change their competitive tactics, not the competitive goals” (Hamel et al. 1989). The changing competitive tactics assist in forming alliances that are based on the competitive goals of each MNE. Every corporation uses alliances to gain corporate benefits by sharing the risks and investments. It provides innovative ways of learning as two companies with different goals come together, they learn, develop and engage in business ventures together. They reduce cultural, language and social differences helping the companies to come closer and fighting the barriers together. Hence, the cooperation “becomes a low-cost route” to gain market access (Hamel et al. 1989).
Benefits of Strategic Alliances for MNCs
Expansion: The strategic alliances provide MNE with the required resources in the form of skills, market, technology, product competence, and investments. The combined ventures bring companies together which enhance skills as the companies can learn from each other. It assists the companies to gain competitive skills without new hiring. As the companies do a cost-benefit analysis, they form partnerships with companies which can provide support and be beneficial for the companies. They agree with supporting each other with skill-building and using each other’s specialty to advance common goals. Consequently, the cooperation helps the companies in accessing the top skilled workers without cost for hiring and paying. The skilled labor enhances benefits for both the companies as it increases the productivity and saves unnecessary costs, it helps them expand their businesses. They can provide required training and mentor to learn new skills that will be beneficial for both the parties. Also, it is essential for the companies to take into account the needs of the customers due to which they focus on building the skills that would assist the companies in gaining the product that is needed for the venture. Hence, the skills are polished and enhanced due to the alliances.
It provides an opportunity to the companies to access the resources and market. The alliances provide both the parties access to the new market for selling their products. It saves energy, research and time of the company in building the rapport with the new market which they get access due to the alliances. It enables them to access the markets that their partners have access to for operational purposes and to launch a new product. And access to the market of the ally companies is one of the reasons that corporates enter into these ventures. The ventures enable them to take advantage of available opportunities and resources of the ally to expand their businesses. It is especially true in case of entering into a new market in a different geographical territory or while launching a new product that is not the specialty of the company. In the different geographical region, it becomes really hard to establish oneself as the forces and culture might not support the product or ideology. The alliances play a positive role in helping the corporation to enter a market that has already developed relationships in the market. It assists outsourcing product with the help of partners. The partnering provides complimentary benefits for alliances.
The strategic alliance is essential in providing technical support and expertise. Agreements with a partner who has strong technological base help to the corporation to gain access to the technology of their partner corporation. It provides technical support and assistance with the expertise. The technical resources are shared and assist the companies in working efficiently. The companies can share the technology to assist each other in growth and production. Such sharing can enhance quality and efficiency for both the corporations. As the firms are forming alliances to gain complementary skills and benefits from the partnership, it becomes crucial for considering technology. It is also necessary because most of the operations depend on the technology, the technological support and complementary skills in technology would be beneficial for any company who is considering expansion from the joint ventures.
Moreover, strategic alliances divide the cost. It reduces the investment cost, technical, training, market research cost, and it divides the risks as well. When a company forms partnership other companies, the company reduces the harm from a new business venture to half because the partner is responsible for cost as well as risks. Therefore, it increases the responsibilities and cautiousness from both the partners to be careful. If anything goes wrong with planning or implementing, it can cost both the partners. Consequently, all the included companies provide standardized planning. It also helps the companies to face their competitions effectively because the two hostility with a company who has friends and strong connections have more risks than having a hostile attitude toward a single competition. Hence, it assists the corporations in putting off their competitors from creating problems. Additionally, two companies aligning against one would pave the ways for better innovations to compete with the competitors. More people with various expertise can come up with better ideas that a single company operating on its own might not be able to generate which makes the strategic alliances wiser options for MNE.
Reduction of Distance: Multinational Corporations seek a reduction of distance when they form alliances. And the distance is of four type geographic, political, economic and cultural distances. The alliances with the local companies are crucial for the MNEs to progress in their business ventures. Otherwise, the MNEs would face challenges to deal with the geographic differences. And some would suggest opting out from a country where the cultural, administrative, geographic and economic distances would be the barrier, but that is not the solution (Ghemawat). A company cannot opt-out of entering a market that is suitable for the product and business because they are different. And the associations aim at bridging the gap and providing a market for the corporate to operate.
As the land is far away from the place of origin of the MNEs, it becomes a problem in operating the business, hiring, setting up the business in another land. Therefore, it becomes difficult for the MNE administration to move to another country to set up a new business. But the alliances help MNEs in establishing a new setup or accommodating them in their space. They can operate from the same space as the local companies, but the MNEs need to form alliances with the competitive and well-established companies to be able to advance their business. A new business might not be as helpful unless the two businesses work together to grow.
Cultural distance and MNE strategic alliances are much debated because many believe the culture impacts on the MNE and its strategy hugely. However, others have found it has little impact on the entry levels if market forces favor the establishment of MNE. Also, the MNE would prefer a joint venture when the cultural differences between the countries are larger, but the MNE will own a venture if the cultural differences are low. It is to reduce the uncertainty and problematic aspects of the cultural differences such as individualism-collectivism, masculinity-femininity, bribery, and corruptions, etc. Additionally, the studies suggest the performance increases when the company is subsidiary ventures in larger distance companies but low in joint ventures. Hence, cultural distance plays a crucial role. It is essential to understand, appreciate and account for the cultural differences to improve the performance of the MNEs. The MNEs are required to tailor their practices and norms according to the cultural norms of the countries where they enter to gain better profits. Therefore, cooperating with the local companies will help the MNEs to understand the culture and cultural barriers. It will assist them in understanding whether starting a subsidiary would be beneficial for the company in the long run or not. The studies show the cultural distance affects larger companies less but has a greater impact on the smaller firms. For an established MNE, the cultural differences do not matter as it has the standardized values and a culture of their own that they incorporate those to fill the gap but they address some of the cultural differences. Hence, the cooperation becomes essential for the MNEs to judge the prospects of their ventures in a different country. The cultural differences can have a negative impact unless the corporation addresses the cultural concerns. And associations with local companies will be helpful in addressing the cultural differences.
Political distance can pose serious threats to the companies through expropriating, political instability and transfer risks. The joint ventures might help in reducing these risks for the MNEs. Expropriation is when a government nationalizes the companies. It takes over all the private companies or only foreign companies with or without compensation which discourages foreign investment as well the companies from expanding. Sometimes the government also target corporations using high taxes to make it less profitable for companies. They can also take over the property rights of the foreign companies which restricts the companies to use the business for profits. The constant interference from government restricts the corporations to operate at its own pace to gain profit or success. Another problem with macro risks is terrorism and hostile political environment. Although the MNEs do their research regarding the political stability, it cannot be predictable. The terrorism or civil war might interfere with the operations and productivity of the companies. Consequently, the MNEs will refrain from doing business in such countries. Lastly, the transfer risk imposes limits on transactions between the countries. It is done by increasing tariffs or restricting imports and exports. This makes it unfriendly and unprofitable for the companies to invest in a country which is troublesome for the MNEs. Regardless of these restrictions, some MNEs tend to operate in these restricting countries. And with strategic alliances, the MNEs can minimize these risks and divide the losses. Alliances are not acquisition due to which the government might not have restrictive policies towards the local businesses as all the governments provide leverages to their companies to grow. It gives some shield from the government interferences. It allows the companies to operate in a country avoiding the major restrictions but terrorism and political unrest might negatively affect the companies. Even in such circumstances, the risks and threats are divided which provide some immunity from the shock and losses. Therefore, joint ventures reduce the risks for all the involved parties which is not possible in the acquisition.
Economic distance also plays a role in the success of a company. The prices, resources and knowledge differences impact on the decisions of whether a company should cooperate with a foreign company. Lack of proper knowledge and wide disparities in the currencies might hinder the alliances. But the disparities in currencies might be a force to promote such ventures. For instance, if the value of the currency of a country is low, it might be profitable for another country to invest and form alliances. It might have low cost. Moreover, if a country has resources or cheap labor, the MNEs can ally with local companies to exploit the cheap labor.
Strategies to Form Alliances:
Hence, strategic alliances are beneficial for all the parties involved. However, the profitability of the alliances depends on strategies, social networks which consists of “collaborative and competitive ties” (Tsai), corporate strategy, management and strategies, technology and performance and risk aversive behavior. According to a research in 2001, 500 global businesses had 60 strategic alliances because with the only announcement of the news of alliances the stock of the company rose one percent. The “alliances increase the market value of $54 million per alliance (Dyer et al., 2001). The alliances enhance the competitive advantage for the corporates. And the productivity of the companies dependent on the strategic-alliance function. It is a body that coordinates “all alliance-related activities” in the organizations and has the responsibility of implementing the “processes and systems to teach, share and” measure the experience of the company and its alliance management (Dyer et al.). And with this kind of functional body, the alliances were able to gain 25 per higher long-term success than the companies without the function body. However, the collaborations strengthen a one-party and weaken another in some ways but focusing on the negative impacts of the ventures negatively affects overall productivity of an alliance. Although one party might have a lesser share or weak in the venture, the overall it strengths both companies in front of other companies.
The success of alliance on the managers as they are managing the whole project, their managing skills become crucial. If the managers focus on the ownership and structure more than the alliance, the success rates decrease. It does not matter what percentage of shares a company owns in joint ventures. Some countries prefer to have ambiguity in legal structure as it “creates more potential to acquire skills and technologies” (Hamel). Additionally, the companies can build knowledge sharing, and coordination mechanisms to address the concerns of the all involved parties and their concerns. The companies and managers also focus on the competitive aspects of the companies, and the joint venture must not lose its competitive ties. The competitive ties will boost the productivity and performance of the companies without debilitating their market values. Moreover, the agreements must have the requirement of specific performance from the involved groups as many of the Japanese joint ventures seek from their partners. It allows mutual growth and skill development. For instance, the agreement between Motorola and Toshiba requires Motorola to “release its microprocessors technology incrementally” (Hamel).
Pankaj Ghemawat comes up with a new framework of an international strategy of AAA triangle to respond to the challenges in a global venture. In his framework, he presents three strategies and the three strategies are an adaptation, aggregation, and arbitrage. Through adaptation, corporations enhance their relevance with the local companies that increase revenues and market share for the companies. He argues through aggregation the corporations are trying to “deliver economies of scale” by operations regionally or globally. And lastly, through arbitrage the company’s focus on maximizing the profit by exploiting the regional or national resources. The corporates will locate the production, supply chain and retail in different places according to the market value. It gives the companies better profits with lower costs.
To conclude, the formation of strategic alliance is essential for succeeding in the global market. They must focus on maximizing their benefits and expansion of their corporations in the global market with strategies that boost the profits without costing money to the companies. It can be achieved through the role of leadership and proper alliance agreement that is flexible yet specific for both the parties to benefit. However, in the process of alliances, the hierarchy must be recognized, but it must not lead to disagreements between the MNEs or the alliance forming groups.