The Determinants of Value Creation for Partner Firms in the Global Alliance Context (1)
Kim, Kwangsoo, Park, Jong-Hun, Management International Review
Performance is a major focus in research on alliances (Gulati 1998). Researchers have studied this issue both at the alliance level (e.g., Beamish 1994, Dussauge/Garrette 1995, Glaister/Buckley 1999, Lyles/Baird 1994) and at the partner level (e.g., Chan et al. 1997, Dyer 1996, Hagedoorn/Schakenraad 1994). The alliance-level studies are concerned with the performance of an alliance itself, whereas the partner-level studies are concerned with the outcomes of alliance participation brought to partner firms. Included in the partner-level studies are two important streams of research that examine the impact of alliance formation on firm value. One stream focuses on contractual alliances (e.g., Chan et al. 1997; Das/Sen/Sengupta 1998), while the other considers joint ventures (e.g., Koh/Venkataraman 1991, Madhavan/Prescott 1995). As previous studies have indicated, these two types of alliances tend to differ significantly in many aspects, including ownership and control, making it difficult to combine them into a single study. For this reason, this study aims to expand the first stream of research by examining the conditions under which contractual alliances create firm value in the global alliance context.
Previous studies on contractual alliances have provided valuable insights into alliance formation and value creation for the alliance partners, but they appear to have made a limited contribution to the literature in the following senses. First, these studies seem not to be comprehensive and systematic in studying the conditions for value creation, although they examine some conditions like alliance type (i.e., technological vs. marketing: Das et al. 1998; horizontal vs. non-horizontal: Chan et al. 1997), uncertainty (Das et al. 1998), and industry globalization (Park/Kim 1999). Understanding such conditions more completely and systematically is likely to have important managerial implications for creating appropriate alliances in terms of partner selection and operational details to maximize firm value. Second, the previous studies examine each condition for value creation without controlling the effects of other conditions. Various conditions in fact exist simultaneously in an alliance and, thus, it seems important to examine each condition while holding the effects of other conditions constant. Third, the prior studies tend to focus primarily on the domestic alliance context. Considering the recent proliferation of global alliances caused by increased global competition (Park/Kim 1999), it is critical to investigate the effects of alliance formation on firm value in the global alliance context. To our knowledge, this issue has not yet been directly studied in the literature.
We intend to address gaps in the literature mentioned above through a more systematic investigation of the determinants of value creation for partner firms in the global alliance context. Since the market value of a firm is captured in the stock price of the firm, value creation associated with global alliances means abnormal returns to partner firms. These abnormal returns are reflected in increases in stock prices over and above expected levels (Brown/Warner 1980). We argue that firm value is affected by global alliances on three levels of determinants: the alliance, partner, and contextual levels. The alliance characteristics that we examine include the scope of cooperation, equity holdings in partner firms, and the number of partner firms. The partner characteristics are relative size, relative performance, and the number of global alliances entered. The contextual characteristic we consider is cultural similarity. Specifically, we propose that the scope of cooperation, equity holdings in partner firms, and cultural similarity will have positive relationships with value creation for firms entering a global alliance, that the number of partner firms will have no association with value creation, and that all three partner characteristics will have negative relationships with value creation. For our purposes, a global alliance refers to a long-term contractual cooperative agreement between firms from different nations that does not lead to a joint venture, which is a separate legal entity. In the next section, we develop a theory on the relationship between global alliances and value creation and several hypotheses about the moderating effect of the various determinants of value creation. Subsequently, we test our hypotheses using global network industries as the empirical context. Finally, we discuss the results of our analysis and highlight the implications of our study.
Theory and Hypotheses
Global Alliances and Value Creation
The economic benefits of global alliances are well documented in the literature. First of all, global alliances allow firms to move into international markets quickly in response to increased global competition (Glaister/Buckley 1996, Ohmae 1989). They further enable firms to gain access to external resources as suggested by the resource-based view of alliance formation. Similarly, firms can acquire and internalize skills from alliance partners (Inkpen 1995). The diversity of such resources and skills tends to be high between partners from different nations (Hamel 1991). Moreover, firms are likely to achieve economies of scale and scope and reduce the risk of performing specific activities in different international locations through global alliances. Global alliances also offer strategic flexibility without sacrificing the autonomy of firms (Contractor/Lorange 1988), since they can be developed and disbanded, if necessary, relatively quickly in response to changing demands in the global marketplace.
On the other hand, there are costs associated with global alliances. Above all, because of incomplete alliance contracts caused by the inability to anticipate all future contingencies, partner firms may have incentives to behave opportunistically and exploit each other whenever unspecified contingencies arise (Parkhe 1993, Williamson 1985). Such inherent opportunistic behavior is likely to cause various transaction costs for searching for reliable partners, designing contracts, and, in particular, monitoring the behavior of partners. Furthermore, other coordination costs are incurred by global alliances, since geographic distance and the potential for varying managerial values and systems between partners tend to necessitate large amounts of coordination. Finally, by forming alliances, partner firms may run the risk of eroding their own competitive positions over time as their partners become more competitive through access to resources, capabilities, and markets afforded by the alliance.
The benefits of global alliances stem mostly from strategic compatibility between partners, such as complementary resources, whereas the costs of global alliances come mainly from a lack of organizational compatibility, such as management complexity. In choosing a global alliance partner, managers are likely to be concerned more with strategic compatibility than with organizational compatibility, since they, ex ante, believe that the complementarity of resources between partners is rather fixed at a certain level, while organizational compatibility can be further enhanced depending on their mutual efforts (Makino/Beamish 1999). This suggests that, in entering a global alliance, firms expect to achieve a desired level of alliance benefits and, at the same time, alleviate alliance costs by enhancing organizational compatibility at the highest level possible. For these reasons, investors will respond to alliance formation by buying stock in the firm entering a global alliance, with the expectation that the alliance will enhance the firm's value. Consequently, this will increase the firm's abnormal returns.
Hypothesis 1: The abnormal returns associated with alliance formation will be positive for firms entering a global alliance.
The overall observation that forming a global alliance has a positive impact on firm value is, by itself, of limited use to theory and practice because it is a broad generalization. A more meaningful extension is to examine various conditions that may determine the extent of value creation. Understanding these conditions has critical implications for forming a value-enhancing global alliance. For this reason, we investigate the determinants of value creation and do so from three different perspectives: alliance, partner, and context. In this section, we first examine these perspectives, which, according to our arguements, moderate the relationship between global alliances and value creation.
Alliance Characteristics as Determinants of Value Creation
Scope of Cooperation
Global alliances offer partner firms the various benefits described earlier, including access to compatible resources, skills, international markets, learning, and cost and risk sharing. These benefits are expected to increase rather directly with the scope of cooperation (2) in an alliance for the following reasons. A cooperative agreement with a broader scope is likely to necessitate that partner firms commit more resources and skills to the agreement than one with a narrower scope (Contractor/Lorange 1988). As Khanna, Gulati, and Nohria (1998) and Anand and Khanna (2000) argue, firms with such an agreement will thus have an opportunity to pool and share relatively more resources and skills and, at the same time, to achieve greater learning from the agreement. Moreover, the increased level of such resources and skills in turn may enable each partner to reduce costs through global scale economies, gain greater access to international markets with minimal risk, and thus gain competitive advantage in the global marketplace.
On the other hand, the costs associated with alliances are not expected to increase directly with the scope of cooperation. The reason is that, while coordination costs tend to rise since the expanded scope of cooperation will require increasingly more comprehensive coordination, monitoring costs may not increase with the extent of …
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Publication information: Article title: The Determinants of Value Creation for Partner Firms in the Global Alliance Context (1). Contributors: Kim, Kwangsoo - Author, Park, Jong-Hun - Author. Journal title: Management International Review. Volume: 42. Issue: 4 Publication date: October 2002. Page number: 361+. © 1999 Gabler Verlag. COPYRIGHT 2002 Gale Group.
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