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Environmental Shocks

and SME AllianceFormation Intentions inan Emerging Economy:Evidence from theAsian Financial Crisisin IndonesiaLouis D. Marino

Franz T. Lohrke

John S. Hill

K. Mark Weaver

Tulus Tambunan

Environmental shocks can occur when emerging country governments open their marketsto outside influences. We extend research conducted primarily in mature economies on howmanagers react to environmental shocks by evaluating how environmental shock type, afirms strategic orientation, and its slack resources affected strategic alliance formationintentions during and immediately following the Asian Financial Crisis. Results from twoIndonesian small- and medium-sized enterprises (SME) samples show that these factorsinfluenced alliance intentions, although not always in ways that were consistent with previ-ous research findings in more mature markets. Overall, our results provide critical insightsinto emerging market firms strategic actions, particularly related to key managerial motiva-tions for SME alliance formation.

How do small- and medium-sized enterprises (SMEs) in emerging economiesrespond when faced with rapid, often unforeseen, changes in their external environments?These environmental shocks, resulting from major shifts in technology, economicforces, political regimes, or, in some cases, from natural disasters, can create substantialuncertainty in these firms by changing an industrys rules of the game (Tushman &Romanelli, 1985; Wright, Filatotchev, Hoskisson, & Peng, 2005). Firms that do notrealign their strategies with the new environmental realities resulting from these shockscan face performance declines that threaten their long-term viability (Fischer, Lee, &

Please send correspondence to: Louis D. Marino, tel: (205) 348-8946; e-mail: [email protected]

PTE &

1042-2587 2008 byBaylor University

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Johns, 2004). At the same time, radical environmental shifts may also create opportunitiesfor entrepreneurial firms to move in new strategic directions or even challenge for marketleadership (Tripsas, 1997; Zammuto & Cameron, 1985).

SMEs in emerging markets may be especially vulnerable to rapidly changing envi-ronments due to the firms lack of resources and the frequently underdeveloped institu-tional safety nets to help buffer a shocks effect in these economies (Sawyerr, 1993).Scholars have frequently studied how SME managers, in general, contend with these

changes (e.g., Covin & Slevin, 1989), including severe shocks (Meyer, 1982). Thisresearch has shown that one strategic response to increasing uncertainty is to establishstrategic alliances (Hitt, Ahlstrom, Dain, Levitas, & Svobodina, 2004), which can improvelong-term survival chances by enhancing an SMEs skills, augmenting resources,spreading risk, providing new market access, or enhancing reputation (Varadarajan &Cunningham, 1995). Research has also noted, however, that strategic alliances can createproblems for SMEs, including losing a competitive advantage to or creating dependenceon an alliance partner (Hamel, 1991; Miles, Preece, & Baetz, 1999). Although always athreat, these issues may be even more acute in a volatile, emerging market whereenvironmental changes make information verification and contract enforcement more

difficult, which, in turn, may encourage a partners opportunistic behavior (Luo, 2007).Thus, SMEs are only likely to form alliances when managers perceive advantages willoutweigh disadvantages (Harrigan & Newman, 1990).

Despite this attention in the literature, with few exceptions (e.g., Tan & See, 2004),most studies have examined SME reactions to environmental change in mature econo-mies. Given that (1) vast differences can exist between environmental and firm charac-teristics in mature and emerging economies (Hoskisson, Eden, Lau, & Wright, 2000;Wright et al., 2005) and (2) both characteristics likely impact how or even whethermanagers respond to external changes (Chattopadhyay, Glick, & Huber, 2001; Mone,McKinley, & Barker, 1998), research examining SME strategies for coping with environ-

mental shocks in emerging economies appears warranted.To address the impact of the contextual characteristics on the strategies of SMEs in

emerging economies we examine how the onset of a shock, the Asian Financial Crisis,affected strategic decision making in SMEs within an emerging economy, Indonesia.Despite occurring a decade ago, the Crisis provides an ideal setting to examine how suchshocks affect SME actions both because of its severity (e.g., it interrupted years ofcontinuous growth that caused political and economic upheaval across the region) andbecause the problems experienced in Asia mirror those in other emerging (e.g., EasternEuropean and Latin American) economies where movements from shielded to marketeconomies have or potentially could produce such shocks (Marer, 1991). In addition,

given that shocks are, by definition, difficult to predict, the opportunity to conduct anatural experiment following the onset of the Crisis provides a unique opportunity tostudy managerial crisis reaction (cf. Meyer, 1982).

We begin by highlighting critical events during the Asian Financial Crisis in Indone-sia. Next, we review research related to managerial reactions to environmental shocks, ingeneral, and then formulate hypotheses related to how SME managers in an emergingmarket should react to a major economic shock like the Crisis. In addition, we examinekey environmental- and firm-level characteristics that may affect this reaction with aparticular focus on whether managers intend to cope with a shock by seeking strategicalliance partners. Employing two samples, we first examine managers environmental

perceptions collected immediately following the Crisis onset (SeptemberNovember1997) when the economy experienced temporary disequilibrium following a major cur-rency devaluation. We then evaluate these intentions after the Crisis had fully developed

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(FebruaryMarch 1998) when the government made permanent changes to open theeconomy to foreign competition. Examining reactions at these two crucial times yieldsimportant insights as to how both firm characteristics and managerial perceptions ofenvironmental uncertainty during times of temporary and permanent shock situationsaffect strategic decision making and alliance intentions in an emerging market.

An Environmental Shock in Indonesia

Indonesia, a sprawling archipelago of over 13,000 islands (600 inhabited) in southeastAsia, has a population of 200 million people. Over 85% of the population is Muslim,though notable Hindu, Christian, and Buddhist minorities also exist. The Chinese, inparticular, are very active commercially, and although they only comprise about 3% of thepopulation, they may control 75% or more of the countrys wealth (Chavez, 1997).

Events in Indonesia from 1997 to 1998 provide an opportunity for examining SMEcrisis reactions in an emerging market. The countrys problems occurred as part of theAsian Financial Crisis, which began in July 1997 with the floating and rapid 18%

depreciation of the Thai baht. Shortly thereafter, the Philippine peso and the Malaysianringgit depreciated by 30%. On August 14, the Indonesian government floated the rupiah,which immediately lost value (Sender, 1997). Seeking to restore confidence and respondto International Monetary Fund (IMF) stipulations for $23 billion in credit, the govern-ment announced major reforms (Liebhold, 1998). In response, the rupiah stabilized atabout 4,000 per U.S. dollar, and the Crisis, having barely started, appeared over.

Given the frequency with which such shocks often occur in emerging economies,local managers can become desensitized to them, even viewing them as more the rule thanthe exception (May, Stewart, & Sweo, 2000). Thus, the Crisis onset could have beenviewed within Indonesia as just another temporary economic setback. Unfortunately,

impending elections in 1998 made President Suharto reluctant to carry out promisedreforms, and, in December 1997, the IMF withdrew its support. The rupiah quicklydropped to 16,500 per U.S. dollar in January 1998 (Sender & McBeth, 1998). The IMFannounced another bailout, this time totaling $43 billion, but only after the governmentpromised it would enact major economic changes (Shari, 1998). Although other subse-quent devaluations occurred, the IMF package enabled the rupiah to stabilize at about10,000 per U.S. dollar at the end of April 1998. This stabilization, however, resulted fromgovernmental policies that significantly and permanently changed the economic land-scape as foreign competition barriers were removed to satisfy IMF demands.

The Crisis significantly affected both Indonesian commerce and society. The

economy lost approximately 6 million jobs as inflation cut domestic demand (Cohen,1998a), and business confidence fell as Suharto family activities, valued at about$40 billion and nurtured by 30 years of cronyism, faced increasing scrutiny (Euroweek,1998). Ethnic unrest, a problem even during good economic times, erupted as the Chinesecommunity was held partially responsible for the crisis (Cohen, 1998b). Althoughlarge Indonesian business conglomerates benefited at times from the major economicreforms, smaller Indonesian firms bore the brunt of the economic belt-tightening policies(Mursitama, 2006). Many firms, large and small, proceeded cautiously and delayedexpansion projects to preserve cash reserves (Tripathi, 1997).

These events illustrate how firms in emerging markets, in general, must contend with

environmental shocks. Although these markets represent the greatest growth potential intodays world marketplace, this potential comes at a priceuncertainty, resulting fromdisruptions not usually encountered in mature markets including rapid political change

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from a coup detat(such as occurred to Thailands Prime Minister Thaksin Shinawatra in2006) or economic shocks (such as Russia cutting off natural gas supplies to Georgia andUkraine, or recent hikes in petroleum prices). Natural calamities such as earthquakes ortsunamis can also paralyze commerce.

Such disruptions are particularly egregious to emerging market entrepreneurs, whomust evaluate the severity of such shocks and how they can disrupt commercial relationswith both domestic and, in some cases, foreign companies. These entrepreneurs may be

less aware how such shocks are perceived in the global economy, and they may lack theformal business education needed to make an informed analysis. To examine these issues,we review extant research on managerial reactions to environmental shocks in the nextsection.

Managerial Responses to Environmental Shocks

With limited exception (e.g., Fischer et al., 2004; Tan & See, 2004), environmentalshocks like the Asian Financial Crisis have primarily been studied in the macroeconomics

field (e.g., Ozler & Rodrik, 1992). Extant research has paid less attention to how theseshocks affect managerial perceptions and firm strategies, despite the recognition that suchshocks increase managerial uncertainty and threaten firm survival (Fischer et al., 2004).

The fundamental nature of a firms relationship with its external environments, ingeneral, has long interested organizational researchers. Scholars have recognized that aninherent tension exists resulting from the environments simultaneous roles in providingcritical resources and creating considerable uncertainty for a firm (Pfeffer & Salancik,1978; Thompson, 1967). Empirical research has demonstrated how environmental uncer-tainty impacts a wide variety of organizational factors including structure (Sutcliffe &Zaheer, 1998), environmental scanning (Daft, Sormunen, & Parks, 1988), and alliance

formation (Street & Cameron, 2007). Cumulative findings support Thompsons (1967)premise that the reduction of environmental uncertainty remains a fundamental challengefor complex organizations.

The means by which managers attempt to reduce this uncertainty, however, remainsan ongoing debate in the literature. Indeed, studies have posited opposite managerialreactions wherein managers focus internally or externally in attempts to reduce uncer-tainty resulting from environmental change and/or organizational performance decline(Ketchen & Palmer, 1999; Mone et al., 1998). On the one hand, studies have found thatwhen confronted with what they perceive as an increasingly uncontrollable environment,managers turn their focus inside the firm, a domain where they exercise greater control

(Barker & Patterson, 1996). This threat-rigidity response often prompts them to cen-tralize authority, rely heavily on past decision routines, restrict outside information flow,and, in some cases, escalate commitment to failing strategies (Staw, Sanderlands, &Dutton, 1981). For example, Cameron, Kim, and Whetton (1987) found that firms in amature economy exhibited a rigidity response when facing increasing environmentalinstability. Organizational turnaround research, including recent work in emerging econo-mies (e.g., Bruton, Ahlstrom, & Wan, 2003), also largely supports this internal focus as aninitial step following a firms performance decline, with any strategic changes that man-agers implement being primarily incremental (Arogyaswamy, Barker, & Yasai-Ardekani,1995). Some emerging markets studies have also noted managers tendency to focus

internally to overcome external uncertainty created either by ongoing institutional defi-ciencies in capital, product, technology, or labor markets (Khanna & Palepu, 2000) orenvironmental shocks (Tan & See, 2004).



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Given this internal focus, we would expect that SMEs may avoid alliances followinga shock for two reasons. First, although such alliances can provide several benefits, theycan also create problems by exposing SMEs to uncertainty arising from a partners futurebehavior. Second, seeking partners requires having an external rather than the internalfocus posited by threat rigidity (Marino, Strandholm, Steensma, & Weaver, 2002).

Alternately, other theoretical perspectives suggest that when faced with increasinguncertainty, managers attempt to actively manage critical resource dependencies and

gather additional information so as to reduce uncertainty. Two in particular, resourcedependency theory (RDT) and information process theory (IPT), both posit this externalfocus. First, based on original works in the sociology and political science, RDT positsthat managers try to cope with external dependencies in order to acquire and maintaincritical resource flows (Pfeffer & Salancik, 1978). One strategy that firms use to reduceenvironmental uncertainty and gain access to necessary resources is to establish inter-organizational linkages such as non-equity alliances, joint ventures, and minority equityholdings (Park, Chen, & Gallagher, 2002). For example, Steensma, Marino, Weaver, andDickson (2000) found that as technological uncertainty increased, SMEs increasinglyformed technology alliances.

Second, IPT posits that as environmental uncertainty increases, so do managersneeds to acquire and process information (Daft et al., 1988). Thus, to reduce uncertainty,managers seek additional information to aid their interpretations of the external environ-ment. To date, studies have employed IPT to explore how both large and small firms reactto increasing environmental uncertainty. For example, sampling Fortune 500 firms, Bergh(1998) found that in diversified corporations encountering increased uncertainty, manag-ers often focused on improving information quality by acquiring strategically relatedunits. In contrast, examining smaller firms lacking resources for acquisitions, Dollingerand Golden (1992) found that firms employed less resource-intensive strategies (i.e.,forming strategic alliances) to gather additional information. Further, Sarkar, Echambadi,

and Harrison (2001) found that firms that used alliances to identify and respond to marketopportunities had higher performance, and this relationship was stronger both in unstablemarket environments and for smaller firms.

Some emerging market research, to date, also supports this external focus to copewith uncertainty. For example, employing RDT, Peng and Heath (1996) posited thatemerging market firms will respond to uncertainty resulting from major economicchanges by increasingly forming external links with other firms so as to gain access tocritical resources and overcome the lack of institutional structures (e.g., property rights) inemerging markets. Moreover, in their study of Korean SMEs, Tallman and Shenkar (1994)found that these firms used strategic alliances to both gather information and gain access

to critical resources. Taken together, the findings of both the RDT and IPT schools suggestthat highly uncertain situations may prompt firms to seek external alliances (Eisenhardt &Schoonhoven, 1996). Thus, we believe that in environments affected by an environmentalshock, firms needs to secure necessary resources and information flows will override theirfear of relational uncertainty and will encourage them to adopt an external focus and seekalliances.

Hypothesis 1: For SMEs operating in an environment affected by an environmentalshock, perceived environmental uncertainty will be positively related to allianceintentions.

In sum, we expect environmental shocks to affect an emerging market SMEs strate-gic actions because the market may lack the institutional structures to contain the conse-quences associated with shock-induced changes such as monetary fluctuation, fiscal

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policy change, and regulatory adjustment (Luo, 1997). As noted, however, how and theextent to which managers respond to the shock remain an ongoing debate in the organi-zational literature.

Given evidence supporting both sides of the debate, we suggest that other importantfactors often not examined in emerging market research, to date, may impact SME actionsfollowing an environmental shock and help clarify how an SME is likely to react.Consequently, we augment the general hypotheses above by suggesting three contingen-

cies that may impact how managers react: expected shock duration, firm strategic orien-tation, and firm slack level. The first of these, defined as how long managers expect theshock to affect their firm, may impact managerial reactions because it provides differentmotivations about whether to implement major strategic changes. The second, defined ashow entrepreneurial or conservative a firm is, may also affect managerial response to ashock by affecting whether managers routinely emphasize external or internal actions(Chattopadhyay et al., 2001). The third, defined as a firms excess resources relative to itsresource demands (Cyert & March, 1963), may impact how, and even whether, managersrespond to a shock because these resources may help buffer a firm from environmentaltrends. In addition, extant research suggests that slack level may have a direct or moder-

ating effect on subsequent strategic actions (Cheng & Kesner, 1997). We, therefore,examine each of these factors, in turn.

Expected Shock Duration

Extant research has noted that how and whether managers react to environmentalchange may depend on the type of change they think they face. Studies have classifiedchange both based on its expected duration, temporary versus permanent, and its shape,continuous versus discontinuous (Meyer, Brooks, & Goes, 1990; Tushman & Romanelli,1985). First, temporary change may result from short-term jolts such as labor union strikes

or economic recession, whereas permanent changes may be prompted by factors such asregulatory or technological changes (Smith & Grimm, 1987). Managers can often adjustto the former by making incremental, short-term changes (e.g., layoffs) whereas the lattermay require sweeping strategic change (e.g., entering new product markets) for a firm torealign with its environment (Zammuto & Cameron, 1985). Second, continuous changes(e.g., demographic shifts) are less disruptive than discontinuous ones (e.g., economiccrises) because firms can slowly adjust strategies to incremental changes in industrycircumstances (Meyer et al., 1990). In contrast, discontinuous changes are more traumaticand usually involve severe disruptions in a firms environment.

Environmental shocks may be temporary or permanent, but, by definition, they result

from discontinuous change. When faced with a sudden shock, managers must reactquickly and decisively to ensure a firms continued viability because implementing small,incremental changes, even in large numbers, often will not produce changes necessary toadjust to new environmental realities (Romanelli & Tushman, 1994). For SMEs, however,such wholesale changes may be especially problematic, because even though they enjoystrategic flexibility (Chen & Hambrick, 1995), they often lack resources necessary tocontend with major environmental shifts (Carter, 1990). Thus, as noted, strategic alliancesmay present SMEs with an attractive option to contend with environmental shocks. Asalso discussed previously, however, both managerial reaction (e.g., an internal versusexternal focus) and the cost/benefit calculus of alliances (threat of partner opportunism

versus resource access) may affect whether managers seek alliances for their firms.We suggest one possible contingency affecting alliance decisions is whether managersperceive the environmental shock to be temporary or permanent because alliances, in



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general, and different alliance types, in particular, offer different costs and benefits interms of risk, investment requirements, and strategic flexibility. Specifically, alliances canrange from long-term contracts that require a minimal investment to equity joint venturesthat require much larger resource commitments. This investment level in an alliance, inturn, impacts the alliances flexibility. Non-equity agreements primarily benefit SMEs byproviding access to critical inputs without forcing firms to commit extensive resources.Similarly, the terms of the agreement improves alliance flexibility, because the shorter the

agreement term, the quicker a firm can redeploy assets to adapt to uncertainty (Auster,1994). Thus, the risk associated with entering into a strategic alliance that does not meetthe needs of a changing environment is reduced.

SME managers facing an environment they believe is undergoing a temporary shockare likely to have a relatively high degree of confidence in the potential future states of theenvironment. Although managers may not be able to specifically predict which future statethe environment will result, the set of potential future states is relatively definable, andmanagers can employ strategic alliances to position their firms favorably regardless ofhow the temporary shock plays out. Given an SMEs limited resources, however, they areoften unable to afford large losses when the uncertainty is resolved. Thus, if managers

seek alliances to contend with increased uncertainty, they should favor non-equity alli-ances that both require a lower resource investment and afford higher flexibility than doequity agreements (Auster, 1994).

As noted, in Indonesia, the initial shock, although rather severe, appeared to beshort-lived. In terms of the environmental changes discussed above, the initial economicshock was caused by inflation, the rupiahs depreciation, and the IMFs imposition ofstringent economic controls. Although these events had some social and political reper-cussions (e.g., riots and Suhartos resignation), they only temporarily disrupted theeconomy given that the currency quickly stabilized. Thus, we would expect SMEs wouldprimarily seek non-equity alliance partners during this time period because such arrange-

ments provided both additional resources and strategic flexibility in responding to futureenvironmental states. More generally,

Hypothesis 2: For SMEs operating in an environment affected by a temporaryenvironmental shock, perceived environmental uncertainty will be positively relatedto non-equity alliance intentions.

In contrast, when faced with more permanent environmental change, SMEs mustoften make major strategic changes to survive (Zammuto & Cameron, 1985). Thus, afterrecovering from the initial shock and making some incremental changes to stabilize thefirm, managers often need to make more long-term, adaptive strategic changes (Pearce &

Robbins, 1993). If managers pursue an alliance in response to environmental changes,however, the nature of these alliances may differ from those sought to contend withtemporary change. Specifically, as noted, when facing temporary change, managers arelikely to believe that they can predict the potential range of future environmental states.In contrast, when facing permanent change, they are less likely to believe that they canaccurately predict future environmental conditions, resulting in higher uncertainty (cf.Milliken, 1987). Based on both RDT and IPT, they are likely to seek stronger agreementsboth to ensure a continued resource flow and to gather information about the changedenvironment (cf. Tallman & Shenkar, 1994). Thus, SMEs operating in an environmentimpacted by a permanent shock may be more likely to seek equity alliances that entail

more significant resource investment and provide tighter coupling with partners.As noted, in Indonesia, the follow-up shock, although rather short-lived, resulted inpermanent structural changes as the rupiah stabilized at significantly lower levels relative

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to major currencies and the government implemented changes that opened up theeconomy to foreign competition. Thus, we would expect SMEs would be more likely toseek new equity alliance partners during this time period. More generally,

Hypothesis 3: In SMEs facing permanent effects from an environmental shock,perceived environmental uncertainty will be positively related to equity allianceintentions.

Firm Strategic Orientation

Although environmental factors may be expected to significantly impact allianceintentions, extant research indicates that firm-level factors will also affect alliance forma-tion and use (Eisenhardt & Schoonhoven, 1996). These characteristics can influencealliance formation because they impact managers cognitive biases that influence theamount and type of information employed in making strategic decisions (Daft et al.,1988).

When faced with a massive environmental shock, perceived environmental uncer-

tainty is expected to significantly increase (Meyer et al., 1990). Yet, due to individualdifferences, managers across different firms are unlikely to perceive these changes equally(Miller & Friesen, 1982). One factor that has been shown to influence key managersperceptions and interpretations of the external environment is the firms strategic posture(Dickson & Weaver, 1997; Tyler & Steensma, 1998), which can range from entrepreneur-ial, characterized by risk taking in the face of uncertainty, to conservative (Covin & Slevin,1991).1 The willingness to take risks or employ a proactive strategy in the face ofuncertainty (i.e., a high entrepreneurial orientation) is not necessarily associated withexploiting inherently risky situations but rather may be associated with perceiving oppor-tunities where those with lower entrepreneurial orientations perceive greater uncertainty

(Palich & Bagby, 1995). Managers with more entrepreneurial strategic postures are,therefore, expected to better tolerate perceived uncertainty than those with less entrepre-neurial postures.

In terms of alliance use, research has shown that SMEs with higher entrepreneurialorientations are more likely to form alliances, in general, suggesting that managers inthese firms tend to focus more on alliance benefits rather than risks (Marino et al., 2002).Following an environmental shock, one particular important benefit alliances can provideis to increase options in terms of products, technologies, or skills that will allow firms tobetter adjust to uncertain future environmental situations (cf. Kogut, 1991). Thus, weexpect that more entrepreneurial firms in this situation would generally pursue more

alliances.2

Hypothesis 4: Following an environmental shock, entrepreneurial orientation will bepositively related to its strategic alliance intentions.

1. It is important to stress here that when we refer to entrepreneurial orientation, we are using this to describethe strategic posture of a firms enterprise strategy rather then the characteristics of any single individual.2. Given that research has only demonstrated a link between entrepreneurial orientation and total allianceusage (e.g., Marino et al., 2002), rather than a specific (e.g., non-equity versus equity) alliance type, weformulated a general hypothesis to investigate this link. In addition, extant research has yet to examine the link

between slack and alliance intentions; thus, we follow a similar course for the slack-alliance intentionhypothesis below. As noted in the Methods section, however, to gain additional insight, we investigateddifferences between alliance types for both hypotheses.



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Organizational Slack

An SMEs resource levels may also affect how its managers respond to environmentalshocks (Meyer, 1982). Although some heretofore valuable resources may become obso-lete following major economic transitions in emerging markets (Wright et al., 2005),managers can often redeploy more general resources in response to new environmentaldemands (Tan & Peng, 2003). One such resource involves organizational slack level,defined as the difference between total resources and demands on those resources, whichmanagers can use both to stabilize and adapt a firm in times of crisis (Cyert & March,1963). Slack, thus, serves as a cushion of excess resources that firms can use in adiscretionary manner to counter threats (Bourgeios, 1981).

Following a shock, firms having sufficient slack resources to cushion the blowthrough actions such as drawing down cash reserves or laying off excess personnel mayconsider multiple options in making strategic decisions because they can often buffer coreoperations and, in turn, postpone or even avoid making major strategic adjustments(Thompson, 1967). In contrast, firms lacking these resources may have fewer options, and,thus, must often quickly find solutions to respond (Chattopadhyay et al., 2001). In one ofthe few empirical studies examining slack in emerging market firms, Tan and Peng (2003)found that higher liquidity improved subsequent performance for organizations facingeconomic transition in China.

Although little research has empirically examined the connection between firm slacklevels and alliance decisions, we can posit, based on RDT, that firms with higher slacklevels can maintain their autonomy, and, in turn, eschew alliances with other firms,whereas those with lower slack may need to seek important resources externally viaalliances (Pfeffer & Salancik, 1978). For example, previous research has noted that firmswith higher slack levels were more likely to react with defensive (i.e., threat rigidity)responses following the onset of the Asian Financial Crisis in Singapore (Tan & See,2004), which, in turn, would suggest that these firms would also seek fewer alliances as

they search for remedies inside rather than outside the firm. This effect may be particularlypronounced on managerial alliance intentions following a shock given that volatilemarkets may increase the risks of engaging in alliances (e.g., increasing likelihood ofpartner opportunistic behavior) because of rapidly changing circumstances (Luo, 2007).Thus, following an environmental shock, we expect that firms with higher slack levelswould generally pursue fewer alliances, in general.

Hypothesis 5: Following an environmental shock, an SMEs slack resource levelwill be negatively related to its strategic alliance intentions.

Slack Interactions

Although a firms slack resource levels may impact how its managers respond toincreasing environmental uncertainty, some research suggests that the whether managersemploy slack as a buffer to environmental change or use it to fund innovation may dependon (1) the type of environmental change experienced and (2) the firms strategic orienta-tion. First Chattopadhyay et al. (2001) found that a firms slack level positively moderatedhow its managers responded to different environmental changes, enhancing both inter-nally and externally focused responses depending on the type of environmental threat

managers perceived.Second, research suggests that managers may have different motivations aboutemploying slack based on what Penrose (1959) termed their entrepreneurial ambition.

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Specifically, when a firm employs a more conservative strategy (e.g., one focusing onenhancing operating efficiency), its managers may be more likely to invest slack to bufferits technical core, thereby reducing the need for major strategic change (Cheng &Kesner, 1997). In contrast, when a firm employs a more proactive strategy (e.g., onefocusing on prospecting for new markets), its managers may be more likely to use slackto fund these initiatives (Mishina, Pollack, & Porac, 2004).

As noted, little research exists examining the direct or moderating link between slack

and alliance use. Based on findings from previous research, however, we posit thatfollowing an environmental shock, an SMEs slack levels will magnify managersresponses to environmental changes and provide them additional resources to invest in afirms current strategy. Thus,

Hypothesis 6a: Following an environmental shock, an SMEs slack resource levelwill positively moderate the relationship between perceived environmental uncer-tainty and strategic alliance intentions.Hypothesis 6b: Following an environmental shock, an SMEs slack resource level

will positively moderate the relationship between its entrepreneurial orientation andstrategic alliance intentions.

Methods

Sample

To examine our research questions, we sampled 1,000 manufacturing companies inthe Indonesian manufacturing sector. We used a randomized process sampling SMEs in all

industry subgroups across all provinces focusing on size and industrial classificationrepresentativeness. We considered a survey appropriate in this context because we wereinterested in perceptual uncertainty measures (Boyd, Dess, & Rasheed, 1993). Weemployed a key informant design, and addressed surveys to each firms owner or generalmanager. To ensure that the respondent was a key informant, we limited the sample tofirms having at least six, but not more than 500 employees. Theoretical support existssuggesting that firms of this size are extensions of the individuals in charge (Lumpkin& Dess, 1996). We developed mailing lists using the 1997 Manufacturing IndustryDirectory, issued by the Indonesian government.

We employed a mailing process that resulted in two samples, each facing a different

environmental situation. Sample 1 resulted from mailing questionnaires to SMEs inNovember 1997. A follow-up mailing was sent to the firms who did not respond within20 days. It quickly became apparent to the research team that a lower than expectedresponse was related, in part, to drastic changes from the environmental shock. Recog-nizing the unique and valuable opportunity this represented, the team decided that asecond wave of data collection would be valuable to determine how the shock impactedSMEs. Thus, we chose to delay until March 1998 to collect Sample 2, because it wasdeemed far enough from shocks onset that managers would have had time to react to theCrisis, but the event would be recent enough to still influence managerial perceptions. Toensure that length of time since the environmental shock would not contaminate our

results, the team set a cutoff date of December 1, with surveys received after that timeincluded in Sample 2. For this latter sample, a combination of mailed and hand collectedsurveys based on telephone appointments was used to increase the response rate.



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Response Assessment

Of the 1,000 surveys, 110 (11%) were returned as undeliverable due primarily toeither faulty addresses or business closings. Of the remaining 890 surveys 137 or15.4% were returned prior to the cutoff date for Sample 1. From the second mailing,148 surveys were returned, resulting in 285 total returned surveys for an overallresponse rate of 32%. Of the returned responses 14 (3 from Sample 1 and 11 fromSample 2) were excluded from the analysis due to missing, incomplete, or inconsistentdata. This process resulted in a total of 271 (134 in Sample 1, 137 in Sample 2) usable

responses or 30.4%.One hundred fifty three (91 in Sample 1, 62 in Sample 2) or 56.5% of the firmscurrently used strategic alliances. Responses by each industry subgroup are presented inTable 1.

Telephone surveys of 40 nonrespondents suggested that their nonresponse resultedprimarily from survey length and the feeling that it did not apply to their firms. Weasked for number of employees and whether a firm exported to compare them withrespondents, and no significant differences resulted, reducing concerns of nonresponsebias.

Measures

To allow us to focus on the effects the environmental shock would have on Indonesianmanagers, we used a previously tested model developed by Dickson and Weaver (1997) toguide our model development. To adapt this model to an emerging economy undergoingan environmental shock, we took two additional actions. First, Dickson and Weaveremployed current alliance use as their dependent variable. In contrast, we employed firmintentions to use strategic alliances in the future because, noting that intentions impactplanned behavior (Fishbein & Ajzen, 1975), previous studies have called for additionalresearch examining the process managers employ when forming their initial opinions, and

in turn, intentions regarding future alliance formation viability (Auster, 1994; Tyler &Steensma, 1998). Thus, this research is primarily concerned with how perceived environ-mental uncertainty influenced these intentions.

Table 1

Firm Response by Industry

Industrial subsector Sample 1 Sample 2

Food, beverage, tobacco, and kindred products 30 29

Wood and wood products 5 8

Printing 0 8

Rubber products 3 15

Metal product machines, tools, and other capital goods 20 4

Textiles and leather products, including footwear 9 32

Electronic computer components and instruments 9 3

Oil and gas equipment 1 1

Transportation 1 1

Others (e.g., plumbing fixtures, brass products) 57 36

Total 134 137

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Given the emerging market setting, we also reanalyzed all scales, including a factoranalysis for environmental perceptions and entrepreneurial orientation, as well as reliabil-ity analysis for each scale previously developed by Dickson and Weaver (1997). We detailresults of this analysis in the following sections.

Future Alliance Intention. We asked each key informant to indicate whether their firmintended to use any of ten different alliance types over the next 12 months. We then split

these into nonequity and equity alliances (see Appendix). This variable was codeddichotomously (0 = no, 1 = yes), and each alliance type was coded as the sum of thenumber of alliances that managers indicated they planned to use. We then summed theseresponses to create both a measure for both total alliance intentions as well as one for eachalliance type.

Environmental Uncertainty. To capture key informants perceived environmental uncer-tainty, we employed a scale that included items employed in previous perceived environ-mental uncertainty research (e.g., Khandwalla, 1977; Miller & Friesen, 1982). All itemswere measured using a 5-point Likert scale, and each was associated with one of four

constructs underlying perceived environmental uncertainty including competitive uncer-tainty, general uncertainty, potential for future growth and profits (reverse-scored), andtechnological uncertainty. Each item, except of those associated with growth and profits,was worded to reflect higher uncertainty.

Although previous research has shown these scales have adequate reliabilities, theygenerally had not been applied to either firms in either an emerging economy or thosefacing an environmental shock. We, therefore, factor analyzed the items using a principlecomponents analysis with varimax rotation, retaining items that loaded with a score ofover .5 and had no significant cross-loadings. The factor analysis resulted in four factorswith eigenvalues greater than one and explained of 62.9% of the variance. Our factor

loadings differed slightly from those of past research. For example, in our sample,perceptions of General Unpredictability grouped together on one factor. It is possiblethat in emerging economies, managers tend to perceive uncertainly more consistently intheir industry environment than do managers in the more mature economies whereresearchers have previously used this scale.

Entrepreneurial Orientation. The risk orientation of a firms strategic posture has beenshown to influence a firms propensity to pursue alliances (Tyler & Steensma, 1998).According to Covin and Slevin (1991), a firm whose management team has an entrepre-neurial strategic posture is characterized by risk taking in the face of uncertainty (p. 10).

We measured this factor by using an entrepreneurial orientation scale based on thework of Covin and Slevin (1988, 1989). The eight-item, 5-point scale (Overall a = .75;Sample 1 a = .75.; Sample 2 a = .76) assessed a firms strategic posture by measuring thetendency of the firms managers to be risk taking, innovative, and proactive towardcompetitors (see Appendix). Previous research has shown this scale to be valid andreliable in cross-cultural settings (Knight, 1997).

Organizational Slack. Previous research has predominantly measured slack employingeither financial variables to capture either objective (e.g., liquidity) or perceived (high/low) slack. We employed perceived measures for three reasons. First, we focused on

managers intended future actions, which may be more influenced by their perceptions ofcurrent resource levels than objective levels (Nohria & Gulati, 1996). Second, by employ-ing subjective measures, we were better able to gauge both current resource levels and



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demands, thereby avoiding the potential bias arising from focusing only on the former(Mishina et al., 2004). Third, we employed subjective rather than objective slack measuresbecause respondents might have felt the latter too sensitive to reveal. Previous researchhas demonstrated that how executives subjectively rate their own firms financial situa-tion correlates highly with objective measures (Dess & Robinson, 1984). We, therefore,employed a scale asking the respondent to rate their current satisfaction with their firmsslack level measured based on sales growth rate, cash flow, and ability to fund business

growth from profits (Bourgeios, 1981).

Control Variables. We also included three control variables in this study. First, to accountfor industry effects, we included indicator variables for each major industry group.Second, we dichotomously measured whether or not the firm engaged in internationalsales. Third, to account for the possibility that structural inertia, rather than our variablesof interest, was responsible for a firms intentions to use alliances, we also includedcurrent alliance use to control for the extent to which the firms dominant logic (Prahalad& Bettis, 1986), its preferred manner of doing business, simply favored the use of strategicalliances over other mechanisms to achieve firm goals. Managers indicated how many

(0 up to 5 or more) times their firms had recently employed each alliance type. Wethen summed these responses using the same non-equity/equity classification as FutureAlliance Intentions (see Appendix)

Survey Translation. Consistent with Brislins (1980) recommendations, the survey,originally developed in English, translated into Indonesian, and then back translated toensure translation reliability. Additionally, industry-specific terminology was altered toensure its appropriateness for use in Indonesia.

Data Analysis. To test hypotheses 1 through 5, we employed OLS regression. To test

hypothesis 6a and 6b, we employed moderated regression to assess whether the interac-tions between slack resources and both strategic posture and perceived environmentaluncertainty were significantly related to alliance intentions. In doing so, we first includedall variables as main effects and then introduced interaction terms created by multiplyingslack by strategic posture and perceived environmental uncertainty, respectively. We meancentered all three variables to reduce possible multicollinearity issues (Aiken & West,1991).

Results

Table 2 presents the means, standard deviations for each variable, as well as theintercorrelations among the variables. Examining this Table reveals that even thoughcurrent alliance use is significantly related to intentions to use future alliances, noevidence of multicollinearity exists among the variables. This conclusion is furthersupported by collinearity diagnostics in the regression equations used to test thehypotheses.

Results for hypothesis tests in temporary and permanent shock environments areshown in Tables 3 and 4, respectively. Hypotheses 1 stated that managers perceived

environmental uncertainty will positively influence a firms intentions to use alliances.Model 1 in both Tables 3 and 4 includes only control variables, and as a group, they aresignificant (p < .001 and p < .01, respectively) in both shock environments. Consistent

169January, 2008


14/27

Table

2

Mean

s,StandardDeviations(S

D),andCorrelations

Variable

M

SD

1

2

3

4

5

6

7

8

9

10

Sample1

1.Fu

tureequityallianceintentions

1.39

1.66

2.Fu

turenon-equityallianceintentions

1.42

1.56

.64***

3.Internationalsales

1.74

.44

.04

-.11

4.Cu

rrentequityallianceuse

3.37

5.30

.55***

.48**

*

-.09

5.Cu

rrentnon-equityallianceuse

4.58

6.03

.40***

.57**

*

-.21*

.63***

6.Co

mpetitiveuncertainty

8.42

2.94

-.16

-.00

-.15

.04

.11

7.Generaluncertainty

11.73

3.90

.16

-.03

.02

-.00

.04

.18*

8.Fu

turegrowthandprofits

5.29

2.03

.07

.07

.03

.10

.06

-.09

.02

9.Te

chnicaluncertainty

4.99

2.36

.01

.04

-.09

.16

.12

-.31***

.09

.17*

10.Strategicposture

20.63

6.81

.16

.20*

.10

.29***

.20*

.19*

.29***

.34***

.27**

11.Organizationalslack

9.67

2.80

.28***

.12

.17*

.21*

.10

-.16

.04

.14

-.06

.15

Sample2

1.Fu

tureequityallianceintentions

1.29

1.37

2.Fu

turenon-equityallianceintentions

.85

1.32

.51***

3.Internationalsales

1.80

.40

.07

-.15

4.Cu

rrentequityallianceuse

1.92

3.27

.53***

.40**

*

-.14

5.Cu

rrentnon-equityallianceuse

2.80

4.97

.15

.32**

*

-.32***

.55***

6.Co

mpetitiveuncertainty

8.96

2.60

-.17**

-.04

-.12

-.15

.01

.

7.Generaluncertainty

10.98

3.55

.11

.12

.36**

.23**

.23**

.25**

.

8.Fu

turegrowthandprofits

5.55

2.09

.04

.03

-.18*

.41***

.35***

-.10

.21**

9.Te

chnicaluncertainty

5.33

2.48

-.06

-.02

-.20**

.20*

.26**

.34***

.26**

.19*

10.Strategicposture

20.41

7.06

.06

.15

-.32***

.28***

.38***

.19**

.46***

.29***

.43***

11.Organizationalslack

9.19

2.58

.26***

.09

.01

.09

-.00

-.11

.03

-.03

-.26**

-.02

*p

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