institutional explanations of cross-border alliance modes: the case of emerging economies firms
TRANSCRIPT
Abstract and Key Results 0 Using a sample of 628 cross-border alliances established by emerging economies
firms across 25 manufacturing and service industries in 64 host countries in the period 1995-2004, we investigate the effect of institutional factors on the adoption of equity alliance mode.
0 The findings of this study contribute to empirical research in institutional theory, insti-tutional explanations of cross-border alliances and strategic behavior of emerging economies firms.
0 We find support for institutional explanations of the adoption of equity alliance mode by emerging economies firms.
0 We also find that institutional effects are contingent on the alliance location. When emerging economies firms establish alliances in developed host countries, their gov-ernance choice is most influenced by the normative pillar, followed by the cognitive pillar, with the regulatory pillar having a negligible effect. When the host countries are emerging economies, the regulatory pillar has the strongest influence followed by the cognitive pillar, with the normative pillar having an insignificant effect.
Keywords Emerging Economies · Cross-border Alliances · Alliance Mode · Institu-tional Theory · International Business Strategy
Institutional Explanations of Cross-border Alliance Modes: The Case of Emerging Economies FirmsSiah Hwee Ang · Snejina Michailova
rESEArCh ArTIClE
DOI 10.1007/s11575-008-0036-6
Manuscript received: August 2006 / Revised: December 2007 / Final revision received: April 2008.
Senior lecturer Siah hwee Ang (*)Department of Management and International Business, University of Auckland, Auckland, New Zealand.
Professor Snejina MichailovaDepartment of Management and International Business, University of Auckland, Auckland, New Zealand.
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Introduction
having been largely a net recipient of foreign direct investment for a number of dec-ades, emerging economies (EE) firms are increasingly expanding abroad. Outward for-eign direct investment by EE firms has risen from a modest amount in the early 1980s to US$ 174 billion in 2006 (UNCTAD n.d.). EE firms are motivated to internationalize in order to alleviate domestic institutional constraints, overcome latecomer disadvantages, counter-attack global rivals’ major foothold in the home country market, and exploit own competitive advantages in host countries (luo/Tung 2007). They are also moving abroad as a result of the internationalization knowledge they have accumulated from foreign firms in their home countries in the past.
EE firms’ international expansions take place through various modes, notably alli-ances, mergers and acquisitions, and greenfield ventures (hitt/Franklin/Zhu 2006). Few empirical researches have looked into the use of alliances vis-à-vis acquisitions in the context of EE firms. Initial evidence suggests that acquisition represents a more dominant mode than alliances (Ang/Michailova 2007). however, alliances have their merits. Alli-ances allow these firms to share risks and costs and also to reduce institutional uncertain-ties by partnering with local firms. Alliances are an efficient mechanism for building on established reputation and legitimacy offered by partners. however, little work has been done on alliances established by EE firms, with the few exceptions focusing mainly on alliance partner selection (hitt et al. 2000, hitt et al. 2004). To our knowledge, no study has addressed the issue of EE firms’ cross-border alliance modes.
Institutional theory is particularly relevant for explaining firm behavior as markets emerge (hoskisson et al. 2000). recent studies have utilized institutional theory to examine, among others, the role of business group affiliation on the survival of foreign subsidiaries of EE firms (Garg/Delios 2007), how institutional changes influence firms’ internationalization paths (Chittoor/ray 2007) and the relationships between institutional environments and foreign subsidiary ownership structure (Chan/Makino 2007). At the same time, empirical studies that have utilized institutional theory have not examined simultaneously the regulatory, normative, and cognitive institutional pillars, levitt and Nass (1989) and Palmer, Jennings, and Zhou (1993) being exceptions. This can result in potential bias as these pillars are interconnected (Mizruchi/Fein 1999). To avoid this, our study simultaneously examines the effects of all three institutional pillars.
The application of institutional theory to explain alliance governance mode is impera-tive. Cross-border alliances are an efficient mechanism to build legitimacy through part-nering with established firms. The three institutional pillars provide bases for legitimacy to compete. In addition, institutional theory takes into account cross-border differences in institutional arrangements. Governance mode decisions may be particularly sensitive to different forms of host country institutional pressures such as competition laws, value systems and business practices.
We examine host countries’ national institutional environments and how they affect EE firms’ choice of cross-border alliance governance mode. Using data of 628 cross-bor-der alliances established by EE firms across 25 manufacturing and service industries in 64 host countries over a 10-year period, we test the individual and relative effects of the regulatory, normative, and cognitive institutional pillars on the adoption of equity mode
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alliance. As research has shown that strategies adopted by EE firms may be contingent on alliance location (hu 1995, lee/Beamish 1995, luo/Peng 1999), we also test how these institutional effects differ for developed vis-à-vis emerging host countries. Our findings contribute to further empirical understanding of institutional theory, institutional explana-tions of cross-border alliances, and strategic behavior of EE firms.
Theoretical Background and Hypotheses
Alliances
Cross-border alliances represent a fast way to access assets and skills embedded in host countries (Kogut 1988). They reduce environmental uncertainty (Burgers/hill/Kim 1993) and insulate firms from environmental threats (DiMaggio/Powell 1983). Studies have documented significant differences in characteristics of international alliances from dif-ferent countries (Geringer/hébert 1991) and across industries (Kogut/Walker/Kim 1995). Many theoretical perspectives have been deployed to explain alliance mode, e.g., transac-tion cost economics (Williamson 1991, Oxley 1999), resource-based theory (Eisenhardt/Schoonhoven 1996), real options theory (Kogut 1991, Folta/Miller 2002), and learning and knowledge-based view (Zollo/reuer/Singh 2002). little, though has been done from the institutional theory perspective (Barringer/harrison 2000, Casson/Mol 2006). An appropriate alliance mode design can help guard against both internal and external uncer-tainties (Williamson 1991, Gulati/Singh 1998) and enhance alliance success (Parkhe 1993). The preference for a particular governance mode depends on the opportunism cost of leaking asset specificity to other firms (Pisano 1989, Williamson 1991, hennart/Zeng 2002, luo 2006) and cost of coordination (Gulati/Singh 1998).
The most common alliance mode comparison is the one drawn between equity and non-equity alliances (e.g., Osborn/Baughn 1990, Oxley/Sampson 2004). An equity alli-ance (commonly represented by a joint venture (JV)) is the pooling of assets in a common and separate organization by two or more firms who share joint ownership and control over the use and fruits of these assets (Kogut/Singh 1988). A non-equity alliance (NEA), on the other hand, refers to an arrangement between two or more firms that establish an exchange relationship but no joint ownership is involved. JVs have more hierarchical controls that provide greater coordination and information processing capabilities than organizational forms with fewer and weaker controls, such as NEAs (hennart 1988, Pisano 1989, Gulati/Singh 1998). As such, JVs also reduce coordination costs resulting from the extent of interdependence expected by the partners and appropriation concerns (Gulati/Singh 1998).
In alliances where ongoing activities require constant communication, negotiation and decision making, equity alliances provide a more efficient means to which standard oper-ating procedures can be put in place. Equity alliances also reduce cost related to complete ex-ante specification of ongoing activities and behavior requirements (Kogut 1988). As cross-border alliances face a complex variety of legal rules and procedures in the host countries, they are often associated with appropriation concerns. Appropriation concerns are common as ex-ante specifications in alliance contracts are not necessarily straight-
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forward (Oxley 1999) because in JVs partners’ interests tend to be more aligned using a separate entity that reduces the probability of opportunistic behavior. JVs also allow joint managerial control that enhances partners’ ability to monitor alliance activity (Arregle/hébert/Beamish 2007). Given these benefits of equity alliances, we expect EE firms to form few non-equity alliances when technology development is involved in the alliance. In addition, we would also expect EE firms not to have imperative to have majority-owned JVs as JVs themselves provide some level of appropriation protection.
Institutional Theory
Institutional theory (in its sociological form) suggests that institutional contexts – the combination of formal rules, informal constraints, and their enforcement characteristics – create an impetus for action patterns in organizations that may not necessarily reflect true efficiencies in a rational economic sense. In other words, firms require legitimacy on top of economic efficiency to survive and succeed (Scott 1995). According to Scott and Meyer (1994), an institutional model consists of several key elements. First, the origins of environmental rationalization reflect influences on the nature of organizing. Second, these origins lead to particular dimensions of a rationalized environment such that rules or ideologies describing or prescribing organizational practices create consistent changes in and across organizations. Third, these general rules and ideologies give rise to specific mechanisms that shape organizations and their functioning. Finally, the specific nature of a given organization with its peculiar identity and activity patterns exists as a product of institutional forces.
DiMaggio and Powell (1983) introduced the typology of coercive, normative, and mimetic institutionalization pressures. Through responding to coercion, expectations of norms and imitation, organizations demonstrate structural and procedural isomorphism (DiMaggio/Powell 1983). That is, organizations embedded in the same environment are believed to become structurally similar as they respond to similar institutional conditions. Such isomorphism has implications for organizations. First, they incorporate elements which are legitimated externally, rather than focusing on internal efficiency. Second, they employ external or ceremonial assessment criteria to define the value of structural ele-ments. Finally, the dependence on externally fixed institutions reduces turbulence and maintains stability (Meyer/rowan 1977). Building on DiMaggio and Powell (1983), Scott (1995) identified three distinct pillars of the institutional context: regulatory (cor-responding to coercive pressures), normative (related to normative pressures), and cogni-tive (elaboration of the concept of mimetic pressures).
Two particular features of institutional theory make it useful and appropriate to explain choice of alliance governance mode. First, institutional isomorphism leads to acquir-ing legitimacy and in that way promotes the survival and success of organizations. As mentioned earlier, cross-border alliances are an efficient mechanism to build legitimacy through partnering with already legitimate firms and governance mode choices may be determined to a considerable extent by the imperative of gaining and maintaining legiti-macy through adherence to institutional pressures. The three institutional pillars provide three related, yet distinguishable bases for legitimacy (Scott 1995) as organizations are rewarded for using structures, policies, and practices that are “desirable, proper or appro-
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priate within some socially constructed system of norms, values, beliefs, and definitions” (Suchman 1995, p. 574). Second, institutional theory is sensitive to cross-country vari-ation in institutional factors, arrangements and prescriptions. Although certain regula-tory institutional aspects have been integrated in transaction cost theory based models (Williamson 1991), the normative and cognitive institutional elements have not yet been incorporated in these models (roberts/Greenwood 1997). Governance mode decisions may be particularly sensitive to various national idiosyncratic institutional pressures, e.g., existing legal rules, value systems and cognitive practices.
Regulatory Pillar of Institutions
The regulatory pillar of institutions consists of rules and regulations, either taken for granted or well supported by public opinion or law enforcement (Starbuck 1976), that are intended to encourage certain behaviors and discourage others. The coercive mechanisms that govern the regulatory pillar of institutions are typically exercised by a powerful actor in order to gain compliance and can be associated with governmental mandate, resource interdependence, state-sponsored legitimacy, and more subtle political processes. Firms pursue activities that will establish and enhance their legitimacy, making them appear in agreement with the prevailing rules, regulations, and requirements of their business envi-ronments (Zucker 1977, Scott/Meyer 1983, Oliver 1991).
regulatory environments can be classified as less restrictive and more restrictive. In less restrictive contexts, governments introduce and protect policies based on goodwill and trust. Civil liberties, political rights, and media independence are well secluded, while laws and regulations are accepted and respected and corruption is minimized. In more restrictive environments, on the other hand, legal protection is weaker, governments are less effective, and policies and practices tend to be immature and ambiguous. In more restrictive environments the “rule of law” is not consistently and efficiently enforced, and the regulatory mechanisms are often deficient and untrustworthy.
Seeking legitimacy in more restrictive institutional environments is difficult because it is complicated to meet existing country-specific regulatory requirements and overcome regulatory restrictions and barriers. In such environments, having a local partner allows access to knowledge about host country rules and regulations and hence mitigates the lia-bility of foreignness (Zaheer 1995). In addition, more restrictive environments are often characterized by political instability. Foreign firms need to rely more strongly on already legitimate indigenous firms who possess knowledge of how to cope with such politi-cally unstable environment. Firms may opt for JVs to minimize the risks associated with political instability while at the same time gaining legitimacy through the local partner. JVs also provide greater information-processing capabilities than organizational forms with fewer and weaker controls, such as NEAs (Gulati/Singh 1998). These capabilities are needed in order to cope with the uncertainty caused by political instability. Thus, we argue that:
Hypothesis 1a. The less restrictive the regulatory institutions at the alliance location, the less likely EE firms will adopt the equity alliance mode.
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It can be argued that EE firms are more familiar with more restrictive regulatory insti-tutions as these firms had to deal with regulatory unprotectability and deficiency in their home country. As a matter of fact, this familiarity and the ability to deal with and capital-ize on institutional voids constitutes an important unique asset of EE firms which they can utilize to compete with multinationals in their home countries and in other EEs (Dawar/Frost 1999, Khanna/Palepu 2006). however, this familiarity with institutional constraints and voids is not likely to result in adopting NEA. legitimate actors in more restrictive regulatory contexts have traditionally been acting in low information transparency envi-ronments and have been adopting command structures as a way of dealing with high uncertainty. The equity alliance mode provides some of these mechanisms.
Developed countries represent a less familiar environment for EE firms. Although developed economies’ investment into EE has helped EE firms gain substantial interna-tionalization knowledge, it has not provided detailed insights into dealing with regulatory conditions and specificities in developed economies. Thus inward investment alone is inadequate of curtailing an EE firm’s liability of foreignness, particularly in more advanced markets (luo/Tung 2007). Being motivated to learn more and faster about coping with relevant actors who define the regulatory environment in the developed countries, and through that, gain and increase legitimacy, EE firms will emphasize the establishment and importance of exchange relationships rather than equity arrangements. In addition, if an EE firm perceives an appropriability regime to be strong as in the case of less restrictive regulatory environments, it is less likely to be concerned about appropriation and will thus adopt NEA.
An illustrative example is Indian pharmaceutical company ranbaxy laboratories, which has JVs and NEAs in 46 countries. It entered into a NEA with Japanese Nippon Chemiphar in 2002. The less restrictive institutional environment of Japan did not neces-sitate the cost of setting up a JV even though the firm faced uncertainty in the Japanese market. In 2005, after legitimacy has been established, the firm started considering the need for greater presence and appropriating from the venture. Consequently, it trans-formed the NEA into a JV.
Hypothesis 1b. The negative relationship between the degree of restriction at the alli-ance location and the likelihood that EE firms will adopt the equity alli-ance mode is stronger in developed host countries than in emerging host countries.
Normative Pillar of Institutions
The normative institutional pillar is embodied in the form of national culture of a given country. It reflects assumptions, value systems, norms, and beliefs about human behav-ior that are socially shared and commonly accepted by individuals. This pillar brings a prescriptive, evaluative, and obligatory dimension into social life and as such determines the legitimate means to pursue valued ends (Scott 1995). legitimized actions are socially constructed and evolve through ongoing interactions into the norm of acceptable behav-iors (Meyer/rowan 1977). Normative mechanisms are brought about by professions and
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are related to cultural expectations that actors feel compelled to honour – often because they are rooted in professional affiliations (DiMaggio/Powell 1983). Pressures may also come from cultural expectations of other organizations which actors depend upon, in the form of governmental mandates, contract laws, financial reporting requirements, and other norms and rituals of conformity to wider institutions. Normative isomorphism occurs when organizations show behavioral patterns considered appropriate in the envi-ronment. It has been suggested that where formal constraints, e.g., laws, regulations, and systems fail, informal constraints, e.g., norms of behavior, values, and attitudes will come into play (North 1990).
A challenge to obtaining social legitimacy in a host environment is cultural distance. In order to conform to the local environment, firms need to tap into the collective mental maps and understandings of the host environment (hofstede 2001). Cultural distance tends to create costs related to the transferability of skills, knowledge, and systems across borders (Fladmoe-lindquist/Jacque 1995). Cultural similarity, on the other hand, has been found to be positively related to the likelihood of continued cooperation (Chen/Boggs 1998) and to problem solving and satisfaction within a partnership (lin/Germain 1999).
Small to medium cultural distance can lead to complementarity (Gong et al. 2001) and JV efficiency and competitiveness (Pothukuchi et al. 2002). In fact, interactions involving small to medium levels of cultural distance may actually pose less problems than inter-actions involving culturally similar actors (Ghemawat 2003, rugman/Verbeke 2004). For instance, leung, Wang, and Smith (2001) found that when managers need to work with colleagues from another culturally distant environment, the awareness of cultural distance may trigger anticipatory adjustment behaviors that assist them in coping more effectively. Conversely, expectations on culturally similar partners might lead to negli-gence and taken for granted behaviors.
Being knowledgeable about and experienced in environments dominated by informal mechanisms, EE firms may be less willing to invest in elaborated and sophisticated con-figurations in host countries that are culturally not very distant from them (e.g., other EEs). This phenomenon is well illustrated by three alliances that China’s haier Group has entered between late 1990s and early 2002. haier first entered into a JV with hong Kong’s CCT Telecom holdings to market its products in hong Kong. Then it formed a JV with Japan’s Sanyo and then a NEA with Taiwan’s Sampo to market each other’s products in their respective countries. Bearing in mind that the cultural distance between China and hong Kong is the smallest, followed by that between China and Taiwan and finally China and Japan, these alliance mode choices illustrate a non-linear relationship between cultural distance and equity alliance mode adoption.
When the cultural distance increases, firms will find it more difficult to respond to the local legitimating actors and will be more likely to rely on their host partners to gain and sustain legitimacy. The use of JVs can mitigate problems associated with substantial differences in and the lack of knowledge about norms, values, and assumptions that con-stitute the foundation of both organizational and individual behavior.
In summary, when cultural distance is small to medium, we expect the likelihood to adopt equity alliance mode to decrease due to increased costs and the need to remain flex-ible to exploit complementarity. Beyond a certain threshold, i.e., when cultural distance
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becomes too large, we expect the likelihood of adopting the equity mode in alliances to increase for better control.
Hypothesis 2a. Cultural distance has a U-shaped relationship with the likelihood of EE firms to adopt the equity alliance mode.
EE firms can expect to encounter cultural impediments to their alliances in developed countries due to larger cultural distance as compared to the distance to most other EE countries. At the same time, cultural norms can vary significantly across EE countries (Khanna/Palepu/Sinha 2005). Thus, even when an EE firm enters another EE host coun-try, it needs to work out the specific expectations of norms, values, and appropriate behav-iors in this host country. In comparison, it is easier to access information pertaining to potential cultural impediments in developed host countries. As such, when facing similar cultural distance in developed vis-à-vis emerging host countries, EE firms are likely to have a stronger anticipation and higher appreciation of the cultural differences between them and developed host countries. This makes them less likely to adopt equity alliances (at all levels of cultural distance).
Hypothesis 2b. The U-shaped relationship between cultural distance and the likelihood of EE firms to adopt the equity alliance mode is stronger in developed host countries than in emerging host countries.
Cognitive Pillar of Institutions
Firms’ strategic decisions are determined partially by the cognitive categories their deci-sion makers construct as they make sense of their environment (haveman 1993). Meyer and rowan (1977) and Zucker (1977) described firms as composites of cultural rules rationalized through the actions of professions, the state, and mass media, and viewed firm performance as inherently social, depending to a great extent on conformity to rational-ized rules, and requirements necessary to acquire needed social support and resources and to be perceived as legitimate.
Mimetic isomorphism relates to conformity through imitation of other referent actors whose behavior appears to be effective (DiMaggio/Powell 1983), hence substituting institutional rules for technical rules (Meyer/Scott/Deal 1983). It is an efficient survival strategy, particularly under conditions of uncertainty as it allows firms to gain cognitive legitimacy by imitating responses to environmental pressures (Zucker 1977, Oliver 1991). Thus, if there are substantial preferences among social actors for an action that result in it being institutionalized, others will follow in order to acquire status-conferring legitimacy in a wider social structure (DiMaggio/Powell 1983, haveman 1993). Not following the legitimated course of action is likely to result in being perceived as less responsive or less effective. Uncertainties may be higher for EE firms as few have international experience. In the presence of uncertainty and lack of prior experience in a host country, EE firms’ mimetic behavior may be intensified.
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Different industries within the same country tend to be embedded in different institu-tional conditions and governments apply different governance mechanisms in different industries (Gimeno et al. 2005). Firms tend to be more receptive of signs coming from other actors in a more narrowly defined environment such as an industry than to others in a more broadly defined environment (Chan/Makino/Isobe 2006). Firms are thus more likely to imitate competitors within their industry as they are viewed as more important competitors than firms from other industries (haveman 1993). In addition, firms are also more likely to view competitors that are present in the same host country as more direct competitors than those that are not present in that host country. lu (2002) found that a firm’s propensity to utilize JVs depends on the frequency of use of JVs by peer firms. A firm is also more likely to imitate firms that have the same country of origin rather than firms from other countries (haveman 1993, Shaver/Mitchell/Yeung 1997). They are also likely to follow the strategy of other firms who are perceived as firms within the same cluster. Thus, EE firms are also more likely to mimic behavior of those firms that come from other EE countries. We therefore hypothesize the following:
Hypothesis 3a. The greater the prior proportion of equity alliances adopted by other EE firms in the same industry and host country as the focal alliance, the more likely a focal EE firm will adopt the equity alliance mode.
EE firms may have an advantage in entering other emerging countries as they are more familiar with and better prepared for handling underdeveloped institutional environments (hu 1995, lee/Beamish 1995), though this will be contingent on host country conditions (luo/Peng 1999). EE firms may also have advantage in emerging host countries due to the need of developed country firms to adjust their business models as the dynamics of emerging countries is different from other more market-oriented markets (Prahalad/lie-berthal 1998). In addition, EE firms may have disadvantages in developed countries as they may be under-resourced to compete in a less restrictive environment (hu 1995). These arguments suggest that EE firms will imitate more often in developed vis-à-vis emerging host countries.
Hypothesis 3b. The positive relationship between the prior proportion of equity alli-ances adopted by other EE firms and the likelihood of EE firms to adopt the equity alliance mode is stronger in developed host countries than in emerging host countries.
Data and Methodology
Sample
We focus on cross-border JVs and NEAs established by firms from the four largest EEs, namely Brazil, russia, India, and China, commonly known as the BrICs, in the period 1995-2004. An UNCTAD survey showed that the BrICs are four of the five most attrac-
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tive investment locations in the world, U.S. being the other (UNCTAD 2005). More impor-tantly, their role as outflow investors is growing in the world economy (OECD 2005).
We collect information on cross-border alliances established by BrIC firms in 25 man-ufacturing and service industries from SDC Platinum, a database developed by Thomson Financial. The database contains worldwide announcements of alliances through examin-ing stock exchange filings, trade publications, and news sources. For each alliance case, we collect information about alliance mode, date, status, location, and SIC codes of the alliances, and the nationalities and SIC codes of partners of the alliances. We focus on alliances with only two partners to avoid complications in calculating regulatory and normative institutional pillars. In addition, we discard cases whereby hofstede’s (2001) cultural dimensions scores (normative pillar of institutions) are not available. In cases
Table 1. Descriptive Statistics of Sample AlliancesBrazil russia India China Total
SectorManufacturing 27
(6.8)65
(16.4)128
(32.3)176
(44.4)396
(63.1)Services 16
(6.9)19
(8.2)109
(47.0)88
(37.9)232
(36.9)Total 43
(6.8)84
(13.4)237
(37.7)264
(42.0)628
(100.0)Governance Mode
Joint Venture 24(6.9)
47(13.5)
107(30.7)
171(49.0)
349(55.6)
Non-equity Alliance 19(6.8)
37(13.3)
130(46.6)
93(33.3)
279(44.4)
Total 43(6.8)
84(13.4)
237(37.7)
264(42.0)
628(100.0)
Alliance Location
U.S. 19(10.9)
19(10.9)
73(42.0)
63(36.2)
174(27.7)
Europe 7(5.3)
46(34.6)
49(36.8)
31(23.3)
133(21.2)
Japan 1(2.1)
2(33.3)
18(38.3)
26(55.3)
47(7.5)
BRICa 1(2.5)
7(17.5)
22(55.0)
10(25.0)
40(6.4)
Americas (less U.S.) 13(41.9)
4(12.9)
6(19.4)
8(25.8)
31(4.9)
Asia (less Japan) 1(0.7)
2(1.4)
35(24.3)
106(73.6)
144(22.9)
Others 1(1.7)
4(6.8)
34(57.6)
20(33.9)
59(9.4)
Total 43(6.8)
84(13.4)
237(37.7)
264(42.0)
628(100.0)
Note: Percentages in brackets.a. This refers to firms of one of the BrIC economies forming alliances in the other 3 BrIC economies.
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whereby two BrIC firms enter a third country or when a BrIC firm allies with a partner in two locations, these are treated as two entries as two alliance decisions have been made in each of these observations. These procedures leave us with 628 alliances in 64 alliance host countries for analysis. Table 1 shows some descriptive statistics of our sample alli-ances. Within the sample, 63.1 percent of the alliances are established in the manufactur-ing sector and 55.6 percent are JVs (equity alliances). The sample alliances reside mainly in the U.S. (27.7 percent), followed by Asia (less Japan) (22.9 percent) and Europe (21.2 percent). We also find that the majority of JVs are relatively evenly split between the BrIC firm and its partner (230 of the 349 JVs) and BrIC firm is the majority-owned partner in few of the JV cases (45 of the 349 JVs). Only 38 cases of the NEAs involve some elements of technology development and 10 of these 38 cases involve co-produc-tion and/or co-marketing activities.
Operationalization of Variables
Dependent Variable
The adoption of equity alliance mode is the dependent variable for the hypotheses. Fol-lowing previous research, we categorize alliances into either equity alliances (represented by JVs) or NEAs (Osborn/Baughn 1990, Oxley/Sampson 2004). This is coded as a dummy variable, where 1 represents equity alliances and 0 represents NEAs.
Independent Variables
Regulatory Pillar of Institutions
The regulatory pillar of institutions is operationalized based on a composite measure of six dimensions of governance as calculated by the World Bank (Kaufmann/Kraay/Mas-truzzi 2005). The six dimensions include various aspects of the political process, civil liberties, and political rights, as well as the independence of the media, the perceptions of the likelihood that the government in power will be destabilized or overthrown by possibly unconstitutional and/or violent means, inputs required for the government to be able to implement good policies and deliver public goods, incidence of market-unfriendly policies such as price controls or inadequate bank supervision, the extent to which agents have confidence in and abide by the rules of society, and the perceptions of corruption. These are compiled over 209 countries on a bi-annual basis starting from 1996. They are based on 352 individual variables measuring perceptions of governance, drawn from 37 separate data sources constructed by 31 different organizations, including the World Bank, World Economic Forum and the Institute for Management Development. They are normalized and thus measured on a relative basis across the 209 countries.
As this data is bi-annual, we use each year’s score to represent two years in our sample, that is, we use the governance score for 1996 as the measure for the regulatory institu-tions for 1995 to 1996, the score for 1998 for the period 1997 to 1998, etc. This proxy is reasonable as the fluctuations of scores between two adjacent periods within each dimen-sion are minimal, with pairwise correlations of the periods within each dimension greater
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than 0.832 across all dimensions. We also find that these six dimensions are highly cor-related with pairwise correlations of greater than 0.732. Thus, we take the mean score of these dimensions to indicate the degree of regulatory institutions. higher scores mean less restrictive regulatory institutions at the alliance location.
Normative Pillar of Institutions
Following previous research, we use cultural distance as a measure of normative institu-tions (e.g., Giacobbe-Miller et al. 2003). Cultural distance is defined as the difference between the national culture of a focal BrIC firm and those of the host countries for the alliances. We adopt the composite measure suggested by Kogut and Singh (1988) with the formula:
where CDjk is the cultural distance between alliance host country j and BRIC k, Dij is the score for country j for the ith cultural dimension (where i = power distance, uncertainty avoidance, masculinity/femininity and individualism/collectivism), Dik is the score for BRIC k for the ith cultural dimension, and Vi is the variance of the index for the ith cultural dimension.
Cognitive Pillar of Institutions
We use mimetic cross-border JV adoption as the measure of cognitive institutions. As we do not have outcome measures of mimetic behavior (e.g., haunschild/Miner 1997), we adopt the frequency-based measurement (e.g., haveman 1993, Yiu/Makino 2002). In this study, this is operationalized as the proportion of JVs to all alliances established in the same industry at the alliance host country by EE firms in the two years prior to the focal alliance.
In order to measure this variable, we rely on the SDC Platinum database to extract all alliances (between two partners) formed in the 64 alliance host countries in both manu-facturing and service sectors over the period 1993 to 2003. This totals to 39,673 alliances, with 13,478 JVs and 26,195 NEAs. We then single out 2-partner alliances involving at least one EE firm. EE firm is defined as any firm that is based in an EE country. The iden-tification of an EE country is based on World Bank’s classification of countries based on GNI per capita (World Bank 2005a). Using this definition, countries with GNI per capita of US$ 10,066 or more are classified as developed, and the rest are classified as EE. This leaves us with 8521 alliances. We then code the alliance data on the number of JVs and NEAs that have been established in each industry in each of the alliance host countries in each year. For each alliance in the sample, we then tally the number of JVs and NEAs established in the same industry and location in the prior two years. In order to adjust for the difference of observing alliances with two EE firms with those that involve only one EE firm, we take the score of 1 if an alliance has two EE partners and 0.5 when there is
CD D D Vjk ij ik ii
= −=∑{( ) / }/2
1
4
4
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only one EE firm involved in the alliance. The reason for this is that in the former case, a BrIC firm observing will notice that two other EE firms, as opposed to one in the lat-ter case, have made the decisions to adopt a specific alliance mode. Finally, we take the proportion of JVs to the total number of alliances as the measurement of mimetic cross-border JV adoption.
Control Variables
We control for a few firm, dyad, and alliance variables for their effects on alliance mode. We control for the origin of the BrIC firms. Though BrICs belong to the aggregate group of EE, they are quite different in their political and social systems, openness, product markets, labor markets, and capital markets (Khanna/Palepu/Sinha 2005). For example, China has an average GDP growth of 9.47 percent in the period 1990-2004 while those of India, Brazil and russia are 5.67 percent, 2.07 percent and 1.13 percent respectively (World Bank 2005b). We code the origins into four dummy variables, with China as the base group. We also control for GDP growth to reflect the stage of development of each BrIC over the 10-year period.
A dummy variable is used to control for whether the alliance is in the manufacturing or service sector. Manufacturing usually incurs greater capital commitments and asset specificity, while service tends to be more customized and highly perishable. Such funda-mental differences may affect the way the alliances are structured. The dummy variable is coded as 1 if the alliance is in the manufacturing sector.
Partner compatibility has been shown to have effects on alliance formation and out-comes (Kogut/Walker/Kim 1995, hitt et al. 2000). We control for whether the partners in an alliance are the same firm type. Firm type in our study includes public listed com-panies, private companies, subsidiaries, government-owned companies, JVs, and invest-ment companies. Firm type is an indicator of the firm’s resources, reputation, and the ability to access resources. For example, public listed firms and subsidiaries may have better access to resources from public sources and parent companies respectively. We code a dummy variable 1 if the partners have the same firm type. 76.9 percent of the alli-ances have a local partner involved. local partners are usually utilized for access to local market knowledge and for overcoming various institutional restrictions, and thus may have an effect on the alliance mode adopted. We code a dummy variable 1 if the partner of the alliance originates from the host country of the alliance.
We also control for the industry of the BrIC firm, the partner, and the alliance. Allying firms from the same industry are expected to have common industry contexts and closer complementary competence bases. In addition, the similarity between partners is closely related to their ability and speed to recognize and assimilate new external information and technological capability (Chung/Singh/lee 2000). Thus, partners from different indus-tries tend to adopt alliance mode that helps to reduce uncertainty. We introduce three dummy variables for the relatedness of the SIC codes of the BrIC firm to the partner’s. These are ‘BrIC and partner in same industry’, ‘BrIC and partner in related industries’, and ‘BrIC and partner in unrelated industries’. Therefore, if the SIC 4-digit code of the main business of the BrIC firm is the same as that of its partner, the ‘BrIC and partner in same industry’ variable will be coded as 1, and the other two variables will be coded as
564 MIr 2008 | 5Ta
ble 2
. Co
rrela
tion
Mat
rix (n
=628
)Va
riabl
eM
ean
S.D
.(1
)(2
)(3
)(4
)(5
)(6
)(7
)(8
)(9
)(1
0)(1
1)(1
2)(1
3)(1
4)(1
5)(1
6)(1
7)(1
8)(1
)Jo
int
vent
ure
0.56
0.50
(2)
regu
lato
ry
gove
rnan
ce0.
990.
81-0
.12
(3)
Cultu
ral
dista
nce
1.88
1.12
-0.0
20.
44
(4)
Mim
etic
JV
adop
tion
0.48
0.28
0.22
-0.1
3-0
.06
(5)
BRIC
na
tiona
lity
is Br
azil
0.07
0.25
0.00
0.05
0.04
-0.0
5
(6)
BRIC
na
tiona
lity
is ru
ssia
0.13
0.34
0.00
-0.0
70.
080.
11-0
.11
(7)
BRIC
na
tiona
lity
is In
dia
0.38
0.49
-0.1
6-0
.06
-0.1
9-0
.13
-0.2
1-0
.31
(8)
BRIC
na
tiona
lity
is Ch
ina
0.42
0.49
0.16
0.08
0.12
0.07
-0.2
3-0
.34
-0.6
6
(9)
GD
P gr
owth
6.41
3.61
0.07
0.04
-0.0
3-0
.05
-0.2
8-0
.56
-0.1
10.
64
(10)
Alli
ance
in
man
ufac
tu-
ring
sect
or
0.63
0.48
0.26
-0.0
90.
070.
29-0
.00
0.12
-0.1
50.
06-0
.04
(11)
BRIC
&
partn
er a
re
sam
e fir
m
type
0.35
0.48
-0.1
2-0
.18
-0.0
3-0
.05
0.05
0.04
0.13
-0.1
8-0
.12
0.03
MIr 2008 | 5 565(1
2)Pa
rtner
is
loca
l firm
in
hos
t co
untry
0.77
0.42
-0.0
30.
050.
13-0
.03
-0.0
50.
04-0
.01
0.01
-0.0
10.
100.
08
(13)
BRIC
&
partn
er
in sa
me
indu
stry
0.24
0.43
-0.1
2-0
.07
-0.0
0-0
.06
0.07
0.04
0.02
-0.0
8-0
.08
0.02
0.16
0.04
(14)
BRIC
&
partn
er
in re
late
d in
dustr
y
0.09
0.29
-0.0
40.
06-0
.04
-0.0
40.
02-0
.06
0.09
-0.0
6-0
.04
-0.1
3-0
.06
-0.0
5-0
.18
(15)
BRIC
&
partn
er in
un
rela
ted
indu
stry
0.67
0.47
0.13
0.03
0.02
0.07
-0.0
80.
01-0
.07
0.11
0.10
0.06
-0.1
1-0
.01
-0.8
0-0
.46
(16)
BRIC
&
allia
nce
in sa
me
indu
stry
0.36
0.48
0.03
-0.0
6-0
.06
0.04
0.05
-0.0
40.
05-0
.04
-0.0
50.
110.
10-0
.04
0.23
0.12
-0.2
8
(17)
BRIC
&
allia
nce
in re
late
d in
dustr
y
0.08
0.27
-0.0
20.
000.
04-0
.03
-0.0
30.
050.
05-0
.06
-0.0
50.
020.
070.
09-0
.00
0.28
-0.1
7-0
.22
(18)
BRIC
&
allia
nce
in
unre
late
d in
dustr
y
0.56
0.50
-0.0
10.
060.
04-0
.02
-0.0
30.
02-0
.07
0.08
0.07
-0.1
2-0
.13
-0.0
0-0
.22
-0.2
60.
36-0
.85
-0.3
3
(19)
Alli
ance
lo
catio
n is
deve
lope
d co
untry
0.74
0.44
-0.1
60.
860.
39-0
.17
-0.0
3-0
.15
-0.0
10.
130.
10-0
.15
-0.1
20.
05-0
.11
0.08
0.05
-0.0
80.
010.
07
| r |
> 0.
066
– p
< 0.
10; |
r | >
0.0
78 –
p <
0.0
5; |
r | >
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8 –
p <
0.01
; | r
| > 0
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– p
< 0.
001.
566 MIr 2008 | 5
0s. We also create a similar set of dummy variables for the relationship between industries of BrIC firm and alliance. Finally, we control for the developmental stage of the alliance location, i.e., whether it is a developed or emerging country using a dummy variable. The classification of the alliance location into developed or emerging country is based on the definition adopted by World Bank (World Bank 2005a). Table 2 shows the summary statistics and correlation matrix of the variables used in this study.
Results
We use logistic regression for testing the hypotheses as the dependent variable in this study, the likelihood to adopt equity alliance mode, is a dichotomous variable. As previ-ous research has suggested that failure to discuss the three pillars of institutions simul-taneously may lead to biased interpretations (Mizruchi/Fein 1999), we include all three pillars of institutions within single regression models in our analysis.
Table 3 shows the logistic regression results. Model 1 and Model 2 show the baseline and full models for the analysis of the pooled sample. In Model 2, regulatory governance has a positive insignificant effect on the likelihood to adopt equity mode. This is contrary to our prediction in hypothesis 1a. Thus, hypothesis 1a is not supported.
In order to test hypothesis 1b on the relative effects of regulatory governance in devel-oped vis-à-vis emerging host countries, we split the sample into two groups, one whereby the alliance host location is a developed country and the other whereby it is an emerging country. Model 3 and Model 4 show the baseline and full models for the analysis of alli-ances in developed host countries and Model 5 and Model 6 show the baseline and full models for the analysis of alliances in emerging host countries.
In Model 4, regulatory governance is found to have a negative effect on the likelihood to adopt equity alliance mode though the impact is insignificant. In Model 6, it is found that regulatory governance has a positive impact on the likelihood to adopt equity alliance mode. In order to compare the results across these models, we calculated the unit change in each of the cases using the formulae e ex x/( )1+ where x is the coefficients presented in the results table. For example, the change in the adoption of equity alliance mode in emerging host country per unit change in regulatory governance is e e0 768 0 7681. ./( )+ which is 0.683. It is evident in this case that the negative effect of openness of regulatory institutions at the alliance location on the likelihood to adopt the equity alliance mode is stronger in developed host countries, thus supporting hypothesis 1b.
Model 2 also shows that the cultural distance variable has a negative significant rela-tionship while its squared term has a positive significant relationship with adoption of equity alliance mode. This suggests a U-shaped relationship. As cultural distance increases, the likelihood to adopt the equity mode decreases. however, at higher levels of cultural distance, i.e., beyond a threshold, the likelihood to adopt the equity mode increases. hypothesis 2a is thus supported.
Model 4 shows this relationship in the case of developed host countries. The result is consistent with that in the overall sample. In Model 6, although the signs of the cultural distance variable and its squared term are both consistent with a U-shaped relationship, the coefficients are insignificant. The contribution of these cultural distance variables
MIr 2008 | 5 567
Table 3. logistic regression results on the likelihood to Adopt Equity Alliance ModePooled Sample Developed host
CountryEmerging host
CountryVariable Model 1 Model 2 Model 3 Model 4 Model 5 Model 6Intercept 1.029*
(0.473)0.728+
(0.554)-0.336(0.515)
0.027(0.727)
2.560**(0.982)
2.231*(1.182)
BrIC nationality is Brazil -0.300(0.427)
-0.067(0.439)
-0.153(0.521)
0.204(0.537)
-0.687(0.881)
-0.681(0.924)
BrIC nationality is russia -0.595+(0.409)
-0.543+(0.417)
-0.431(0.543)
-0.267(0.557)
-1.035+(0.663)
-1.152+(0.744)
BRIC nationality is India -0.708**(0.232)
-0.540*(0.240)
-0.748**(0.277)
-0.524*(0.290)
-0.876*(0.525)
-0.528(0.567)
GDP growth 0.000(0.037)
0.019(0.038)
0.045(0.047)
0.062(0.048)
0.140*(0.079)
-0.133+(0.084)
Alliance in manufacturing sector 1.029***(0.186)
0.920***
(0.195)1.266***(0.215)
1.212***(0.228)
0.336(0.465)
0.340(0.502)
BrIC & partners are same firm type
-0.490**(0.189)
-0.476**
(0.195)-0.395*(0.231)
-0.472*(0.239)
-0.711*(0.376)
-0.404(0.407)
Partner is local firm in host country
-0.189(0.210)
-0.161(0.214)
-0.196(0.251)
-0.160(0.256)
0.074(0.420)
0.224(0.440)
BRIC & partner in same industry
-0.718***(0.220)
-0.721***(0.225)
-0.771**(0.273)
-0.774**(0.279)
-0.528+(0.393)
-0.702*(0.412)
BRIC & partner in related industry
-0.179(0.328)
-0.203(0.335)
-0.337(0.368)
-0.387(0.374)
0.782(1.210)
0.438(1.262)
BRIC & alliance in same industry
0.185(0.202)
0.177(0.204)
0.463*(0.243)
0.501*(0.246)
-0.414(0.400)
-0.715*(0.429)
BRIC & alliance in related industry
0.084(0.364)
0.172(0.374)
-0.197(0.429)
-0.036(0.440)
1.447(1.147)
1.272(1.211)
Alliance location is developed country
-0.855***(0.213)
-0.803*(0.414)
regulatory governance 0.061(0.224)
-0.309(0.307)
0.768*(0.397)
Cultural distance -0.591*(0.274)
-0.651*(0.325)
-0.622(0.728)
Cultural distance 2 0.149**(0.061)
0.154*(0.069)
0.156(0.219)
Mimetic JV adoption 0.934**
(0.344)0.793*
(0.404)1.270*
(0.770)-2 log likelihood 770.64*** 754.52*** 561.58*** 548.54*** 186.57 178.79+
d.f. 12 16 11 15 11 15Δ -2 log likelihood 16.12(4)** 13.04(4)** 7.78(4)+
Marginal contribution of regula-tory governance (Δχ2)
0.08(1) 1.02(1) 3.86(1)*
Marginal contribution of cultural distance (Δχ2)
6.98(2)* 5.94(2)+ 0.83(2)
Marginal contribution of mime-tic JV adoption (Δχ2)
7.51(1)** 3.90(1)* 2.82(1)+
Number of alliances 628 628 163 163 465 465+p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001
568 MIr 2008 | 5
to the model is also insignificant (based on the marginal contribution entry). Thus, the U-shaped relationship between cultural distance and the likelihood of EE firms to adopt the equity alliance mode is stronger in developed host countries than in emerging host countries, supporting hypothesis 2b. It is important to note that the change in adoption of equity alliance mode as a result of a unit change in cultural distance is the same for both cases, though significance levels differ.
In Model 2, mimetic JV adoption is found to have a positive effect on the likelihood to adopt equity alliance mode, i.e., the greater the proportion of JVs to all alliances estab-lished in the same industry and host country as the focal alliance in the prior two years, the more likely that the equity mode will be adopted for a new alliance formed by an EE firm. hence, hypothesis 3a is supported. Comparing the change in adoption of equity alliance mode, we also find that the effect of mimetic JV adoption is stronger in the case of developed host countries, thus supporting hypothesis 3b.
We test the marginal contribution of each of the pillars in each case using chi-square tests. For the case of developed host countries, the normative pillar has the largest contri-bution, followed by the cognitive pillar, while contribution of the regulatory pillar is neg-ligible. For the case of emerging host countries, the regulatory pillar is the most important element. This is followed by the cognitive pillar. The contribution of the normative pillar is negligible. Two observations stand out here. First, it is evident that the three pillars have differentiated effects on the likelihood to adopt equity alliance mode. Second, this difference in effects of the three institutional pillars is contingent on whether the alli-ance location is developed or emerging. Separate analyses using only individual pillars of institutions produce consistent results.
The control variables have similar effects on adoption of equity alliance mode across all regression models, with varying significance levels for the developed and emerging host countries. Indian firms are less likely to adopt equity alliance mode than Chinese firms in developed host countries. russian firms are less likely to adopt equity alliance mode than Chinese firms in emerging host countries. Alliances in the manufacturing sec-tor in developed host countries are more likely to adopt equity alliance mode. Alliances with partners that are the same firm type are less likely to adopt the equity alliance mode in both developed and emerging host countries, suggesting that in alliances where partners are relatively symmetrical in resources and access, less hierarchical control is necessary. In developed host countries, alliances in which the BrIC firm and partner are in the same industry are less likely to adopt the equity alliance mode than those in which the BrIC firm and partner come from unrelated industries. This effect is also observed in emerging host countries though to a smaller degree. When partners come from the same industry, information about the industry and market competition is common knowledge. There is less information asymmetry involved in the interaction between the partners and hence NEA is a cheaper option. BrIC firms are also more likely to adopt the equity alliance mode when they establish an alliance in the same industry in developed host countries as their core business as compared to unrelated industries. The equity alliance mode will ensure returns to which the BrIC firm is expecting from an industry it is familiar with, while NEAs allow flexibility in unfamiliar product markets. however, BrIC firms are less likely to adopt the equity alliance mode when they establish an alliance in the same industry in emerging host countries.
MIr 2008 | 5 569
Discussion and Conclusion
Based on an analysis of 628 cross-border alliances established by BrIC firms across 25 manufacturing and service industries in 64 host countries over a period of 10 years, we find support to institutional theory explanations for alliance governance mode choice. We argue that when EE firms establish cross-border alliances, they are faced with institutional pressures posed by the host country. They need to comply with regulatory, normative and cognitive conditions in order to gain, maintain and develop legitimacy. We also argue that institutional environments of developed and emerging economies have differentiated influence on EE firms’ alliance governance mode decisions.
Our analysis does not find support that the less restrictive the regulatory institutions, the less likely EE firms will adopt the equity mode in developed countries. This may be due to the fact that EE firms’ perceptions of developed countries are very similar, i.e., if EE firms perceive developed countries as a group of countries that are much more open, regulatory governance becomes a non-factor. That is, the relative degrees of openness of countries within the group do not matter. Contrary to our prediction, we find that EE firms prefer equity alliance mode in less restrictive environments. When the alliance location is an emerging country, EE firms expect more restrictive forms of regulatory governance to which they are used to in their home country. This suggests that EE firms would in fact be less familiar with a more open emerging country as uncertainty of how such an environment operates increases. As such, equity alliance may be adopted to cope with this uncertainty.
We also find that as cultural distance increases, the likelihood to adopt the equity mode decreases. however, at higher levels of cultural distance, i.e., beyond a threshold, the likelihood to adopt the equity mode increases. This relationship is only significant for alli-ances established in developed countries. In culturally similar environments, the poten-tial complementarities that can be generated from relatively small cultural differences (Gong et al. 2001) and the likelihood to gain legitimacy through complying with differ-ent, but not largely different norms and values may not justify the use of equity alliances. however, as the cultural distance gets substantially large, understanding the normative environment and subsequently adjusting to it in order to get established and recognized in this environment becomes more challenging, making equity alliances a better option. This is an important contribution of our study in light of the fact that much of the litera-ture on cultural distance has assumed linear relationships between cultural distance and other effect factors on the presumption that costs and problems arise as cultural distance increases, even at lower levels. The fact that small cultural distance can be beneficial (leung et al. 2001) has not been strongly emphasized and/or empirically examined.
Although our data does not allow us to differentiate between the reasons for firms’ mimetic behavior, our finding of the effect of cognitive institutions on alliance mode represents another important contribution. Finding support for this effect adds on to pre-vious applications of cognitive institutions in the areas of market entry (haveman 1993) and market entry modes (Yiu/Makino 2002). Among the empirical studies of cognitive institutions, the focus tends to be either on a single industry (haveman 1993) or business units of a few large corporations (Yiu/Makino 2002). Though our study has no focus on internal mimicry – the prior behavior of the individual firms themselves, as our sample
570 MIr 2008 | 5
does not consist of many firms with multiple alliances in the same industry and host country, every effort has been made to track 39,673 alliances across 25 manufacturing and service industries in 64 host countries, suggesting that our empirical finding is rigor-ous and generalizable.
We find that mimetic isomorphism is stronger in the context of establishing alli-ances in developed countries vis-à-vis emerging countries. That is, EE firms are likely to adopt similar alliance mode in alliances adopted previously by other EE firms in the same industry in the same host country as the focal alliance. Three explanations can be brought forward as to why the effect is stronger in developed countries than in emerging countries. First, developed countries represent a more unfamiliar ground for EE firms and thus it may be more necessary to follow other EE firms that have previously made similar inroads into these countries through alliances. Second, there may be significantly less prior alliances that EE firms can follow when forming alliances in emerging countries as many of these countries are relatively unexplored. Comparatively, there is much more common knowledge about developed countries that EE firms can tap into. Third, the fact that early and later movers have different motivations (Westphal/Gulati/Shortell 1997) can help explain our results – when EE firms establish alliances in developed countries, they seek more legitimacy and thus follow prior behavior of other alliances being estab-lished in these locations. In this way, by mimicking, EE firms signal their own legitimacy (lieberman/Asaba 2006).
It is suggested that coercive, normative and mimetic isomorphism are closely intercon-nected and operate simultaneously (DiMaggio/Powell 1983), thus it is also imperative to discuss their effects simultaneously (Mizruchi/Fein 1999). We test the relative importance of the three pillars in explaining the choice of adopting equity alliance mode and find that for alliances in developed countries the normative pillar has the strongest effect. This is followed by the cognitive pillar and finally the regulatory pillar, which is negligible. This observation coincides with previous studies that suggest that EE firms may be unfamiliar with developed countries and more familiar with other emerging ones (e.g., hu 1995). EE firms also face more uncertainty when they enter developed countries and thus engage in mimetic behavior to gain legitimacy. In addition, developed countries generally have less restrictive regulations and thus provide less uncertainty as compared to uncertainty relating to cultural distance. For the case of establishing alliances in emerging countries, the regulatory pillar becomes the most important factor, followed by the cognitive pillar and then the normative pillar. As highlighted earlier, EE firms are more familiar with operating in restrictive regulatory environment. Thus, even within the emerging country group, less restrictive markets would suggest the need of EE firms to adjust their business models. This finding would also mean that more caution should be taken when examining EEs as a group as differences among these countries can be substantial.
The above findings have several managerial implications. The ones that appear to be of utmost importance are directed towards managers of EE firms. If their strategy is to expand through alliances in developed countries, it would be meaningful for them to invest in gaining substantial knowledge about the predominant values, norms, belief sys-tems and acceptable and desirable behavior in those countries. While gathering infor-mation and knowledge about rules, regulations, and requirements in the developed host countries and how other firms behave in these countries is important, it is the normative
MIr 2008 | 5 571
pillar that has the strongest effect when EE firms’ managers have to decide on the alliance mode in developed markets. If, however, the EE firm preferred strategy is expanding in other emerging countries, our recommendation to managers is to pay serious attention to the specificity of the regulatory requirements and possible legal restrictions and bar-riers in these countries as the regulatory pillar has a stronger effect on managers’ deci-sions regarding the alliance mode. While normative and cognitive considerations remain important in less developed host countries and while at first glance EE countries’ regu-latory environments might appear to be similar to each other, our findings suggest that the EE host country’s regulatory institutions are of decisive importance in choosing the alliance governance mode.
Theoretically, our results contribute to the understanding of the relative importance of the three institutional pillars, thus contributing to empirical examination of institutional theory. Applications of institutional theory to alliance behavior are scarce (Barringer/har-rison 2000, Casson/Mol 2006), and none has linked institutional theory to alliance gov-ernance mode. Our research has addressed this gap in the literature. Finally, very little has been done with respect to EE firms moving abroad. Within this small, although growing literature, most studies have focused on market entry (e.g., Aulakh/Kotabe/Teegen 2000), with the exception of few that focus on alliance partner selection (e.g., hitt et al. 2000, hitt et al. 2004). In this aspect, our study contributes to understanding of both EE firms’ strategic behavior in cross-border activities and alliance mode choice made by EE firms when forming cross-border alliances.
limitations and Suggestions for Future research
Our study is subjected to a few limitations. We have considered the effects of institutions as they exist at the national level. This is, however, not the only level at which institutions operate. Although dominant societal models exist in countries, it is also possible to find a variety or mixture of institutional models within the same country. Although we have adopted a single level of institutions in analyzing alliance mode choice, we recognize that important insights can be gained by engaging in a multi-level institutional analysis, and encourage future research along this line of enquiry.
While we have only examined host countries’ institutional environments, it would be fruitful to also study EE home countries’ institutional factors. This would be an impor-tant research avenue as EE firms’ international expansion is related to both home and host country. For example, internationalization may be an effort by EE firms to avoid institutional constraints such as no consequent enforcement of existing rules and their continuous and unpredictable changes and corruption or red tape (luo/Tung 2007). In addition, having gained initial knowledge about firms’ motives for, strategies, and pat-terns of behavior of EE firms investing abroad, EE governments are increasingly expe-rienced and confident in introducing frameworks that facilitate these activities. Thus, it would be important to investigate these ‘pull’ and ‘push’ factors simultaneously in EE firms’ global expansion decisions (Chan/Makino 2007).
We have treated cultural distance using a single composite measurement and hence we have not examined the effects of different cultural dimensions. Future research should look into such more detailed and fine-grained discussion (e.g., Shenkar/Zeira 1992,
572 MIr 2008 | 5
Pothukuchi et al. 2002). Note that the Kogut and Singh’s (1988) composite measure that we adopt in this study has also been criticized for not capturing the complexity of cross-country differences – neglecting the critical role of societal institutions in creating and disseminating cultural and social cues (Shenkar 2001). however, as our study focuses on all three pillars of institutions and not just the normative pillar, we do not examine in detail the different cultural dimensions.
While we have used the proportion of JVs to total number of alliances in the same industry in the same host country in measuring for mimetic behavior, we have not been able to obtain data with regards to the similarity of these alliances to our sample alli-ances. In particular, we have not been able to observe whether these JVs and NEAs have been established by similarly sized firms as the EE firms in the sample or those that are successful in the host country (haveman 1993). Future research should attempt to adopt these measures through extensive data collection. It is important to note that the 8521 alliances used in our calculation of cognitive institutions (mimetic behavior) are formed by firms from more than 100 EEs. This diversity may explain the less significant effect of cognitive institutions on alliance mode as compared to regulatory and normative institu-tions. In addition, EE firms may actually mimic firms that are geographically closer to them. A dataset with such details will provide further understanding of the different types of cognitive institutions that are at play under different conditions.
While our study includes a period of 10 years, we have not looked into the sequences of the EE firms’ alliance behavior over time. Part of the reason is that very few EE firms in our sample have more than one alliance represented in the sample. Future research should look into such sequences in order to deepen the understanding of institutional effects. A longitudinal dataset that traces the sequences of behaviors will allow to filter out learning effects embedded in EE firms’ global expansion processes.
Finally, we have chosen BrICs on the criteria that these are the largest EEs and firms from these economies are more likely to be the ones that have the resources to engage in cross-border activities. On many dimensions, BrICs are more advanced than others as shown in the World Bank Development Indicators (World Bank 2005b). Thus, we would expect cross-border alliance behavior from EE firms to be well captured by observing the behavior of BrIC firms. At the same time, although we have used BrIC firms as an aggregate group, we recognize that BrICs have different characteristics and thus the firms from these countries may behave differently (e.g., hoskisson et al. 2000, hitt et al. 2004, Wright et al. 2005). recognizing this, we have included the nationality of our sam-ple EE firms as a control variable in this study. Future research should examine a larger set of EEs and also more focused sets of firms from individual EEs to identify similarities and differences of cross-border alliance behavior of EE firms.
Acknowledgements
We acknowledge the constructive comments from two anonymous reviewers.
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