What are Pros & Cons of foreign partners?

.straxQ Academy
Jun 13, 2023
3 min read

Updated: Aug 7, 2024

Exploiting advantages and mitigating risks associated with international strategic alliances requires intentional balancing of the trade-offs. Though, overall alliance portfolio configuration, partner selection and internationalization process are equally essential.

.credits: Lavie and Miller, 2008 / Gulati, 1999 / Bos et al., 2019 / Dyer et al., 2018 / Oxley, 1999

Heterogeneity of alliance partners - i.e. Alliance portfolio diversity is one of two main factors influencing firm performance. (Bos et al., 2017). Engaging with a foreign partner can have numerous advantages, though it may cause some problems. Therefore, it is crucial that firms take both perspectives into consideration and configure their alliance portfolios in a way that balances the trade-offs and provides overall performance benefits.

Advantages of internationalization

Access to specific countries, markets or technological clusters

can stimulate innovation (Gulati, 1999; Bos et al., 2019) and significantly expand the pool of knowledge and resources, which might be especially valuable due to diversity steaming from dissimilar national backgrounds and cultures (Lavie and Miller, 2008).

Increased flexibility, responsiveness and adaptability

Cultural distance which is defined as “the difference in values and beliefs between home and host countries” (Puck et al., 2009) can increase the flexibility, responsiveness and adaptability of a focal firm to global market conditions (Lavie and Miller, 2008)

Availability of resources and capabilities

Cross-national alliances can enable access to resources which can be scarce in the domestic market and thus reduce risks and uncertainties (Eisenhardt and Schoonhoven, 1996).

Resource convergence is less likely

to happen when partners have diverse corporate cultures and are from different countries (Dyer et al., 2018).

Disadvantages of foreign partners

Cross-national differences between the firm’s home country and its partner’ countries of origin, which are often represented by institutional differences, geographic and cultural distance and dissimilarities in levels of economic development are often additional factors, which enhance the overall uncertainty associated with foreign partners (Ghemawat, 2001).

Liability of foreignness

In order to mitigate uncertainties and achieve better firm performance, international strategic alliances often move towards more hierarchical governance i.e. equity (Pisano, 1989; Oxley, 1999). The shift parameter framework developed by Oxley (1999) found that cultural distance increases the overall governance costs due to higher monitoring, enforcement and integration costs (Oxley, 1999).
High cultural distance requires investments into communication, transportation and necessary product customization based on local preferences (Lavie and Miller, 2008).

Behavioural uncertainty

The negative effects of cultural distance can be characterized by increased behavioural uncertainty, which might be further enhanced by specific environmental uncertainty (Krishnan et al., 2006), general liability of foreignness (Lavie and Miller, 2008) and increased transaction costs (Puck et al., 2009).
Due to differences in legal and regulatory systems in various countries, the intellectual property leakages, appropriability hazards and overall behavioural uncertainty is significantly increased (Lavie and Miller, 2008; Oxley, 1999).

Firms should configure their alliance portfolios in a way that balances the trade-offs and provides overall performance benefits. Profitability can be effectively managed via API and also influenced by Foreign alliance experiences or Subsidiary country overlap.

Alliance portfolio internationalisation

In the article ‘Can you be too international?’ we focus on diversity stemming from internationalization within alliance portfolios. Article provides a closer look at a concept called alliance portfolio internationalization (API) introduced by D. Lavie & S. R. Miller in 2008.

The study analysed the impact of internationalization (API) on firm profitability (ROA) and overall effectiveness of collaboration. The portfolio performance differs based on API and displays a Sigmoid curve.

Moderating effects of Foreign partnering experience & Subsidiary country overlap

Both factors can mitigate the risks associated with international alliances and help companies to overcome cultural differences and bridge geographical distance.

In sum, nurturing international partnering experience should enhance firm ability to successfully manage alliance portfolios and increase profitability. Utilisation of a foreign subsidiary can be useful for risk mitigation and effective governance which reduces the negative effects and costs of collaboration on performance. (Lavie and Miller, 2008)

Conclusion

International alliance portfolios can provide benefits such as increased flexibility, responsiveness and adaptability to global market conditions (Lavie and Miller, 2008) and access to new or scarce resources which can stimulate innovation or reduce risks (Gulati, 1999; Bos et al., 2019; Eisenhardt and Schoonhoven, 1996). On the other hand, cultural distance often leads to significant differences in organisational design, competitive strategy and management practices, which may result in conflicts and additional alliance costs in coordination and communication (Gulati, 1995, Jiang et al., 2010). Therefore, it is crucial that firms take both perspectives into consideration and configure their alliance portfolios in a way that balances the trade-offs and provides overall performance benefits. Lastly, profitability can be also enhanced or diminished, by an existence or lack of alliance experiences and foreign subsidiaries.

References

Bos, B., Faems, D., & Noseleit, F. (2017). Alliance Concentration in Multinational Companies: Examining Alliance Portfolios, Firm Structure, and Firm Performance. Strategic Management Journal, 38(11), 2298-2309.
Dyer, J. H., Singh, H., and Hesterly, W. S. (2018). The relational view revisited: A dynamic perspective on value creation and value capture. Strategic Management Journal, 39(12), 3140-3162.
Eisenhardt, K. M., and Schoonhoven, C. B. (1996). Resource-based view of strategic alliance formation: strategic and social effects in entrepreneurial firms. Organization Science, 7(2), 136–150.
Ghemawat, P. (2001). Distance still matters. The hard reality of global expansion. Harvard Business Review, 79(8), 137–40.
Gulati, R. (1995). Does familiarity breed trust? The implications of repeated ties for contractual choice in alliances. Academy of Management Journal, 38(1), 85-112.
Gulati, R. (1999). Network location and learning: the influence of network resources and firm capabilities on alliance formation. Strategic Management Journal, 20(5), 397–420.
Jiang, R., Tao, Q., and Santoro, M. (2010). Alliance portfolio diversity and firm performance. Strategic Management Journal, 31(10), 1136–1144.
Krishnan, R., Martin, X., and Noorderhaven, N. G. (2006). When does trust matter to alliance performance? The Academy of Management Journal, 49(5), 894–917.
Lavie, D., & Miller, S. R. (2008). Alliance portfolio internationalization and firm performance. Organization science, 19(4), 623-646.