Strategic alliance criteria for firms in emerging economies

Cooperative Strategy

The criteria for successful Alliances in Emerging Country Economies

Economic shifts and globalization caused by the development of emerging economies and the recent financial crisis have affected various industries. Firms must adapt appropriately to the new standard where time to market is shortened even with their shrinking capital bases and growing global competition. At a period when alliances and partnerships are fundamental, particular emerging economies are subject to become critical partners. This paper seeks to give a theoretical foundation for analyzing the prevalence, the nature, and the location of global strategic alliances of firms in emerging economies. The focus will be on the criteria for alliances in these economies compared to alliances in developed countries. Propositions will be posted with respect to Small Medium Size Enterprises (SMEs).

Emerging economies previously used for contract manufacturing are evolving at a rapid speed. In a number of industries propelled by local government investment and priorities in response to increasing demands and burgeoning populations, emerging economies are poised to be not only lucrative but also essential business alliances to meet the prerequisites of the new global economy (Milner, 2010). Some of these nations cannot only provide developed partners lower cost operations but also infrastructure, skilled human resources, and knowledge for local cultures and regulatory environments. Additionally, these markets present local health problems that require innovative solutions (Peng, 2009).

Firms in developed economies are confronted with a new standard that requires them to reinvent their traditional market strategy and business model. Private and government insurers in developed economies have placed unprecedented pressure on companies as they face mounting healthcare costs, shrinking tax bases and aging population. To survive the challenges, they must respond efficiently to the changes in developed economies by supplying a range of innovative cheap products to providers in developed economies and leverage their successful goods through capturing demand from fast growing emerging economies. Industries along with firms are major players in the business world and now view emerging economies as an opportunity to acquire global competitive advantage through creating innovative precedents in how products are developed, promoted, distributed, and reimbursed.

Selection of a business partner is a crucial decision pertaining to a strategic alliance. With global strategic alliances, emerging market partners are a crucially vital international phenomenon to participate effectively in the new global economy; more research is required and knowledge is still in its infancy. The ultimate goal of this study is to present a picture of companies' alliance activities in emerging economies. This is achieved by focusing selection criteria that firms in developed countries use while choosing their foreign partners comparative to those used for partners in developing nations. This study will offer a baseline for eventual assessment of the evolution of industry alliances in the transition period.

Emerging Markets

While evolving from less economically developed countries and third world countries, the term emerging economies is currently used as a positive label suggesting the uplift, progress, and dynamism of some countries becoming noticed in the global business arena. In this context, the acronym BRIC (Brazil, Russia, India, and China), has regrouped countries that were anticipated to be the future members of economic big league. As more members continued to advance in terms of economic growth, population size, and openness to foreign investment, they joined the BRICs. Countries such as India and China have become two of the largest markets in the region (van, KA, (2008). Consequently, new members have emerged over the years, using quite different criteria. As a result, some countries have been viewed from different perspectives as emerging economies and as developed economies. Some of the countries in this category include China, Colombia, Brazil, Egypt, Hong Kong, Saudi Arabia, Turkey, Thailand, South Africa, Russia, Singapore, Poland, India, and Chile (Faulkner & Tallman, 2010).

In the business world, emerging economies are projected to give fifty percent of global market expansion in the next four years (Chang, 2013). Therefore, they represent highly significant markets for products and services. This is recognized by local governments in the most emerging economies. They support the start-up and expansion of local firms in response to the rapidly growing local needs for products and developing export products (Gupta & Wakayama, 2012).

Local Sectors in Emerging Countries

The expansion of local firms in emerging markets is the result of various factors among them:

I. Reinvestment of revenues obtained from contract research institutions performing trial related activities like developing new products, collecting and analyzing data for companies as service providers (Corbo, Krueger, & Ossa, 2010)

II. Original research carried out by local organizations to discover and develop innovative local goods

III. Government involvement

IV. Better physical and legal infrastructures

V. Exploitation of special niches

VI. Integration of local companies into global networks (Khosrowpour, 2009)

All these strategies will be later grouped into four strategies.

Government participation

Of course, governments of a number of emerging markets have recognized and heavily invested in firms and industries as a driving force for economic development and as an approach to fulfill their needs in various angles. For others, the development of industries is a result of policies and national priorities, coupled by public financial incentives for foreign investors such as tax advantages for special economic zones (Dalal-Clayton, Swiderska, Bass, & Aguilar, 2012). They have put massive investments in public research institutions in order to attract multinationals. For instance, the government of Singapore actively the recruitment of product scientists while Indian government accounts for technology transfer firms (Faulkner & Tallman, 2010). Typically, these firms started as outsourcing hubs for production and R&D, especially in generic products. Later, with new players and infrastructures, they developed experienced and qualified human resources. They also encouraged their students to return from Western universities, especially to form star-up ventures. China offers a supportive and stable institutional environment for global strategic alliances, which enables Chinese firms to embrace a longer term view of strategic alliances than is usual (Marinov & Marinova, 2012).

Improved financial, legal and physical infrastructures

Improved quality of work and intellectual property protection are vital in emerging economies if they are to be successful players in the global business arena. In this sense, some larger economies have already initiated important changes as seen in the case of China. Following its adherence to the World Trade Organization, China has consistently improved its intellectual property rights protection. However, it must convince the developed economies of the Western world (Njoroge, 2010). In 2010, the government of China enacted a regulatory firm and since then, it requires all manufacturing organizations to adhere to the international standards in ingredients and manufacturing. Recently, modified legislation demanded that innovation was to be new in both the local and global arena (Kreimer, 2010). As a sign of desire by the U.S. government to enhance the quality of products from China, in 2012, the U.S. product administration announced the launch of its Chinese branch office. Nevertheless, these transformations are not always easy to manage. For example, technology transfer mechanisms and policies are weak and must be restructured in India (Dolfsma, Duysters & Costa, 2009).

Targeting research niches

With improved regulatory bases and infrastructure, emerging markets must move up the value chain through massive financing of research niches to correspond to their traditional strength, to areas left by developed economies of through targeting local needs. Therefore, regions can develop industrial expertise and applications in areas coinciding with their resources (Wezel, 2010). For instance, Brazil's Amazon region has the largest majority of the rare genes in the world. This can develop industries slowly based on their economic potential. In exchange for access to such biodiversity, companies in developed markets ought to transfer technology and share benefits (Dalal-Clayton, Swiderska, Bass, & Aguilar, 2012). China has placed emphasized on traditional products to generic concepts. Other niches include areas where most western markets have been unable to invest due to political and other limitations like socio-cultural barriers. Other developing economies have focused their innovation on local needs. For instance, depending on technology transfer from overseas and combining local efforts and global cooperation on R&D, Vietnam has turned its research into business operations, transforming some scientists into great businesspersons (Miller, 2008).

Selection Criteria for Alliance Partners

Against the backdrop of global strategic alliance activities in the business world, the focus of this paper is the selection criteria. This refers to the criteria for selecting a partner used by developed economies in industries when choosing global alliance partners in emerging countries. From the partner selection criteria in diverse markets, it is evident that differences in the criteria used by developed economies and emerging country executives occur based on variations in infrastructures, norms, and resources. This results in fundamental differences in partner preferences. Studies support the hypothesis that managers in developed countries utilizing the same partner selection criteria might have skewed priorities compared to executives in emerging economies. Studies have generated at least fourteen selection criteria (Holloman, 2013).

Managers in developed markets emphasize on six factors than managers in emerging countries do:

I. Previous alliance experience

II. Unique competencies of the partner

III. Market knowledge and access

IV. Cost of alternatives

V. Special skills to obtain from the partner and VI. Industry attractiveness (Tellis, 2011).

Their emphasis is on the predominantly intangible nature of the criteria engaged by partners in developed countries:

I. Market knowledge

II. Market access

III. Unique competencies

Such assets are not easy to imitate and might offer a ground for a competitive advantage. In this context, the issue is whether these managers use the same criteria during partner evaluation regardless of whether the partner is from an emerging economy or a developed market. A number of internalization theories suggest elements upon which the developed economy firms might evaluate and select partners in emerging countries (Sels, 2009). This paper has drawn from economic theories and behavioral school because of their wide use throughout literature on international corporate strategy and technology agreements. From the economics perspective, transaction cost analysis holds that partner selection in a global market should be based on the reputation of the global partner and the view that an opportunity is related with the particular partner. Under the internalization theory, the selection criteria include partner reputation and competence along with experience (Arogyaswamy, 2008). Evolutionist theorists suggest that any partner will be selected based on the compatibility of his/her routines and the confidence level between the partners. The theories have incorporated learning as a vital element of a partnership in the context of fostering the acquisition, communication, and coordination of knowledge (Corbo, Krueger, & Ossa, 2010).

If Western firms fail to develop strategies for engaging across their value chains with the developed economies, they will be unlikely to remain competitive for long-term. Nevertheless, the rapidly improving infrastructure, the spread of internet and despite the crumbling tariff barriers in these emerging economies, country managers should not assume that they could do business in emerging economies the same way they do in developed countries (Kline, 2012). This is because the quality of the market infrastructure is different from one country to another. This means that advanced markets have effective contract-enforcing mechanisms and wide pools of seasoned market intermediaries while emerging economies have less effective legal systems and unskilled intermediaries (Estrin & Meyer, 2011).

Conclusion

This study has offered a theoretical basis for studying country firm's alliance operations linked to emerging economies. It recommends that firms from advanced economies form both exploitation and exploration alliances in these markets, that these alliances are likely to be concentrated in various countries that have prioritized the development of technology centers and that research alliances are formed with universities and research centers in emerging economies (International Business Publications, 2012). It is evident that firms use multiple selection criteria when evaluating potential business partners. These criteria often differ based on the market context of potential partners. These propositions must be investigated in future studies. This will permit the tracing of potential partner operations in emerging economies and contribute to key insights on partner selection criteria in emerging economies (Dalal-Clayton, Swiderska, Bass, & Aguilar, 2012).