Strategic Alliances and International Mergers and Acquisitions in the Modern Global Business Environment
The modern globalized world has triggered stark change in the actions of many of the actors in traditional society. One such actor that has embraced this change and recognized its benefits is in the area of international business. With globalization providing access to a myriad of new networks, markets, and technology at an unprecedented pace, international business firms have aligned themselves to capitalize on these new opportunities. While inter-firm alliances, mergers, and acquisitions are certainly not a new innovation in international business practice, the modern international business environment has seen a significant increase in the number of mergers, acquisitions, and joint ventures in response to globalization.
The motivations for these inter-firm alliances have also changed in conjunction with this recent trend. Traditionally, businesses engaged in inter-firm alliances, mergers, or acquisitions to either increase their market power in a region or territory, or to reduce a firm’s transaction costs. However, in accordance with the globalization of international business activity, firms have had new motivations emerge as reasons for inter-firm alliances, mergers, or acquisitions. The extent that these new motivations arise in firm activity must be examined by studying the following questions: i) why have motivations changed; ii) what are the factors that
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I. Why have the motivations for inter-firm alliances, mergers, and acquisitions changed? Corporate firms have long engaged in alliances, mergers, and acquisitions as a strategic tool to optimize their particular economic goals. As described by Andrew Inkpen in his analysis of strategic alliances entitled, Strategic Alliances, the use of alliance formation, mergers, and acquisitions has become a vital source for the continuing success of many firms: “The overall strategic objective of alliance partners is the pooling of resources to create a value in a way that each of the parents could not achieve by acting alone” (Inkpen 404).
These strategic objectives were generally used to increase their market power, reduce their transaction costs, or as a defensive reaction to guard against losing a potential opportunity. The market power approach, a strategy utilized by firms to capitalize on a particular market while restraining competition, and the transaction cost approach, a inter-firm relationship to reduce transaction costs between companies, both are reflected in the world economy practices of international firms of most of the past century. While each of these objectives still is prevalent in firm alliance, merger, and acquisition activity today, they have become increasingly less popular as globalization has changed the way multinational firms conduct business in the transforming world economy.
In his journal entitled, Reappraising the Eclectic Paradigm in an Age of Alliance Capitalism, John Dunning makes the case that the world economy has changed significantly, and is on the verge of entering a new phase entirely: “Over the last decade or so, a number of events have occurred that…suggest that the world economy may be entering a new phase of market-based capitalism or, at least changing its trajectory of the past century” (Dunning 461). This new world economy as described by Dunning would serve as a contrast to the “hierarchical capitalism” (463), which dominated most of the past century.
Under hierarchical capitalism, Dunning contends that, “the essential characteristic of both these systems is that the governance of production and transactions is determined by the relative costs and benefits using markets and firms as alternative organizational modes” (463). The hierarchical capitalism methodology of attempting to hold governance over transaction costs and market power became the central motivation for alliances, mergers, and acquisitions amongst firms. However, with the rise of globalization, technological innovation and communication networks have grown grew to lead in the formulation of “alliance capitalism” (466).
Alliance capitalism has been brought about by the changing climate of the world economy, mainly as a result of globalization and technological innovation. According the Dunning, the “critical feature of this new trajectory—which is essentially the outcome of a new series of landmark technological advances and of globalization of many kinds of value added activity—is that it portrays the organization of productions and transactions as involving both cooperation and competition between the leading wealth creating agents” (467).
This shift in ideology to a more cooperative approach over an ownership-based mentality to global business has created a new set of motivations to arise of out inter-firm alliance, mergers, and acquisition activity. In their essay entitled, Alliances, Acquisitions, and Multinational Advantage, Sarianna Lundan and John Hagedoorn, agree with Dunning’s assessment that there has been a fundamental shift in the world economic environment.
According to Lundan and Hagedoorn, “the balance has shifted from the exploitation of ownership advantages abroad to, first, improving the efficiency of the existing configuration of activities, and, finally, to the active acquisition of new advantages” (Lundan 230). With the ideologies of multinational firms changing to face the growing challenges of globalization, the new motives for inter-firm alliance, mergers, and acquisition activity will continue to be cornerstones of global business.
II. What are the new motivations for inter-firm alliances, mergers, and acquisitions? Since the global economy has undergone a fundamental ideological transformation from the ownership-dominated idea of hierarchical capitalism to the cooperative-based approach of alliance capitalism, the motivations for a firm to participate in inter-firm alliances, mergers, and acquisitions, have also been transformed. Due to globalization having such an unprecedented and profound impact on global business, firms now make an increased effort to acquire access to new markets, ideas, networks, and also technologies to enable and maintain strategic growth.
Lundan and Hagedoorn confirm the notion of firms placing an emphasis on asset-seeking and efficient growth: “…there is an increasing role for the efficiency-seeking and strategic asset-seeking investment, which makes mergers and acquisitions as well as strategic alliances critical to the asset augmenting FDI undertaken by multinationals” (Lundan 230). Though “market or resource-seeking motivations will always characterize some portion of investments” (230), some of the newer motivations or factors contributing to firms activity in inter-firm alliances, mergers, and acquisitions are as follows: a) knowledge and competence based; b) to add to a company’s legitimacy or to reduce risk and promote stability; c) technological seeking.
A firm will engage in inter-firm alliance, merger, or acquisition activity to increase their knowledge or competence in a particular market or area of expertise. Inkpen argues that a firm will participate in alliance activity to “gain access to another firm’s knowledge or ability to perform an activity where it there are asymmetries between firms…firms seek access to such things as distribution channels and specialized know-how” (Inkpen 405). One of the principle motivations behind a firm’s a competence based alliance is to acquire access to an expertise at a much cheaper cost then producing the innovation on their own. For a firm, the act of acquiring or forming an alliance with a subsidiary in a new market or business venture, it hopes that it may become a “center of excellence” which would help spur further growth for the firm.
Another motivation for international alliance, merger, or acquisition activity is to add to a company’s legitimacy. This motivation will cause a firm to seek a cooperative arrangement to form a relationship with a particular market or region. In forming this relationship, the goal of the arrangement is for the firm to acquire a local partner who “may provide the necessary legitimacy for firms that are unfamiliar and uncertain about local conditions” (405). Additionally, according to Inkpen, a firm may engage in such an arrangement to reduce the risk of a venture and promote stability. These alliances “may be an attractive option for large, risky projects because neither partner bears the full cost of the venture activity” (405). Lastly, another motivation for inter-firm alliances, mergers, and acquisition activity is a technology-based motive.
Technology-based alliances are designed to become a collaborative effort where both parties establish a network of learning between firms that are complementary to one another. Lundan and Hagerdoon note the emerging popularity of technology-based alliances: “Researched based historical data sets, such as the MERIT-CATI databank, reveals that strategic technology alliances have become increasingly popular with firms during the past few decades” (Lundan 232). The popularity of strategic technological alliances has coincided with the emergence of the “increasing importance of high-technology sectors, such as pharmaceutical biotechnology, information technology and new materials” (232).
The aforementioned motivations have emerged as a result of the expanding global economy multinationals currently operate in. In response, firms engaging in inter-firm alliances, mergers, and acquisitions, have undergone a change in their strategic planning methods.
III. How have the new motivations for inter-firm alliances, mergers, and acquisitions led the firm to choose on which form of activity to partake? It has been analyzed throughout this paper, that the changing global economy has led to a shift in the alliance, merger, and acquisition activity of firms. With the globalization of the world economy, firms participating in alliances, mergers, or acquisitions have taken on increased strategic planning in deciphering which form of activity in which to partake. As identified by Lundan and Hagedoorn, oftentimes it appears that “in many instances the preferred, and possibly the only means of acquiring such assets is either through mergers and acquisitions, or by way of strategic alliances” (Lundan 230).
Since these areas have now become the primary source of growth for multinational firms, the preferred method of organizational arrangement of firms helps understand the causes for alliance, merger, and acquisition formation. For a firm to determine its preferred method of organizational arrangement, the activities of the firm must be examined to determine if the firm’s needs are similar or complimentary to its potential business partner: “The extent to which alliances and acquisitions are alike in their strategic motivations is contingent on the question of the extent to which the resources sources abroad are complimentary or similar to the existing competencies of the acquiring firm” (234). If two firms’ motivations for activity are similar in nature, the two of them have similar capabilities that need to be exercised in common.
When similar sets of activities are present the result is likely a restructuring of corporate boundaries through mergers and acquisitions. In studying the actions of firms with similar activities, evidence shows that large wave of cross-border mergers and acquisitions takes place, with capabilities being connected with rearrangements instigated at the subsidiary level. By far, the number of mergers and acquisitions account for the majority of cross border activity in international business: “In total, flows of M&A’s accounted for 80% of FDI in 1999” (234). In contrast, when firm activity is complementary to each other, the capabilities that are required are to increase overall competencies.
Lundan and Hagedoorn contend that “…over 95% of all strategic technological alliances are formed between companies from the developed economies, suggesting a straightforward relationship between the degree of technological sophistication of an industry and the degree of participation of firms from less developed countries…the higher the R&D intensity of the industry, the lower the participation of companies from developing and emerging economies” (233). In this example provided by Lundan and Hagedoorn, it can be seen that the majority of alliances are formed when two parties have capabilities that compliment the other’s requirements. In studying technological alliances, Lundan and Hagerdoorn acknowledge that technology companies from developed economies and states with still developing economies have a complementary relationship, which develops the technology firm’s foreign direct investment organization.
To effectively determine the preferential method of organizational arrangement for a firm, a variety of factors must first be taken into account. However, once the firm’s activities are decided upon, it becomes clearer to narrow down the type of international business activity the firm should consider. To conclude, the global economy has undergone a dramatic shift in the ever-increasing globalized world. This shift can be seen in the transformation from the ownership-dominated idea of hierarchical capitalism to the cooperative-based approach of alliance capitalism. Due to this ideological shift, the motivations for firms to participate in inter-firm alliances, mergers, and acquisitions have also been transformed.
While past motivations such as market power and transaction cost approaches still exist as causes for inter-firm alliances, mergers, and acquisitions, new motivations have also become increasingly relevant. The newer motivations such as a knowledge or competence based motivation, a legitimacy-seeking motivation, or a technology-based motivation have created a new wave of alliance, merger, or acquisition activity. This new wave of activity has led firms to undertake a more strategic approach in the type of business activity they wish to partake in. Firms now dedicate a significant amount of resources in determining how and when to engage in, either, an alliance, merger, or acquisition in achieving the firm’s objectives. With the globalization phenomena showing no signs of slowing down, the strategic alliance, merger, and acquisition activity of multinational firms looks to continue to grow as well.