Alliance Commitment and Control: SMEs from Developing Countries

Keith D. Brouthers

Temple University

Philadelphia, PA

George Nakos

Clayton College and State University

Atlanta, GA

Lance Elliot Brouthers

University of Texas at El Paso

El Paso, TX

Paper presented at the Academy of International Business

46th annual meeting, Stockholm, Sweden, July 10-13. 2004

Alliance Commitment and Control: SMEs from Developing Countries

SMEs from developing countries tend to prefer to expand internationally through alliances. However, there is little research examining how to manage alliances once formed. In this study we combine commitment and control theories to explain how alliance commitment and process controls can lead to greater alliance performance. When tested on samples of developing country SMEs from two distinct regions we find support for our theoretical predictions. We discuss the managerial implications of using commitment and process controls in SME international alliances.


Alliance Commitment and Control: SMEs from Developing Countries

Alliance research indicates that many alliances fail, are short-lived and do not meet partner expectations (Johnson, Korsgaard & Sapienza, 2002; Shamdasani & Sheth, 1995). Yet, for small and medium sized enterprises (SMEs) alliances may be one of the few options available for international expansion (Karagozoglu & Lindell, 1998). The reason for this is that SMEs tend to have few excess resources that can be applied to international activities (Zacharakis, 1997). Second, SMEs typically have very little international experience; they lack knowledge and expertise in issues of international business such as managing differences in culture, distribution and price that may significantly impact international performance (Qian, 2002; Karagozoglu & Lindell, 1998). Third, because of their small size, lack of resources and experience, SMEs may suffer from information asymmetries relating to finding, negotiating and attracting potential alliance partners (Karagozoglu & Lindell, 1998).

For SMEs from developing countries these limitations may be accentuated since they may not have the economic and political environment within their home country to provide support (Cook, 2001; Weaver & Dickson, 1998). SMEs from developing countries may lack the support of an organized national export policy; an essential component to international success for SMEs from industrialized countries (Katsikeas, Piercy & Ioannides, 1996). Hence, when SMEs from developing countries want to expand into international markets they are more dependent of alliance partners for the success of their international ventures. This dependency may create problems of opportunism and free riding, leading to an alliance that will be short lived and perform poorly. As Aulakh, Kotabe and Sahay (1996: 1006) state: “the critical determinant of partnership success becomes the ex post maintenance of the partnership.”

The question that SMEs from developing countries need to answer is how to manage international alliances and achieve their goals and objectives. Based on commitment theory (Johnson, Korsgaard & Sapienza, 2002; Cullen, Johnson & Sakano, 1995; Anderson & Weitz, 1992; Beamish & Banks, 1987), we suggest that SMEs from developing countries can achieve alliance success by taking a long-term orientation toward their international alliances (Boyle, Dwyer, Robicheaux & Simpson, 1992) and using process controls to safeguard against opportunism (Bello & Gilliland, 1997; Aulakh et al, 1996).

Commitment theory suggests that taking a long-term perspective helps improve alliance performance because the expectation of continuity leads to a level of satisfaction in the alliance and partners do not look for alternatives (Aulakh et al, 1996; Boyle et al, 1992; Anderson & Weitz, 1992). Commitment helps reduce opportunism which influences the need for other types of control and improves alliance performance (Beamish & Banks, 1987).

Research suggests that commitment can be reinforced through supporting organizational control mechanisms which also help minimize opportunism and improve alliance performance (Aulakh et al, 1996; Beamish & Banks, 1987). Through process controls focal firms attempt to influence alliance partner behavior and help to alleviate problems of opportunism because the focal firm is involved in decision making and assumes a supportive posture in the alliance (Bello & Gilliland, 1997). Process controls reward long-term orientation and organizational commitment, potentially enhancing alliance performance (Bello & Gilliland, 1997; Aulakh et al, 1996).

Previous scholarship has tended to concentrate on the antecedents to commitment (e.g., Geyskens, Steenkamp & Kumar, 1999). Here we focus on the consequences of commitment by building on previous organizational commitment (Cullen et al, 1995; Boyle et al, 1992) and process control (Bello & Gilliland, 1997) research. More specifically we explore (1) the impact of organizational commitment on alliance performance, (2) how commitment influences the use of process controls in alliances, and (3) the impact of process controls on alliance performance. Our empirical contribution examines SMEs from developing countries and looks at how commitment and process control contribute to international alliance performance.

THEORY

Alliances are agreements between two or more companies to achieve a specific goal or objective (Shamdasani & Sheth, 1995). Alliances take many forms and include both equity based agreements, such as joint ventures, and non-equity forms of co-operation; distribution, licensing or consortium agreements (Weaver & Dickson, 1998; Shamdasani & Sheth, 1995). SMEs that want to sell their products or services in foreign markets tend to prefer alliances over other forms of international activity because alliances provide market access and local knowledge; resources not usually available to a SME. Alliances may also provide other resources (government contacts) and expertise (customer knowledge) lacking in foreign SMEs. Finally, alliances are preferred because they reduce the risks of international expansion (Saxton, 1997; Tallman & Shenkar, 1994). Recent research has shown that the majority of internationalizing SMEs consider international marketing alliances essential to the success of the company (Karagozoglou & Lindell, 1998).

Research suggests that despite the popularity and importance of alliances, we have a very limited understanding of how to manage them (Aulakh et al, 1996; Shamdasani & Sheth, 1995; Gulati, Khanna & Nohria, 1994). This lack of management know-how may explain the high failure rates of international alliances. To help fill this knowledge gap Geyskens, Steenkamp and Kumar (1999) prepared a meta-analysis of the literature on alliance satisfaction and identified the antecedents to commitment. Reviewing ninety-three empirical studies, they found that factors such as trust, conflict, partner communication behaviors and dependency all influenced the level of commitment in alliances. They suggest however, that little is known about alliance performance and how commitment may influence alliance performance.

Recently, several scholars have applied commitment theory to alliance management research. To date the results of this research, while limited, has been very promising (e.g. Aulakh et al, 1996; Shamdasani & Sheth, 1995; Anderson & Weitz, 1992). Building on this new research stream, we discuss commitment theory and how firm commitment and control can be combined to improve international alliance performance.

Commitment

Beamish and Banks (1987) suggest that alliances may be a more efficient form of international operation if there is a long-term commitment to venture success. Commitment can be defined as the willingness to maintain a stable relationship and the degree to which an alliance partner expects the alliance to continue into the future (Shamdasani & Sheth, 1995; Cullen, Johnson & Sakano, 1995; Anderson & Weitz, 1992; Boyle et al, 1992). As Skarmeas, Katsikeas and Schlegelmilch (2002: 759) state “commitment consists of a rather diverse set of factors including desire, willingness, sacrifice behavior, expectation of continuity, belief, and importance of the relationship”. When alliance partners view an alliance as a long-term commitment they are less likely to take advantage of the other partner or withhold cooperation and are more likely to act unilaterally to benefit the long-term prospects of the alliance for all partner firms (Cullen, Johnson & Sakano, 1995; Gulati et al, 1994).

Commitment leads to an increased effort and concentration on the alliance by alliance partners helping the alliance achieve its goals and objectives (Johnson, Korsgaard & Sapienza, 2002; Saxton, 1997; Shamdasani & Sheth, 1995; Anderson & Weitz, 1992). Morgan and Hunt (1994) found that commitment leads to increased interfirm cooperation. When a firm is committed it wants the alliance to work (Cullen, Johnson & Sakano, 1995; Anderson & Weitz, 1992). Interfirm cooperation may increase knowledge creation and learning leading to a more successful alliance (Johnson, Korsgaard & Sapienza, 2002; Skarmeas et al, 2002).

Commitment can reduce partner interest in other activities or searching for other partner organizations (Aulakh et al., 1996; Morgan & Hunt, 1994). Both opportunistic and switching behaviors increase alliance costs. When a firm is committed to an alliance it will desire to keep such costs to a minimum (Shamdasani & Sheth, 1995; Morgan & Hunt, 1994). Alliance partners therefore tend to refrain from self-seeking behaviors, like shirking or withholding resources, and do not search for alternative partner organizations.

Commitment may also impact customer perceptions, when this commitment to a long-term relationship is communicated though actions of partner organizations (Morgan & Hunt, 1994; Anderson & Weitz, 1992). Customers may perceive greater value and loyalty in alliances where commitment exists (Morgan & Hunt, 1994). Greater customer value perceptions and loyalty tends to result in greater success (Anderson, Fornell & Lehmann, 1994).

From a transaction cost perspective (Williamson, 1985), commitment to a long- term relationship can reduce behavioral uncertainties, that otherwise drive up transaction costs and would create problems in an alliance. Commitment decreases opportunism because partner organizations have a long term perspective and do not take actions that sacrifice long-term gains for short-term benefits (Aulakh et al., 1996; Shamdasani & Sheth, 1995; Morgan & Hunt, 1994). Commitment to continuity (or long- term orientation) can provide benefits that reduce the need for more direct (equity based) controls (Skarmeas et al, 2002; Beamish & Banks, 1987).

Hence, commitment can increase cooperation and reduce costs which should result in better alliance performance (Skarmeas et al, 2002; Cullen, Johnson & Sakano, 1995). Commitment may also lead to greater customer loyalty and value perceptions, resulting in greater alliance performance (Morgan & Hunt, 1994).

Several studies have found a significant relationship between level of commitment and alliance performance for multinational enterprises (Skarmeas et al, 2002; Aulakh, Kotabe & Sahay, 1996; Beamish & Banks, 1987). Although for developing country MNEs from Korea, Lee and Beamish (1995) found no significant relationship.

The literature investigating SME commitment and alliance performance is not well developed. Karagozoglou and Lindell (1998) examined the success factors in a small sample of U.S. high-tech SMEs. They found that these firms considered each international alliance to be very important for the success of the firm. In a study examining U.S. SMEs involved in network relationships, Sherer (2003) found that when network partners displayed a high degree of commitment to the survival of the alliance, it showed better performance. In a study of 201 US exporting manufacturing firms – the vast majority of which were SMEs – Leonidou et al. (2002) found that companies expressing a high degree of commitment to the relationship with their foreign distributor, reported a more satisfying and harmonious long-term relationship in comparison to firms reporting low commitment. Based on the theoretical arguments and limited empirical evidence discussed above we hypothesize that:

H 1. For SMEs from developing countries greater alliance commitment will lead to greater alliance performance.

Control

Beamish and Banks (1987: 4) suggest that long-term commitment can be “reinforced with supporting interorganizational linkages such as …control systems”. Control systems can be used to help minimize self-seeking behavior of alliance partner organization and/or can help increase alliance performance by creating supportive behaviors. Generally two types of controls can be used in alliances, output controls and process controls (Bello & Gilliland, 1997; Celly & Frazier, 1996; Aulakh et al, 1996; Gencturk & Aulakh, 1995). Output controls focus on alliance results and consist of monitoring the outputs of the alliance, such as sales levels or profits. Process controls focus on alliance behavior and consist of influences on selling procedures, promotional activities, product development practices, and daily marketing programs (Bello & Galliland, 1997; Gencturk & Aulakh, 1995).

Output controls focus on monitoring the results of partner efforts and tend to shift risk to the partner firm (Celly & Frazier, 1996). Because of this, partner firms often feel isolated and alone which encourages self-seeking behaviors that may damage the long-term prospects of the alliance (Aulakh et al, 1996). Output controls do not promote cooperation or knowledge sharing; firms do not have the incentive to work together to achieve alliance objectives (Bello & Galliland, 1997; Celly & Frazier, 1996). Output controls are normally demotivational because of potential environmental uncertainties that create ambiguous cause and effect relationships; alliance partners are held responsible for factors outside their control (Celly & Frazier, 1996).

Contrary to this, process controls are used by firms to monitor partner behavior and direct that behavior toward specific goals and objectives (Bello & Gilliland, 1997; Aulakh et al, 1996). Firms that use process controls assume some of the risks involved in international expansion which encourages long-term behavior from partner organizations (Aulakh et al., 1996). Process controls provide a supportive atmosphere in the alliance, reducing the motivation for self-seeking behavior and encouraging greater cooperation and knowledge sharing (Bello & Gilliland, 1997). Because developing country SMEs have few alliance partner alternatives, process controls may provide an effective means to garner partner support, guard against opportunism, and develop a long-term relationship because this control method signals the importance of the alliance to the firm and the willingness to share risks (Celly & Frazier, 1996).

Morgan and Hunt (1994) found that commitment leads to greater partner acceptance or adherence to specific requests or policies. Because process controls rely on partner cooperation in responding to specific requests and situations, greater alliance commitment may lead to an increased use of process control systems.

Hence, in alliances where commitment is high process controls may be preferred because they reinforce the long-term orientation of the alliance, they reduce the occurrence of opportunistic behavior, and they help increase cooperation between alliance partners.

H 2. For SMEs from developing countries greater commitment will lead to greater use of process controls.

Because process controls influence the behavior of alliance partners, they may lead to increased alliance performance (Bello & Gilliland, 1997; Aulakh et al, 1996). The reason for this increased alliance performance is that partners using process control methods tend to exchange knowledge directly and share information which can result in a better match between foreign market knowledge (possessed by one partner) and product specific knowledge (possessed by another partner). This exchange of knowledge results in better performance than could be achieved by either alliance partner alone because each partner may lack knowledge in one or more critical areas (Bello & Gilliland, 1997).