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Abdul Gani & Tull—Alliance Formation

Gadjah Mada International Journal of BusinessSeptember-December 2010, Vol. 12, No. 3, pp. 355–376

Ahmad Bashawir Abdul GhaniUniversity Utara Malaysia, Malaysia

Malcolm TullMurdoch Business School, Australia

Competition in global industries is shifting increasinglyfrom inter-firm rivalry to rivalry between networks of firms.Strategies of individual firms are thus contingent on the degreeof interdependence that exists between them and the parent firmin the network. The present study examines the effect of networkaffiliation on a member firm’s decision to enter a foreign marketand international strategic alliance formation. Affiliate firmshave two options available to them: (1) enter into a competitivestrategic alliance with a competitor or (2) enter into a symbioticstrategic alliance with the parent firm of the network organiza-tion. We tested this assertion using data from archival sourceson sixty-five Japanese automobile suppliers that had set upstrategic alliances in Malaysia and that belonged to variousinter-organizational networks. Results indicate that when affili-ate firms are dependent on the parent firm, they prefer to formsymbiotic strategic alliances. Conversely, affiliate firms prefercompetitive strategic alliances with competitors when they arenot dependent on the parent firm.

ALLIANCE FORMATIONA Study of the Malaysian Automobile Supporting Industry

Keywords: automobile industry; joint venture; mode of entry; networks; strategicalliances

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Gadjah Mada International Journal of Business, September-December 2010, Vol. 12, No. 3

Introduction

International Strategic allianceshave become an extremely popularmode of entry into new foreign mar-kets for a variety of reasons. It enablesa firm to enter new and difficult mar-kets in a quick manner, overcome own-ership restrictions, lower risk, minimizeglobal competition, provide an opportu-nity to learn, and often acquire thealliance partner’s skills and capabilities(Inkpen 2006). Of the various modesof entry available to a firm expandinginto a foreign market, strategic alli-ances have become increasingly popu-lar because they are often an efficientway of handling environmental uncer-tainty at a foreign location (Beamishand Banks 2007), and often they out-perform entry via acquisitions (Wood-cock et al. 2004). Similar to a jointventure, any strategic alliance is a dec-laration of mutual trust between thealliance partners (Madhok 2005);hence, appropriate partner selection isof extreme importance. The choiceand nationality of the partner selecteddepend on the motives for forming thestrategic alliance; both are critical forthe stability and performance of theventure as well as for the control andconflict issues that often surface(Parkhe 2001, 2003).

Much of the literature on mode ofentry, strategic alliance formation, andpartner selection, has examined theindividual firm as the unit of analysisand has assumed that the mode-ofentry decision is made by an individualfirm on its own (Anderson and Gatignon

2006). This assumption is valid only ifone takes a traditional view of the firm,which states that a firm is normallyregarded as a “complete entity,” oper-ating in an environment that is definedimplicitly as “everything that is not thefirm” (Jarillo 2008). This view of thefirm is extremely narrow and neglectsa consideration of the firm as an entityembedded in a social network withstrong interdependencies (Granovetter2005; Ghoshal and Bartlett 2001). Theincreased presence of the networkform of organization forces us to viewthe individual firm not as a fully inde-pendent decision-making entity but asa semi-autonomous body, many ofwhose decisions are influenced by itsnetwork members (Powell 2000).Hence, the choice of mode of entry intoa foreign market should not be viewedas an isolated decision but as a mani-festation of the strategic posture ofboth the firm (Hill et al. 2000) and thenetwork to which it belongs.

The emergence of the networkorganization, as an alternative to mar-ket or hierarchical organizations(Williamson 2005; Provan andGassenheimer 2004) forces us to re-validate our theories in terms of theemerging forms of new organizations.Increasing globalization in many indus-tries is also causing the competitiverivalry to shift from inter-firm rivalry tointer-group rivalry (Gomes-Casseres2004), resulting in network memberscoordinating their strategic actions inthe market place to gain competitiveadvantages for network firms and theentire group. The global success of the

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Japanese automobile producers hascreated an “isomorphic effect”(DiMaggio and Powell 2003) in manymanufacturing industries and promptedseveral North American and Europeancompanies to develop supplier networksalong Japanese lines (Turnbull et al.2002; Helper and Soko 2005). Theestablishment during the 1980s of amanufacturing base in Asia by suchleading Japanese automobile compa-nies such as Toyota, Honda, Mitsubishi,Nissan and others have led to the re-creation of their supply networks inAsia (Martin et al. 1995; Banerji andSambharya 1996).

This movement toward the net-work form of organization enhancesthe importance of investigating the ef-fects of the Japanese corporate net-work forms (known as keiretsu) onformation of strategic alliances andpartner selection by its member firms.A considerable volume of literatureexists concerning the causes of jointventure formation (Contractor andLorange 1988; Harrigan 1988; Kogut1988; Gomes-Casseres 1989; Parkhe1991), yet surprisingly little is knownabout how networks influence strate-gic alliance formation particularly inSouth East Asia. This study focuses ona network of organizations and theeffect of that network on strategicalliance formation and partner selec-tion decisions of firms that are mem-bers of that particular network in Ma-laysia.

Based on the Pfeffer and Nowak(1976) framework of joint venture for-mation, this study identifies two alter-

nate types of strategic alliance venture:competitive strategic alliances (CSAs)and symbiotic strategic alliances(SSAs). Focusing on the resource de-pendencies between firms that com-pose an organizational network, thisstudy proposes and tests hypothesesconcerning the circumstances underwhich each of these two types ofstrategic alliance is likely to be formed.Hypotheses are tested against datacollected from Japanese automobilesupporting companies that have estab-lished manufacturing facilities in Ma-laysia via strategic alliance formationsbetween 2006 and 2009. This periodwas chosen because there was a largeinflux of Japanese automobile ancillarymanufacturers into Malaysia duringthis period (MIDA 2009). There fol-lows a brief description of Japanesecorporate structure and keiretsu andan ensuing discussion on strategic alli-ance formation in the context of net-work.

Japanese Automobile Industryand Network Relationships

The emergence of the networkorganization in the last couple of de-cades has changed the dynamics ofglobal competition. Instead of firmscompeting against other firms, groupsof firms or a network of firms com-petes against other networks (Gomes-Casseres 2004). In a network organi-zation, individual firms exist in relationto other firms in that network. Inter-firm relationships in a network takeconsiderable effort to establish andsustain; thus, they need network mem-

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bers’ to have the ability to adapt tochanging circumstances. Within a net-work, it is more prudent to settle differ-ences by persuasion and negotiationsthan by termination of the relationship.Repeated exchanges and alliances be-tween the network members also gen-erate a high level of inter-firm trust,which makes it easier for networkmembers to transact business with otherfirms in the same network rather thanwith firms that are outside the network(Gulati 2005). The network membersshare the benefits and burdens of work-ing together, and their expectationsabout each other are well understoodby the relevant parties. A mutual orien-tation is established through knowl-edge that the parties assume each hasabout the other and upon which theydraw in communicating with each otherand in problem solving (Powell 2000).In a network, despite a loss of auto-nomy, organizations develop and main-tain relations with each other as a wayof reducing uncertainty and attractingscarce resources (Provan 2004).

Inter-organizational networksknown as a keiretsu characterize mostJapanese industries. A keiretsu is de-fined as a group of interrelated organi-zations that have cross-ownership, jointshareholdings, common trademarks,involves in commodity transactions, andbank loans between themselves(Gerlach 2002; Orru et al. 1999). Thereare various types of keiretsu that maybe divided into three broad categoriesbased on their relational structure(Gerlach 2002): (1) corporate groups,(2) financial centrality, and (3) indus-

trial interdependence. The automobileindustry in Japan is organized on thelines of industrial interdependence,which is popularly known as a verticalkeiretsu. In a vertical keiretsu, mem-ber firms have a high level of coordina-tion in order to manage their nonfinan-cial resource flows (Gerlach 2002) tocreate a “stable collective structure ofcoordinated action” (Pfeffer andSalancik 1978:161). The objective of avertical keiretsu is to guarantee a mu-tually beneficial, self-sufficient struc-ture for the lead firm and its affiliates.The member firms of the verticalkeiretsu essentially belong to the sameindustry but perform different func-tions along the industry’s value-addedchain (Gittelman et al. 2002). Mostvertical keiretsu have a large centralcore firm that is linked vertically tomany subordinate companies (Orru etal. 1999).

The firms in a keiretsu-type net-work may be categorized into twogroups namely core firms and affiliatefirms (Jarillo 2008). A core firm is thefocal organization in the keiretsu net-work; it sets up the keiretsu and takesa proactive role in the care of it. Affili-ate firms become a part of the keiretsueither by mutating from the core firm(Ito and Rose 2004) or by choosing tobe part of the network after having anincreasing number of favorable trans-actions with the core firm (Banerji2002). Affiliate firms usually play asecondary role in the keiretsu andmainly provide a continual flow of re-sources to the core firm to support thelatter’s activities. In many networks,

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the core firm is generally a large manu-facturing organization, whereas affili-ate firms are smaller organizationswhose major role is to supply the corefirm with necessary products and ser-vices (Thorelli 2006). Research indi-cates that when a core firm in thekeiretsu establishes a manufacturingpresence in a foreign country, many ofits subordinate affiliate firms follow itinto that market and establish their ownmanufacturing facilities (Florida andKenney 2001; Martin et al. 2005). Inthis study, Japanese automobile manu-facturers have been labeled as corefirms and Japanese auto ancillary sup-pliers as affiliate firms.

Strategic Alliance Formationand Networks

Most strategic alliances may becategorized as one of two broad groups,based on the type of interdependencethat exists between the activities of theparent firm in the venture and theaffiliate firm. According to Pfeffer andNowak (2006), the interdependencebetween two or more organizationsmay be competitive or symbiotic. Whentwo organizations are producing simi-lar products and services for similarmarkets, they are said to have competi-tive interdependence; for example, twoautomobile manufacturers whose prod-ucts are sold in the same geographicmarket are said to have competitiveinterdependence. When two organiza-tions have products that are verticallyrelated in the production chain, they aresaid to have symbiotic interdependenceas for example in the relationship be-

tween automobile producers and ancil-lary manufacturers. Hence competi-tive interdependence exists on a hori-zontal level among like organizations,while symbiotic interdependence ex-ists between organizations “verticalIyrelated in the production process”(Pfeffer and Nowak 2006).

A possible explanation for manystrategic alliance activities is anorganization’s response to these twoforms of interdependence. Most coop-erative ventures are formed to reducedemand or to reduce competitive un-certainty (Burgers et al. 2003), and tocreate opportunities to learn (Hamel2001; Inkpen 2006). Key objectives forforming a strategic alliance betweentwo organizations with competitive in-terdependence are to overcome theeffects of competition (Pate 2009) andto learn from each other (Hamel 2001;Inkpen 2006). On the other hand, a keyobjective in cases of symbiotic interde-pendence is to reduce the uncertaintyrelated to resource acquisition (Pfefferand Nowak 2006).

In a network situation, these twotypes of strategic alliance have differ-ent implications for the member firms.In most cases of symbiotic strategicalliances, the automobile producer hasmore opportunities to control the sup-porting manufacturer. A symbiotic stra-tegic alliance is likely to occur betweenthe automobile producer and the sup-porting manufacturer because thesetwo types of firm usually have a buyer-supplier relationship.

In contrast, a competitive strate-gic alliance is likely to occur between a

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member firm and a non-network firmthat is located in the targeted foreignmarket. A competitive strategic alli-ance with a local firm from the foreignmarket usually eases the entry of anetwork member firm into that marketby providing the latter with the requiredmarket intelligence. However, in thecase of a competitive strategic alli-ance, the supporting manufacturer isan equal partner in the strategic alli-ance with the non-network supportingmanufacturer from the host country,sharing the day-to-day knowledge ofaffiliate activities and participatingequally in decision making processes.Harrigan (2008) found that joint ven-tures that were formed by horizontallyrelated firms were on the increase,particularly in the automobile industry,and were more likely to be judged asuccess by both sponsoring firms.

Keeping in view the implications ofthese two types of strategic allianceand their differences, this study cat-egorizes them as two different modesof entry (see Fiure 1). Hence, thehypotheses are developed and empiri-cally tested based on two types of entrymode: competitive strategic alliancesand symbiotic strategic alliances.

Hypotheses

In a study of the entire populationof first-tier suppliers, Banerji andSambharya (2006) found that smallJapanese firms are likely to enter inter-national markets in the automobile indus-try. These firms may lack the techno-logy and are more likely to form coope-rative ventures with a foreign partner(Shan and Hamilton 2001) comparedwith larger Japanese firms. The deci-sion whether to form a strategic alli-

Figure 1. Conceptual Framework: The Choices of Strategic Alliancesthat Can Be Made by Affiliate Firm in a Network Relative tothe Level of Its Interdependence on the Parent Firm

Symbiotic StrategicAlliance

High Dependence on Parent Firm

Competitive StrategicAlliance

Low Dependence on Parent Firm

Japanese SupportingManufacturer Affiliate Firm

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ance with a foreign partner, particular-ly in the automobile industry, is frequent-ly influenced by the membership statusof the Japanese automobile ancillarymanufacturer in one or more verticalkeiretsu and the resulting interdepen-dencies that develop in a verticalkeiretsu.

Because there are strong interde-pendencies in a vertical keiretsu, re-source dependency theory (Cook 1997;Pfeffer and Salancik 1998) provides auseful theoretical framework to ex-plain what type of strategic alliance aJapanese supporting supplier firm islikely to form. The essence of resourcedependence theory is that in a businessrelationship, dependencies are createdbetween the exchange partners, andsuch dependencies often enable theexchange partners to influence eachother’s behavior and profitability(Emerson 1992; Cook 1997; Pfefferand Salancik 1998). According to re-source dependency theory, organiza-tions exercise some degree of controlor influence over the resource environ-ment or the firm’s exchange partnersfor the purpose of relationship stability.This stability can be attained throughthe exercise of power, control, or thenegotiation of interdependencies to-ward the reducing of environmentaluncertainty and a predictable flow ofresources (Oliver 2001). Researchershave applied resource dependencytheory to joint ventures (Greening andGray 2004; Yan and Gray 2004). Afew studies have used resource depen-dence theory to explain keiretsu (Lin-coln et al. 2002; Handfeld 2003; Banerji

and Sambharya 2006).

In a keiretsu, a core firm is oftendependent on an affiliate firm for acritical resource that may form thebasis of a distinctive competence forthe core firm. Often, this critical re-source may be a raw material, a sub-assembly, or a particular service thatthe core firm is unable to procure at thenew location in the foreign market orfor which the cost of procurement isextremely high, or for which the qualityof the resources available is not good.In such a situation, the core firm willwant the affiliate firm supplying suchcritical resources to enter the sameforeign market as the core firm andcontinue to supply those resources(Martin et al. 2005; Banerji andSambharya 2006) so that the core firmcan transfer its competitive advan-tages to the foreign market for contin-ued successful operations (Hu 2005).The dependence of the core firm on anaffiliate firm increases when the re-source received from an affiliate firmis critical for the output of the core firm(Pfeffer and Salancik 1998). In thiscontext “criticality measures the abilityof the organization to continue func-tioning in the absence of the resources,”supplied by the affiliate firm (Pfefferand Salancik 1998).

The dependence of the core firmon an affiliate firm is also determinedby the variety of resources received bythe core firm from a particular affiliatefirm. In cases in which the core firmreceives only one type of resourcefrom an affiliate firm, the dependence

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of the core firm is determined basedonly on that resource. In cases in whichthe core firm receives several resourcesfrom an affiliate, the dependence of thecore firm on that affiliate firm is deter-mined by all the resource exchangestaken collectively. However, the twobasic tenets of criticality of resourceand lack of alternative sources for thatresource need to be present for thewhole variety of resources being ex-changed between a core and an affili-ate firm.

When an affiliate firm sets upproduction facilities in a foreign mar-ket, it has a “liability of foreignness”(Zaheer 2005) and faces a great dealof environmental uncertainty for bothacquisition of resources and selling ofoutput. Hence, it needs the support ofthe core firm in that foreign market.The affiliate firm may get this supportfrom the core firm in two ways. First, itmay enter into a strategic alliance withthe core firm and thereby assure itselfof the core firm’s support. Second, ifthe core firm is dependent on the affili-ate firm for supply of critical resources,then it will provide the affiliate firmwith all the support the affiliate needsso that the core firm is assured acontinual flow of critical resources fromthat affiliate firm.

When a core firm is dependent onan affiliate firm for critical resources,the affiliate firm will not be interested ina symbiotic strategic alliance with thecore firm, because in such an allianceit has to share with the core firm controlof its activities in that foreign market.

The very dependence of the core firmon the affiliate firm will assure it of thecore firm’s support. On the contrary,the affiliate firm will be more interestedin entering into a strategic alliance witha local firm in the foreign market as itreduces competitive uncertainty andprovides an opportunity to learn quicklythe intricacies of the host country mar-ket from its local partner. To the localfirms in the host country, the affiliatefirm may be a very lucrative partner,because the latter often has firm-spe-cific strategic advantages (Kimura2009) and intimate knowledge of thetrue requirements of the core firm.Also, such a venture often deflectsprotectionist sentiments in the foreignmarket (Reich and Mankin 2006;Yoshida 2007). It may also reduce thecompetition faced by the affiliate firmin the foreign market in selling its prod-ucts to firms other than the core firm.When a number of other firms alsoenter the same foreign market, thesupport from the competitive strategicalliance partner may be critical for thesurvival of the affiliate firm in theforeign country (Shaver 2005). Throughits alliance partner, the affiliate firmwill be able to access a new group ofcustomers who had previous dealingswith the alliance partner of the affiliatefirm. The alliance partner will be ableto provide the affiliate firm with thenecessary market knowledge to suc-ceed in that foreign market (Hamel andPrahalad 1999). These types of cross-border cooperative strategy are veryeffective for entering into new geo-

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graphical markets (Bleeke and Ernest2001), because they also reduce thetransaction cost of developing a newmarket (Hennart 2001).

By and large, research on strate-gic alliances suggests that learning is aprimary objective of firms entering intostrategic alliances. An affiliate firmwill maximize its potential by swappingits technological expertise for market-ing and distribution advantages offeredby competitors in this type of coopera-tive venture (Buckley and Casson2006). Inkpen (2006), in a case study offive international joint ventures estab-lished in the United States betweenU.S. and Japanese firms in the auto-mobile industry, found that learningwas the primary objective of both part-ners. Thus, a competitive strategic al-liance makes it easier for the U.S.partner to become a potential supplierto the major Japanese automobile firmsin the transplant operations. Hence, thefollowing hypothesis may be made:

H1: The higher the dependence of

the core firm on the affiliatefirm in the home market, thegreater the likelihood that theaffiliate firm will follow the corefirm into a foreign market byway of a competitive strategicalliance.

In a keiretsu network, the rela-tionship between the core firm and anaffiliate firm is usually based on reci-procity of resources. As resourcesflow from the core firm to the affiliatefirm, the affiliate becomes increasinglydependent on the core firm. Theseresources may take various forms, such

as long-term purchase contracts, tech-nical know-how, and plant or equip-ment and financial capital (Asanuma2005). Probably the single most impor-tant source of support to an affiliatefirm from a core firm is the purchase ofthe affiliate firm’s products. Selling itsproducts in a competitive market is amajor source of uncertainty for manyorganizations, especially when thereare many producers of a particularproduct and few purchasers. Often, acore firm enters into a long-term pur-chase contract with an affiliate firmand buys a significant portion of theaffiliate firm’s annual production. Thishelps the affiliate firm to cope with theuncertainty of selling its products.

Usually, small affiliate firms tendto deal primarily with a single core firm(Richardson, 2003). Due to this exclu-sive dealing (Odaka et. al. 2008), theaffiliate firm’s dependence on and as-set specificity relative to the core firmincrease, often leading to a situation of“virtual integration” (James 2005). Itbecomes harder for the affiliate firm tofind a substitute for the core firm as itsmajor customer. Often an affiliate firminvests in assets that are specificallyrelated to meeting the needs of a par-ticular core firm that purchases a majorshare of its total output (Helper 2000).Over time, such investments reinforcethe dependency of an affiliate firm onthe core firm. For example, in theautomobile industry, an affiliate firmmay invest in machines such as dies,metal punches, and other machine toolsthat produce products needed by aparticular automobile manufacturer.

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This high asset specificity increasesthe affiliate firm’s cost of switchingsupply from one core firm to another(Porter 2000) because those assetswill produce products that are con-sumed by only one automobile manu-facturer. If the affiliate firm wants tosupply another manufacturer, then ithas to invest again in a new set of dies,tool, punches, and other equipment.Hence, the affiliate firm becomesheavily dependent on a particular corefirm to sell its products and gets lockedinto an exclusive exchange relationshipwith that core firm.

The core firm often acts as aresource base to an affiliate firm. Thecore firm may provide affiliate firmswith the necessary manufacturing tech-nology, product know-how, manage-rial training, and sometimes plant, ma-chinery, land, and buildings (Odaka etal. 2008). This type of support strength-ens the relationship between the corefirm and an affiliate firm and makes therelationship more than a mere buyer-supplier linkage. However, the corefirm provides this kind of support mainlyto those affiliate firms whose productsplay an important role in the manufac-turing process of the core firm. Theexact nature of the support from thecore firm to an affiliate firm is usuallydetermined based on the mutual needsof the core and affiliate firms.

In a keiretsu network, the corefirm purchases a major share of anaffiliate firm’s output and provides itwith various resources such as techni-cal expertise, plant and machinery, andfinancial assistance. This makes an

affiliate firm highly dependent on thecore firm. When an affiliate firm entersa foreign market, it faces a high level ofenvironmental uncertainty both in termsof resource acquisitions and outputdisposal. Often, an affiliate firm needsfinancial, managerial, and technicalsupport from the core firm in the for-eign market, along with an assurancethat the core firm will purchase a majorshare of its output produced in thatforeign market. The presence of thecore firm in the foreign market and itswillingness to provide support to theaffiliate firm help the latter cope withenvironmental uncertainty. In manycases, affiliate firms prefer to haveequitable participation by the core firmin order to signify continued supportfrom the core firm. When the depen-dence of an affiliate firm on the corefirm is high, such assurances of contin-ued support from the core firm play acritical role in the choice of entry modeby the affiliate firm. Based on thisdiscussion, the following hypothesis maybe made:

H2: The greater the dependence of

an affiliate firm on the corefirm, the greater the likelihoodthat the affiliate firm will followthe core firm into a foreign mar-ket by way of a symbiotic strate-gic alliance.

Methodology

The strategic alliance formationhypotheses developed in this study weretested empirically using data from 65first-tier Japanese automobile support-

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ing manufacturers that had entered theMalaysian automobile industry between1995 and 2007. During this period,Japanese foreign direct investmentsurged, resulting in the entry of morethan 120 auto ancillary manufacturersinto Malaysia (Banerji and Sambharya2006). For this study, we identified theseven major Japanese automobile as-semblers (Toyota, Nissan, Honda,Mazda, Mitsubishi, Isuzu, and Suzuki)as the core firms.

The data on Japanese automobileand automobile parts companies, oper-ating in both Japan and in Malaysia,were collected from three secondarysources: The Structure of the Japa-nese Autoparts Industry (3rd ed. 2006),published by Dodwell Marketing Con-sultants, Tokyo; Japan’s ExpandingAsia Manufacturing Presence (2008),published by the Japan Economic Insti-tute, Washington D.C.; and The Rela-tionship between Japanese Auto andAutoparts Makers (2007), publishedby Mitsubishi Research Institute.

Data on supply of parts, sales,stock ownership, capital structure, prof-its, and affiliation of ancillary supplierswere taken from The Structure of theJapanese Autoparts Industry (Dodwell2006). Japan’s Expanding Asia Manu-facturing Presence (Japan EconomicInstitute 2008) provides data on thedate of entry of the affiliate firm intoMalaysia, the name of the Malaysianpartner in cases of competitive strate-gic alliances, the percentage of owner-ship by each partner for every allianceformed, and the product range of the

newly formed company in Malaysia.The Mitsubishi Research Institute(2007) study provided the informationon multiple linkages between support-ing firms and major automobile assem-blers.

Measurement of Variables andStatistical Analysis

In this study, there are four inde-pendent variables, three control vari-ables, and one dependent variable. Twoof these four independent variables(sales index and capital index) relate tothe dependence of the affiliate firm onthe core firm. The other two indepen-dent variables (variety of products andimportance of affiliate firm) relate tothe dependence of the core firm on theaffiliate firm. The three control vari-ables relate to the level of internation-alization of the firm, firm size, and firmprofitability. The single dependent vari-able is a dichotomous one that de-scribes the type of joint venture formedby the Japanese auto ancillary firm-either competitive strategic alliance orsymbiotic strategic alliance.

Dependence of the core firm onthe affiliate firm

To calculate dependence betweena core firm and an affiliate firm andvice-versa, we identified the core firmfor each affiliate firm based on theaffiliate firm’s keiretsu membershipas identified by the report on the Japa-nese autoparts industry (Dodwell 2006).The dependence of a core firm on anaffiliate firm was measured by two

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variables: (1) importance of an affiliatefirm to its core firm; and (2) variety ofproducts purchased by the core firmfrom an affiliate firm.

The importance of an affiliate firmto the core firm was measured by thecriticality of the products supplied bythat affiliate firm to the core firm andthe relative status of the affiliate firm insupplying those products. The infor-mation on the level of criticality of aproduct and status of the supplier firmwas taken from Dodwell (2006) study.It was based on a maximum of 145major ancillary components such ascarburetors, fuel pumps, pressed bodyparts, and so forth.

C = criticality of the product supplied(min. 1, max. 3);

S = status of the affiliate firm (min. 1,max. 5); and

n = number of products supplied by aparticular affiliate firm (min. 1,max. 145).

The higher the importance of theaffiliate firm, the greater the depen-dence of the core firm on the affiliatefirm. It is hypothesized that firms thatplace a higher level of importance onaffiliate firms are more likely to form acompetitive strategic alliance with aMalaysian based ancillary manufac-turer and enter the Malaysian market.

The variety of products purchasedby the core firm from an affiliate firm

was measured by the number of differ-ent types of component a core firmpurchases from a particular affiliatefirm. The information on the varietyproducts purchased from an affiliatefirm also extracted from Dodwell(2006). The higher the variety of prod-ucts, the greater the dependence of thecore firm on the affiliate firm. Wehypothesize that firms with higher lev-els of variety of products are likely toestablish themselves in the Malaysianmarket by using a competitive strategicalliance.

Dependence of an affiliate firm onthe core firm

Two variables were used to mea-sure the dependence of an affiliate firmon a core firm: sales index and capitalindex. The sales index measures thesupport an affiliate firm gets from acore firm in selling its output. Thecapital index measures the financialsupport an affiliate firm gets from thecore firm. The sales index indicates thepercentage of total sales of an affiliatefirm purchased by a core firm.

Because the sales index indicatesa percentage, the scores on it rangefrom 0 to 100. A lower value indicatesless affiliate firm dependence on thecore firm, while a higher value indi-cates high affiliate firm dependence onthe core firm. We hypothesize that the

Importance of affiliate to the

core firm= CnSn/n, where

Sales Index= (sales to the core

firm/total sales of the

affiliate firm) X 100.

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higher the sales index, the greater thepossibility that an affiliate firm willenter the Malaysian market by way ofa symbiotic strategic alliance.

The capital index similarly indi-cates the percentage of total capital ofan affiliate firm that is held by the corefirm in the keiretsu.

Because the capital index indi-cates a percentage, the scores on itrange from 0 to 100, with low valuesindicating less dependence of the affili-ate firm on the core firm. We hypoth-esize that the higher the capital index,the greater the possibility of a symbi-otic strategic alliance. The informationon both the sales index and the capitalindex comes from Dodwell (2006).

Control variables

Three control variables were usedin the study: previous level of interna-tionalization, firm size, and firm perfor-mance. Previous research indicatesthat the level of internationalization(Juul and Walters 2007) often affects afirm’s choice of mode of entry. Thesubsidiary index measured the interna-tionalization of the affiliate firm. It wascreated by weighing manufacturing andtrading subsidiaries by the ratio of three

to two and adding them, respectively.Manufacturing subsidiaries were givenmore weight because they indicate astronger international posture and com-mitment (Banerji and Sambharya2006). The higher the subsidiary index,the greater the internationalization ofthe affiliate firm. The performance ofan affiliate firm was measured by av-eraging its return on sales (ROS) priorto its entry into Malaysia. The higherthe ROS, the better the performance ofthe affiliate firm. The information tocalculate the subsidiary index and theROS was taken from Dodwell (2006).The size of the firm was measured bythe number of employees. Logarithmictransformation of the number of em-ployees was performed to normalizethe distribution of the variable.

The dependent variable in this studyis the formation of the two differenttypes of strategic alliance, namely, com-petitive strategic alliance (CSA) andsymbiotic strategic alliance (SSA), forentering the Malaysian market. Thedependent variable, being a dichoto-mous one, was coded with values 0 and1. Which affiliate firms entered theMalaysian market and their date ofentry were collected from the JapanEconomic Institute update (2008). Thebasic procedure used to test the CSA/SSA formation was a logistical regres-sion. This covered 65 Japanese auto-mobile ancillary firms that entered theMalaysian market between 1997 and2007 by way of a strategic alliance.

Capital Index= (capital of affiliatefirm owned by acore firm/totalcapital of theaffiliate firm) X100.

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Results

Table 1 shows the summary sta-tistics for all the independent variablesused in the statistical procedures. In-cluded in the table are means, standarddeviations, and Pearson inter-correla-tions. A logistical regression is appro-priate when the dependent variable is adichotomous variable as in our case, inwhich the type of strategic allianceformation, was CSA/SSA, when a firmentered the Malaysian market. All ofthe four independent variables are con-tinuous in nature. Table 2 shows theresults of the logistical regression. Weran four models in the statistical analy-ses. In Model 1, only the control vari-ables were entered. None of the con-trol variables were significant. Next,the independent variables= variety ofproducts, importance of affiliate firm tocore firm, and the capital index wereentered in Model 2. There is a marked

improvement in the fit of the modelwith two variables: importance of af-filiate firm and capital index are nowsignificant as indicated by the Waldstatistic. The Wald statistic is the ratioof the maximum likelihood estimate ofthe slope parameter to an estimatedparameter of its standard error (Hosmerand Lemeshow 1989). Similarly, weentered three independent variables-importance of affiliate firm, variety ofproducts, and the sales index-in Model3. We entered capital index and salesindex separately in Models 2 and 3because they were significantly inter-related, not surprisingly (both measurethe importance of core firm to affiliatefirm); we wanted to disentangle theirrespective effects on type of strategicalliance formed. Both the importanceof affiliate firm and sales index aresignificant. Finally, in Model 4, weentered all four independent variables-sales index and capital index as well as

Table 1. Means, Standard Deviations, and Correlations for All Variables

StandardVariables Means deviation 2 3 4 5 6 7

Firm size 7.39 1.07 .27 .59 *** -.28 ** -.16 .31 ** .35 ***

ROS .0215 .027 .46 *** -.15 .02 .001 .64 ***

Subsidiary index 6.74 8.16 -.25 ** -.19 .10 .40 ***

Sales index 38.20 24.42 .53 *** .09 -.04

Capital index 16.53 23.47 .24 * .14

Importance of affiliate firm 5.98 4.21 .29 *

Variety of products 2.84 4.37

* P < .10; ** P < .05; *** P < .01.

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variety of products and importance ofaffiliate firm. Models 2, 3, and 4 indi-cate a good fit, with the percentage offirms being classified correctly at ~71percent.

The results indicate that financialsupport and capital ownership by thecore firm are integral in the formationof a symbiotic strategic alliance be-tween the affiliate firm and the corefirm, when the affiliate firm enters aforeign market in which the core firmhas already established a manufactur-ing presence. The significance of thesales index variable indicated that whenthe core firm is a major customer of the

affiliate firm, the interdependence be-comes very strong and often leads to asymbiotic strategic alliance. The thirdindependent variable that was signifi-cant was importance of the affiliatefirm to the core firm. This indicates thatwhen the core firm is very dependenton the affiliate firm, the chances arehigh that the affiliate firm will enter themarket by way of a competitive strate-gic alliance. These findings providemoderate support for the first hypoth-esis, which proposes that higher levelsof core firm dependence on the affili-ate firm will lead to formation of com-petitive strategic alliances. The results

Table 2. Results of logistical regression—Dependent variable CSAs/SSAs

Independent Variables Model 1 Model 2 Model 3 Model 4

ROS 1.72 1.03 2.18 1.44

Firm size .74 .03 .05 .001

Subsidiary index .44 1.19 .66 1.23

Capital index 8.45 ** 5.69 **

Sales index 4.91 1.19

Variety of products .03 .07 .03

Importance of affiliate firm 4.53 ** 2.70 4.6 **

% classification correctly 59.09 68.18 68.66 71.21

—2 Log likelihood 84.84 72.03 78.15 71.21

Goodness of fit 65.26 63.06 63.99 62.75

Model chi-square 3.37 12.81 7.33 13.98

Significance .30 .005 .06 .01

Improvement 3.37 12.81 7.33 13.98

Significance .30 .005 .06 .01

Note: * P < .10. The number in columns is the Wald statistic; ** P < .05; *** P < .01.

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also provide strong support for thesecond hypothesis, which proposes thathigher levels of affiliate firm depen-dence will lead to the formation ofsymbiotic strategic alliances.

Discussion and Conclusion

The management of an organiza-tion’s interdependence with the taskenvironment is the key activity of topmanagement (Thompson 1997). Main-taining co-alignment with the mainstakeholders of the firm is paramountin order to sustain strategic competitiveadvantage. The present study investi-gated the dynamics of managing inter-dependence with one such key compo-nent of the task environment-the sup-pliers. Firms are aware that buyer-supplier relationships increasingly arebecoming a focal point for achievingthis competitive advantage due to thelong-term advantages in terms of cost,trust, and reliability. We extend theliterature by looking at the networkeffects on managing interdependencein the context of the Japanese automo-bile supporting industry.

Previous studies of strategic alli-ance formation have assumed that afirm is a “complete entity” and is freeto choose any other firm as an allianceor venture partner. This study pointsout that this assumption is not neces-sarily true in the case of networks. Thefindings of this study indicate that stra-tegic alliance formation, especially forJapanese companies, is strongly influ-enced by its keiretsu ties. The inter-firm relationships within a keiretsu

evolve over a period of time and arereinforced by every transaction. Thefirms within a keiretsu become ex-tremely dependent on each other toretain their competitive advantage.These dependent relationships havestrong implications that affect withwhom a keiretsu member will form astrategic alliance. These findings areextremely important because the suc-cess of Japanese firms is having astrong “isomorphic effect” (DiMaggioand Powell 2003) all over the worldthrough the adoption of “continuousbenchmarking” and “best practices”by competitors. During the 1990s and2000s, many U.S.-based companiesreorganized their supplier networksbased on the Japanese model. There isevidence of the formation of keiretsu-style networks in Malaysian automo-bile firms (Dyer 2006). Currently, manyEuropean manufacturers are re-orga-nizing their supplier networks based onthe same model. The popularity ofvarious enterprise integration programsindicates that this phenomenon hasalso spread to many industries in othercountries.

The findings also indicate a mixed-motive relationship within a strategicalliance (Parkhe 2001). The support ofthe core firm in a network motivatesmany affiliate firms to move into for-eign markets. Without this support,some of the affiliate firms would havenever ventured abroad. Hence, manyof the affiliate firms are very loyal tothe core firm even at the foreign loca-tion. However, the formation of manystrategic alliances with Malaysian based

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ancillary manufacturers also indicatesthat given a chance, many affiliatefirms would like to move away fromtheir core firms, especially when theyare confident that due to its depen-dence the core firm will continue to buythe necessary components from themat the foreign location.

This study extends the literatureon strategic alliance formation and part-ner selection by identifying a new set offactors that deal with the interdepen-dencies within the keiretsu: the depen-dence of the core firm on the affiliatefirm, and the dependence of the affili-ate firm on the core firm. These twofactors have a strong impact on strate-gic alliance formation by the memberfirms of a keiretsu. The findings fromthe present study also add a new levelof variables to the three-level categori-zation by Kogut and Singh (1998).They may be termed as “network-level” variables because they occupy aposition between the industry-levelvariables and the firm-level variables.The use of the resource dependenceframework to explain strategic allianceformation also extends the applicationof this framework in the internationalarena.

Based on prior research(Nishiguchi 2004), in this study weassumed that affiliate firms often dealexclusively with their core firms, and inmost cases that is true. However, someaffiliate firms had supply links withmore than a single core firm. Suchmultiple linkages may affect the de-pendency relationship between the core

and affiliate firm and thereby influencethe strategic alliance partner selectionprocess.

The significance of organizationallearning has been identified recently inthe joint venture literature (Parkhe 2001;Inkpen 2006; Lyles and Salk 2006).Even though the present study does notdirectly address this issue, organiza-tional learning is very relevant to thetopic. Most strategic alliances result ina “learning race” (Gulati 2005) be-tween alliance partners, and strategicalliances formed within the context ofthe keiretsu are no exception. Theability to learn and absorb knowledgefrom an alliance partner often changesthe resource dependence equationwithin the alliance and the consequentorganizational bargaining power vis-à-vis the alliance partner.

Inkpen (2006) identified the im-portance of organizational learning inhis study of U.S. and Japanese jointventures in the automobile industry.Our study predicts some of the ante-cedents of organizational learning instrategic alliances. The intensity andmagnitude of the interdependencies inkeiretsu will determine what sort ofstrategic alliance a Japanese supplierwill undertake. If the affiliate firm isdependent on the core firm, then thestrategic alliance will be a symbioticone and potential for learning will belimited. On the other hand, if the corefirm is dependent on the affiliate firm,then the latter can use its leverage toform a competitive strategic alliancewith a Malaysian partner. In the latter

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situation, the potential is unlimited. Acompetitive strategic alliance would bea ideal for a technology-for-markettype of exchange and would maximizelearning for both the Japanese andMalaysian partners.

The findings of this study are alsorelevant to other industries in which theprocess technology is similar to that ofthe automobile industry. In industriessuch as computers, construction equip-ment, consumer electronics, farmequipment, heavy machinery, motor-cycles, telecommunications, and trans-portation equipment, in which the finalassembly depends on a network ofancillary suppliers, similar types of stra-tegic alliance can be formed. Thus, theaffiliate firm will have the option ofchoosing the type of strategic alliance(competitive or symbiotic) in its modeof entry into a foreign market, depend-ing on its level of interdependence withthe core firm.

Previous studies indicate thatnearly 60 percent of all internationaljoint ventures fail (Zahra andElhagressy 2004). The median life ofmost joint ventures is only seven years,often ending with a sale by one partnerto the other (Bleeke and Ernst 2001). Itwould be interesting to investigate thechanging relationship between the part-ners and the endurance of these twotypes of strategic alliance. Being a partof the network may have an effect inprolonging the life of these two types ofjoint venture. The bargaining power ofthe venture partners often has an ef-fect on their profitability (Yan andGray 2004). Because the bargainingcapacity of the Japanese ancillary pro-ducer firm will be different in these twotypes of strategic alliance, it may beworthwhile to examine the profitabilityof competitive strategic alliances andsymbiotic strategic alliances.

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