Can you be too international?

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

.credits: Lavie and Miller, 2008

Firms often engage in more than one strategic alliance, therefore applying a portfolio approach for effective alliance management is necessary. The configurational perspective of extant alliance portfolio research suggests that there are two main factors which influence firm performance (Bos et al., 2017):

Number of alliances - i.e., alliance portfolio size
Heterogeneity of alliance partners - i.e., alliance portfolio diversity.

In this article we will focus on diversity stemming from internationalisation. We will discuss a concept called alliance portfolio internationalisation (API) introduced by D. Lavie & S. R. Miller in 2008.

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

Advantages

Disadvantages

In an article called ‘What are Pros & Cons of foreign partners?’ you can have a closer look on all benefits and weaknesses associated with international strategic advantages.

Alliance portfolio internationalization

The concept refers to the degree of foreignness of a firm's partners within its alliance portfolio. API - a robust measure which combines factors influencing strategic partnerships, thus the overall firm performance:

National diversity (Cultural distance, communication)
Geographical distance (transportation and transactional activities)
Institutional, regulatory and political differences (government effectiveness, political stability, regulatory quality, rule of law, control of corruption)
Economic differences between countries (GDP per capita)

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

Low	Medium	High
When a firm engages with a proximate partner, the benefits of internationalization are limited and unobserved differences may hinder collaboration. Therefore, firm performance is likely to decrease at first.	Then, at a moderate level, performance increases due to value in resource exchange and firm’s ability to recognize risks and exploit opportunities. This allows organisations to benefit from alliances and effectively manage international portfolios.	However, too much internationalization can lead to complexity and higher coordination costs which diminish the performance. The obtained benefits are marginal compared to the overall liability of foreignness.

Moderating effects of Foreign partnering experience & Subsidiary country overlap

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

Foreign partnering experiences should lead to development of partnering capabilities and collaborative routines. In addition, firms should be able to exploit existing network resources, utilize valuable assets and identify partnering opportunities.
Existence of a Subsidiary in a foreign country is excellent for building trust, developing interpersonal relationships and creating informal safeguards, which can improve foreign governance. This can be also beneficial for conflict resolution, cultural alignment and overall improvement of communication. Lastly, accumulated partnering and country experience enhance a firm's relative absorptive capacity, which leads to better learning & knowledge transfer.

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

Conclusion

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

References

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