Rationale of Strategic Alliances

There are several different methodological approaches developed on strategic alliances. These include: transaction cost economics, social networks, resource dependency, strategic choice, and organizational learning. (Barringer and Harrison, 2000)  Each of these theoretical regimes offers a unique perspective on the formation of alliances. This paper reviews three widely used theoretical paradigms that explain alliance formation, including transaction cost economics, resource dependence theory, and strategic choice theory.

Transaction cost economics (TCE) TCE focuses on how an organization chooses governance structure in terms of the characteristics of transactions so as to minimize its production and transaction costs. Governance structure choices range from discrete market exchange at the one extreme, to centralized, hierarchical organization at the other, with hybrid or intermediate modes in between (Williamson, 1985). TCE proposes the match of governance structures with transactions in terms of asset specificity, frequency, and uncertainty.

With the increase in asset specificity, recurrence frequency, and uncertainty involved in a transaction, internal organization will be more likely to take place of market arrangement. From a TCE perspective, R&D alliances are one type of inter-firm relationships found in between standard market transactions of unrelated companies and integration by means of mergers and acquisitions (Hagedoorn, 2002). Alliances are preferred when transaction costs associated with a specific exchange are too high for an arm's-length market exchange but not high enough to justify vertical integration (Hennart, 1988).

Resource dependency Resource dependence theory is rooted in an open system framework, which argues that organizations must engage in exchanges with their environment to obtain resources (Scott, 2002). Resource dependence theory examines the formation of strategic alliances as a result of underlying resource dependence (Pfeffer and Nowak, 1976). From the resource dependence perspective, 'no organization is completely self-contained' (Pfeffer and Salancik, 1978).

An organization must transact with others to acquire resources to survive. Interdependence thus exists between the organization and others who control resources it needs. Firms seek resources that they lack and that are essential to achieving competitive advantage. Strategic interdependence between organizations describes a situation in which one organization has resources or capabilities beneficial to but not possessed by the other (Gulati, 1995).

Resource dependence theory suggests that one common reason for the formation of strategic alliances is to take advantage of complementary assets (Barringer and Harrison, 2000). The benefits of joint R&D are based on the pooling of complementary resources provided by partners, such as technological skills and assets, financing, and access to the large domestic or international markets (Hladik, 1988). Strategic choice The strategic choice theory focuses on the competitive environment of an organization (Porter, 1980).

From a strategic choice perspective, strategic alliances are a mechanism for firms to enhance their competitive positioning or market power (Porter, 1986; Kogut, 1988). Alliances are a natural consequence of globalization and the need for an integrated global strategy (Porter, 1986). According to Porter (1986), a strategic alliance can be a transitional state in the adjustment of firms to globalization, used to accelerate the process of foreign market entry. The motivations to alliances for strategic reasons are numerous (Kogut, 1988).

Strategic alliances are used to gain access to market, shape competition, facilitate international expansion, increase speed to market, gain fast access to new technologies, benefit from economies of scale, reduce costs, share risks, and increase market power (Glaister and Buckley, 1996). As R&D alliances have become a key source of competitive advantage, many multinational corporations have adopted global R&D strategies and established extensive R&D alliances with local partners in emerging markets. Therefore, the choices of the form and function are important aspects of international R&D alliance strategies.

Motives of R&D Alliances As different theories can be used to explain the formation of strategic alliance, a comprehensive perspective integrating different theories should provide us with better understanding of the formation of international R&D alliances in China. This study draws on three widely used theories, i. e. transaction cost, resource dependency, and strategic choice theories, to examine the international R&D alliances in China. Using this integrated perspective, we set out a number of key strategic motives that drive MNCs to form international R&D strategic alliance in an emerging economy like China.

Market access and market share In an international context, entry into foreign markets is a well-known rationale for firms to enter into alliances with local partners (Hladik, 1988). The selection of a particular local partner may be a strictly strategic decision, based on how the partner can enhance the firm's long-term competitiveness in a foreign market, rather than on specific resource dependency needs or transaction costs considerations (Barringer and Harrison, 2000).

To examine the motives behind international R&D alliances in China, we should draw much attention to the lure of a huge domestic market to foreign partners. Although China is currently undertaking a series of aggressive reform measures to transform the centrally planned economic system into a market-oriented economic system, state-owned enterprises still dominate its economy and national and local government often place strict control over market operations (Lee, Chen, and Kao, 2003).

Under such circumstances, alliances with local partners may be the only way to enter the domestic market. For instance, due to the implementation of the policy of 'Technology Transfer from Opening Domestic Markets' (Zhao and Sun, 2003), access to the local market can occur only if the foreign company transfers technology to a local partner to meet the government policy requirements. This government pressure is very common in technology intensive industries such as the emerging information technology industry.

Foreign firms in these industries who wish to sell products in the Chinese market may form R&D strategic alliances with local firms to commit to technology transfer so as to get access to the market. In those industrial areas where foreign firms are allowed to enter the domestic market, China's business environment and volatile market are still major challenges to MNCs. Targeting this unfamiliar market, MNCs will wish to obtain market knowledge and enhance market share through partnering with local firms who have strong market position.

The Chinese partners' existing sales and support network in China is of great help for MNCs to promote their technology and products to the vast Chinese market. The localization of R&D through alliances also enables multinational corporations to move product development and resources closer to the customers and respond more quickly to domestic market requirements. This can enhance a firm's competitive advantage and market share. MNCs may also use R&D alliances to increase recognition and credibility of their technology and products in the new market.