Determinants of incidence and modes of alliances: a study of Indian information industry

Abstract

Globalization and technological changes are rapidly changing the context in which business firms function. Firms are responding in a variety of ways to these changes and one of the responses is the use of alliances, characterizes as a hybrid mode of governance between firms and markets. This is evident in the rapid rise in the incidence of alliances and concomitant changes in the content of alliances during the past two decades. The rapid increase in the incidence of alliances has seen a corresponding increase in the number of studies of the phenomenon, providing deeper insights into a variety of issues. One of the issues, which has been widely studied but continues to be explored, is the determinants of incidence and modes of alliances. Appropriability (ability of an economic agent to extract rents from an economic activity, for example, commercializing innovation) and uncertainty have been studied as significant predictors of alliance formation. However, the extant literature on alliances takes a narrow definition and operationalization of appropriability reflecting only national institutional mechanism of intellectual property protection. Various studies, especially those relating to technological change and innovation, have, however, pointed to firms’ use of variety of mechanisms for enhancing appropriability than just taking resource of legal mechanisms. These include like being first to market, access to complementary assets etc. Thus, the effectiveness of these appropriability mechanisms is seen as idiosyncratic to a firm depending on firm’s internal resource characteristics, industry characteristics and national policy environment. Using these insights, the present study widens the scope of appropriability and studies the links between perceived effectiveness of various appropriability mechanisms and incidence and modes of alliances. Further, extant literature provides leads into how, among other factors, various types of uncertainty affect alliance formation, especially its mode. This study makes an effort to capture different types of uncertainty empirically and estimate their impact on the incidence and mode of alliances.

The study uses a multi-methodology research design comprising a case-study, questionnaire-based survey of Indian Information Technology firms and analysis of secondary data on alliances in Indian IT industry. The secondary data was gathered by content analysis of alliance announcements published in two leading IT magazines during 1994-2000.

The study shows that the films have entered into alliances primarily to access new geographical and product markets and enhance credibility. The study further shows that perceived effectiveness of access to complementary assets for enhancing appropriability is positively associated with the incidence of alliances whereas perceived effectiveness of complexity is negatively associated with the incidence of alliances. Thus, firms tend to enter into alliances to access complementary assets but avoid such linkages when complexity of their technology provides them with an effective appropriability mechanism. Apparently, transfer of such knowledge is difficult. Higher perceived uncertainty does not lead to higher incidence of alliances. However, age firms in India IT industry have used larger number of alliances with strategic motivations to access markets and enhance credibility rather than to overcome uncertainties. This partly reflects the nature of IT industry in India today, which is service rather than product oriented and is essentially focused on export markets. For an average IT firm, given the cost-competitiveness, the key to growth is accessing the large and stable export markets which are not fraught with uncertainty. Apparently, larger number of alliances facilitates this process.

In mode choice, perceived competitive uncertainty and perceived effectiveness of complexity as an appropriability mechanism is positively associated with higher usage of equity modes, whereas perceived effectiveness of secrecy, lead time ad legal appropriability mechanisms are associated with lower usage of equity. These results, together with the ones on incidence suggest that in situations of high competitive uncertainty, firms respond with more equity based alliance and not with more alliances in general. This response can be seen as one that will enhance credibility (due to equity based strong ties and commitment) and thereby create differentiation.

The results on incidence of alliances suggest that in general firms will not enter into alliances if technology complexity provides an effective appropriability mechanism. If at all, under circumstances firms do enter into alliances they would seek higher control through equity for closer interaction to transfer technology and probably to avoid unintended leakage of knowledge. Likewise, higher uncertainty about the behavior of the competitors also tends to induce higher control in an alliance. Effectiveness of lead times, secrecy and legal mechanisms reduces the use of equity as bureaucracy associated with equity may increase lead times and closer interactions might result in leakage of useful knowledge. Availability of legal mechanisms for higher appropriability reduces the role of control and monitoring, a result that s fairly intuitive and well known.

The study shows that a multi-perspective view of alliances enhances current understanding of the phenomenon. The conceptualization of appropriability as a firm strategic level multi-dimensional variable, advances explanation of both incidence and mode of alliances. The study finds that need for complementary assets that policy needs to facilitate use of more complex cross-border linkages for enhancing learning from alliances.