International Cooperation: Motivation, Success Factors and Critical Assessment

Table of contents I

Table of Figures

1 Relevance of cooperation within the international business

2 Fundamentals on International Cooperation
2.1 Primal Considerations on International Companies
2.2 Definition and Theory of International Cooperation
2.3 Strategic Alliance and Joint Ventures: Selected Forms of Cooperation

3 Motivations and Reasons for International Cooperation

3.1 Basic Reflections on Causes leading to International Cooperation

3.2 Internal Incentives as Motivation for Cooperation

3.3 External Reasons leading to International Cooperation

4 Major Success Factors and Requirements for an International Cooperation
4.1 Phase-Oriented Illustration of Crucial Success Factors
4.1.1 Deciding on Cooperation: The Phase of Initiation
4.1.2 Essential requirements for selecting a partner: The Phase of Formation
4.1.3 Successfully Maintaining the Cooperation: The Phase of Realization
4.1.4 Aspects on Ending a Cooperation: The Phase of Termination
4.2 Control as a cross-stage Success Factor in International Cooperation

5 Peril or Opportunity: A Critical Assessment on International Cooperation

6 Summarization and Concluding Statement on International Cooperation

Bibliography

Table of Figures

Fig. 1: Cooperation as a construct between market and hierarchy

Fig. 2: The cooperation’s system of objectives

Fig. 3: Phases of the cooperation process

1 Relevance of cooperation within the international business

The Internationalisation of the markets in the world is past-pacing. Keywords like “Globalisation” and “International Companies” are characterizing this development.

For many companies, this growing interconnection of the global economy represents new challenges for the management, primarily evoked by an increasing international competition which is above all characterized by accelerated developments in technology, shorter life cycles of products or lower barriers to market entry. To overcome these complex challenges and to keep up competitive advantages, companies can often not rely on their own potentials anymore. To survive in the international environment many of them are forced to agree on cooperation with other companies. They consider international cooperation as a form of organisation to ensure the access to resources of strategic importance and as a competitive factor on fast changing markets.^[1]

This paper will try to substantiate these notions. It is concerned with possible motivations leading companies to international cooperation, as well as with essential success factors. Therefore, the terms “international company” and “international cooperation” will be elucidated and definitions will be given after this introduction. Chapter three analyses the motivations and reasons for cooperation. Subsequent, possible success factors are being discussed according to a phase model of the cooperation process in chapter four. Finally, a critical assessment of cooperation is made by looking at potential risks. The paper closes with a conclusion summarizing the acquired insights.

2 Fundamentals on International Cooperation

2.1 Primal Considerations on International Companies

In order provide conclusive contemplation on international cooperation, it is necessary to analyse the term “international company” first. Following the relevant literature, several definitions can be found in which the internationalisation of companies is described as certain types of market entry, for example export, portfolio investments and licensing, as management of subsidiaries or as other types of cross-border activities.^[2] But these perspectives only give a lose definition. A more precise answer to the question whether a company is considered to be international can be given by means of the institutional approach. Thus, a company is understood as international if any kind of cross-border interaction exists.^[3] Since this definition is not directly connected to a specific functional area, the internationality is ascertained independently from the kind of activities carried out abroad by taking the intensity as a key figure. Though the important question is, from which intensity forth internationality can be assumed, as not every international engagement automatically results in an international company. Till now a coherent and clear agreement on this problem could not be found.^[4]

With the qualitative orientation on the business objective, current approaches provide a demarcation which even goes beyond the before mentioned quantitative view. It classifies an enterprise as an international if the cross-border activities are of main significance for the accomplishment of the corporate objectives.^[5] This definition shall represent the understanding of international companies throughout this paper.

2.2 Definition and Theory of International Cooperation

After providing an understanding of what is meant by international company the concept of cooperation has to be defined, especially in an international context. Also a demarcation of the characteristics and main types has to be made, since neither the literature nor the field of economics gives a widely accepted definition.^[6] This is due to the fact that the term cooperation can be found in the common linguistic usage as well as in the business terminology. Furthermore different scientific disciplines are dealing with the phenomena of cooperation giving it a divergent meaning.^[7]

Against this background it appears useful to start the consideration with the etymologic origin of the word. Based on the Latin language, cooperation can be translated as ”collaboration” or “joint completion of tasks”.^[8] In business administration the definition is more constricted. Nieschlag/Dichtl/Hörschgen for example define cooperation as collaboration among two or more legally and economically independent companies to enhance their efficiency.^[9] Sell expands this view by narrowing the independency down to the non-cooperative sector and by adding a middle-term to long-term time frame for the joint completion of tasks.^[10] In addition, Schubert/Küting point out that the collaborating partners commit themselves voluntarily to cooperation.^[11]

Based on this perception the transitions to international cooperation are seamless. The already mentioned characteristics can be maintained, though the distance between the partners is changing by focussing on collaboration partners in different countries.^[12] Considering all these reflections lead to an all-embracing characterisation like the one made by Quack who states that international cooperation specifies a situation of two or more legally and economically independent companies in different countries working together on a voluntary, long-term basis to enhance effectiveness by consciously coordinating actions.^[13]

In general, the cooperation is intermediary situated between market and hierarchy coordination. As figure 1 shows, it evolves, starting from a market situation, by internalisation respectively integration. Based on a hierarchy situation this process is initiated by an externalisation due to a limited spin-off of divisions or alternatively the loosening of hierarchical structures.^[14]

illustration not visible in this excerpt

Figure 1: Cooperation as construct between market and hierarchy,

source: adapted from Sydow (1993), p. 104.

Both, internalisation and externalisation can appear vertical, horizontal or diagonal according to the interdependency of the involved partners. Vertical cooperation is found when companies are connected to each other along the value chain as it happens to be for example between buyer and supplier. If companies of the same branch collaborate this connection is known as horizontal and a connection with other branches as diagonal cooperation.^[15] Based on the above mentioned conceptual classification a variety of different types of cooperation have emerged and terms like license agreement, franchising, subcontracting, strategic alliance and joint venture are found as well.^[16] However, they are often used without a certain demarcation and in a synonymous way.^[17] For this reason, in the following the constructs of strategic alliance and joint venture, ranking among the most often discussed forms of cooperation^[18], will be explained more detailed.

2.3 Strategic Alliance and Joint Ventures: Selected Forms of Cooperation

The term strategic alliance covers relations between companies focussing on conjointly and complementary gaining strategic advantages in competition.^[19] In practice, it is often replaced by the term cooperation without taking the relationship between the partners into consideration.^[20] Thus the strategic alliance may be distinguished from other types of cooperation by focusing on the same business sector. It requires a direct or indirect interaction of companies of the same branch, for example competitors, or more precisely a horizontal cooperation. Accordingly, a connection between buyer and supplier cannot be seen as a strategic alliance, because the objectives are not covering the same business sector.^[21] In contrast to joint ventures, which will be regarded subsequently, establishing strategic alliances does not mean founding new subsidiaries but generating a connection while keeping up the autonomy of all partners. They are often part of a stable business environment, designed on a long-ranging time frame but still temporary. Also they are frequently seen as a preliminary stage and trial period for later acquisitions or joint ventures.^[22]

A joint venture is understood as a form of cooperation where an affiliate company is founded with equity participation by several partners. They represent the most intensive form of interfirm collaboration and are often used wherever a long-term combination of cooperative activities is necessary.^[23] Due to the bilateral capital ownership this kind of joint venture is also referred to as “equity joint venture”. It is based either on a minority, majority or on a fithy-fithy equity participation.^[24] If one of the partners is situated abroad, the participation and the equity transfer respectively is called direct investment with the purpose of gaining influence on the business operations of the particular company. It can be carried out by founding a new subsidiary, by a joint investment in an already existing company or by conjointly taking over a third firm.^[25] The partners share the leadership, the control, the revenues and the economic risk.^[26] Concerning the interaction between the partners all types of horizontal, vertical and diagonal joint ventures can be found in the business practice.^[27] In addition, a second kind of joint venture is called “contractual joint venture” which is only based on a joint contractual agreement on cost, risk and return sharing.^[28] But regarding this paper, only the equity joint venture will be taken into consideration for the following remarks.

3 Motivations and Reasons for International Cooperation

3.1 Basic Reflections on Causes leading to International Cooperation

In the preceding chapter a basic understanding on international companies was provided. Also the definition and main characterisation of cooperation have been developed and two types of cooperation have been described more detailed. This chapter will now deal with the question, what factors may be the motivation for companies to commit themselves to international cooperation. The realization of competitive advantages and the improvement of the market position are often seen as the superior intention of cooperation.^[29] Usually companies are organised in a way in which they can accomplish the demands given by the environment to ensure the achievement of these advantages. That also applies for cross-company cooperation as it represents an instrument for dealing with changes in environmental conditions. Eisenhardt/Schoonhoven state that “…alliances form when firms are in vulnerable strategic positions…”^[30] Since markets grow closer internationally, the participants are facing an increased demand to push the sales of their products and to be present on an international level in order to remain competitive. Thus, this change in the environmental demands implicates a potential threat leading to an increasing willingness of the companies to agree on cooperation.

If the realization of competitive advantages is considered as the primary goal of the cooperative action, then a number of sub-motives can be identified accordingly and a sub-classification into internal and external motivations is possible. These coherences form a system of objectives as illustrated in the following figure 2.

illustration not visible in this excerpt

Figure 2: The cooperation’s system of objectives,

source: adapted from Friese (1998), p. 121.

Depending on the extent of the cooperation, the partners aim at realising one or more motives. However, in the majority of the cases the cooperation partners concentrate on a bunch of goals. Also, it has to be kept in mind, that the motivations are rarely non-overlapping. In spite of the interdependency, to guarantee a high degree of transparency the next two chapters of this paper will illustrate the motivations in detail following the mentioned sub-classification into internal and external motivations and reasons.

3.2 Internal Incentives as Motivation for Cooperation

For realizing competitive advantages, some internal factors can be identified which profit from cooperative agreements. The first to be considered is the quality. The quality is deemed to be one factor for the differentiation from the competitors and with that for gaining competitive advantages.^[31] Cooperation comprises manifold possibilities to realise quality advantages. New and improved performance and quality can result from a mixture of attributes, abilities or skills of the partnering companies if complementary know-how is broad together by cooperation, both in the research and development and in the production sector.^[32] Thus, a lack in the range of products can be eliminated with a conjointly developed output or by marketing the own outputs together with those of the partnering company. Besides that, the partners can benefit from each others image if the expressed quality is enhanced due to an image transfer.^[33] A further important motivation for cooperative agreements is the reduction of costs.^[34] By having a clear vantage cost structure, companies can strengthen their competitive position on the market. If, in the context of cooperation, activities along the value chain are combined, this can result in crucial cost advantages for example by joint sourcing or the combined usage of resources. Also a reduction of costs can be achieved by realising economies of scope. They occur in collaborative productions when the partners increase the variety of goods and services that they produce by sharing components and using the same facilities and personnel to produce several products.^[35] Moreover, cooperation offers a risk reduction potential in certain situations. For example, it allows spreading the risk of large projects over more than one firm. But it also enables a diversification in the product portfolio which leads to a lower market risk due to an independency from only one product. The risk sharing function of coalitions can also be of high importance in the research and development sector. Here the development costs tend to increase with each new generation of products while shrinking life cycles leave less time for cost amortization.^[36] For strategic alliances in particular, this fact can be seen as one of the main reasons for a cooperational engagement. Especially the risk of investments in markets with pervasive technological developments and progresses is eminently high. It can be lowered by dividing the research activities and with it the expenses, proportionate over the partners and thereby reducing the risk of each individual company.^[37]

[...]

^[1] Balling (1997), p. 7.

^[2] Macharzina (1989), pp. 903-905, Colberg (1998), p. 3, Carl (1989), p. 27.

^[3] Perlitz (2004), p. 9.

^[4] Dülfer (2001), p. 7.

^[5] Perlitz (2004), p. 10.

^[6] Balling (1998), p. 13.

^[7] Friese (1998), p. 57.

^[8] Rotering (1993), p. 6.

^[9] Nieschlag/Dichtl/Hörschgen (2002), p. 261.

^[10] Sell (2002), p. 5.

^[11] Schubert/Küting (1981), p. 119.

^[12] Meyer/Lorenzen (2002), p. 33.

^[13] Quack (2000), p. 10.

^[14] Balling (1998), p. 60.

^[15] Sell (2002), pp. 13-19.

^[16] compare figure 1.

^[17] Belzer (1993), p. 45.

^[18] Balling (1998), p. 55.

^[19] Fuchs (1991), Chapter 2.2.1.

^[20] Straatmann (2004), p. 89.

^[21] Backhaus/Piltz (1990), p. 2-3.

^[22] Jansen (2000), p. 113.

^[23] Fuchs (1991), Chapter 2.2.1.

^[24] Macharzina (2003), p. 861.

^[25] Sell (2002), p.13.

^[26] Gilroy (1993), pp. 156-159; Friese (1998), pp. 159- 161.

^[27] Straatmann (2004), p.75.

^[28] Murphy (1988), pp. 32-35.

^[29] Balling (1998), p. 89; Friese (1998), p.120.

^[30] Eisenhardt/Schoonhoven (1996), p. 136.

^[31] Nieschlag/Dichtl/Hörschgen (2002), p. 120.

^[32] Contractor/Lorange (1988), p. 13.

^[33] Lewis (1991), p. 53.

^[34] Staudt et al. (1992), pp. 4-5.

^[35] Friese (1998), p. 129.

^[36] Contractor/Lorange (1988), p. 11.

^[37] Gahl (1990), pp. 36-37.