Economic, political and legal factors affecting alliance success in the European Union

Economic, political and legal factors affecting

alliance success in the European Union

Francesco Sagliocca

Student number: 11585129

Date: January 26

, 2018

MSc Business Administration International Management

Master Thesis

University of Amsterdam

Amsterdam Business School

Supervisor: Dr. Vittoria G. Scalera

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Statement of originality

This document is written by Student Francesco Sagliocca who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

ABSTRACT

Small- and medium-sized enterprises (SMEs) have increased their international activities given the reduction and abolition of trade barriers in the last decades. Extensive research has focused on the the way how and the reasons why SMEs target foreign markets by conducting strategic alliances with international partners. However, the role of institutional factors that characterize the business environment present in the home country of the alliance partner is relatively unexplored. This thesis examines the effects of the economic, political and legal environments of the alliance partner’s home country on the likelihood of alliance success. We hypothesize that the better the three environments, the higher the chances of success of an international strategic alliance. Furthermore, we hypothesize that the European Union (EU) has a moderating impact on the relationships described above. In particular, we look for a stronger relationship if both the countries are located in Member States of the EU. The findings suggest that the economic and political environments of the partner’s home country have a positive influence on the chances of alliance success. Furhtermore, the relationship between quality of political environment and alliance success is positively influenced by the moderator EU.

Keywords: Small and Medium Enterprise (SME); strategic alliances; institutions; alliance

success; home country; economic environment; political environment; legal environment; European Union (EU).

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TABLE OF CONTENTS

1. INTRODUCTION ... 6

2. LITERATURE REVIEW ... 9

2.1. SMALL AND MEDIUM ENTERPRISES ... 9

2.1.1 A DEFINITION ... 9

2.1.2. CHARACTERISTICS OF SMES ... 10

2.2. INTERNATIONALIZATION ... 12

2.2.1. BENEFITS AND LIMITATIONS OF INTERNATIONALIZATION ... 13

2.3. ALLIANCES AS A MARKET ENTRY MODE ... 17

2.3.1. MODES OF ENTRY IN A FOREIGN MARKET ... 17

2.3.2. ALLIANCES ... 19

2.4. INSTITUTIONS AND ALLIANCES ... 22

2.4.1. ECONOMIC ENVIRONMENT ... 24

2.4.2. POLITICAL ENVIRONMENT ... 26

2.4.3. LEGAL ENVIRONMENT ... 27

3. THEORETICAL FRAMEWORK AND HYPOTHESIS ... 29

3.1. ALLIANCE SUCCESS ... 29

3.2. QUALITY OF HOST COUNTRY ECONOMIC, POLITICAL AND LEGAL ENVIRONMENT ... 30

3.3. EUROPEAN UNION AS A MODERATOR ... 33

4. METHODOLOGY ... 36

4.2. SAMPLE ... 38

4.3. MEASURES ... 40

IN THE FOLLOWING THREE SECTIONS WE DESCRIBE THE DEPENDENT, INDEPENDENT, MODERATING AND CONTROL VARIABLES. ... 40 4.3.1. DEPENDENT VARIABLE ... 40 4.3.2. INDEPENDENT VARIABLES ... 41 4.3.3. MODERATING VARIABLES ... 43 4.3.4. CONTROL VARIABLES ... 43 5. RESULTS ... 45 5.1. RELIABILITY ANALYSIS ... 45 5.2. FACTOR ANALYSIS ... 45 5.3. STATISTICAL ANALYSIS ... 46

6. DISCUSSION AND CONCLUSION ... 55

ACKNOWLEDGEMENTS ... 59

REFERENCES ... 60

APPPENDIX ... 68

APPENDIX A ... 68

LIST OF FIGURES

Figure 1. Market entry modes………...18

Figure 2. Theoretical framework………...28

LIST OF TABLES Table 1. SME definition……….8

Table 2. Dependent variables………...39

Table 3. Independent variables………...41

Table 4. KMO and Bartlett’s Test...45

Table 5. Rotated factor matrix showing the factor loadings of the items composing the independent variables...45

Table 6. Descriptive statistics: means, standard deviations and correlations...49

Table 7. Parameter coefficients. Ordered Probit Regression predicting Alliance success, Model 1...50

Table 8. Parameter coefficients. Ordered Probit Regression predicting Alliance success, Model 2...51

Table 9. Parameter coefficents. Ordered Probit Regression predicting Alliance success, Model 3...52

Table 10. Parameter coefficients. Ordered Probit Regression predicting Alliance success, Model 4...53

Table 11. Parameter coefficients. Ordered Probit Regression predicting Alliance success, Model 5...54

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1. Introduction

The gradual reduction and abolition of trade barriers that characterized many markets around the globe since the last decade of the 20th century have given companies greater chances to internationalize their businesses with respect to the past. For this and other reasons – e.g. spread of low-cost technology, increased flows of information among markets and rise of business opportunities deriving from developing countries - a particular type of company, namely the small- and medium-type enterprise, today has increasing chances to start business in foreign markets (Acs, Morck & Yeung, 2001; Rugman & Verbeke, 2004). This is possible even though these kinds of companies are characterized by having limited resources with respect to their bigger competitors (Hessels & Terjessen, 2010). One of the motivation lying behind SMEs internationalization has its roots in opportunities of innovation of processes and technologies that may not be available in the home market (Peng, 2001). Nevertheless, classic business internationalization motivations such as market, efficiency and resoruce seeking opportunities are appealing to SMEs (Dunning, 2000).

Given the lack of significant resources - e.g. financial resources, lack of expertise and limited size - SMEs enter foreign markets especially making use of non-equity entry modes (Pan & Tse, 2000). As highlighted in different previous studies, SMEs prefer making use of exports in order to target foreign markets. This is because of the limited resources commitment and risk that characterize exports and that thus limit SMEs’ liability of foreignness - defined as “all the additional costs that a firm operating in a market overseas incurs compared to a local firm” (Zaheer, 1995, p. 343) - (Dalli, 1995; Zahra, Neubaum & Huse, 1997). Nonetheless, apart from the already studied benefits of exports (Lu & Beamish, 2001), strategic alliances constitute another type of non-equity market entry mode that SMEs may exploit in order to profit from internationalization and decrease their liability of foreignness without incurring in high costs and risks. At the same time, a higher level of resource commitment of strategic alliances – given by shared knowledge and expertise and shared goals and risks between the partners - with respect to exports, gives SMEs

better learning and knowledge opportunities about the foreign markets (Pan & Tse, 2000). This is true because strategic alliances allow SMEs to enter new markets by sharing with a foreign partner benefits and managerial control over the performances of assigned activities and maintaining at the same time legal independence (Yoshino & Rangan, 1995).

SMEs’ internationalization through strategic alliances has already been analyzed in the literature from perspectives such as the way how and the reasons why these businesses target foreign markets by exploiting strategic alliances benefits (e.g. Hoffmann & Schlosser, 2001; Sarkar, Echambadi & Harrison, 2001). However, a gap in the literature exists about the role that the foreign country’s institutional environment plays in influencing the alliance success between two international partners. In particular, it has not been studied yet how particular factors, such as a host country’s political and economic instability or the lack of competition policies that in other markets may be considered a business standard, may influence the relationship between two partners of a strategic alliance. The institutional environment of a country is fundamental because it represents the set of the rules of the game that businesses must respect to obtain legitimacy from their stakeholders (DiMaggio & Powell, 1991). Nonetheless, if the institutional environment is not functional in supporting the businesses and protect their basic requirements, a strategic alliance between two international partners may not be successful. This is especially true when dealing with SMEs, a type of business that does not possess strong financial resources to better protect itself from an unstable business environment (Buckley, 1989).

In this thesis we aim at shedding light on the influence that specific economic, political and legal factors have on determining the alliance success between two partner companies that are located in different countries. In particular, by making use of the concepts of institutional distance (Zaheer, 1995) and liability of (regional) foreigness (Arregle,Beamish & Hébert, 2009), we will try to understand if a political and economic union as the European Union (EU) is responsible to support the correct institutional environment that guarantees the success of a strategic alliance between two companies (Rugman & Verbeke, 2007; Dunning, Fujita & Yakova, 2007). In order to

8 do so, we will look for SMEs located in EU Member States (MS) that are involved in strategic alliances with businesses located in another European MS or in countries outside the EU.

Therefore, the research question we will try to answer is: How do economic, political and legal factors affect the success of a strategic alliance between high-tech SMEs in the EU? In this way, we want to understand how the quality of the host country’s economic, political and legal environments may influence the strategic alliance success between two partner companies and if the institutions within the EU can guarantee a better institutional standard quality. To answer the proposed research question, we will gather the necessary data by means of a survey. Questions regarding how specific institutional factors may have an impact on the likelihood of alliance success will be asked to the respondents. We will finally analyze the data using an ordinal probit regression with SPSS, a recognized statistical software in academic research.

This topic will give interesting insights to the academic community to understand which institutional factors have an impact on the decision making process of SMEs that want to internationalize their operations in the EU via the alliances. The findings of this work could give potential insights to SMEs managers that aim to conduct business with a partner from a Member State of the EU and interesting policy implications may arise.

In the following chapter, a literature review is provided to the reader in order to clearly understand what are the main theoretical principles that are cardinal to the current work. In the third and fourth chapter, the hypotheses, sample and methodology will be illustrated. In the fifth chapter, the results of the analysis are showed followed by the concluding remarks, implications for managers and policy-makers and the limitations of this study.

2. Literature Review

2.1. Small and Medium Enterprises

2.1.1 A Definition

To understand this kind of business entites, it is fundamental to underline the factors that characterize an SME. According to the EU recommendation 2003/361, a business can be classified as an SME if the staff headcount is comprehended between 50 and 250 employees and the company turnover is between €10 and €50 million, as represented in Figure 1.

Table 1. SME Definition, 2012. Data source: (EU Publications, 2009).

Small- and medium-sized enterprises (SMEs) represent 99% of the total businesses in the European Union (EU Publications, 2009). This figure is extremely meaningful in order to fully grasp the significance that SMEs have in the business environment of their own countries and, in a larger setting, within the European Union (EU) marketplace.

According to the Annual Report on European SMEs 2015/2016 issued by the European Commission, in 2015, just under 23 million SMEs generated €3.9 trillion in value added and employed 90 million people; SMEs accounted in 2015 for two thirds of EU28 employment and slightly less than 60% of EU28 value added in the non-financial business sector. Such statistics

10 make this kind of business the object of a number of academic studies, especially because of their importance in delineating the Gross Domestic Product (GDP) of each single European country.

2.1.2. Characteristics of SMEs

The literature on small and medium enterprises has been growing for a decade given the importance that such business entities have in conducting business both in their home country and in foreign locations. As already outlined, SMEs represent a growing sector in different global markets. Even though many articles of the relevant literature often analyze them as a block of homogeneous companies, SMEs are involved in a complex variety of industries and sectors spacing from manufacturing and food industry to chemicals and high-tech (Levy & Powell, 2004).

According to Levy and Powell (2004), there exist five influences on SMEs:

1. Market. Storey and Sykes (1996) assess that since an SME only owns a small market share percentage, it does not have high possibilities to be a price setter as big corporations do. For this reason, SMEs face greater uncertainties by operating in a classic perfect competition setting.

2. Independence. Many SMEs are beholded by a parent firm for financing and decision-making (Levy & Powell, 2004). Nonetheless, the management is often independent from the parent company.

3. Personal. The management of the SME is vital to the survival of the business (Levy & Powell, 2004). Organizational culture, relationships among employees and firm’s capabilities are fundamental factors that allow the sustainability of the small- and medium-sized enterprises (Knight & Cavusgil, 2004).

4. Flexibility. Small and medium enterprises often obtain advantages when they exploit factors such as: their adaptability and agility such as their close proximity to their customers, being other businesses or final users; their openness towards new ways of working given by

their flexibility on organizational change; their risk taking approach during the decision making process (Berry, 2002; Laforet & Tann, 2006).

5. Innovation. According to Storey (1994), SMEs do not usually develop large R&D functions with respect to their bigger competitors. Nonetheless, they can be more innovative than larger firms by transforming the knowledge accumulated in products and services to always anticipate customers’ change in tastes and be ready to respond to them. Besides organizational flexibility, quality of the products and services created and capacity of adaptation to both other businesses and customer needs are winning factors that allow SMEs to serve small but meaningful market niches.

SMEs conducting business only in their home country need to consider risks and opportunities of operating in a marketplace that is increasingly populated by strong international competitors. The market niches that result of vital importance for a number of SMEs may be targeted by competitors coming from other markets. Increasing competition, limited market size, low demand, inefficient marketing, poor competitor understanding, poor location and market understanding and the inability to identify the target market constitute a set of drawbacks that SMEs must consider when foreign expansion is not part of their strategies (Reuvid, 2014).

The increasing integration of the global markets that have characterized the last two decades represents a solid opportunity of growth for SMEs by geographically diversify their operations. As discussed by Oviatt and McDougall (1994), SMEs expanding in foreign markets must take into account that competition with indigenous firms might be fierce because of these latter experience and knowledge in the local market. Nonetheless, the opportunities to capitalize on market imperfections of foreign markets that internationalizing SMEs have are concrete ways to enhance the firms’ growth and their likelihood of survival (Coviello & Munro, 1997). The internationalization of SMEs is a major vehicle for such business entities to sustain innovation, employment and economic and social renewal (Greene & Mole, 2006).

12 The main focus of this thesis is centered on SMEs that conduct business in one or more countries through specific forms of market entry mode.

2.2. Internationalization

Globalization, as defined by Garrett (2000, p.400), is “the international integration of markets in goods, services, and capital”. The increased level of integration between markets that globalization has provided, has led in a first phase MNEs and, eventually, SMEs to consider the opportunities and risks offered by foreign and global competition (Ruzzier, Robert, Hirsch & Antoncic, 2006). The increased integration is a consequence of the process of gradual dismantlement of countries’ trade barriers, global technological upgrade and entry of the Asian countries in the international markets. In particular, technological development in ICT allowed a reduction in transaction costs of multinational interchange that in turn permitted SMEs to increasingly internationalize early since their establishment despite the limited financial availability that characterizes them with respect to large corporations.

In international business, according to Vissak and Francioni (2013), two theoretical frameworks are broadly used to explain the timing of the internationalization process of small- and medium-sized enterprises: the Uppsala model (Johanson & Vahlne, 1977, 2009, 2011) and the “Born Global” approach (Oviatt & McDougall, 1994, 1997, 2005).

The Uppsala Model was developed by Johansonn and Vahlne (1977) showing that companies tend to follow an incremental approach when entering in foreign markets. In this way, companies benefit from a learning effect given their lack of resources and market-specific knowledge during their internationalization process. Such a deficit in market-specific knowledge is mainly derived by the existence of the psychic distance between the internationalizing company and the host market. This kind of distance is the result of differences in languages, education systems, cultures, managerial practices, and industrial development. Johansonn and Vahlne (1977) analyze the linear pattern followed by companies during their internationalization process. They conclude

that the lack of market knowledge represents a fundamental obstacle to international expansion. Psychic distance will cause companies to first internationalize in neighbouring countries through low risk and low commitment market entry modes such as exports. With increasing international experience, psychic distance will have a lower influence on managers allowing the companies to expand their businesses in more distant markets and increasing the level of commitment of their resources with foreign direct investments. Given its nature, the Uppsala Model is also known as the stages model of internationalization since different consecutive steps are taken by the companies when expanding their businesses in foreign markets.

The Uppsala Model has been deeply criticised by scholars such as Oviatt and McDougall (2005) that developed the “Born Global” approach since it offers a more completete explanation of SME internationalization. The “Born Global” perspective does not consider internationalization as a linear approach following predetermined stages. Born global companies attempt since their inception to exploit their resources in order to build their competitive advantage internationally in both close and distant markets. Such companies make use of a mix of entry modes such as international joint-ventures, acquisitions, and alliances. A fundamental role in the born global companies is played by the entrepreneurial proactivity of managers that exploit the firm-specific advantage of their businesses in order to match the market opportunities of neighbouring and distant countries. Born globals eventually increase their performances through a complex process of geographic coordination of value chain activities (Oviatt & McDougall, 2005).

2.2.1. Benefits and limitations of Internationalization

The existing literature gives huge contributions to what are the benefits that push SMEs to the internationalization of their activities: it provides exploration and exploitation benefits and it enables a firm to realize economies of scale and scope (Caves, 2007); it helps to reduce fluctuations in revenue by spreading its investment risks over different countries (Kim, Hwang & Burgers, 1993); it lowers costs by enabling arbitrage of differences in input and output markets (Hennart,

14 1982); it gives access to host country resource endowments and location specific-advantages (Hennart, 2009).

Nonetheless, the possible drawbacks of internationalization must also be taken into account. Relevant theories elaborate that these small businesses have increasing resource constraints in terms of finance, management of information flows, capacity etc. (Buckley, 1989). SMEs have substantial difficulties in conducting international business with respect to their bigger competitors, the MNEs (Hessels & Terjessen, 2010). Of course, company size is one of the most recurrent factors in the relevant literature that influences the internationalization process of business entities (Becker & Porter 1983, Levitt 1983, Mugler & Miesenbock 1986). The so-called liability of smallness (Jansson & Sandberg, 2008) can be the source of different types of related issues: inefficient human capital, limited financial capacity, lack of foreign market recognition, limited availability of science and engineering (S&E) pools are only a few examples of internal barriers to the business internationalization (Leonidou, 2004). Host country’s external barriers such as its policies and regulatory environment, its competition environment, its network integration and all the different factors that increase companies’ liability of foreignness also have a major impact on the possibilities of conducting business of SMEs (Johanson & Vahlne, 2009; Ruzzier et al., 2006; Torkkeli, Puumalainen, Saarenketo, & Kuivalainen, 2012; Zucchella & Servais, 2012).

When SMEs decide to internationalize their activities, issues such as the liability of foreignness, the liability of regional foreignness and the increase in transaction and coordination costs represent, among others, the major downsides (Hymer, 1976; Jones & Hill, 1988). The liability of foreignness has been exhaustively defined in the existing literature as “all the additional costs that a firm operating in a market overseas incurs compared to a local firm” (Zaheer, 1995, p. 343). Such additional costs are the result of: the unfamiliarity of the foreign market’s environments; the differences of the economic, political and cultural spheres; the difficulties in coordinating activities across geographic distant locations (Hymer, 1976; Kindleberger, 1969).

The liability of regional foreignness is a derivation of the concept of liability of foreignness and consists in the cost of doing business across different regions that are defined as a grouping of countries with physical continuity and proximity (Arregle, Beamish & Hebert, 2009). The physical proximity gives regions a sense of unity or shared characteristics (Aguilera, Flores & Vaaler, 2007). Therefore, regions are economically different, geographically distant, and characterized by internal attempts to achieve greater cohesion (Rugman & Verbeke, 2007). When SMEs operate across different regions, the complexity and diversity of operations increase significantly and make the relative costs rising in the same way as described for the liability of foreignness (Qian, Li & Rugman, 2013).

Finally, companies also have to consider the transaction costs defined by Jones and Hill (1988) as “the negotiating, monitoring, and enforcement costs that have to be borne to allow an exchange between two parties to take place”. Transaction costs arise from six main factors: bounded rationality, opportunism, uncertainty and complexity, small numbers, information asymmetries, asset specificity (Jones & Hill, 1988).

The additional costs that are generated as a consequence of an increasing liability of (regional) foreignness have to be considered by all types of firm, independently from the company size or scale of operations. Nonetheless, these costs may have a heavier impact on smaller companies, as underlined in the previous paragraph. As analyzed by Daamen, Hennart, Kim and Park (2007), the way companies possess to reduce the liability of (regional) foreignness as well as transaction and coordination costs relies in two categories: localization and unfamiliarity reduction. Through localization, companies operating in a foreign market or region can adapt the organization of internal processes and their structure to the local conditions. Local managers may better know how to deal with specific issues, such as human resource management, sales and marketing, better than how a foreign manager would do in the foreign subsidiary. A foreign market entry mode based on a strategic alliance with a local partner could be a way to achieve such localization (Das, 2015).

16 On the other hand, through unfamiliarity-reduction mechanisms, the liability of (regional) foreignness can be reduced “by reducing the unfamiliarity between home and host country nationals and actors” (Daamen et al., 2007, p. 29). This can be done in six possible ways, namely: individual and organizational learning, knowledge acquisition, use of cultural translators, standardizing comunication, creation of trust between cultures, and establishing a common culture (Daamen et al., 2007). Finally, as highlighted in the next paragraph, choosing the right entry mode when conducting business in a foreign market results fundamental in order to limit the increasing costs associated with the liability of (regional) foreignness (Chen, Griffith & Hu, 2006).

2.3. Alliances as a market entry mode

2.3.1. Modes of Entry in a Foreign Market

One of the crucial factors that companies need to consider after having dealt with the decision to internationalize is choosing the mode of entry in the foreign market. Managerial diligence is fundamental in this process because of the hard-to-reverse nature of modes of entry (Pan & Tse, 2000). Brouthers and Hennart (2007) define the modes of entry as the form of operations that firms use to enter in foreign markets when they internationalize. Among the different entry modes, Pan and Tse (2000) distinguish between the ones that involve deployment of equity, that are eventually labelled as Foreign Direct Investments (FDI), and those that do not involve any equity deployment, namely exports and contractual agreements. Both equity and non-equity entry modes are shown in Figure 1.

Determining the entry mode choice that a company will adopt when conducting business in a different market is crucial due to important implications such as: the level of resource commitment to invest is hard to change and correct once established because of SMEs limited financial resources and time to market; the choice between exploitation and exploration strategies involve different levels of investments and timing; the amount of risk and uncertainty that characterizes the host market may pose severe threats to the sustainability of an SME’s operations over the time; the transaction costs deriving from learning and knowledge transfer between different locations may increase if an SMEs does not know how to properly protect its intangible assets given its lack in international experience (Root, 1994; Pan & Tse, 2000).

The complex relationship among different factors must be considered before choosing which entry mode to adopt: distances between home and host country, FDI motivation, host country characteristics such as institutional stability etc. are all factors that influence the company’s strategy on how to enter a new market. All of these factors increase the liability of foreignness that an internationalizing company may encounter if the right entry mode is not chosen. An increasing level

18 of resource commitment and risk must be considered when companies choose between equity and non-equity entry modes.

An important amount of literature focuses on the analysis of both equity and non-equity entry modes adopted by SMEs. Among all entry strategies, the effects of the different forms of exports have been deeply studied by numerous authors. This is because exporting strategies are particularly efficient for SMEs since they often lack of financial resources for conducting an FDI (Dalli, 1995; Erminio & Rugman, 1996; Zahra et al., 1997). Moreover, “exporting provides SMEs with fast access to foreign markets, with little capital investment required, but with the opportunity to gain valuable international experience” (Lu & Beamish, 2001, p. 568). The level of commitment that is derived by exports gives SMEs a limited amount of learning and knowledge opportunities and a limited competitive advantage in the host market. Moreover, transportation costs, trade barriers and risk of opportunistic behavior of the exporter’s foreign agent are all downsides that must be considered by SMEs. Strategic alliances are a form of contractual agreement that give SMEs an increased level of commitment with respect to exports. By exploiting this kind of entry mode, SMEs may obtain better insights about a foreign market’s business opportunities and decrease the liability of foreignness by having a local partner.

Figure 1. Market entry modes. Data source: (Pan & Tse, 2000).

2.3.2. Alliances

Even though exporting strategies may result appealing for internationalizing firms, other non-equity entry strategies such as contractual agreements might be particularly efficient for firms’ performances. Licensing and R&D contracts may be a high risky entry mode especially if signed with companies based in host countries where the enforcement of contracts is weak (Pan & Tse, 2000). In this work, the main emphasis is focused on the alliances, another form of contractual agreement between two or more partner firms. Alliances between small and medium enterprises have not been analyzed in depth yet in the existing literature with respect to other non-equity modes of entry such as direct and indirect export. Moreover, the line of argument that combines the

20 existing theories results fragmented. Nonetheless, the factors that characterize alliances are agreed among most of the previous studies.

Alliances have three key features: (1) the firms remain legally independent after the alliance is formed – therefore, no intra-firm transfer of equity for purposes of control; (2) the firms share benefits and managerial control over the performances of asssigned activities; (3) the firms make continuous investments in the main strategic functions, such as R&D, technology, etc. (Yoshino & Rangan, 1995). These fundamental characteristics make clear that, according to transaction-cost theory, alliances are cosidered as the most transaction-cost-efficient market entry mode in case of medium asset-specificity (Williamson, 1991). Another implication is derived by resource-based view that reckons the firm as a bundle of tangible and intangible resources and capabilities needed to sustain its competitive advantage (Eisenhardt & Schoonhoven, 1996): “From this perspective, alliances arise when a firm needs additional resources that cannot be purchased via market transaction and cannot be built internally with acceptable cost (risk) or within an acceptable amount of time” (Hoffmann & Schlosser, 2001, p.359).

As for every mode of entry, alliances between SMEs may have both advantages and disadvantages for the partnering firms. Documented advantages of this contractual form are of course related to the shared investment and risks that the partners face and that may eventually reduce the total costs of the alliance agreement. Moreover, exploitation of firm’s complementary skills and assets and learning opportunities result concrete for the partners involved (Lorange & Roo, 1991). Therefore, strategic alliances provide SMEs avenues for improving performance in ways that may be difficult or impossible to obtain independently due to their size (Sarkar et al., 2001). According to Chen et al. (2006), the listed advantages result fundamental in order to decrease the liability of foreignness of the company.

Reported disadvantages of alliances between SMEs are related to: negative knowledge spillovers, that may be the source of a loss in competitiveness for partners; the risk of a firm to become too dependent on its partner; the possibility of opportunistic behavior derived by

differences in bargaining power between allies (Hamel, 1991; Mariotti, Piscitello & Elia, 2010). These factors might increase uncertainty and thus costs for the SMEs involved in the alliance (Beamish & Banks, 1987; Chi, 1994).

Often, the lack of financial capacity that distinguishes SMEs from MNEs do not allow them to opt for foreign market entry modes that involve transfers of equity such as greenfields, acquisitions or international joint-ventures (IJVs) (Pan & Tse, 2000). For this reason, contractual forms such as strategic alliances between two international SMEs can constitute a way to build and strengthen a sustainable competitive advantage (Lorkhe, Kreiser & Weaver, 2006). Managers often hope to improve SMEs’ performances by developing new skills, obtaining critical resources, gaining market access, developing new technologies, attaining important scale economies, and/or enhancing firm reputation (Varadarajan & Cunningham, 1995). Alliances are a concrete way to achieve such goals. As already discussed, downsides such as partner’s risk of opportunistic behavior and information leakage constantly have to be considered and monitored when dealing with the partners of strategic alliances (Dickson, Weaver & Hoy, 2006).

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2.4. Institutions and alliances

Institutions are well-known in the existing literature as “the rules of the game”. Scott (1995, p.33) defines institutions as “the regulative, normative, and cognitive structure and activities that provide stability and meaning to social behavior”. The environmental attributes, such as the readiness of foreign institutions (Dickson & Weaver, 2011), are extremely important to support the process of formation of alliances between SMEs. Both informal institutions – defined as codes of conduct and rules of behavior derived from culture and ideology e.g. norms, culture and ethics – and formal instutions – the rules of the game established by political regulations, legal decisions and economic setting e.g. laws, regulations and rules – need to be taken into account to conduct efficient business transactions among countries (Peng, 2000; North, 1990). In this work, we focus on formal institutions since they are fundamental to reduce uncertainty between a wide variety of stakeholders such as companies, governments, people etc. “by conditioning the ruling norms of behaviors and defining the boundaries of what is legitimate” (Peng, Sun, Pinkman & Chen, 2009, p.66).

Nautrally, institutions are the mirror of the society that represents them. For this reason, the institutional environment present in the company’s home country may be deeply different from the institutional environment that characterizes another country. This difference, defined as institutional distance, must be taken into account by the internationalizing company when targeting the market that will host its operations. Institutional distance must be considered because an SME, in order to survive, must conform to the complex regulatory and cultural systems prevailing in the host environment. Only through coercive, mimetic and normative pressures, the organization can obtain institutional isomorphism and therefore legitimacy (DiMaggio & Powell, 1991).

Differences in institutional arrangements across countries can both benefit and impede SMEs activities abroad. Often these differences present opportunities for institutional arbitrage, encouraging exploitation of different capabilities across countries (Gaur & Lu, 2007). However, as already seen previously, institutional differences contribute to the liability of foreignness faced by

the SMEs in the form of unfamiliarity, relational and discriminatory hazards that require additional costs of adaptation to host-country environments. Institutional forces can either limit or contribute to the firm’s strategic initiatives by regulating the arrangement of resource allocations within a firm’s environment (DiMaggio & Powell, 1991).

SMEs must deal with institutional pressures coming from both the home country and the host country. Through an alliance with a local partner in the host country, the pressures of institutional distance may be considerably diminished because the level of legitimacy would increase. The motivation behind this assumption is that, apart from the cognitive limitations that do not allow managers to be aware of all the possible solutions, the need for legitimacy restricts the set of options that are disposable to the firm’s leaders that enable them to make the best strategic choices. This complication is increasingly amplified if an SME considers to adopt an entry strategy in a country choosing a partner but not involving any exchange of equity. This is true since, in entry modes, higher levels of equity involved imply higher levels of commitment and risk but, at the same time, provide a better way to monitor firm’s activities to exercise control and decrease internal information asymmetries thus decreasing the likelihood of agency problems (Pan & Tse, 2000). The uncertainty related to loss of proprietary knowledge or partner opportunistic behavior becomes increasingly significant if non-equity modes of entry are coupled with an institutional setting of a target country that cannot guarantee a normal execution of the company’s operations. Uncertainty is even higher if we consider that SMEs cannot diversify risk to respond to the challenges coming from the institutional environment (Brouthers & Nakos, 2004).

The mechanisms to reduce such uncertainty thus allowing the success of an alliance between partners located in different countries are multiple: efficient exchange between partners of knowledge about the industry and the technologies, reduction of coordination and transaction costs and frictions between partners notwithstanding their cultural distances, shared objective- and financial-driven mentality to achieve the goals (Hoffman & Schlosser, 2001). Such mechanisms are

24 enhanced by stable institutional characteristics that are given by the mix of economic, political and legal environments of a market.

For the sake of the current analysis, institutional distance is relevant to help recognize the main factors related to a country’s institutional environment that have an impact on the decision making process for the success of an alliance between two SMEs located in different countries (Scott, 2008). “Alliance formation is broadly shaped by general economic conditions and the institutional frameworks in countries of operation, including legal requirements, macro-economic policies, price controls, financial capital markets, distribution channels, and methods of contract enforcement” (Todeva & Knoke, 2006, p.130). Rules and regulations issued by governmental institutions alter firms’ ability to form alliances and joint ventures. These kinds of business coalitions often require national governments to approve them especially because of issues regarding antimonopoly and antitrust regulations (Todeva & Knoke, 2006). In this work, the focus is centered on the analysis of the effect that a given institutional environment has on the success of alliances between SMEs located in different countries. In particular, we want to explore to what extent the economic, political and legal environments that characterize the institutional setting of the host country where the partner is located, influence the outcome of a strategic alliance.

2.4.1. Economic environment

Economic factors such as economic growth, labor cost and productivity and availability of short- and long-term loans and venture capital institutions could be crucial to reduce the transaction costs and institutional distance between partners and enhance the likelihood of success of an alliance (Schwens, Eiche & Kabst, 2011).

Positive economic growth has been associated as an incentive for FDI inflows in many empirical studies (Al Nasser, 2010; Jiménez, 2011; Kandil, 2011). Some of the main reasons why foreign investors and companies looking for alliance partners may target growing markets are related to the achievement of scale and scope in production. Growing markets represent a signal of

market demand and this, in turn, attracts the interest of foreign businesses. A growing market is a market where demand grows and, in turn, where there are better chances to achieve economies of scale and scope (Agosin & Machado, 2007; Carstensen & Toubal, 2004). Moreover, potential and expected economic growth in the future also stimulates foreign investments inflows because they can signal higher potential profits for the foreign investor and, as a consequence, for a partner involved in an alliance (Torrisi, 1985). Lim and Zhang (as cited in Iamsiraroj and Doucouliagos, 2015) argue that “a higher economic growth rate, other things being equal, leads to a higher level of aggregate demand, leading to greater opportunities for making profits and, hence, increasing the incentive to invest”. Therefore, we believe that positive economic growth may be a factor that influences alliance success between SMEs in the same way it influences FDI decisions.

Labor cost is often a considerable factor to take into account during the process of internationalization. “Low labor cost is considered a favorite factor if it is comparatively lower while not suffering from low quality” (Fung & Zhang, 2003, p.138). O’Sullivan (1985) finds that, according to the theory of minimum wage, lower labor costs are a source of competitive advantage and that can therefore attract capital flows across national boundaries. Dunning (1993) describes the efficiency seekers as those firms that conduct foreign investment to take advantage of differences between countries in the availability and relative costs of factor endowments such as labor costs. Therefore, we conclude that low labor cost in the host market can be a source of alliance success between SMEs.

The role of financial markets in the host country can be fundamental for the establishment and success of an alliance between SMEs. This is especially true because SMEs do not possess large amounts of equity and may therefore need to borrow credit to supply the funds necessary for the investments in the alliance. The availability and efficiency of institutions that provide short-term and long-term credit may result crucial. Bilir, Chor and Manova (2014) show that countries with high levels of financial development attract more subsidiaries. Kaur, Yadav and Gautam (2013) prove that better developed local financial markets tend to be associated with higher aggregate FDI

26 inflows. The need of a developed host country’s financial market is even higher if the foreign investor is credit constrained at home. Therefore, we believe that efficient credit institutions in the host market may be a source of alliance success between SMEs.

2.4.2. Political environment

Political factors such as influence of host country political forces, political instability and legislative effectiveness may be critical to reduce uncertainty and distance between the partners and enhance the likelihood of alliance success (Schwens et al., 2011).

One of the factors that may influence the alliance success between SMEs is related to political risk. “The State itself – given its monopoly power in legal coercion and its implicit presence in the background of every economic transaction – poses a threat to multinational corporations” (Henisz, 2000, p.237). Political risk is the result of political changes or instability in a country. National institutions such as governments and political forces may modify legislation on taxes, spending, regulation, currency valuation, trade tariffs, labor laws and many other types of regulations and in this way may affect an investment’s returns and therefore the likelihood of an alliance success (Oxley & Sampson, 2004).

Influence of host country’s political forces on businesses through the presence of State-Owned Enterprsises (SOEs) in relevant sectors and industries may also influence the success of alliance betwen SMEs (Darendeli & Hill, 2016). Finally, the risk of nationalization of a given industry by the foreign government poses an extreme threat to the alliance success. This is true since if the foreign partner operates in an industry that runs the risk of being nationalized, both the investments done and the outcomes expected from the strategic alliance may be eventually lost (Darendeli & Hill, 2016).

2.4.3. Legal environment

Legal factors such as enforceability of contracts, risk of exproriation, judicial effectiveness and fairness, restriction on repatriation of profits, effective anti-trust regulation and intellectual property rights (IPRs) protection policy may be indispensable conditions to reduce contractual uncertainty and frictions between the partners of an alliance (Schwens et al., 2011).

Gastanaga, Nugent and Pashamova (1998) examined the relationship between various political and legal variables and foreign investment inflows. They found that lower expropriation risk and better enforceability of contracts are associated with higher FDI inflows. Busse and Hefeker (2007) show that contract viability (exproriation) and profit repatriation are positively linked with foreign investment flows between countries. Henisz (2000) showed that multinationals face an increasing threat of expropriation if political hazard in the host country increases. Well-functioning civil justice systems protect the rights of all citizens and businesses against infringement of the law by others, including by powerful parties and governments. An essential component of the rule of law is indeed based on effective and fair judicial systems to ensure that the laws are respected and appropriate sanctions are taken when they are violated (OECD, 2015).

Without a strong and effective anti-trust regulation, SMEs, given their reduced size, may suffer from unfair treatment with respect to big corporations and SOEs. Competition legislation is fundamental in order to maintain stable conditions of market competition by regulating anti-competitive and abusive behavior of companies. SMEs heavily rely on traditional finance from credit institutions and financial contributions are often granted to the development of SMEs by national governmental institutions. Therefore, SMEs may be highly vulnerable to antitrust abuses in financial services. Governments should avoid the use of anti-competitive instruments for protectionist purposes (Motta & Onida, 1997).

An IPR is a “government protected right granted to an inventor or creator to exclude others from using the technology or product” (Maskus, 2004, p.22). Intellectual properties (IPs) such as patents, trade secrets, copyrights and trademarks compose as much as 85% of a corporation’s

28 economic value (Smith & Parr, 2000). The infringement or violation of intellectual property rights (IPRs) may be the source of major loss in competitivity and profitability for an SME. Therefore, to safeguard their IPs, an effective regulation on IPR protection in the host market may be necessary for the success of alliances between SMEs.

In the next section, we formulate the hypothesis focusing on how the economic, legal and political environments of a host country may influence the likelihood of a strategic alliance success.

3. Theoretical Framework and Hypothesis

The theoretical framework used in this thesis is showed in Figure 2. The dependent variable is represented by the likelihood of success of the alliance. The indipendent variables are represented by the quality of, respectively, the economic, political and legal environments of the host country. The European Union will work as a moderator of the relationships between the independent and dependent variables.

Figure 2. Theoretical framework.

3.1. Alliance Success

The dependent variable of this analysis is the likelihood of alliance success. In accordance with the literature by Schwens et al. (2011) and Swoboda, Meierer, Foscht and Morschett (2011), we measure strategic alliance success on the basis of the following variables: development of new products and technologies; periodical renewal of the alliance contract between the partners; achievement of concrete financial objectives and performance expectations; alignment of objectives between partners; commitment of the partner to long-term relationships.

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3.2. Quality of host country economic, political and legal environment

The three independent variables of this analysis are the quality of host country economic environment, the quality of host country political environment and the quality of host country legal environment. All the three independent variables are positively correlated with the likelihood of alliance success. We assume that in countries that present a higher institutional quality there are lower chances that institutional radical changes may shock the status quo of the business environment. “The higher the formal institutional risk of the host country, the more the firm is challenged to adapt its business to insufficiently functioning political, legal, or economic institutions” (Schwens et al., 2011, p.333).

We measure the quality of host country economic environment by using four variables: economic growth, labor cost, labor productivity and existence of a solid financial market. Economic growth of the host country is expected to have a positive impact on alliance success because it signals high market demand that in turn translates in chances to achieve scale and scope economies for businesses (Jimenez, 2011). An SME seeking for a strategic partner in a foreign country is attracted by the business opportunities of the growing market in the first place because of the possibilities that a developing economy may offer. A local firm, on the other hand, may need the expertise and knowledge of a company coming from a developed economy to achieve its business objectives (Knight & Cavusgil, 2004).

Low labor cost and high labor productivity have a positive effect on alliance success because SMEs are characterized by financial constraints that limit their spending capacity and therefore may base their strategic alliance on a cost-advantage strategy that decreases their costs and increases their productivity (Fung & Zhang, 2003).

Availability of financial markets and of credit institutions that provide short-term and long-term debt have a positive effect on the likelihood of success of a strategic alliance. This might be the case whenever internationalizing SMEs may not have solid financial institutions in their home markets. To contribute to the continuous investment to increase the likelihood of success of the

strategic alliance, such firms may have to rely on borrowing credit from their partner’s home country.

Economic growth, labor cost and productivity and availability of financial markets positively influence the quality of host country’s economic environment. This in turn has a positive effect on the likelihood of alliance success. Therefore our first hypothesis:

H1. The better the quality of the economic environment of the host country, the higher the likelihood that a strategic alliance will be successful.

The quality of host country political environment is measured in terms of influence on businesses of political forces, political instability and efficiency of the legislative process.

Influence on businesses of political forces has a negative impact on the likelihood of alliance success. The monopoly power of the State in legal coercion and its ability to control the market may pose a threat to foreign SMEs that are involved in strategic alliances with local partners. For example, State-owned enterprises that possess strong financial and legal resources may be able to drive foreign competition out of the market and therefore contribute to the failure of a strategic alliance.

Political instability has a negative effect on the likelihood of alliance success. Political instability may eventually result in cases of nationalisation of industries and businesses (Darendeli & Hill, 2016). In case of nationalisation, a foreign strategic partner would have to give up all the operations and investments previously done in the strategic alliance and this would have a negative impact on the alliance success.

Efficiency and fairness of the legislative process is positively related to alliance success. An example of inefficiency of the legislative process is related to sudden changes in governmental regulations on subject matters such as corporate taxes. A foreign partner may have chosen to conduct a strategic alliance with a company located in a country with a favourable tax environment in order to extract a higher level of profits from the transactions. A change in tax regulation may

32 cause the strategic partners not to renew the alliance contract and therefore would negatively influence the likelihood of alliance success (Laamanen, Simula & Torstila, 2012).

Influence on businesses of political forces, political instability and efficiency of the legislative process influence the quality of the host country political environment. The higher the quality of political environment, the higher the chances of a successful strategic alliance. Therefore, our second hypothesis:

H2. The better the quality of the political environment of the host country, the higher the likelihood that a strategic alliance will be successful.

The quality of host country legal environment is measured in terms of enforceability of contracts, risk of expropriation, judicial effectiveness and fairness, restriction on repatriation of profits, effective anti-trust regulation and intellectual property rights (IPRs) protection policy.

A high enforceability of contracts and a low risk of expropriation both have a positive effect on the likelihood of alliance success. These factors are important characteristics of a well-functioning civil justice system and are needed to protect the legal rights and obligations of SMEs in strategic alliances.

A high level of restricions on repatriation of profits has a negative effect on the likelihood of alliance success. The institutional environment may impede foreign firms to repatriate profits deriving from a strategic alliance by forcing the foreign partners to reinvest the profits in their territory. The partners must be able to decide over the profit derived from the investment in the strategic alliance and legal institutions must grant their rights.

An effective anti-trust regulation is positively correlated with alliance success. SMEs highly suffer from unfair treatment coming from corporations and SOEs because of their reduced size. Competition legislation must regulate anti-competitive and abusive behavior of companies to grant the right of free market competition to partners involved in strategic alliances.

Finally, IPR is a fundamental asset of many SMEs and IPR protection is positively correlated with alliance success. The host country legal environment must ensure companies coming from abroad to possess the right attributes in order to efficiently protect intellectual property rights. Opportunistic behavior of one of the partners coupled with an inefficient IPR protection regulation may cause the loss of important company assets and therefore bring to the failure of the strategic alliance. “When property rights are not granted, repatriations of earnings are not ensured, and business rules are variable, the formal institutional set-up implies high risk and hinders a firm’s economic acting” (Schwens et al., 2011, p.333).

Enforceability of contracts, risk of expropriation, judicial effectiveness and fairness, restriction on repatriation of profits, effective anti-trust regulation and intellectual property rights (IPRs) protection policy are all factors that influence the host country legal environment. The higher the quality of legal environment, the higher the chances of a successful strategic alliance. Therefore, our third hypothesis:

H3. The better the quality of the legal environment of the host country, the higher the likelihood that a strategic alliance will be successful.

3.3. European Union as a Moderator

As previously underlined, SMEs may encounter an increasing institutional distance when expanding their activities in foreign markets far from the home country (e.g. Kindelberger, 1969; Hymer, 1976; Zaheer, 1995). Liability of regional foreignness is one of the mechanisms responsible of the increasing distance as already highlighted in the previous chapter. The liability of regional foreignness implies that the liability of foreignness within regions is lower than the liability of foreignness among regions (Arregle et al., 2009). For such reason, internationalizing SMEs may prefer to establish a strategic alliance with a partner located in a foreign market within their own region (Rugman & Verbeke, 2004, Arregle et al., 2009). Rugman and Verbeke (2004) show that

34 80% of the Fortune 500 companies included in their findings only conduct business in their home region given the higher transaction costs that companies have to face to enter markets located in different regions.

The economic and political agreements among countries belonging to the same region are one of the main reasons that accentuate liability of regional foreignness and that thus do not easily allow companies to enter foreign markets located in different regions. A remarkable number of agreements exists among countries located geographically close to each other: free trade areas, custom unions, common markets, and economic unions are only a few names that characterize different regional trade agreements (Balassa, 1961). The scope of such agreements is to limit at the minimum the liability of foreigness among markets that belong to the same region. According to Blevins, Moschieri, Pinkman and Ragozzino (2016, p.320), “regions like the EU, NAFTA, MERCOSUR, ASEAN, etc., present common features among their members such as provisions on the flow of factors of production, labor and immigration laws, quality standards, etc.”. These are all fundamental institutional factors that allow SMEs to conduct international operations in the different countries within the same region.

Among the previous list of relevant regional agreements, the European Union can be easily stated to be the most institutionally integrated region, for reasons not limited to the presence of a common market and currency among its Member States. The European Single Market guarantees the free movement of goods, capital, services and labor within the European Union (Barnard, 2013). Such freedoms create an environment of fair competition within the EU. Firms are stimulated to recruit talented human resources from a much wider pool, relocate their activities in the value chain where it is most economically feasible, and lower the general transaction costs related to fluctuations of currency and inter-country dealings (Martynova & Renneboog, 2006). Therefore, the unique economic environment that we can find within the EU is assumed to positively influence companies that operate internationally by means of different market entry modes such as strategic alliances. We assume that the EU economic environment positively influences alliance success if

the parties are both located within EU because of reasons such as availability of financial markets regulated by a Central Bank or the common currency to reduce uncertainty.

Despite the massive effort put in work by the EU, the heterogeneity in cultures and, as a consequence, in laws and regulations that affect the business environment make the path to a totally integrated political and economic union very challenging (Moschieri & Campa, 2009). According to Aktas, Bodt and Roll (2007) and Campa and Hernando, (2004), even though the EU has facilitated the entrepreneurial process of companies that want to operate in different Member States, it also has created a sort of competition between countries and cities that resulted in explicit and tacit transaction costs for prospective entrants – a leading example is given by the compelling discussion on which city is most suitable to take the place of London as the “European financial capital” in case of pull out of Great Britain from the European Union (Brexit). Moreover, the European Member States naturally feature huge differences in national fiscal policies, cultures, and degree of development of infrastructures. Such differences can play a major role when SMEs are seeking for the formation of strategic alliances with partners located in other European countries.

Despite these differences, we assume that the role of the EU to create a positive political and legal institutional environment for SMEs is stronger than the institutional environment that these businesses would find outside of the Member States’ borders. By entering a foreign market through a strategic alliance, SMEs would suffer less from the effects of the liability of regional foreignness if the international expansion was to be conducted within the EU borders. The unique political and legal environments that characterize the EU markets are assumed to positively influence the alliance success if the parties are both located in the EU. This is true because of the higher political and legal uniformity existing among the different Member States that lowers the risks of political instability and influence on businesses, legislative effectiveness etc. Therefore, our fourth and final hypothesis:

H4. The economic, political and legal environments present in the home country of the alliance partner positively influence the likelihood of alliance success if the country is a Member State of the European Union.

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4. Methodology

In this section we first describe the method used to gather the data necessary for the analysis. Then we analyze the sample obtained.

4.1. Survey

To answer the proposed research question a quantitative analysis was performed. A survey was used as the instrument of data collection to gather cross-sectional data. In different previous studies, the survey was proved to be an efficient data gathering design in this field (e.g. in Hoffmann & Schlosser, 2001; Swobodoa et al., 2011). One single survey translated in three languages – English, Italian and French – was prepared. The surveys were translated in different languages to obtain a higher response rate (McKay, Breslow, Sangster, Gabbard, Reynolds, Nakamoto & Tarnai, 1996). The survey was both created and distributed via Qualtrics, a tool that enables users to collect and analyse data online for different purposes including academic research. Most of the questions asked in the survey were closed or multiple choice questions with single or multiple answers. To obtain the data necessary for the dependent, independent and control variables, questions showing matrix tables with 1 to 5 (disagree-agree) Likert scales were used.

The questionnaire contained two main sections: the goal of the first part was to obtain general company information to understand whether the company was suitable or not to be included in the analysis. For example, in this study requirements such as company’s size and turnover are important discriminants and observations that did not respect them had to be discarded. In particular, the first part of the questionnaire asked respondents for their personal information (name, function in the company) and their companies demographics (funding year, address, industry and markets in which they operate, entry modes mostly used in foreign markets) and general information about their most recent business performances (number of employees, turnover, sales and export growth in 2016).

On the other hand, the second section of the survey represented the core and asked the respondents to supply the necessary information to subsequently build the dependent, independent, moderating and control variables. After a brief introduction on the topic of strategic alliances, we gathered the necessary data for our analysis. The complete survey is attached in Appendix A.

The survey was addressed to one of the C-level executives of the companies since the questions asked regard topics that could only be discussed with agents with a specific level of decision-making power. To do this, the multiple choice question “What is the function that the respondent of this survey occupy in the company?” was asked. Only the surveys answered by presidents, executives, directors and managers were exctracted.

The survey translated in Italian was emailed to Italian companies; the survey translated in French was emailed to French companies; the survey translated in English was emailed to all the remaining companies.

To address every single company of our sample, we extracted the email addresses from the Orbis database that contains comprehensive information on companies worldwide both listed and unlisted and includes company financials in a standardised format, financial strength indicators, ratings, directors and contacts, original filings/images, stock data, private equity data and portfolios, patents, detailed corporate and ownership structures, industry research etc. We created the list of respondents in Qualtrics. Every single response corresponds to each observation of our final dataset. We set up Qualtrics to send two reminders, the first one after one week and the second one after eighteen days from the first email. A third and final email reminder was sent to a small subgroup of the sample of randomly selected companies. For such subgroup, we looked for personal email addresses of the companies’ CEOs in order to increase the chances of obtaining more responses.