The role of strategic alliances in the automobile manufacturers’ regionalization : a multiple case study

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The role of strategic alliances in the automobile

manufacturers’ regionalization

A multiple case study

Master Thesis

MSc. Business Studies – International Management Supervisor: Dr J.P. Lindeque

Second reader: Mr Erik Dirksen M.Sc. Student: Sergii Karandin

Student ID: 10733728

Date: 15.03.2015

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1 Abstract

The current research investigates representatives of the constantly globalizing automotive industry throughout the ten year period (2002-2012) in order to verify relevance of Rugman and Verbeke (2004) notion of the home region orientation nature of the world’s largest MNEs. Further, the research investigates the role of strategic alliances in the geographical expansion patterns through the lens of resource-based view theory and institutional-based view concepts. On the sample of 6 MNEs, this study adds to the regionalization body of knowledge by separating upstream and downstream firm-specific advantages seeking behavior in the automotive industry. The data revealed that upstream tangible FSAs in the form of joint production sites appeared to be the primary reason for an alliance engagement. Institutional constraints are stronger in the Asian region, thus they represent the second most important reason to form strategic alliances in that region.

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2 Statement of originality

This document is written by Student Sergii Karandin 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.

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3 Acknowledge ments

First of all, I would like to thank my supervisor Johan Lindeque for his expertise, constant support and valuable feedback. His guidance and inspiration throughout the entire thesis writing process helped me to finish this project. Secondly, I would like to express my sincere gratitude to my family for offering me the opportunity to study in Amsterdam in first place, and for the follow-up support and understanding. Finally, I want to acknowledge my friends Mykhailo Breiman and Artem Vysotskyi for their contribution to the writing process by providing constructive criticism and thought-provoking ideas.

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Index of Tables and Figures

Tables

Table 1. Strategic orientation of MNEs listed in Global Fortune 500. 10

Table 2. Case selection. 22

Table 3. Qualitative data collection outcomes. 23

Table 4. The codebook. 25

Table 5. General Motors regional sales breakdown ($). 27

Table 6. Quotation support for General Motors. 29

Table 7. Ford regional sales breakdown ($). 31

Table 8. Quotation support for Ford Motor. 33

Table 9. Daimler AG regional sales breakdown ($). 35

Table 10. Quotation support for Daimler AG. 37

Table 11. Volkswagen Group regional sales breakdown ($). 38

Table 12. Quotation support for Volkswagen Group 40

Table 13. Honda Motor Company regional sales breakdown ($). 42

Table 14. Quotation support for Honda Motor. 45

Table 15. Suzuki Motor Corporation regional sales breakdown ($). 47 Table 16. Quotation support for Suzuki Motor Corporation. 49

Table 17. Results on working proportions. 58

Figures

Chart 1. GM’s regional sales breakdown ($). 28

Chart 2. Ford’s regional sales breakdown ($). 32

Chart 3. Daimler AG regional sales breakdown ($). 35

Chart 4. Volkswagen Group regional sales breakdown ($) 39

Chart 5. Honda’s regional sales breakdown ($). 43

Chart 6. Suzuki’s regional sales breakdown ($). 47

Chart 7. North American region sales share. 50

Chart 8. European region sales share. 51

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1. Introduction

A regionalization vs. globalization debate has been a hot topic among IB scholars and been intensified by the sub-questions multiplicity in this theme, which consequently provides room for different opinions and disagreements. The regional vision originates from Ohmae’s (1985) Triad Power, which divides the world into 3 economically most developed parts: the U.S, Japan and Europe. This concept has been evolving alongside its more acknowledged counterpart – globalization. Some scholars perceive regionalization to be an alternative to the globalization phenomenon, while others see it as an intermediary stage of globalization. Contrary to the belief in continuous (markets’) globalization, the paper of Rugman and Verbeke (2004) contested this notion on the grounds of their findings, which showed that among MNEs listed in Fortune Global 500 only 9 were truly global (in terms of sales distribution), while the vast majority of companies remain regionally orientated, i.e. successfully operate within only one region. The use of this sample is justified by the fact that companies from the list perform over the half of world’s total trade and FDI (Rugman, 2000). The topic is complicated in that MNEs’ strategic patterns are heavily influenced by the number of factors: home-country effects, industry-specificity, asset-specificity, etc. (Osegowitsch and Sammartino, 2008, Rugman and Verbeke, 2008).

The thesis will explore the strategies of the car manufacturing MNEs listed in Fortune Global 500. The automotive industry is particularly interesting since there are a number of MNEs, who changed their strategic orientation towards growth over the last twelve years and the industry itself became global (Camuffo and Volpato, 2002). To understand which factors (internal vs external) and to what degree have contributed to this change in strategic patterns, the multiple case study analysis will be conducted. In order to cover both internal and external factors, firms are studied through the lens of recourse-based view (RBV) and institution-based view (IBV), accordingly. Another interesting specificity of the automotive industry is the significant use of strategic alliances, so it is insightful to see whether this particular entry mode is superior to firm’s ability to globalize. Thus, the fundamental issue of why some companies increased their international presence beyond home-region, while others did not will be answered with the help of within and between case analyses. Simultaneously, strategic alliances’ role in car manufacturers’ regionalization will be assessed. Moreover, this study is interested in examining dynamics, rather than just state of affairs, in the industry.

Furthermore, this study contributes to future research by providing materials for industry-specificity analysis. From the managerial perspective, the following questions will be

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7 answered: 1) How strategic alliances shape concurrent automobile industry to be different from other industries? 2) Does entering new markets in host regions through strategic alliances help enhance international presence?

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2. Literature review

2.1. Globalization and regionalization.

A cross-border integration, and the globalization in particular, has been one of the core topics of interest in the international business literature for a long time. The very first controversial theme to spark academic debates on is the definition of globalization itself. The definitions vary in broadness and focus. Thus, to reduce complexities that will arise from a broader definition (for example proposed by Giddens, 1999), this paper sticks to the economic-based one and sees globalization as ‘the production and distribution of products and services of a homogenous type and quality on a worldwide basis’ (Rugman and Hodgets, 2001). It is important to state in the very beginning, that globalization phenomenon is investigated at two levels of analysis: the micro-(firm-) and the macro-(country-)level.

One stream of researchers supports the position of ongoing globalization. Garret (2000) puts an effort in examining globalization in terms of product and financial markets integration. Three perspectives are adopted to capture those integrations, namely world trade, multinational production and international financial integration. Having found persuasive macro-level evidence towards the increased globalization to take place (Garret, 2000), the micro-level confirmation has become the next challenge for scholars. Garret (2000) believes that the causes of globalization lie in the nature of three phenomena: “rapid technological change, growing international economic activity, and the liberalization of foreign economic policies”. So, taking into consideration the aforementioned causes and perspectives, MNEs (and their international activities) would seem to be the most appropriate constructs to look at when reaffirming globalization at micro-level. This goes in line with Rugman and Verbeke argument about MNEs to be the main drivers of the globalization. But before proceeding to analyzing multinationals in light of global strategies, another stream of academic views has to be introduced.

The concept of ‘semiglobalization’ was developed by Ghemawat (2003) with intent to characterise the current state of cross-border market integration, which appeared to be neither close to complete nor isolated. Simply put, either of these extremes would restrict firms’ activities to one (home or global) country. Therefore, Ghemawat’s notion contributed to the whole IB dialogue by distinguishing location-specific opportunities that arise from markets heterogeneity, thus enabling unique strategic manoeuvres. Shifting focus from a country to a firm, Ghemawat looks beyond simple standardization/localization choice, identifying strategic potential to exploit market differences in two forms. The first one, arbitrage, allows MNEs to

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9 leverage product and factor markets distinctions among countries. MNEs can do it by spreading their value adding activities to places with optimal market conditions. The second, aggregations, emphasized benefits of exploiting similarities through means of adaptation, clustering and ‘platform’ model (Ghemawat, 2003).

Going in line with semiglobalization concept logic, Rugman and Verbeke (2004) challenge the role of MNEs in cross-border integration processes and the relevance of globalization as a concept for the IB field at both macro- and micro-level. Building on the Ohmae’s (1985) ‘Triad Power’, the authors refer to regionalization as being a predominant economic picture of the world (and, consequently, implying regional orientation of international economic actors as opposed to global one). Supporters of the regionalization theory believe that multinational companies (even the largest ones) operate within only one of three geographical regions: 1) North America, 2) EU-15 and 3) Asia and Oceania.

Rugman (2003) proclaims globalization (in terms of sales distribution) to be a myth. Truly, at the country-level, regionalization proved to be the case, with intra-regional trade accounting for over 50% for each part of the triad (Rugman, 2000). Under this school of thought, the appropriate classification of MNEs was developed in order to investigate the phenomenon at the firm level (Table 1). In a sample of 380 companies only 9 fit into the global category, while 320 MNEs were found to be home-region orientated. Thus, empirical micro-level data clearly corroborates predictions about mostly regional nature of MNEs. Five possible explanations for this observation are proposed by Rugman and Verbeke (2004). Firstly, the global product strategy is problematic to implement because of variations in consumers tastes. Secondly, non-location bound (NLB) firms specific advantages (FSAs) are actually limited, and can be successfully transferred only within a particular region. Thirdly, MNEs’ ability to tap into, deploy and exploit location bound (LB) FSAs may be weaker outside the region(s) of orientation. Fourthly, inconsistency can emerge due to various market positions across regions, as different positioning requires changes in strategies and sets of exploited FSAs. Finally, in order to operate globally, MNE’s government structure must be able to cope with external diversity (institutional factors), which influences MNE’s functioning. Although the percentage of home-region orientated firms (among those with sufficient data to determine orientation type) has decreased since 2001, the majority still operates within one region, thus clearly calling for further development of the theory.

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10 MNE type Home-region

orientated

Host-region orientated

Bi-regional Global Explanation >50% of sales in

the home region

>50% of sales in the host region

>20% and <50% in each of any two regions >20% and <50% in each region of the triad Global Fortune 500, 2001, % 64 2,2 5 1,8

Table 1. Strategic orientation of MNEs listed in Global Fortune 500. Source: Adapted from Rugman and Verbeke (2004).

Note(s): Annual percentage sum does not account for 100% due to inability to classify some of MNEs because of insufficient data.

With the increasing attention to and strengthening position of the regionalization concept, the criticism inevitably must arise. Thus, while acknowledging the relevance of regionalization phenomenon itself, scholars tend to dispute conceptualization and measurement approaches. To illustrate, Dunning et al. (2007) take a step in emphasizing the importance of supplementing micro-level findings with country-level analysis. The enriched twofold analysis is intended to close gaps when accounting for intra-regional effects and home-country effects in terms of sales distribution, and external (institutional in particular) environment. Amussen (2008) further elaborates on the necessity to control for home country effect and casts doubt on metrics applied by Rugman and Verbeke (2004) to classify MNEs’ orientation. Benchmark parameters are also questioned by Osegowitsch and Sammartino (2008), showing that slight manipulations with the thresholds values (which are 50% for main region sales and 20% for other region sales marks) can undermine the robustness of findings on regional nature of MNEs and change the perception of regional-bound FSAs and inter-regional LoF concepts. The issue of industry specificity is raised. The validity of Rugman and Verbeke (2004) global category is also challenged by alternative assumption (Fisch and Oesterle, 2003) that sales distribution of genuinely global MNEs must match the distribution of global GDP.

Remarks, which found to be significant, were answered by the proponents of regionalization theory. Some of the criticism was perceived as groundless: the limitations of macro-level analysis undermine its validness. “The problem with macro data is that such data cannot reflect adequately the selection processes that individual MNEs engage in when choosing their path of international expansion and their organizational structure and governance mechanisms” (Rugman and Vebeke, 2007, p.7). Other notes were confirmed to be

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11 considerable, like industry specificity affecting MNEs’ strategic orientation patterns through industry internationalization level, variations in sizes across the regions, etc. (Rugman and Verbeke, 2008).

Overall, the regionalization vs globalization debate with the relationship to companies’ strategies drew enough academic attention to receive a number of special issues in managerial journals: Management International Review (2005, vol. 45), European Management Journal (2009, vol. 27), International Marketing Review (2009, vol. 26) and British Journal of Management (2014, vol. 25). After the path breaking work of Rugman and Verbeke (2004), most researches developed regionalization topic in the next directions: 1) generalizing Rugman and Verbeke (2004) findings (in terms of controlling for country of origin effect, firm’s size, industry, etc); 2) assessing performance of regional MNEs (particularly how regional orientation affects performance compared to global orientation) and 3) examining region-level factors and how they shape location choice decisions (Oh and Rugman, 2014). 2.2. Key themes within regionalization literature

2.2.1. Home-country effect

One of the reasons to have debates over regionalization is the home-country effect, which is a bias by the nature, which Rugman and Verbeke (2004) did not manage to address. Osegowitsch and Sammartino (2008) raise the question regarding the home-regional nature of the majority of MNEs, hypothesizing that such results might be the reflection of the strong home-country (not region) orientation, i.e. the largest part of intra-regional sales actually accounts for domestic sales. Indeed, during the analysis of the U.S. MNEs sample, Hejazi (2007) has found that concentration of within-U.S. activities greatly exceeds predicted by the gravity model level. Thus the regional nature of the U.S. MNEs is driven by the strong ‘national dimension’. Furthermore, Osegowitsch and Sammartino (2008) found inter-regional sales to be 2.5 times bigger than intra-regional foreign sales (i.e. excluding domestic sales). Similar results were found for the sample of British MNEs listed in Fortune Global 500: average 64% of intra-regional sales reduced to only 12% when controlling for (excluding) home-country sales (based on Rugman and Verbeke, 2007; Yip, Rugman and Kudina, 2006). The notion of home-country effect can be expanded to take into account heterogeneity within a region (Kolk, Lindeque and Buuse, 2013). Dunning et al. (2006, p. 181) thus elaborate on that thought, assuming that “MNEs might be attracted to particular sub-regions or countries in a region rather than to the region as a whole”. In general, since strategies of domestic firms will differ from those of home-region orientated MNEs, it will be helpful to distinguish under

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12 home-region category the domestic subcategory (for those firms with more than 90% sales in the home country), as proposed by Oh and Rugman (2014).

2.2.2. Sector specificity

Industry specific characteristics are believed to shape the strategy patterns (global vs regional vs local) by fostering or hindering international expansion and setting direction for cross-border activities. Numerous studies have examined particular industries striving to identify state of affairs in term of strategy with the help of empirical data and consequently explain which forces drove firms to become what they are. Among studied industries are automotive (Rugman and Collinson, 2004; Schlie and Yip, 2000), food and beverage (Filippaios and Rama, 2008), international retail (Rugman and Girod, 2003), cosmetics (Rugman and Oh, 2006, 2007), soft drink (Gardner and McGowan, 2010), and services Li (2005).

2.2.3. Assets specificity

The degree of regionalization differs not only between the firms, but also within the firm. Rugman and Verbeke (2008) provided evidence of this argument by distinguishing between upstream (associated with production) and downstream (with sales) activities geographic dispersion. The authors argue that asymmetry between those two dispersions appears because of different FSA types. To illustrate, the ability to distribute and integrate upstream activities (and therefore to adopt global upstream strategy) does not imply nor possibility neither necessity to pursue a global downstream strategy. On the example of European MNEs, Oh and Rugman (2012) further elaborate on the need of different strategies for the each part of value chain. Thus, authors formulate four strategies to exist, depending on the dispersion of both sales and production activities: regional integration, global integration, global production (i.e. only upstream activities are global) and global sales (only downstream).

The strategies are contingent on FSAs, namely on capabilities to exploit economies of scale; managerial, R&D and marketing and financial capabilities. With that, CSAs’ importance is emphasized as additional means to enhance not only regional, but also global competitiveness, going in line with transnational solution logic (Barlett and Ghoshal, 1989). However, while acknowledging the need for distinction between strategies for two types of value chain activities, Rugman and Verbeke (2004) claim that only sales dispersion across triad regions genuinely reflects the degree of firm’s globalization.

2.2.4. Intra- and inter-regional LoF

According to Zaheer (1995), the liability of foreignness concept (LoF) has been present in the IB literature for a quite time, as an integral part of MNEs cross-border activities

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13 (Buckley & Casson, 1976; Hymer, 1976). LoF is represented by ‘all additional costs a firm operating in a market overseas incurs that a local firm would not incur’ (Zaheer, 1995), originating mainly from three factors: 1) spatial distance (including coordination and transportation costs), 2) firm-specific costs incurred by being unfamiliar with foreign markets environment and 3) home- and host-country specific barriers that can be imposed on MNEs. Thus, being a context-specific phenomenon, LoF strongly depends on cultural, political and economic differences.

Applying this concept to the regionalization thinking, Rugman and Verbeke (2007) are calling for the extension of the LoF notion, distinguishing between intra-regional and inter-regional. This division can explain, indeed, regional orientation of most firms, as “the liability of intra-regional expansion appears to be much lower than the liability of inter-regional expansion” (Rugman and Verbeke, 2007, p. 201). Home region is therefore perceived to be more attractive for two reasons: 1) due to firms’ potential to convert LB FSAs developed at home-country into regional-bound (RB) FSAs 2) NLB FSAs can be utilized more efficiently within precisely the region of origin. Building on Zaheer’s (1995) classification, inter-regional LoF can be decomposed into 1) uncertainty LoF (related to the lack of knowledge, tacit in particular, about foreign markets), 2) discriminatory (hostile governmental policies) and 3) complexity (cost by coordination problems) (Goerzen and Asmussen, 2013). Understanding the complementary nature of LoF is important issue as each component can be overcome through different means and requires customized approaches.

Overall, the general research gap stems from two interrelated problems under the regionalization topic, which are industry specificity (in terms of unique state of LoF, which companies within an industry are facing and their eventually unstable nature) and firm-specific advantages firm-specificity (i.e. firms’ changing-over-time ability to overcome those LoF is developing through building FSAs). The interest to this topic is fueled by the observation of the automotive industry, where over the last twelve years (2001-2012) the number of globally-orientated companies increased significantly. Moreover, having an intense number of strategic alliances within, automotive industry raises a specific question about influence of this particular cooperation form on the tendency of car manufacturers to expand internationally. So, the general research question is

“Why some car manufacturers increased their international presence, while others preserved their regional orientation?”

Two possible explanations are proposed: 1) inter-regional LoF become have become less severe, thus reducing costs of global expansion, 2) firms’ ability to develop (or to expand

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14 the reach of) interregional FSAs stimulates MNEs to pursue global goals. Thus, to understand why a number of car manufacturers have recently grown beyond their home regions, it is necessary to see to what extant (if any) the inter- and intra-regional LoF have changed. In case of changed LoF, the question arises why some companies were able to seize the opportunity to expand while others not. If, however, the LoF pressure remained unchanged, we need to understand why some companies managed to overcome inter-regional LoF and what role the FSAs endowment plays in this process.

2.3. RBV and IBV

The resource-based view and the institution-based view are two approaches, which in conjunction can provide a deep insight into the globalization and regionalization processes and into the nature of LoF concept in particular. RBV and IBV are complementary in that the first approach focuses on the firm’s internal factors, while the second one explores firm’s external environment.

2.3.1. RBV.

Firm’s sustained competitive advantage is the condition that allows firms to stay in the game. It is reached when a value creating strategy is unique at the moment (not implemented by competitors) and will remain such in the future (competitors cannot replicate the strategy efficiently). In order to achieve sustained competitive advantage, firm’s resources must satisfy VRIN conditions, i.e. to be 1) valuable, 2) rare, 3) imperfectly imitable and 4) non-substitutable (Barney, 1991). Such resources in the IB literature are also defined as firm-specific advantages (FSAs). These advantages can consist of stand-alone resources, routines and recombination capabilities. FSAs can be transferred into host countries either by being embedded in a product, or through FDIs. At this point, it is necessary to introduce somewhat countervailing concept to FSA, which is CSA. CSAs (country-specific advantages) are those external factor (cheap workforce, for example), which can be obtained in a particular country by any firm. Thus, FSAs and CSAs inevitably interact during firms’ international activity. In their early work, Rugman and Verbeke (1992) distinguish two kinds of FSAs. Location bound (LB) FSAs have limited applicability to a particular area (country) and cannot be transferred internationally (or can be transferred at high costs and require significant adaptation). Non-location bound (NLB) FSAs, in turn, are usually global in their nature, as they can be transferred abroad relatively easily and at low costs. Those FSAs notions are further reconsidered and complemented by the authors in their later works: Rugman and Verbeke (2007), on the one hand, comment on the nature of LB FSAs, stating that they can be

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15 modified (‘augmented’) to become efficiently exploitable in the whole home region, i.e. beyond home country, but to limited extend. On the other hand, NLB FSAs are just like their carriers: not truly global, but restricted to a region. In this spirit, Rugman and Verbeke (2004) emphasize the need to complement traditional bundle of LB and NLB FSAs by the regional-bound (RB) FSAs – the resources needed for successful functioning in the region. These properties of FSAs are partially the reason of and partially the cause to ‘the liability of intra-regional expansion to be much lower than the liability of inter-intra-regional expansion’ (Rugman and Verbeke, 2007).

Therefore, it can be assumed that operating in the host-regions is extremely difficult for MNEs. First of all, host-region activities will require new unique RB FSAs, which are usually cannot be obtained by modifying existing home-region FSAs. This idea is supported by the small number of host-orientated MNEs in the Rugman and Verbeke (2004) findings.

The supply chain concept helps to futher distinguish FSAs into two categories: upstream and downstream. The classification comes from Rugman and Oh (2009) work on supply chain role in the globalization/regionalization debate. Companies may pursue different strategies for different parts of supply chain. To illustrate, global upstream part of the supply chain (global manufacturing or global purchasing) not only allows to significantly reduce the cost of final product, but also “enable[s] MNEs to take advantage of global talents and enrich their knowledge assets. Through partnerships with suppliers in various parts of the world, multinational firms are able to keep abreast of the constantly evolving design and engineering technologies” (Rugman and Oh, 2009, p. 387). Applying this logic to the automobile producers, first three working propositions are derived:

WP1: When a company is expanding inter-regionally, Strategic Alliances can lower LoF by providing access to tacit knowledge on consumers’ preferences and partner’s technology (upstream intangible).

WP2: When a company is expanding inter-regionally, Strategic Alliances can lower LoF by providing access to supplier networks (upstream intangible).

WP3: When a company is expanding inter-regionally, Strategic Alliances can lower LoF by providing access to partner’s production sights (upstream tangible).

Downstream-related activities, such as distribution, marketing and after sales services constitute another potential area for globalizing. To exemplify, standardized marketing policies and globally managed network of after sales service facilities can boost competitiveness by once again lowering products costs. This fact leads to the fourth working proposition:

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16 WP4: When a company is expanding inter-regionally, SAs can lower LoF by providing access to distribution networks (downstream tangible and intangible).

Overall, although RBV have a great explanatory power for the firm’s internal processes in the IB, “researchers [still] need to pay careful attention to the institutional context in which IB activities take place” (Peng, 2001). The next section, therefore, addresses this requirement.

2.3.2. IBV.

The institution-based view is aimed to address external to a firm factors and the institutional environment. There are two main approaches to the institutional theory in the IB literature. The first one, sociological (Scott, 1995), is aimed primarily at explaining the processes which MNEs go through in order to obtain legitimacy. The second, economic (North, 1991), approach links institutions to the transaction cost theory in order to explain efficiency (Peng, 2002). Therefore, to stay focused and precise in the analysis, this work will stick mostly to the North’s approach. The author believes it can better explain external factors, which shape MNEs’ location choice decisions (both intra- and inter-regional). It is worth noting that institutional factors shape not only location, but also entry and establishment mode decisions.

Institutions are defined as “the humanly devised constrains that structure political, economic and social interactions” (North, 1991), also known as “rules of the game”. Institutions are designed “to reduce transaction costs by reducing uncertainty” (Meyer, 2001). They appear in two forms: formal and informal. Formal institutions, such as laws and property rights, are usually obligatory in their nature and bind economic actors to their enforcement. Informal institutions are represented by taboos, customs and traditions. They are not binding and more stable in nature, i.e. changes in informal institutions occur at much slower pace than in formal ones. Although working inseparably to reduce transaction costs, formal and informal institutions can vary in significance for a particular country (region). Consider the U.S. with the well-developed market-supporting institutional infrastructure. Under such condition, formal institutions play the major role in constituting stable ground for operating and reducing uncertainty. On the other hand, emerging economies with weak formal institutional advancement, such as Chinese, will force economic actors to rely more on informal ties and links.

Roughly, when speaking about cross-border operations, formal institutions may be seen as the sources of the discriminatory LoF, while informal rules constitute uncertainty LoF. To clarify, MNEs’ strategies are contingent upon institutional differences between home and target countries. Firstly, the regulative (formal) differences can be expressed with the help of

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17 the institutional advancement concept (Dikova and Witteloostuijn, 2007), which incorporates a number of proxies for measuring formal institutional differences. Secondly, the culture, a substantial concept in the IB literature, can be perceived as a part of informal institutions (Peng et al., 2008). Hofstede’s (1994) approach to measuring cultural differences is acknowledged to be one of the most useful. Simply put, usually a bigger difference in institutional advancement and cultural distance results in greater LoF. It is important to remember, however, that institutional factors are assessed in conjunction with CSAs. Such assessment may have different strategic implications, than when looking at the institutional variance separately. Moreover, institutions dynamically interact with FSAs to form strategic choices (Peng, 2001) Therefore, firms are sensitive to the institutional particularities of host countries when building strategic plans (location choice decisions in particular).

Therefore, due to institutional discrepancies’ ability to influence business environment and companies’ strategies across regions, companies have to reckon with host institutional environment, which leads us the last two working propositions:

WP5: When a company is expanding inter-regionally, Strategic Alliances can lower LoF by providing legitimacy to an entrant to avoid the discrimination by governmental regulation.

WP6: Inter-regional liability of foreignness are harder to overcome than intra-regional in the automotive industry.

2.4. Entry Modes and Strategic Alliances

Strategic alliance can be characterized as a form of inter-organizational relationship, when two or more autonomous firms “1) are maintaining their legal independence after the alliance is formed; 2) share benefits and outputs; 3) share managerial control over processes; 4) make contribution to at least one strategic area, such as product design, production, marketing and distribution” (Todeva and Knoke, 2005). Two underlying conditions, according to Eisenhart and Schoonhoven (1996), determine firm’s preference for a strategic alliance over other entry modes: strong social position and vulnerable strategic position (the latter consists of competition, stage of market development and firm’s strategy). Regarding motives, 4 categories are listed, which are roughly correspond to the traditional 4 motives, implying that strategic alliances can be seen as a solution to any of the 4 stated company’s needs. The motives are: market seeking, efficiency seeking, resource seeking and strategic assets seeking (Dunning, 1998). However, the effectiveness of each will vary depending on the alliance’s legal and organizational form and both long-term and short-term goals.

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18 Moreover, three levels of factors have an impact on the strategic alliance formation decisions: 1) country-level (business environment) factors, which deal mostly with the institutional aspects of firms’ activities; 2) industry-level factors, which address the competitive environment and market specificity; and 3) organizational-level factors, related to distinctive characteristics of each firm (such as asset portfolio, company size, etc.) (Todeva and Knoke, 2005). Additional fourth layer can be introduced as above-country-level (global) to cover such topics as “heightened competitive pressures on a global scale; shorter product life-cycles due to rapid technological change; emergence of new [global] competitors; and others” (Todeva and Knoke, 2005). And it is precisely the changes in the fourth layer, what induce side effects on the all lower levels in the automotive industry. Increased globalization (in line with Verbeke and Brugman (2005) forecast) influenced tremendously the competitive environment leading to normative changes in governmental regulations and impacting the different aspects of organizational form (Sturgeon and Florida, 2000). Penetration to new markets was seen as a part of the response to a stiffer competition, meaning that each of FDI motive can be traced: “expansion of the product range and line ups [as an attempt to take advantage of niche market opportunities]” demonstrates market-seeking behaviour, “produce where you sell it” strategy indicates resource- and efficiency-seeking motive and “achieving cost saving in manufacturing, purchasing and design” represents efficiency- and strategic-assets-seeking motives (Camuffoo and Volpato, 2002). It is worth noting that market-seeking investments (related to downstream activities) tend to be more risky and costly, as they “require more local knowledge and embeddedness” and “due to one-sided nature of such investments” (Verbeke and Brugman, 2005). The aforementioned notion represents one of the barriers to the global expansion, namely the fact that car manufacturers are rooted by “downstream activities and after-sales markets (which are location-bound), such as insurance, financing, maintaining and repairs” (Rugman and Collison, 2004). Other barriers are “1) cultural; 2) driven by differences in environmental regulations among countries and regions; 3) the ‘cluster’ nature of auto companies activities, meaning the dependency of manufacturers on their [supplier] networks, most players in which are location-bound” (Rugman and Collison, 2004). However, the strength of the latter barrier might be diminishing, as at least some of suppliers became global as well (Sturgeon and Florida, 2000).

Factors that define superiority of the strategic alliance entry mode: “1) Alliances sidestep much of the cultural and market place trauma that come with a full merger; 2) Alliances ensure that everyone, including management talent, stays actively engaged; 3) Strategic alliances can become an intermediate phase between a merger or acquisition to test

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19 firms’ ability to cooperate. The issue is relevant since, as stated by GM top management, “[w]e are not in the business of acquiring a company we cannot work with on a partnership basis” (Camuffoo and Volpato, 2002). In that way, strategic alliances can help to overcome LoF and thus become more efficient (compared to other entry modes) under specific circumstances.

The study contributes to the existing literature by linking SA entry mode to the international strategy and performance under the RBV body of knowledge. The distinctive feature of the study is the discrimination between upstream and downstream FSAs and longitudinal assessment of companies’ activities.

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3. Methodology

3.1. Research philosophy and research approach

According to Saunders and Lewis (2012), for a researcher, the adoption of a certain philosophy and approach results in choosing a particular research design and strategy (including data collection methods). Therefore, it is important to align the research design with the philosophical views and “be able to defend them in relation to the [existing] alternatives” (Saunders and Lewis, 2012). Four main philosophical strands are defined: positivism, realism, interpretivism and pragmatism (Saunders and Lewis, 2012). This study adopts the positivist perspective, which is being dominant in the management and organizational studies (Brannick and Coghlan, 2007). Positivism advocates the existence of “objective external reality, which can be examined by a value-free researcher” (Brannick and Coghlan, 2007) and concerned with an establishment of casual-effect links (Saunders and Lewis, 2012). Further, choosing between inductive and deductive approach, this study sticks to the latter, because of 4 characteristics: “1) an ability to establish casual relationships, 2) operationalization of the concepts, 3) the need to collect and analyze data in order to answer the research question, 4) use of clearly structured methodology to facilitate replication (to achieve reliability)” (Saunders and Lewis, 2012). Nevertheless, the elements of “bottom-up” inductive approach are also incorporated to create an iterative relationship between theory and findings.

3.2. Multiple case study research design

Yin (2014) offers 3 reasons to prefer case study research design over other possible options: “1) research questions come in forms of “how” and “why”; 2) researcher has little or no control over behavioural events; 3) the focus of the study is a contemporary phenomenon”. As all three reasons are being relevant to this study, the multiple case study research design was adopted, similar to that of Rugman and Collinson (2004). The main benefit the case study research can provide is the possibility “to retain holistic and real-world perspective”, thus allowing for in-depth investigation of a complex phenomenon, especially when the boundaries between that phenomenon and context are blurred (Yin, 2014). The effect is strengthened by supplementing quantitative data with qualitative information (described in the latter sections).

The quality of research design is an important issue for an academic piece of work, therefore 4 design criteria must be satisfied in order to ensure decent level of quality: construct validity, internal and external validity, and reliability (Yin, 2014).

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21 Construct validity

Construct validity represents the first so-called “test”, which is particularly challenging and vulnerable to critique, as it concerns the process of matching investigated concept(s) with the appropriate measures. The first task is to define research question(s) and working propositions in a form of specific concepts in order to satisfy adequately research objectives (Yin, 2014). To illustrate, in this study the international presence notion is covered through the regionalization concept of Rugman and Verbeke (2004). The second task is to develop (or adopt, if possible) coherent measures for those concepts (Yin, 2014). Such, as regional sales to total sales, regional employee number to total employee number and regional assets to total assets, as measures for regionalization (Rugman and Verbeke, 2004). However, this approach is not without flaws: researchers can manipulate with the operationalization of measures to achieve different results. Therefore, to increase construct validity, 3 tactics are available: 1) multiple source of evidence; 2) a chain of evidence; 3) a review of the case study report draft by key informants (Yin, 2014). This study will make use mostly of the first one.

Internal validity

Internal validity is the second “test” a solid research design must address (Yin, 2014). It is concerned with the causal links, therefore becomes crucial for explanatory case studies. According to Yin (2014), two questions are raised: 1) how do know the event x is caused by the event y, but not the event z? 2) When event y has an influence on the event x, we should consider possible preceding event z, which might be the cause of event y (without such consideration the understanding of phenomenon would not be complete). Four techniques are used to increase internal validity: 1) pattern matching – comparison of empirical findings with predicted patterns; 2) explanations building – iterative comparison of the initial theoretical proposition with each case, and applying consequent modifications; 3) time-series analysis – a comparison of the theoretically predicted trends to the longitudinal findings; 4) logic models (Yin, 2014). Each of the techniques can benefit from incorporating both qualitative and quantitative data (Yin, 2014).

External validity

Generalizability of the findings of a case study are discussed under the external validity notion and represents one of the main critiques of the case study research design. Generalization may come in two forms: statistical and analytical (Yin, 2014). Statistical generalization addresses the ability to transmit observed characteristics of the sample to the population (Yin, 2014). Since in the case studies units of analysis are not representatives of

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22 populations (and not meant to be so), statistical generalization has little relevance to case studies. On the other hand, “analytical generalization is based 1) on corroborating or modifying [investigated] theoretical concepts or 2) on the new concepts that arise upon completion of case study” (Yin, 2014), being a valuable quality criteria for conducting a trustworthy case study.

Reliability

The purpose of reliability ‘tests’ is to ensure procedural consistency, implying that “a later researcher would arrive at the same conclusions and findings by following the same procedures, as the earlier researcher” (Yin, 2014). In this regard, documentation of research procedures becomes a main concern of the reliability test. Yin (2014) proposes 2 tactics to achieve proper reliability: 1) the use of case study protocol – thorough documentation of procedures; and 2) the creation of the case study database (Yin, 2014).

Case selection

Since there is a necessity to investigate both inter-regional conditions According to Yin (2014), case selection should reflect either literal or theoretical replication logic. Since this study is built on the existing theory, the use of theoretical replication is more appropriate. The unit of analysis is the companies within a region (North America, European Union and Asia and Oceania) with embedded subunits – companies. Six car manufacturing companies are selected from the Fortune 500 in order to satisfy next conditions: 1) to represent each of three regions and 2) to represent both increased and unchanged international presence (see table 2).

Company/region North America Europe Asia and Oceania

Increased international presence Ford Motor Daimler Honda Unchanged international presence General Motors Volkswagen Suzuki Table 2. Case selection

Source: Author

Note(s): adapted from financial reports

Based on the preliminary financial reports analysis of the all available car manufacturers in the Fortune 500, the next companies were selected: Ford Motors, General Motors, Daimler, Volkswagen, Honda and Suzuki. Each pair is put into a similar context, representing a literal replication logic, but different outcomes allow us to account for different strategies of companies (and the role of SAs in particular). Within-case study is supplemented by between-case analysis. It is important to note that both home-region institutional and resource-related context and those contexts of regions of expansion constitute LoF. Therefore, it could have been useful to distinguish in each group firms which have grown or not, but also

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23 the destination of the growth (to illustrate, in the EU region group include 4 cases: not increased international presence, expanded to the NA region, expanded to the Asian region and expanded globally, i.e. to both Asia and North America). Unfortunately, such thorough breakdown is out of the scope of this study.

3.3. Data collection

As stated above, this study will include both qualitative and quantitate data, resulting in collecting data from two sources.

First, the data on annual reports for each company will be collected for each company for each year from 2002 to 2012 (including). “This is done through systematic reading of annual reports and manual recording of qualitative and quantitative data on their internationalization strategies and geographical markets” (Kolk, Lindeque and Buuse, 2013). The quantitative data includes regional breakdown of sales, assets and employment. Data on industry-specific measurement (thousands of vehicle sold) is also collected. The data is used to assess the level of internationalization. Longitudinal approach was chosen in order to get insight into dynamics, not only snapshots of companies profiles in the first and last studies years (2002 and 2012, accordingly). Qualitative data collected from annual reports is used to enrich the understanding of strategic decision and the context. Additionally, companies’ websites can provide rather detailed information about strategic alliances a company enters (although not for all of them).

Company/Source FT NYT Annual reports

Daimler 1702(183) 673(46) 11 Ford >3000(269) >3000(92) 11 General Motors >3000(627) >3000(362) 11 Honda Motor >3000 2875(31) 11 Suzuki 403(107) 351(40) 11 Volkswagen >3000(308) 1855(152) 10

Table 3. Qualitative data collection outcomes Source: Author

Notes: Numbers in brackets: relevant articles

Second, quantitative information about strategic alliances will be supplemented with the qualitative data collected from newspapers in order to get deeper insight into the context of deals and underlying reasons for them. For this purpose NexisLexis database is accessed.

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24 The Financial Times will serve as a main source, and New York Times and will complement the information from the FT.

In some cases, Orbis database was used as an additional source for collecting and clarifying data regarding joint ventures, strategic alliances, ownership structure and other partnerships-related information, which could contribute to the picture. Table 4 provides an overview of the collected information.

The numbers of articles represent the whole population of articles containing information and the numbers in brackets demonstrate the amount of articles containing relevant information: either having information on strategic alliances, joint ventures or the institutional environment. The final part of this section will consist of two elements: 1) separate investigation of the cases’ patterns through within-case analysis and 2) consequent differences and similarities across cases will be explained with the help of established theoretical concepts. This number however includes repetitions and articles of similar content. 3.4. Data analysis

Quantitative data were collected from annual reports and analyzed with the help of Microsoft Excel in order to draw conclusions about firm’s orientation. As stated above, regional breakdown of sales (both in terms of number of vehicles sold and its money equivalent), assets and employees are measured when there is enough data exists. Following Rugman and Verbeke (2004) logic, exactly regional breakdown of sales is chosen to be the dominant indicator of geographical orientation, with the other indicators being supplemental in debatable situations.

Newspaper articles are analyzed in order to understand why the discovered geographical presence is observed. For this purpose, among the four general strategies, more deductive “relying on theoretical proposition” (Yin, 2014) strategy was adopted, and the data was analyzed with the “cutting and sorting technique” (Ryan and Bernard, 2003), meaning that relevant and important quotes and expressions are arranged into piles of things that go together. With this purpose the following codebook was developed (see Table 3).

NVivo software was used in order facilitate the coding process.

Separate nodes for each of the company were created, and then the subnodes for each type of FSAs and LoF were introduced (in each node). Among the whole population of articles, the relevant were identified with the help of the text search query (“strategic alliance” and “joint venture”, as a particular form of strategic alliance). Among found articles, relevant articles were read and appropriate passages were coded.

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25 Code

4. Results

The following section investigates peculiar properties of each MNEs’ international expansion patterns and links companies’ performance to the role of strategic alliances in the within-case analysis subsection. Based on the within-case analysis results, cross-case analysis is executed onwards in order to account for differences imposed by each region and pave the way for assessment of working proposition based on obtained through analyses knowledge.

4.1 Within-case analysis

The following section will analyse separately each of three cases (NA region MNEs, EU and Asian ones), with the greater emphasis put on the subcases (Ford and GM; Daimler and Volkwagen; Honda and Suzuki). The information on the regional orientation will be presented, with the further assessment of strategic alliances’ role in the observed geographical presence and the FSAs implications.

4.1.1 North American car manufacturers

Although put into different “geographical presence” categories, General Motors and Ford Motor demonstrate fairly similar regionalization patterns when looking at the regional breakdown of sales in currency. Therefore the number of vehicles sold was taken into account in order understand deeper international activities of the companies. Both companies are members of the Big Three, with GM being the biggest car manufacturer in the U.S. and Ford holding the second position. In order to get the insight into the environment the companies are functioning in, Porter’s 5 forces analysis was performed (based on the Industry Handbook: Automobiles).

1. Threat of new entrants. Historically U.S. car manufacturers had the strongest position in the domestic market (and dominant role in the region), so the Big Three (GM, Ford and Chrysler) retained rather monopolistic attitude due to being pathbreakers and first in the industry to set large volume production. Yet the loosening of governmental protectionism and emergence of capital, technology and managerial skills endowed foreign competitors allowed them to enter the biggest (at the time, nowadays the second biggest) automobile markets. Honda, Toyota, and later Daimler were able to seize the opportunity. In the studied decade, Hyundai Motor were able to increase its U.S. market share up to 2.2%, tripling the sales revenues in 2012 compared to 2003.

2. Supplier bargaining power. Representing a highly segmented business, automotive suppliers possess little bargaining power, being dependant on manufacturer’s orders and

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27 vulnerable to their switch decisions, since most suppliers cooperate with one or few car producers.

3. Power of buyers. The bargaining power of car manufacturers appears to be strong and presumably will remain so, since the customers never purchase large volumes. However, being price and product sensitive, consumers may prefer foreign alternative to American automobiles.

4. Availability of substitutes. Growing comfort and variety of public transport constitute a real threat to car manufacturers, as the competition moves beyond the industry and forces car producers to account for additional factors, such as traffic, fuel prices, etc.

5. Competitive rivalry. For a long time automotive industry was perceived to be an oligopoly. This fact helped reduce price-based competition and maintain above average returns. However the emergence of new competitors (mostly Asian ones), who are able to compete on price, forced the industry returns to drop, as the cost of competition raised.

4.1.1.1. General Motors Regional Orientation

General Motors demonstrates rather strong home-region orientation with the percentage of North America region sales never dropping below 54% (54.81% is the lowest number – 2009). Beginning with over 80% of sales at home-region in 2002, GM however manages to reduce this number to 60% in the 2012. Sales in the Asian region, although show steadily growing trend, remain low, never hitting 10% mark. European sales fluctuate between the 10% and 20% level, reaching its maximum in the 2009 (22.73%). This correlates with the lowest percentage of home sales, reflecting the economic downturn (and its American component in particular), with the factual figure of 2009 home-region sales being only a half of that in 2007 ($57 million compared to $115).

region /year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 NA 81.86 % 79.97 % 77.44 % 72.51 % 71.61 % 63.66 % 59.31 % 54.81 % 61.37 % 60.84 % 63.46 % EU 14.12 % 15.80 % 17.17 % 17.40 % 16.75 % 19.55 % 21.82 % 22.73 % 16.88 % 16.76 % 13.60 % Asia 0.00% 0.00% 0.00% 4.46% 5.47% 8.63% 5.90% 6.06% 6.15% 6.98% 7.80% Table 5. GM regional sales breakdown ($)

Source: Author, adopted from annual reports Notes: 0.00% indicates the missing data.

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28 Indeed, economic crisis put the entire automotive industry of the U.S. in danger, resulting in further governmental bailout, which led to the $11.2 billion loss (Beeh, 2014). The European sales, in turn, reduced only by 50%.

The firm specific-advantage perspective on the role of strategic alliances

Global collaboration is perceived to be one of the core goals of the GM (Annual report, 2006). Through the international partnership (but not only) GM aims to maintain its competitiveness by gaining access to global purchasing efficiency, global manufacturing and global product development. In 2012 GM has established a strategic alliance with PSA in order to achieve those goals. First of all, a long-term exclusive service agreement with the Gefco (Peugeot’s WOS) clearly demonstrates GM’s willingness to tap into its counterpart downstream FSAs, thus leveraging downstream activities related costs. Secondly, developing vehicle platforms and components jointly allows GM to exercise both economy of scale and share logistic spending. The agreement has a more tacit implication: joint development allows GM to save on the European market research by gaining access to the PSA Group’s (Peugeot Société Anonyme) tacit knowledge on consumer preferences, providing a good exemplifying case of both tangible and intangible upstream FSAs seeking behavior.

Thirdly, “purchasing joint venture for the sourcing of commodities, components and other goods and services based on the combined purchasing reach of both companies helps to realize purchasing synergies” (GM annual report, 2012, p. 22), resulting in estimated €60 million saving due to the synergy effect. Such JV can be perceived as the company’s striving to obtain particular both tangible and intangible upstream firm-specific advantages.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Chart 1. GM's regional sales breakdown ($)

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Dimension Explanation Quote

Upstream intangible FSAs

Consumer preferences play an important role when entering new market

“General Motors's new joint venture with Avtovaz, the leading Russian carmaker. Together, they have built a factory in Samara region, where they began producing late last year a sports utility vehicle of Russian design with American refinements”.

Upstream tangible FSAs

Sharing a supplier network results in greater synergy and cost savings.

“The American and French carmakers [GM and Fiat] said they would share vehicle platforms, components and modules and create a global purchasing joint venture to buy commodities and parts that would have combined purchasing volumes of $125bn a year…” Downstream

tangible and intangible FSAs

Distributor networks is a cornerstone when deciding whether a company would be able to operate in the Chinese market

“…planned joint venture. The deal would give GM a foothold in Asia's second-largest car market. The three-way partnership, combines the US company with Shanghai Automotive Industry Corp (SAIC) and Wuling Automobile. The cars will be distributed through Wuling's own national network.”

Table 6. Quotation support for General Motors.

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Although the strategic alliance with Fiat has the potential to impact GM’s performace, it was established at the end of the investigated period (2012), meaning that it will not have an impact on the performance in the observed decade. Contrary, two notable Chinese joint ventures (SAIC-GM-Wuling in 2002 and FAW-GM in 2009) were able to influence the company’s performace in the Asian region. Already having a JV with SAIC (in 2001), GM further expanded partnership to include Wuling Group. The need for such alliance stems from the opportunity to battle European rivals in the Asian region on the one hand, and the neccesity to comply with Chinese regulation rules on the other: “The American auto maker needs SAIC to begin assembling Cadillacs in China so it can attack a luxury car market dominated by German car makers. Chinese law requires that foreign auto makers have local partners, and how GM manages its relationship with SAIC is crucial.” (Terlep, 2012). Speaking in RBV terms, GM requires conterparts’ upstream FSAs, namely market access, consumers’ preferences knowledge (consider GM’s production under Wuling’s brand, Baojun) and ability to attracts financial resources: “GM also has tapped SAIC's deep pockets. In 2010, the companies launched a joint venture in India, a market that GM couldn't afford to tackle alone.” (Terlep, 2012). FAW-GM, in turn, is utilized not only to produce for local sales, but also to crafts complete knock-down kits for vehicle assembly outside of China. In this way, GM’s alliance with FAW allows to receive not only upstream production-related FSAs due to the economy of scale effect and the outbound logistic costs cut in the Asian region, but also to exploit economy of scale effect outside of China (in the regions of final assembly).

Regarding LoF, GM is reaping benefits of governmental support in the U.S. exposed through the preferential treatment (along with Ford Motor Company). Therefore, the absence of such in the European region can be considered as a hindering factor in its European Union operations. Moreover, in the Asian region (particularly in China), “maintaining good relations with our joint ventures partners is an important part of our China growth strategy” (GM annual report, 2012, p. 21), as it becomes the vital factor for achieving and maintaining legitimacy. To sum up, consumer preference knowledge, obtained through strategic alliances (in Russia, China, other developing countries), allows to overcome inter-regional liability of foreignness by decreasing discrepancy between locals and outsiders in this competitive resource endorsement area. Moreover, spatial space related LoF is minimized through the JVs in the Asian region.

The role of strategic alliances in the automobile manufacturers’ regionalization : a multiple case study