Thursday, September 24, 2009

Partner Selection Strategy between Malaysia-Indonesia Alliances

By Ahmad Bashawir & Muhammad Subhan

Introduction

For a long time, international management theory did not place much emphasis on the study of international business cooperation. In most cases, collaborations were viewed as second best solutions, for example, in countries where the investment regulations do not allow the establishment of wholly owned foreign subsidiaries (e.g., Beamish 1988; Franko, 1971; Harrigan, 1986). Moreover, they were perceived to have a negative impact on competitiveness. For example, in his study on the competitive advantage of nations, Porter (1990, p.67) concludes that “alliances appear to be most common among second tier competitors or companies trying to catch up … (while) global leaders rarely if ever rely on a partner for assets and skills essential to competitive advantage.”

In recent years, however, the attention paid to international cooperation has increased, in both international management theory and practice. Perlmutter & Heenan (1986), for example, argue that increased global competition underlines the necessity to achieve worldwide economies of scale and to cope with internationally diversified customers. In their opinion, only firms that cooperate across national borders will be able to meet these new challenges and compete globally. According to a study by Dyer, Kale and Singh (2001), the 500 largest firms in the world have an average of 60 major cooperation agreements each. International alliances are cooperative arrangements, with cross border flows and linkages that utilize resources from autonomous organizations headquartered in separate countries (Parkhe, 1991). International strategic cooperation has at least three distinct purposes (Holtbrugge 2004):

   1. Scale advantages: Cooperation allows the partner firms to achieve scale economies and reduce excess capacity by combining similar resources that belong to the same stages in the value adding process. This motive is particularly relevant in global industries where large standardization and integration advantages exist (Dussauge, Garette & Mitchell, 2000; Park and Russo, 1996; Porter & Fuller, 1986).

   2. Resource advantages: Cooperation may also be aimed at combining complementary resources, skills and strengths that belong to different stages in the value adding process. Resource advantages are especially important for partnerships between firms from developed and developing or transformational countries where the former provide management know how, financial resources, and technological capabilities, while the latter contribute access to local customers, suppliers, and government officials (Beamish & Killing, 1997; Holbrugge, 1995; Sim & Ali, 1998).

   3. Learning advantages: Cooperation can also be a means for learning and internalizing new skills. This motive is particularly relevant in high tech industries where the ability to acquire and apply knowledge is a key success factor (Kale, Singh & Perlmutter, 2000; Simonin, 1999; Stuart, 2000).

For Dunning (1997), the implications of international strategic cooperation go even beyond the firm level. According to him, a transition of the entire economic system from market capitalism to “alliance capitalism” can be observed, wherein large multinational corporations are interconnected with small and medium sized firms in a dense network of joint ventures, licensing agreements and other forms of equity and non equity cooperation. The paradigm shift in international management that can be omitted with this transition may be illustrated by the following cases of Malaysian firms, which represent different motives and different forms of international strategic cooperation. Strategic alliances are a common strategy for entering new countries. This entry strategy has some peculiarities of its own. On the one hand, having a local partner may reduce the entry risk faced by the company as well as its level of committed resources. This offers an advantage when country risk is high and when the familiarity with the host country is low (Hill, Hwand and Kim, 1990). On the other hand, partnerships are difficult to manage, especially when there are significant cultural differences between the partners (Perlmutter and Heenan, 1986).

Direct investment in Indonesia involves a relatively high risk and benefit for Malaysian companies. First, investing in Indonesia involves significant country risk, mainly because of political instability, lack of infrastructure, lack of laws governing and protecting business interests and difficulties in obtaining supplies and raw materials (McCarthy, Puffer and Sommonds 1993, Hitt et al. 2000, Tresno, 2003). Second, the cultural, political and economic differences between Malaysia and Indonesia are considerable (Rosten, 1991). Patrick and Luthans (1995) suggested that even countries that are geographically proximal could be economically, politically and culturally distant in significant ways. When investing in Indonesia for the first time, Malaysian companies are unfamiliar with the peculiarities of this country; this makes partnerships an attractive alternative for entering the Indonesian market. Finally, although Malaysian economy has grown at a stronger pace than most developing country economies, many of the businesses in Malaysia are young or recently privatized (Hamid et al. 2005), and their resource endowments are unlikely to be strong. Thus, Malaysian firms may use alliances as a means of acquiring tangible and intangible resources to develop their capability to compete in their domestic and global markets with multinational firms from other countries particularly Indonesia. Firms from Malaysia tend to have richer resource endowments, but they nevertheless also search for partners with specific resources, tangible and intangible, to complement their own resource bases.

Although the use of partnerships reduces entry risks, managing these partnerships entails difficulties. Even if a local partner may compensate for the lack of country knowledge, cooperating with a culturally different partner as Indonesian companies are to Malaysian companies engenders difficulties. Under these circumstances, partner selection and the initial steps toward managing the new relationship become critical factors for successful entry. At the partnership creation stage, the balance between the contributions each company will bring to the partnership and the difficulties they will face in managing their relationship need to be considered. As the relationship unfolds, social processes gain importance. The level of inter-partner trust or “perceived likelihood of the other not behaving in a self interested manner” (Madhok, 1995) influences the performance of the partnership (Gill and Butler, 1996). This study explores (1) the criteria used by Malaysian companies to select their partner, both task related and partner related criteria; (2) the contributions that Malaysian and Indonesian companies bring to the partnership; and (3) management of the inter partner relationship, including the difficulties encountered, how the relationship management varies with the characteristics of the Malaysian partner, and the resulting effects on the process of trust building.

Methods

Research on partnerships between Malaysian and Indonesian companies has not focused on partner selection and the management of the first steps in the relationship. Thus, given the state of knowledge in this area, theory building goals, research design and data collection methods were selected accordingly in an exploratory manner (Parkhe 1993; Steven White 2002).

The methodology used was qualitative analysis of data collected mainly from semi-structured interviews. This information from Malaysian offices was complemented by interviews of managers conducted in Malaysia as well as by reports provided by the same managers describing company operations in Indonesia. This study is part of a broader research project on how Malaysian companies approach their investments in Indonesia, jointly undertaken by three Malaysian and two Indonesian researchers.

Sample selection   

From an initial set of twelve Malaysian companies with investments in Indonesia, we selected eight companies identified as having used partnerships as a key means of entry in their investments in Indonesia. The companies were selected according to the following criteria: industrial sector, size and access to key players in the company. We tried to have as much variation as possible. Because of time and financial constraints, we focused our selection on companies involved in agriculture, telecommunication, manufacturing, banking and industrial sector. As for the industrial sector, we covered a broad range of economic sectors; industrial products, consumer goods and services. We tried to include companies that varied in size, anticipating that the nature of the difficulties faced would be influenced by the companies’ resource endowment (Welch, 1993). Access was facilitated by the business contacts of professors from business schools in Indonesia. The availability of the Malaysian affiliates, as a means to compare and contrast Indonesian perspectives, was the last factor in our sample selection.

These efforts resulted in a sample of eight companies. Four were in the industrial products industry, two in consumer goods and two in services. We used number of employees as the size criterion; companies with fewer than fifty employees were classified as small, while companies with mote than 500 people were classified as large. Hence, two of the companies were classified as small, three as medium sized and four as large.

Data collection and analysis

Data were collected mainly by means of semi-structured interviews with open ended questions. The questions were identified by reviewing relevant literature on partnerships and identifying key issues in partnership management; criteria used in partner selection (Geringer, 1991), evolution and management of the inter partner relationship (Ring and Van de Ven, 1994), and interpartner trust (Madhok, 1995). Three pretest interviews helped ensure face validity. A representative from one of the selected companies; a Malaysian manager of a Malaysian joint venture and a Malaysian consultant with years of experience advising Malaysian companies on entry into Indonesia were used for this pretest. The final questions are listed in the appendix to this paper.

The interviews were carried out between January and March 2005. The interview questions were faxed in advance to all interviewees so that they could have time to think about them before the interview. In most cases, one representative from the headquarters of each company was interviewed; in a few cases, we were able to hold interviews with more than one manager. In all but one case, interviewees held senior executive positions (CEO, vice president for international or eastern operations, head of international investments, etc.) The exception was an area manager for Malaysian operations. At least two of the researchers participated in each interview. Interviews lasted between two and three hours. After each meeting, we reviewed our notes for completeness and accuracy. The opportunity to interview managers in charge of Malaysian operations in Indonesia reduced the need to contact the headquarters interviewees to resolve doubts about the accuracy of the data initially collected. Interview information was complemented with archival data obtained during our visits to the companies’ premises and with press clippings whenever available. The archival data were mainly annual reports and reports about Malaysian offices and operations.

Analysis was done using tools and techniques for qualitative data analysis suggested by Miles and Huberman (1984). The procedures these authors suggest involve the use of descriptive and analytical matrices designed ad hoc by the researchers to facilitate data reduction, data display and conclusion drawing and verification.

Partner Selection

Geringer (1991) opines that partner selection criteria may be grouped into task related and partner related criteria. While task related criteria refer to the complementary capabilities the partner may offer, partner related criteria are closer to the notion of ability to work with the partner. According to the data, the most prominent criteria Malaysian companies look at when searching for a potential partner fell into the categories suggested by Geringer (1991). Task related criteria include knowledge of the market conditions, knowledge of the environment and political influence. Partner related criteria include reputation, potential to maintain a continuing and stable relationship, position within the industry, professionalism, honesty and seriousness, fit and enthusiasm for the project.

Task related criteria

The main deficiency of Malaysian companies when investing in Indonesia is their lack of market knowledge in terms of business conditions, products and clients. When searching for a partner, the first condition Malaysian company look at is whether the potential partner will be able to provide that knowledge. In one extreme case, one of the Malaysian banks felt no Indonesian bank would be able to provide this knowledge, given the lack of commercial banking activities with a market orientation in the recent past. This was one reason for this Malaysian bank to partner with another foreign bank with operations in Indonesia already, instead of joining an Indonesian one. Knowledge of the environment economic trends and the regulatory system edge of the environment-economic trends and the regulatory system and the capacity to have an influence on politicians were also appreciated by some of the companies. Interestingly, only the two banks in the sample did not find the latter a significant factor in partner selection. Because of the merger development of the Indonesian banking system and the reduced number of local entities, foreign banks did not value local partners as a source of key political and business connections.

Partner related criteria

According to one of the interviewees, the choice of a partner is more important than funding; “If you don’t have funds, you don’t undertake the project, and that’s it; but if the partner isn’t a good one, then you’re in trouble.”

This remark reveals the importance of knowing who the partner is. It is difficult, though, for Malaysian companies to discern which companies are good ones. This is why reputation is important. Malaysian companies look for a good reputation in the business sense, not in the political one. They explicitly stated that they avoid involving politicians although having a partner with some political influence was considered very important in an untested and fluid legal environment for some tasks, such as obtaining approval to set up a new office or in registration, custodial and settlement procedures. In order to have a sense of the potential partner’s reputation in business, Malaysian companies wanted to know what a potential partner had done in the past and what it was doing currently. Interestingly, banks and industrial companies with one exception attributed a great deal of importance to reputation in the core or related business area of activity. In contrast, the consumer goods companies did not mention reputation as a characteristic to look for in a potential partner.

Most of the Malaysian companies in our sample acknowledged that they were in Indonesia in hopes of long run future benefits, rather than taking the kind of “hit and run” or “one night stand” position that seemed to characterize some of the early entrants. Thus, these Malaysian companies needed a partner with a certain degree of stability and the capability to stay with them in a continuing manner. The quest for stability seems to be closely related to the search for reputation. Most of the companies that had looked for a partner with a good reputation also acknowledged they had looked for a continuous relationship. Again, the companies in the consumer goods industry did not mention stability as a desirable condition in a potential partner. This is not to say that these companies do not appreciate their partner’s reputation or continuity in the relationship, but that these Malaysian companies either took these conditions for granted or attach greater importance to other conditions.

Also related to the partner’s reputation is its position within the industry. This feature was stressed by the banks, one of the engineering services companies, and the consumer products companies. One of the banks participated in a consortium involving a number of banks from other countries as well as two Malaysian banks. All of the partners were leading banks in their respective countries. As already mentioned, the other bank had decided not o have a local partner in Indonesia because they did not think they could find a local bank that could bring to the partnership either experience in local private banking or funding in the local currency. According to the consumer products companies, a partner’s sound position in the industry may help in a number of ways, for instance, saving start-up costs if the partner’s facilities can be easily accommodated to the western practices, or providing connections with local companies.

Professionalism is also appreciated in a potential partner. Indonesian companies with managers that already have a professional mentality and managerial skills are scarce but very much appreciated. Yet, a significant number of Malaysian managers believed they will have to wait for the next generation of young people with a professional mentality, given the impossibility as one manager stated of older people adapting their mindset to rapidly changing conditions. However, Malaysian companies’ expectations for young Indonesian people with minds open to professional influence were very high. They expected the younger generation to play a key role in future managerial responsibility within the local affiliates. The process of replacing expatriates as local managers gradually assumes the former’s positions had begun in all companies interviewed. In one case, the Indonesian general manager of a joint venture, with a majority stake by the Malaysian company, had been employed by the Indonesian partner before.

Malaysian companies looked for honesty and seriousness in their partners. Obviously, these characteristics are valued in any context. The difficulties Malaysian companies have in ascertaining their presence in Indonesian companies have to do with the fact that these words may have different connotations in the two cultures. What is considered ethical or unethical behavior by Malaysians and by the Indonesians may not be the same (Puffer and McCarthy, 1995). As a consequence, what Malaysian companies look for is common ground in this area.

Fit between the companies was also mentioned by two of our interviewees. One of the consumer products companies said they had looked for a company about the same size as their own; in fact, they partnered with the largest Indonesian producer of their own product line. One of the industrial companies also talked about fit. Product complementarity had made it easy for the Indonesian company to restructure its manufacturing facilities to adapt them to the new joint product. Some Malaysian companies thought enthusiasm for the project on the Indonesian partner’s side was important. Such willingness to succeed was perceived as a signal of commitment to the partnership, a necessary condition for success. By now, it should be clear that task related criteria are closely connected with the contributions each company will make to the partnership and that partner related criteria will affect the process of managing the relationship.   

Contributions to the partnership

In previous decades, partnerships particularly joint ventures were used as an entry mode to new countries out of necessity. Frequently, a local partner was needed to fulfill governmental requirements, but no important contributions were expected from this passive partner. More recently, the contributions from local partners are at least as important as those from the foreign company. More and more, the partners are interdependent and each needs contributions from the other (Nohria and Garcia Pont, 1991).

The contributions from both Malaysian and Indonesian companies to the partnership are closely connected with the task related criteria for selecting a partner. Thus, we may expect the contributions from Indonesian companies to be related to their knowledge of the local conditions and those from Malaysian companies to be related to their business skills.

Contributions from Indonesian companies

Apart from the banks, the main contributions from the Indonesian companies in the sample were their industrial facilities and production capacity as well as their market access. Local facilities provide a basis to start with, even if they require renovations. In one case, the Indonesian partner contributed its sound position in a related area, and in this way it provided access to key raw materials. One of the consumer products companies saw the labor force as one of the contributions of its Indonesian partner. Another company saw this kind of contribution as a negative one; in that the ratio of production to staff personnel was comparatively low.

Market access was another important contribution in some cases, and so was the Indonesian companies’ ability to manage their own people. The latter was also acknowledged by one of the banks.

Some additional contributions from Indonesian companies include the search for a good location and ability to manage the process of securing regulatory approvals. When the latter is done by the local partner or by a specialized local institute, the process speeds up because of the locals’ knowledge of regulation and procedures and personal contacts.

Contributions from Malaysian companies

The main contributions from Malaysian companies are knowledge transfer and financial resources. Knowledge transfer takes place at several levels; technical know how, marketing skills and management systems. Not only manufacturing companies but also banks transfer technical know-how. Given the primary stages of the banking system in Indonesia, knowledge about new technologies had to be transferred by the Malaysian telecom and bank joint venturing with an Indonesian one.

The need for the transfer of marketing skills is a natural consequence of previous market conditions in Indonesia. The lack of competition in the Indonesian economic system of the recent past engendered no need for marketing related skills and capabilities. The production standards were set by the government and companies just had to meet them, knowing that their products would find a demand. As an anecdote, one of the interviewees said that their Indonesian partner was proud not to have their brand in the market, which shows a mentality totally at odds with a western one. In some cases, not just the marketing skills but also the brand and the product image had been transferred to the partnership.

The transfer of the technical know-how and of marketing skills is necessarily accompanied by the transfer of management systems. This requires training the people involved. Malaysian companies provide extensive training programs, at both the managerial and the technical level. Often these programs take place in Indonesia as well as in Malaysia. Financial resources are also a main contribution from the Malaysian companies. Their up front investment serves as a guarantee or as a signal of commitment fro financial institutions to provide the remaining necessary funds.

Other contributions from Malaysian companies include experience and credibility and the initiative to undertake the project. Interestingly, the bank that had no hope for an Indonesian partner chose a foreign bank because of the political connections it had established while operating in Indonesia prior to this partnership.


... see more at The Global Studies Journal

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