ISBInsight: Why do firms from developed markets form international marketing alliances with firms in emerging markets?
A major reason firms from developed markets are increasingly interested in expanding to emerging markets is that they represent about 40% of the global economy and about 65% of the world’s population. Emerging markets have rapid economic development and liberalised economic policies, which favour the adoption of a free market system. For example, Skechers, a US-based lifestyle and performance footwear company, believes India can be a multi hundred-million-dollar country, maybe even close to a $1 billion, and hopes to build what’s becoming a massive population of middle-class consumers.
Firms from developed markets form international marketing alliances (IMAs) with firms in emerging markets with the intention of generating competitive advantages by expanding to international markets. Multinational firms not only gain access to relational market-based assets, such as brands and end-consumers, but also get access to intellectual market-based assets, such as market intelligence, competition and access to local distribution networks.
Although emerging markets seem very lucrative for firms from developed countries, the institutional context of emerging markets is significantly different from that of the developed countries. The institutional context presents significant socioeconomic, demographic, cultural and regulative deviations from that of European or North American countries. This difference creates a challenging environment for firms coming from developed markets to manage their IMAs in emerging markets. Even though firms in developed markets bring in financial resources and technological advances, IMAs in emerging markets challenge our conventional understanding of constructs and their relationships.
For emerging market firms, how are international marketing alliances with developed markets different from marketing alliances with other emerging market firms?
Emerging market firms initiate marketing alliances with other firms in the same market (or domestic marketing alliances) primarily for two reasons. One, to achieve increased efficiency and two, to expand the market through higher volumes. In our research, we found that IMAs help emerging market firms to improve effectiveness, build brand equity, learn cutting-edge business processes, and move up the value ladder through reputation. Domestic market alliances help partners access each other’s lower order or basic resources such as distribution channels or infrastructure to save costs. On the other hand, IMAs provide access to higher order resources such as technological capabilities and brand equity for emerging market firms.
Domestic market alliances are individual partner driven, usually prioritising on individual process efficiency, whereas in an IMA, priority is given to a systematic, standardised and collective process improvement. Domestic market alliances are short-term. They focus on value appropriation. IMAs are long term and focus on value creation. Another key difference between domestic market alliances and IMAs is the ease of dissolution. Domestic market alliances offer an easy and immediate exit, whereas IMAs are difficult to exit keeping in mind several regulatory challenges and the potential negative impact on shareholder value after dissolution.
Rarely do firms deliberate about the cultural fit when forming domestic market alliances- i.e. ensuring that an alliance partner firm’s values and beliefs are in line with their own core values and culture. In IMAs, cultural fit between the partner firms is critical for the success of the alliance and drives knowledge sharing and collaboration between the two firms.
What are the factors that drive formation and dissolution of international marketing alliances in emerging markets?
Developed markets are characterised by the presence of strong institutions, such as efficient intermediaries and regulatory processes. Emerging markets, on the other hand, fall short of a range of such institutional arrangements. This can lead to institutional voids characterised by a chronic shortage of resources, inadequate infrastructure and a scarcity of basic market transaction enablers. These institutional voids are a major source of high transaction costs and invariably affect the IMA’s formation and dissolution in unique and undetermined ways in emerging markets.
In our study, we uncover the factors that could potentially aid managers in manoeuvring the institutional voids, facilitating successful alliance management and capturing the growth opportunities in emerging markets.
In the case of emerging market firms, the critical drivers for forming IMAs are: the aspiration to move up the value ladder, need for affordable solutions, new middle-class consumption, ease of doing business, early-mover advantage and restrictions on imports. Developed market partners showed a greater propensity to form an IMA in emerging markets based on their awareness of gaining access to human resources, market knowledge, distribution channels and regulatory resources of the emerging market partner firm.
The dissolution stemmed from ex-post opportunism, market turbulence, conflict of interest, delay in obtaining approvals and relaxation of FDI norms. Furthermore, the developed market partner firm’s motivation to acquire the IMA in emerging markets imperils the alliance.
What guidance can you provide to marketers for managing the IMA process in emerging markets?
We conducted in-depth interviews with senior executives from 106 companies involved in marketing alliances. The main factors that hinder emerging market firms from engaging in IMAs with firms in developed markets were listed as: the risk of losing control, lack of trust, limited scale of business and the potential resource requirement for investment in processes while working with developed market firms.
Developed market firms find it challenging to manage alliances in emerging markets due to differences in business, cultural and political context in developing countries. We discovered that one of the key reasons for IMA dissolution in emerging markets is the delay in obtaining approvals. Institutional voids add to further challenges and complexities. We recommend managers consider these emerging market specific factors while planning for formation of IMAs in emerging markets.
Second, customer preferences are rapidly changing in emerging markets, and managers of IMAs should constantly innovate and improve their offerings to ensure the IMA’s stability and superior performance.
Finally, the demand for affordable solutions is rapidly growing in emerging markets. Emerging market firms are increasingly motivated in forming alliances with developed market firms to ideate and develop affordable solutions for their consumers. Strategically managing affordable solutions and new middle-class consumers is a time-consuming and a long-term process. Developed market firms must avoid the desire to please short-term financial interests of shareholders and focus on nurturing long-term relationships with culturally different stakeholders like low-income consumers and non-traditional channel partners.
The right collaboration can strengthen the longevity of an alliance and delay or minimise the chances of dissolution of IMAs. Building partner acumen- the ability to see through the partner’s lens with an emphasis on empathy or intelligence in understanding the partner’s priorities – is vital in ensuring partnership success.
About the Research:
Pedada, K., Arunachalam, S. and Dass, M., 2019. A theoretical model of the formation and dissolution of emerging market international marketing alliances. Journal of the Academy of Marketing Science, pp.1-22.
About the Interviewer:
Glory George is a Research Associate at ISB.