Exercise E – Strategic Alliances

We can see a combined chart of institutional distance and ownership commitment both for developed and emerging markets. The relationship is the following: If a firm from an emerging market decides to enter South Africa the higher the ownership commitment is the higher the institutional distances get. Institutional distance describes the extent of the similarity or dissimilarity between two countries (focusing on informal-formal, cognitive-normative and regulative) it is also an important factor as institutions dictate the rules of the game (North 1990). High institutional distance picture a challenging economic environment for new entry firms who have to face the liability of foreignness. This distance mean increased transaction costs, higher information costs and uncertainty. Which is especially important as South Africa is ranking only 50 on property right indexes.
The other chart describes the relation between ownership commitment and the nature of knowledge, which shows that to actually gain the Location and Ownership specific advantages ( as Sumatra Inc. is looking for a locally embedded partner, Dunning – OLI paradigm) higher degree ownership commitment is required. This tacit knowledge can be tapped by equity investment or co-op.
Tacit knowledge is embedded in the company’s socially complex organizational routines and employee skills, expertise. Making it hard to codify. The most effective way of learning complex know-how’s is to learn by doing, most preferably by experts/ strategic alliances. In Sumatra Inc.’s case due to the high asset specificity and value-added services, such tacit knowledge is possessed by both firms (Sumatra – complex engineering solutions – Local firm – local network, technological capabilities). The best way to assure the captivity of Sumatra Inc. is to take advantage of the OLI advantages through a co-operation.
As we discussed in class many cases firms choose their market entry strategies wrong. Many times direct entries or wholly owned subsidies are not the right strategies to approach a new market. Just as we learned by the Hatteras and Jobek case it is clear that putting our firm into an unfavorable deal can lead to bankruptcy.
In this specific case I would suggest Sumatra Inc. to set up a Joint-Venture with its local South African partner by a strategic alliance. Small-scale equity investment is suggested. Setting up such a co-operation would be a perfect opportunity to get to know to the local market in SA, but also in generally to the African markets. An up-stream vertical alliance would be beneficial for Sumatra Inc. as it already has the know-how but lacks the local capabilities and struggles with the liability of foreignness. Having equity in the JV would allow Sumatra to monitor and control, also better options are available in terms of Intellectual Property rights enforcement. But also a much loose contractual alliance is possible to conduct, but in this case real option thinking is strongly advised, incase of early success.
This time institutions are playing a role as South Africa is not clearly a developed country, but has some of the patterns. It is clearly cannot be labled just as developed and emerging, as it has the most competitive extracting industry, but lagging behind in technological sciences.

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[ 1 ]. http://www.globalpropertyguide.com/Africa/South-Africa/property-rights-index