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Alliances as collaborative regimes

An institutional based explanation of interrm collaboration
Henry Adobor
Department of Management, School of Business, Quinnipiac University, Hamden, Connecticut, USA
Abstract
Purpose The management and strategy literature continues to show that many companies now rely on alliances for their long-term success. This paper seeks to explain why some industries have an over-representation of inter-rm strategic alliances, relative to others. Design/methodology/approach A theory of group behavior is used to show that an inter-organizational phenomenon, notably the interaction of convergent expectations, including shared patterns of behavior, beliefs and mindsets, are partially responsible for the disproportionate use of alliances in some industries relative to others. The theory of group behavior presented draws mainly on conceptual ideas from regime and new institutional theory. Findings The framework suggests that the presence of industry-embedded factors, including shared mindsets, creates the conditions that transform the strategic interests and behavior of individual rms into a macro phenomenon that diffuses across an industry. Industry developed shared mindsets in turn provide the conditions for trust to endure, cooperation instead of opportunism to prevail, and lower transaction costs, all critical elements for alliance formation. Practical implications The research presented here shows that industry-level factors may be an important factor for determining the incidence and perhaps the performance of value-creating alliances. Originality/value This paper extends our understanding of strategic alliances as a source of a rms competitiveness and fullls a need for a greater understanding of the over-representation of strategic alliances in some industries, relative to others. Keywords Strategic alliances, Group behaviour, Organizational theory, Economic sectors Paper type Conceptual paper

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Competitiveness Review: An International Business Journal Vol. 21 No. 1, 2011 pp. 66-88 q Emerald Group Publishing Limited 1059-5422 DOI 10.1108/10595421111106238

1. Introduction and background Why do some industries have an over-representation of inter-rm strategic alliances, relative to others? For example, it is known that alliances have become the dening characteristic in the biotechnology industry in North America and the global airline industry with each industry having a more than disproportionate share of alliances (Delerue and Simon, 2009; Ernst & Young, 1995; Go and Williams, 1993). At the same time, the global tourism industry has been criticized for the paucity of inter-organizational linkages (Selin, 1993). Answering this question is important for at least two main reasons. First, because if alliances have become a critical factor for competitive success (Lavie, 2009; Ireland et al., 2002; Dunning, 1995; Gerlach, 1992), then it is of interest to look at the dynamics that foster cooperation. Indeed, the late management guru, Peter Drucker, predicted

more than a decade ago that alliance management capabilities and their use for value creation will become the next strategic frontier. More recently, Lavie (2009) has suggested that many companies rely on alliances for long-term success. Second, and related, despite the generally positive expectation of partnering, research and past experience has shown that sometimes widely shared industry mindsets and strategic postures may have a long-term negative impact on collectives of rms. Widely shared strategic postures have been linked to strategic inexibility, myopia, and collective failure (Bresser and Harl, 1988; Abraham and Fombrun, 1994). For example, Swissair, noted for having multiple alliances with some of the industries biggest players, collapsed. Suen (2002) suggests that Swissair Groups bankruptcy was a direct consequence of the implementation of its alliance strategy. Strategic alliances involve non-trivial, bilateral cooperation between autonomous rms (Das and Teng, 2001; Williamson, 1991). As distinct organizational forms, alliances can range from fully integrated, shared equity joint ventures to arms-length relations in which collaboration may be nothing more than loose working relationships (Yoshino and Rangan, 1995). Alliances between rms in the same industry are called horizontal alliances while alliances between rms in various segments of the value chain are vertical alliances. This paper focuses on horizontal alliances. Compared to vertical alliances or cross-industry alliances, research on conguration of alliances within an industry is sparse (Burgers et al., 1993). This is in spite of the realization that horizontal strategic alliances are more difcult to manage than vertical alliances (Bengtsson and Soren, 2000; Perry et al., 2004). Some existing research has linked industry structures to the incidence of alliances. For example, it has been shown that the size of an industry positively relates to the intensity of inter-rm alliances (Burgers et al., 1993). The nature of industry environment, dened in terms of resource scarcity or abundance, is also said to inuence the use of cooperative strategies (Dollinger, 1990). The degree of demand and competitive uncertainty that faces an industry has also been related to the rate of alliance formation in an industry (Eisenhardt and Schoonhoven, 1990). It has also been suggested that the cost structure and the costs of new product development in an industry all have an effect on the rate of alliance formation in an industry (Varadarajan and Cunningham, 1995). While insightful, these explanations alone may not adequately allow us to explore the prime dynamics that underlie all aspects of inter-rm behavior. To some extent, these and similar explanations are based on individual rm rationality and self-interested behavior. Taken alone, models based on individual rationality and self-interested behavior may be inadequate to explain what may be a group-level behavioral phenomenon. The fact is most industries face the same challenges such as high cost of new product development and uncertainty, yet alliances may not be found in equal numbers across all industries. As Schelling (1960) showed, models focusing on individual rationality and self-interest behavior are inadequate to account for the convergence of expectations. Thus, despite the important work done so far, some gaps remain in our understanding and calls have been made for a greater understanding of industry structures and their link to the use of cooperative strategies (Varadarajan and Cunningham, 1995). Osborn and Hagedoorn (1997) call for a greater exploration of institutional aspects of strategic alliance use. Singh (1997) speculates that industry-embedded conditions may affect decisions about alliances and cooperation.

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This paper attempts to ll some of the existing gap by linking industry mindsets to alliance formation. This paper argues that an inter-organizational phenomena notably the interaction of convergent expectations and patterns of behavior, practice, shared beliefs, and mindsets are partly responsible for the incidence of alliances. The presence of these institutional advantages confer four critical benets on rms: they reduce the transaction cost associated with partnering, foster cooperation, trust, and ensure that ties will be formed. Thus, industries that have well-developed convergent expectations of behavior and practice will see more alliances relative to other industries. Prior research has documented that a lack of trust or its fragility (Gulati, 1995), lack, or difculties of cooperation (Buckley and Casson, 1988), difculties of forming ties (Uzzi, 1996) and high transaction costs (Hill, 1995) are all obstacles to alliance formation and performance. The paper proceeds as follows. Section 1 introduces the concept of regimes (Young, 1982; Krasner, 1986) to explain how the convergence of expectations and behavior may emerge in an industry. Section 2 examines how the features of industries give rise to convergent expectations. Section 3 discusses how convergent expectations inuence four key outcomes: the transaction costs associated with partnering, trust building, cooperation, and social structure. These factors ensure that alliances in such industries would tend to be more successful than in industries that do not share such norms. Section 4 concludes the paper. Figure 1 shows a summary of the main arguments in schematic form. Contextual and situational factors increase convergence expectations ( ). In turn, convergence expectations increase institutional trust, non-relational cooperation, cultural and structural embeddedness, while reducing (2 ) transaction costs. Collectively, these conditions ensure that alliances are formed in the industry. The research uses a theory of group behavior to link industry structure to alliance incidence. It combines aspects of institutional theory (Scott, 1995; DiMaggio and
Contextual Factors Spatial clustering Age in life cycle + Situational factors Industry recipes Trade associations Perception of common threats Convergent expectations + Shared mindsets Guides to behavior Social control Transaction costs Cultural and structural embeddedness + + Institutional Trust Cooperative infrastructure

+ + +

Outcomes Alliance formation

Figure 1. A framework for understanding the relationship between embedded industry conditions and alliance formation

Migration of executives

Powell, 1983) including the concept of inter-organizational macrocultures (Abraham and Fombrun, 1994), the notion of industry recipes (Spender, 1989), and regime theory from the international relations literature (Krasner, 1986) as a baseline model to explain the incidence of horizontal inter-rm alliances. The main argument contained in this paper is that the convergence of expectations arises when rms develop similar mindsets and expectations, including similar recipes (Spender, 1989), which may themselves be aided by such factors as common perceptions, migrations of key individuals across rms in the industry, and various forms of isomorphism. In turn, the presence of convergent expectations aid the development of trust and cooperation in alliances between rms in the industry, as well as reduce the transaction costs associated with such relationships. These conditions make it more likely that rms from these industries have a greater than average chance of having a successful alliance. 2. Convergent expectations as regimes Regime theory has its roots in political theory and international relations. Following Young (1982, p. 277), we dene regimes as social institutions governing the actions of those interested in speciable activities. Although some theorists argue that regimes presume explicit agreement between independent actors (Krasner, 1986), regimes may be more or less formally articulated, and they may not be accompanied by explicit organizational arrangements. Regime theory has been used to study issues such as security between nations (Nye, 1987) environmental problems, and issues of multi-state cooperation (Young, 1982). The use of regime theory in this paper has a similar mission, to elucidate inter-rm cooperation. Whether explicitly articulated or not, a key distinguishing feature of regimes is the conjunction of convergent expectations and patterns of behavior or practice. Young (1982) observes that the conjunction of relatively enduring expectations produces conventionalized behavior. These behaviors are based on recognizable social conventions that become guides to action. More importantly, perhaps, is the idea that actors accept and treat such guides to action as operative without making detailed calculations on a case-by-case basis. This may be so because social norms generate established and self-reinforcing patterns of behavior. Of course, individual actors are free to conform to such social conventions or not to conform. However, the more widespread the conventions, the greater their legitimacy and the more likely that actors will adopt and conform to such social conventions. Expectations converge when relatively enduring expectations and assumptions emerge within a group of institutional actors. In our particular case, the industry is the level of analysis. These collective assumptions and expectations inuence behavior of individual social actors indirectly because they are accepted without question. Regime theory shares some similarities with the theory of social conventions (Lewis, 1969) and the new institutionalism (Powell and DiMaggio, 1991). Both theories suggest that the behavior of social actors may be determined by shared assumptions and expectations. The implicit assumption is that the institutional values that shape individual actor behaviors are enduring. Again the new institutional theory, like regime theory, accepts that individual actors create and produce the institutional order and each individual is free to accept or reject conformance to the social conventions. The institutional actors can, similarly, change the institutional structures.

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According to institutional theorists, institutional context consists of relatively stable rules, social norms, and cognitive structures (Scott, 1995). Scott identies three dimensions on an institutional context: normative, regulatory, and cognitive. Normative institutions dene which behaviors and values are expected of individuals or rms and are seen in the shared values or norms regarding the appropriate ways to act. Normative institutions can be both national and industry based. Regulatory institutions consist of laws, regulations, and government policies that promote and restrict behavior. Finally, cognitive institutions reect how certain knowledge sets become institutionalized and become part of a shared social understanding. In general, institutions provide the rules of the game (North, 1990), and institutional frameworks provide informal constraints in the form of socially sanctioned norms of behavior which may become embedded in shared norms (Bucar et al., 2003). Young (1982) identies three main forms of regimes: spontaneous, negotiated, and imposed. First are spontaneous regimes. The term spontaneous regimes are traced to Hayek. He denes spontaneous orders as the product of the action of many men but not the result of human design (Hayek, 1973; cited in Young (1982)). As Young notes, spontaneous orders do not often require explicit consent on the part of subjects or prospective subjects. Descriptions of economic collaboration in such geographically bound enclaves such as Silicon Valley (Saxenian, 1994), Emilia-Romagna province of Modena, North-Central Italy (Brusco, 1982) and Baden-Wurttemburg, a center of textile manufacturing in Germany (Piore and Sabel, 1984) seem to exhibit some features of spontaneous orders. In all these cases, the close proximity and clustering of rms seem to have provided one impetus for the widespread use of inter-rm collaboration. Second are negotiated orders. These are regimes characterized by explicit consent on the part of individual participants. For example, the General Agreement on Trade and Tariffs may be an example of a regime in which member nations agree to be bound by rules and regulations of a negotiated order or regime. The rise of certain forms of inter-rm collaboration may be viewed as negotiated orders. For example, in Europe, cooperation among rms on the airbus project was greatly facilitated by member European governments (Tucker, 1991). In the USA, the passing of the National Cooperative Research Act in 1984 led to the formation of several research consortia such as the semiconductor initiative, SEMATECH, and the Software Engineering Institute in Pittsburgh (Gibson and Smilor, 1992). Although the government provided the incentives for rms to pull together, the collaboration was based on explicit agreement among participating rms. Finally are imposed regimes. This occurs when norms of behavior are forced upon consortia of actors by a dominant actor. As in spontaneous orders, individual actors may not explicitly give their consent, but the dominant actor(s) succeeds in getting them to conform to the requirements of the regime through a combination of coercion, co-optation, and the manipulation of incentives. Japans Ministry of Trade and Industry (MITI), may be a good example of a dominant actor which has fostered cooperation among Japanese rms by manipulating incentives and building consensus (Hill, 1995; Hagen and Choe, 1998). Gerlach (1992) suggests that in the case of Japan and MITI, at least the actors or rms may have a belief, however well justied, that their interests are being served by the sort of conscious institutional guidance MITI provides.

2.1 Industry structure and convergence expectations We conceptualize inter-rm alliances in this research as spontaneous regimes. What this means is that cooperation has become a self-reinforcing norm or convention in the industry and rms accept partnering as a legitimate strategy because it has cognitive legitimacy. Cognitive legitimacy refers to the level of knowledge about a process in an industry (Aldrich and Fiol, 1994). Regime theory is less explicit on the specic mechanisms by which most regimes come into being. However, we can speculate that the interaction of individual agents plays an important role in their emergence. In this research, we propose that regimes, as social conventions, arise when individual rms interact with one another. Learning and behavior adaptation occurs as a result of the repeated interactions. Over time, self-reinforcing norms that guide individual rm behavior emerge. Next, the collective norms or rules of interaction that arise eld-wide become widely known by all the actors concerned. The convergence of expectations that facilitate the sort of industrywide homogenization and convergence regimes imply are often industry-related. They include the dissemination of industry recipes, the migration of executives, and the presence of strong trade associations amongst others. Other contextual factors that aid the process of homogenization and convergence include the age of the industry and the spatial clustering of rms. 2.2 Industry recipes and convergence expectations Social conventions are sometimes agreed upon in advance or emerge spontaneously. They may also arise from the action of a few individuals who interact with each other or learn a new way of doing things and adapt their behavior over time. Shoham and Tennenholtz (1997) observe that there is often concurrent adaptation of behavior between two interacting actors in a complex system. The same dynamics may operate at the level of the industry where individual rm behavior is learnt by another rm who adapts its strategy accordingly. For example, partnering may be an internal recipe of a rm where the decision to form alliances may be motivated by strategic needs of a rm. Over time, partnering may become an industry recipe if other rms in the industry begin to see it as a useful strategy. Organizational research has identied how rm level behaviors produce second-image or industry behaviors. Spenders (1989) research on industry behavior is particularly useful. Spender (1989) introduced the concept of industry recipes. He denes a recipe as a set of shared ideas. According to Spender (1989), a recipe reects what managers think about their company rather than the industry, but rms in the same industry may share similar recipes. Spender(1989, p. 194) suggests that such shared recipes may become institutionalized if they nd their way into the language, dress, customs and rituals of an industry. Once institutionalized, such shared recipes affect organizations both as individual entities and as collectives. The extensive sharing of industry recipes may be a factor in the formation of what Abraham and Fombrun (1994, p. 730) call inter-organizational macrocultures. They dene the term as the relative idiosyncratic, organizational-related beliefs that are shared among top managers across organizations. Spender (1989) identied such macro cultures in the foundry and liquid milk industry in Britain while Marcus and Goodman (1986) associated macro cultures with US airlines. The diffusion of individual level recipes into industry recipes may occur through a number of paths.

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First, the diffusion may occur through information that circulates in specic industry media. For example, Abraham and Fombrun (1994) point to the coordinating inuence of industry-specic newspapers, magazines, and newsletters. The authors suggest that the existence of value-added networks that link rms together explains how rms may come to share similar beliefs. The authors also suggest that a level of homogeneity that exists in macrocultures may affect how rms process information about what issues are facing them and the industry; how they evaluate the reputation of other rms, who they identify as competitors, as well as rms they consider as non-competitors. Teer (2001) found that industry-wide publications and institutionally organized festivals were important in coordinating relations between the wine industry and other related stakeholders in Ontario, Canada. Second, the migration of senior executives, within the same industry, can be an important factor in the homogenization and development of common values, including an appreciation of the need for collective strategies in an industry. For example, it has been proposed that rms may deliberately hire executives from their rivals as a way of facilitating inter-rm coordination (Pfeffer and Leblebici, 1973). It is proposed that the greater the migration of executives within the industry, the greater the tendency toward homogeneity and convergence of expectations. Institutional theorists have recognized the role of executives in the processes of isomorphism (Stinchcombe, 1968), as well as the promotion of institutional change (Greenwood and Hinnings, 1996). Migration, dened as the movement of executives from rm to rm, may be a particularly effective conduit for promoting shared expectations and the development of collective values because of the key role executives play in the shaping of organizational culture, strategy, and direction. DiMaggio and Powell (1983, p. 152) suggest that cross-hiring of managers facilitates this sort of industry-level isomorphism. They note that cross hiring may lead to a situation where organizations come to be run by a pool of almost interchangeable individuals who possess a similarity of orientation and disposition that may override variations in tradition and control that might otherwise shape organizational behavior. Executives are often the repositories of their organizational values and carry their shared experiences from one rm to the other. Organizational level values, including recipes, that leaders carry in their heads are thus transferred from one organization to the other. This may be one reason why the individual experiences of executives within an industry increases their organizations conformity to the industrys central values and behaviors (Hambrick and Finkelstein, 1987). More recently, Kraatz and Moore (2002, p. 124) proposed that the migration of executives may play an important role in facilitating inter-organizational learning. The authors argue that executive migration can help organizations overcome some of the barriers to inter-organizational learning because the migration of a leader from one organization to another creates a relatively high-capacity conduit between organizations and may thus promote the transfer of reliable and ne-grained information, which is often necessary for social learning. Inter-organizational learning may be particularly important to the diffusion of eld-wide convergence of expectations because learning is at the heart of any transfer of individual-level behaviors into system-wide or second image behavior. Third, the use of common industry standards can also aid the process of homogenization that fosters similar mindsets and collective values. In their study of

cooperation in the Texas-based research consortium, SEMATECH, Browning et al. (1995) found that the presence of common industry standards aided the process of cooperation in the industry. Adoption of industry standards such as ISO quality certication may further help homogenization in an industry. This should be so because rms who adopt these industry standards have to meet a certain uniform criteria. For example, rms that apply for the Malcolm Baldridge Awards or, the Canadian equivalent, the National Awards for Excellence (both national awards for quality), all have to meet a certain criteria. The process of fullling the requirements for the awards forces some degree of homogenization of systems and operations. Even where a rm does not apply for these awards, the guidelines are readily available and well-known that any rm is free to make use of them. Finally, the perception of common threats may encourage the development of shared expectations. More importantly, shared perceptions of common threats may promote the use of collective strategies. For example, Browning et al. (1995) note that the Texas-based semiconductor research consortia, SEMATECH, was formed partially as a result of the common perception of threats to the semiconductor industry from abroad. The perception that the products or services of an industry are collectively evaluated by consumers or outside stakeholders may also encourage the development of shared expectations, as well as collective behavior. In this type of setting, it is easy for rms to see and interpret common threats more easily. For example, the average wine buyer (except perhaps wine connoisseurs amongst us) often talk in general terms of French wine, as opposed to talking about individual French wineries such as Mouton Rothschild, or Chateau Pauillac. This realization may have been partly responsible for the presence of institutional control mechanisms such as the appelation controllee by which wines are certied to meet a certain quality standard. Institutional developments similar to the French case are underway in the wine producing regions of the Niagara Region in Ontario, Canada. Like France, Canada has its own appellation system, the Vintners Quality Alliance that governs the quality of wine produced in Ontario (Teer, 2001). The evidence suggests that wine producers see that there are benets for cooperation and the success of the wine business in the Niagara region is one of common survival. Thus, common perception of a collective threat and the industries response all aid in the emergence of some collective norm of cooperation, even if this is not explicitly dened. Research in organizational sociology has also shown that industry-related links provided by trade associations and interlocking boards can be a source for referrals and information on prospective partners (Burt, 1992). In summary, we note that institutional-level factors, including the adoption of common standards, recipes, which may all be helped by perception of common threats and intra-industry migration of executives can lead to the development of convergent expectations on collaboration. The discussion and research is the basis of the following proposition: P1. Industries with common recipes are more likely to have convergent expectations than industries without shared expectations.

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2.3 Industry associations and convergence expectations Another important factor in the development of collective norms is a strong trade association. Trade associations can positively impact the development of shared mindsets and expectations. Trade associations tend to be voluntary

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self-organized groups. As organized interest groups, trade associations allow members to share industry-specic knowledge and engage in collective strategizing. Often, trade associations inuence the development of institutional frameworks because their job is essentially to strategize on behalf of a collective of rms. Strong trade associations may inuence convergence because they are a link between several rms. Lane and Bachmann (1997) come to some interesting conclusions in their comparative study of British and German trade associations. They found that compared to German trade associations, British trade associations lacked a strong institutional framework and a capacity to provide general guidelines for the behavior of their members. In Germany, to the contrary, trade associations are much stronger and provide leadership for their members. The authors observed that German trade associations are an efcient tool for the development of the sort of social conventions regimes imply. Bachmann (2001, p. 356) notes that as self-organized groups, German trade associations represent member interest actively, are able to engage in collective strategies, and are in general highly conducive to generating and monitoring the rules and standards of business behavior within their industries and beyond. More importantly, Bachmann (2001) found that German trade associations actually exercise and apply indirect social control on member rms. It is important to note that this sort of social control may be a factor in producing a certain amount of system or institutional trust (Luhmann, 1979; Zucker, 1986). Another example of the role of strong trade association in promoting shared mindsets and cooperation can be found in the Niagara wine region in Ontario, Canada. The Wine Council of Ontario is responsible for developing market research (Hackett, 1999). The council is also said to have provided critical leadership in setting standards for the Ontario wine industry and as a liaison between wineries, grape growers, and government organizations. In his study of alliances between wineries in the Niagara region, Teer (2001) reports that the existence of a series of formal associations governed by rules and regulations promote alliance formation between wineries. His analysis also reveals that individual wineries accept the leadership of the formal trade associations and actually look up to them for direction. Such an active role of formal associations should facilitate the development of shared mindsets, homogenization, and convergence on the need for collective strategizing. In general: P2. Industries with strong associations are more likely to have convergent expectations than those with weak industry associations.

2.4 Spatial clustering and convergence of expectations The geographic boundedness of an industry may also affect the development of norms and shared values. There is a greater possibility for rms that are clustered to develop shared norms and other characteristics that sustain cooperation than those that are dispersed for at least two reasons. First, clustering increases the frequency of social interaction, including the initiation of personal contacts that may become the basis of ties that are crucial for alliance formation (Gulati, 1995). There is a greater chance for people to form friendships when they meet frequently (Homans, 1950) and proximity to each other makes this possible. Second, proximity and frequency of interaction may be related to the level of reciprocity and relational assets that develops between actors in an industry. For example, while the willingness to be in someones debt helps the process of trust

building (Ouchi, 1980), it is known that people are more willing to be indebted to others where chances of frequent interaction are greater (Homans, 1950). This may be so because the opportunities to repay a debt are greater the more frequently people interact. Indeed, Lorenz (1988) found, in his study of subcontracting in the French industry, that rms cited geographic proximity as one factor that made it possible to develop personal contacts that became the basis for cooperation. Powell (1996) also found that trust-based governance seems easy to sustain when rms are spatially clustered. While important, clustering per se may not always lead to cooperative behavior. In a comparative study of two industrial districts in the USA, Saxenian (1994) demonstrated that two similar industries, with about the same degree of clustering, evolved into two separate forms. While there was generally a sense of cooperation among high tech rms in Silicon Valley, there was competition among similarly clustered rms along Route 128 (Boston) in Massachusetts. The research and discussion is the basis for the following proposition: P3. Industries that are spatially clustered are more likely to have convergent expectations than industries that are not spatially clustered.

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2.5 Stage in industry life cycle The development of collective mindsets, including institutional structures, in an industry takes time. Thus, one may nd a direct relationship between the stage in which an industry is and the incidence of collective strategies, including strategic alliances. Both the theory of regimes and the theory of industry life cycles (Stinchcombe, 1965) suggest that industries and regimes pass through a progression of introduction, growth, and maturity. Looking particularly at the industry life cycle concept may be insightful. There is reason to suggest that the rise of regimes, as a reection of the convergence of expectation around the use of collective strategies, is likely to be directly related to the stage of industry development for at least two reasons. First, the early stage in an industry life cycle is often marked by uncertainty. New industries have to gain the acceptance of all sorts of stakeholders including potential customers (Aldrich and Fiol, 1994). Whether new industries will succeed or not remains unanswered in the early stages of their life cycle. Under such conditions, rms in new industries may be preoccupied with their own survival and less interested in engaging in collective behavior. Even if collective action becomes a recipe, it is unlikely that it will diffuse widely in the industry to affect individual rm behavior. Collective action in general may be more difcult to organize in the earlier stages of an industry because there is a greater possibility of free rider problems in the early stages of an industrys evolution (Olson, 1965). Second, theories of industry life cycles suggest that the emergence of alliance building factors such as trust between potential partners may be dependent on the age of an industry (Stinchcombe, 1965). For example, it has been suggested that how disputes between rms in an industry are resolved may depend on the specic values that an industry develops. It may be more difcult to develop trust and collective norms in a young industry because there is often a lack of a shared history in the early states of industry growth (Suchman, 1995). In new industries, new vocabulary must be coined, new labels manufactured, and shared beliefs engendered in an

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industry with no history. To the contrary, more established industries may enjoy shared metaphors and worldviews (Huff, 1982). The lack of a shared history means that perceptions of risks are likely to be very subjective in new industries (Brophy, 1982). These liabilities of youth can affect the process of building cooperation and the development of shared mindsets. For example, Sabel (1993) found in his study of collaboration among stakeholders in Pennsylvania that the re-interpretation of a collective past can be a powerful tool for building cooperation and trust among stakeholders even where mutual suspicion runs deep. The presumption here is that compared to a matured stage of an industrys life cycle, rms in young industries will be less inclined to behave in a trustworthy manner. In summary, we note that the age of an industry facilitates the development of shared norms and convergent expectations such that older and more established industries will have greater degrees of convergent expectations on collaboration than younger industries. The research and discussion is the basis for the following proposition: P4. Firms in the mature stage of their industry life cycle are more likely to have convergent expectations than those in the younger stages of their life cycle.

3. Convergent expectations and alliance formation Figure 1 shows that shared mindsets will produce relational assets that assure not only that alliances will be formed but also increase the probability that such alliances will be successful. The presence of convergent expectations in an industry should directly affect the outcome of inter-organizational relationships in an industry in four main ways: (1) it easier for rms interested in forming alliances to take the initiative because of the presence of shared mindsets (cognitive embbededness) and interpersonal ties (structural embeddedness); (2) it promotes trust building; (3) it reduces the transaction cost associated with partnering; and (4) fosters cooperation by altering the dynamics of interaction, tilting it toward greater cooperation by making opportunism more costly. 3.1 Embeddedness and alliances Convergent expectations promote embeddedness. Embeddedness as rst used by Karl Polanyi refers to the link between social relations and economic action. Although more recent treatments of the concept have been less sweeping, the core idea has been retained (Granovetter, 1985). DiMaggio and Powell (1983, p. 15) dene embeddedness broadly as the contingent nature of economic action with respect to cognition, culture, social structure, and political institutions. Our interest here is primarily on the cultural and structural aspects of embeddedness. First, is structural embeddedness or the contextualization of economic exchange in patterns of ongoing inter-personal relationships (Granovetter, 1985). The manner in which individuals are connected to each other in an industry may be particularly important. Where there are dense networks of relationships, one should expect a greater use of collective strategies. Shared norms and constitutive behaviors should make the process of making the links and building ties with others in the industry easier. Such pre-existing ties and contacts can be indispensable in building a social

structure which can become an important source of inter-rm relationships. Social connections and prior ties are especially useful in making the personal connections that often form the basis for inter-rm relationships (Gulati, 1995; Uzzi, 1996). Research has also shown that such social structures are important for the development of trust and cooperation (Uzzi, 1996). Second, is cultural embededdness. Cultural embeddedness refers to the role of shared collective understandings in the shaping of economic strategies and goals (DiMaggio and Powell, 1983). The collective norms that result from homogenization and convergence serve an important purpose. Cultural embeddedness provides a form of social control. Individual actors are less likely to shirk their responsibilities in alliances or engage in opportunistic behavior when they know that there is a high social cost attached to such behavior. Institutional social control occurs because individual actors may internalize self-restraining behaviors because they know what the costs will be, both socially and economically, for violating trust in the industry. The result is that alliances between rms that are culturally embedded with each other may experience greater stability. More specically, we propose that: P5. The probability of alliance formation between rms in an industry increases with the level of structural and cognitive embeddedness in the industry.

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3.2 Convergent expectations and institutional trust Trust is often mentioned as a lubricant in economic exchange and the virtues of trust in alliances are widely discussed (Das and Teng, 2001; Krishnan et al., 2006; Ring and van de Ven, 1992). Spekman and Carraway (2006) observe that trust is often considered as the glue that holds collaborative relationships together. It is widely accepted that trust can positively affect performance in an inter-rm alliance because it reduces agency and transaction costs (Hill, 1995). However, trust is fragile and hard to nd (Aulakh et al., 1997). Thus, mechanisms that facilitate trust creation and ensure its resilience will be important assets to rms in collaborative relationships. Trust may emerge in an alliance because the actors believe there are costs associated with violating it (Ring and van de Ven, 1992), or because the partners calculate their counterpart intends to perform a benecial act (Barber, 1983) and has the competence to do so or has in fact demonstrated competence performance in the exchange situation (Das and Teng, 2001; Suh and Kwon, 2006). Both situations can lead to the emergence of relational trust (Rousseau et al., 1998; Dyer and Chu, 2003). Relational trust refers to trust that emerges as the partners in an alliance interact over a period of time and is therefore specic to particular relationships. Trust can also derive from the presence of factors unrelated to specic situations. One particular form of trust, institutional or global trust (Butler, 1991; Luhmann, 1979), emerges outside of the relational context when the presence of institutional mechanisms assures a critical mass of trust that sustains good faith behavior and risk taking. Of course, the presence of institutional trust can also facilitate the development of relational trust (Hagen and Choe, 1998). Convergent expectations become a form of institutional factor that promotes good faith behavior. A substantial amount of research and theory suggests that the presence of shared norms between actors promote trust. This form of trust has been called depersonalized or globalized trust (Butler, 1991). For example, history, ethnicity, and religion can be a source of shared norms (Zucker, 1986). Luhmann (1979, p. 73) is most

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explicit on the role of shared norms in producing trust. He notes: trust is a question of generalized attitudes, with considerable indifference toward numerous details and slight shadings of experience. The idea is that the internalization of societal or system values can become effective tools for social control, thereby allowing actors to sustain trust. The availability of institutional trust should aid alliance formation within an industry for at least three reasons. First, the fact that key individuals in the industry share similar outlooks and are accustomed to the same rituals makes it more likely that initial trust (McKnight et al., 1998) will develop faster among members of the collective. Initial trust refers to the goodwill that actors extend toward each other even before they have time to verify that their counterpart intends to honor their obligations. Initial trust should be high when there are shared mindsets because convergence produces a certain amount of what Zucker (1986) calls background expectations. Background expectations are institutional-level guarantees that people will behave in a trustworthy manner. There is, in effect, a certain amount of institution-based trust or global trust (Butler, 1991) among rms in an industry with convergent expectations. Such an expectation may embolden actors to develop interpersonal and rm-based trust. The high initial trust that shared expectations make possible may translate into high initial trusting intentions. When we view trust as a form of sense making (Weick, 1995), initial intentions become very important because it allows people to make sense of highly uncertain circumstances. High initial trust may produce a virtuous circle in which high initial expectations lead to desirable behaviors and trust building through the mechanisms of a self-fullling prophecy (Adobor, 2005). Second, institutional trust should make inter-rm and interpersonal trust stronger. Trust is resilient when it is not easily broken. Institutional trust assures resiliency in inter-rm trust because shared norms act as a form of social control. Shared norms may also imply that there are several guardians of trust (Taylor, 1987) in place, making it less likely that rms will act opportunistically, thereby violating trust. This may be so because individual actors may engage in greater self-regulation because of the presence of institutional controls. Indeed, research has shown that relational trust or trust based on relationship-specic factors is often thin because it may only rest on compensation for negative behavioral expectations and not positive expectations (Noteboom, 2002). Finally, there is reason to suggest that shared expectations produces or at least makes it easier for the production of studied trust (Sabel, 1993), a particular form of trust. Studied trust is trust that emerges out of a shared sense of community. Convergent expectations on the importance of collaboration in an industry mean that rms believe they would have to use alliances sooner or later. This means that the chances that individual rms will act opportunistically and exploit others are reduced. It is important to note that institutional controls can limit the development of trust in inter-rm situations especially where legal mechanisms promote inexibility with respect to conict resolution (Zucker, 1986). That notwithstanding, we note that relationships with resilient trust should perform better than those with fragile trust. In turn, rms that believe that it will be easier to nd trust, so to speak, will be more inclined to enter alliances. Taken together, the presence of shared norms and convergent expectations will help create and sustain trust and encourage tie building. Shared industry norms have also been shown to contribute to trust development at

a dyadic level (Browning et al., 1995). The research and discussion is the basis for the following proposition: P6. The probability of alliance formation between rms in an industry increases with the level of institutional trust in the industry.

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3.3 Convergence expectations and cooperative infrastructure Previous research has identied cooperation as one key ingredient in interorganizational collaboration. Most of the existing research has looked at cooperation in terms of relationships. The existence of certain conditions, what is termed here as cooperative infrastructure, may also promote trust. This concept is similar to Zuckers (1986) notion of background expectations on trust. Actors who have this cooperative infrastructure have, in effect, some comparative advantage over those who do not have it. Cooperation has been dened as coordination affected through mutual forbearance (Buckley and Casson, 1988, p. 32). A person who forbears, refrains from opportunistic behavior. Although cooperation is important for performance in alliances, getting actors to cooperate in alliances, or any mixed-motive situation for that matter, may not be easy. Transaction cost theorists are most explicit on the hazards of opportunism in economic exchange (Williamson, 1985), and there is some universal recognition that opportunism certainly exists in inter-rm alliances. In fact, some evidence suggests that rms are vulnerable to opportunistic behavior of their partners. For example, Tucker (1991) notes that collaborative projects involving highly appropriable technologies have often been conducted in ways that suggest rms are concerned about opportunism on the part of their counterparts. As Buckley and Casson (1988, p. 34) indicate, there is an inalienable de facto right of all parties involved in a venture to pursue their own interests at the expense of the others. This same theme is echoed by experimental research in game theory where the paradigm example of the prisoners dilemma is used to illustrate the difculties of cooperation, in even in situations, where cooperation, not self-interested behavior, will yield the maximum benets (Axelrod, 1984). Research in game theory has demonstrated that actors can use ex ante strategies to induce cooperation. Axelrod (1984) demonstrated that patterns of payoffs, shadow of the future, and behavioral transparency can be manipulated to promote cooperation. First, game-theoretic reasoning suggests that there can be no cooperation unless both rms see that there are benets, or payoffs, from mutual cooperation. Parkhe (1993) demonstrated that the pattern of payoff most conducive to mutual cooperation is one in which the parties suffer the greatest lost when there is a complete break up of the strategic alliance. Second, future payoffs are also very important to cooperation. Anticipation of future payoffs creates a shadow on the present and the shadow of the future links present cooperation to future benets. A long shadow of the future is conducive to cooperation. The time horizon of the relationship or how long the partners will stay together lengthens the shadow of the future. A long time horizon will positively affect cooperation because it serves as a disincentive to discount future payoffs. Finally, behavioral transparency promotes cooperation. Frequent communication, including a clear understanding of the signaling behavior partners send to each other will also prolong

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the shadow of the future (Axelrod, 1984). Shared mindsets facilitate communication, including the understanding of signals. Although partners can use ex ante strategies to enhance cooperation, the presence of convergent expectations will achieve the same results for at least two reasons. First, convergent expectations alter the payoff structure in the alliance by making defection more costly. The presence of shared mindsets and values reduce the gains from opportunistic behavior, thereby reducing the incentives for opportunism. Shared mindsets mean that opportunism is less likely to be acted on since the costs of opportunism are much higher because of the power of both social control and self-monitoring. Second, the presence of shared mindsets presupposes that rms in the industry have accepted certain norms and values, including the norms of cooperation. These norms and values are then invoked as informal constraints against opportunistic behavior. There is some suggestion that people, as members of a collective, will tend to follow known rules out of respect for those rules as long as they know that other people will respect those rules (Zucker, 1986; Coleman, 1993). Sometimes, institutional behavior is often adopted simply because people accept their existence as a social fact which other actors must obey (Zucker, 1986). Thus, while partners in an alliance may be tempted to be opportunistic (defect in game theoretic terms), the presence of convergent expectations of behavior and practice mean that they will be less inclined to do so. The interesting thing here is that the alteration of the payoff structure between alliance partners is accomplished by the institutional or sectoral level constraints, rather than the deliberate actions of individual actors as suggested in transaction cost economics (Williamson, 1985). The recognition that a violation of partner expectations amounts to a violation of a collective norm reduces the probability of opportunistic behavior and enhances the chances for partner cooperation. Convergent expectations also promote cooperation because they indirectly create structural conditions that lengthen the shadow of the future. Game theorists have identied behavioral transparency as an important factor in cooperation. Parkhe (1993, p. 305) notes that poor behavior transparency limits actors ability to recognize cooperation and defection by others, separates beliefs from reality, and serves to sever the critical links between current actions and future consequences. Shared mindsets mean that actors are able to interpret the signals their counterparts send accurately and misperceptions between the partners can be minimized. This is important because the power of signals fade with time (Jervis, 1976). Finally, interaction is less conictual when partners in an alliance share some common institutional norms. These conditions ensure that rms in an industry with shared expectations will have a greater incentive for cooperation and partnership formation. Collectively, these collaborative assets enhance the prospects for better relational governance in intra-industry alliances and may help reduce relational risks associated with alliances. Alliances generate relational risks due to the dual control of the relationship and the uncertainty about the partners behavior and the possibility of change in future goals (Parkhe, 1993; Das and Teng, 2001). Das and Teng (2001) suggest that trust reduces the perceived risk of opportunistic behavior because it leads to positive expectations about alliance partners. Shared mindsets similarly reduce relational risk by both making it more costly for defections and for acting as a buffer against opportunism. In some sense, what these conditions promote is a form of

cooperative infrastructure which in turn makes it more likely that alliance partners will have a productive relationship with the possibilities of instability reduced. The research and discussion is the basis for the following proposition: P7. The probability of alliance formation between rms in an industry increases with the level of cooperative infrastructure in the industry.

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3.4 Shared expectations transaction costs There are substantial costs associated with partnering. The importance and relevance of transaction costs in alliances has made transaction cost theory (TCE) perhaps the most common theoretical framework for the study of strategic alliances (Anderson and Sedatole, 2003). At its core, TCE holds that it is the characteristics of transactions in alliances that raise risk. The theory assumes that managers adopt a particular governance arrangement to minimize risk. Asset specicity, uncertainty associated with the transaction and the frequency of these transactions all affect transaction costs (see, Williamson, 1991 for a more complete explanation of TCE). Hill (1995) denes transaction costs in terms of all these sources: . the costs of identifying a partner who is less likely to shirk or avoid its responsibility; . negotiating costs, including the costs of providing incentives to a counterpart to reduce the temptation to avoid responsibility; . monitoring costs; and . enforcement costs. There are at least three sources of costs in partnerships. Hill (1995) demonstrated from his analysis of exchange in Japan that the transaction costs associated with economic exchange may be substantially reduced by the nature of national institutional structures in a country. First, there is the cost of searching for the right partner. Partner selection issues have been well-discussed in the strategic alliance literature. The main recommendation is to choose a partner with whom one shares some similarity. Finding the right partner, however, involves a search cost (Larson, 1992). Firms can research the background of their prospective allies by talking to others or by conducting their own research. Second, there are costs that arise when a partner engages in opportunism or free riding. Finally, costs arise in cooperation when a partner makes a specic investment for the alliance and the counterpart rm fails to deliver its side of the project, thereby holding up the other rm. In general, uncertainties about the partners competence, intentions, and behavior increases transaction cost (Williamson, 1985). The presence of convergent expectations reduces all these forms of transaction costs. Social conventions, in general, reduce transaction costs because they coordinate expectations and reduce uncertainty associated with exchange (Warneryd, 1994). Primarily, convergent expectations provide background expectations for interaction in exchange. Such background expectations serve as general frameworks for behavior, guaranteeing prospective partners some assurance that they can work toward a successful alliance. It may also be easier to identify a prospective partner because of the several institutional ties that exist under shared industry mindsets. Also, because opportunism is less likely to be acted upon, losses from shirking and opportunism will

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tend to be lower and this should increase the motivation of rms to take the risk of entering an alliance. As alliances become industry recipes, there is a reduced need to craft elaborate incentive structures to promote good faith behavior and reduce shirking. This is because the average rm in the industry will recognize the importance of inter-rm relations and may use it at one point in time. The benet of shared norms decreases some of the uncertainty associated with transactions. For example, shared mindsets reduce the monitoring costs as well as the maladaptation cost that arise from communication and coordination failures between constracting parties and smooths the difculties associated with their ability to react rapidly to changing conditions over time in alliances (Dahlstrom and Ingram, 2003). In sum, we note that the presence of institutional structures and mindsets would help reduce the transaction costs associated with partnerships which make it more likely that rms will enter alliances with each other. The reverse situation is also true. Higher transaction costs mean less incentive to collaborate. Specically: P8. The probability of alliance formation between rms in an industry is inversely related to the level of transaction cost of partnering in the industry.

4. Conclusion and discussion The proliferation of alliances has somewhat altered the traditional norms of competition. Terms such as alliance capitalism and co-opetition have become common in discussions of sources of competitive advantage. Recently, competition not only relies on internal capability and resources but also on close cooperation with external organizations (Claybond and Franwick, 2004). Alliances may be popular, but recent evaluations of their performance show a low success rate (Sadowski and Duysters, 2008). This indicates that despite the proliferation of studies on alliances, our appreciation of their complexity and value-creating potential still requires additional study. Knowing what promotes successful collaboration is important and looking within industries that have an overrepresentation of alliances may give us a greater understanding of their dynamics. Using a theory of group behavior, this paper makes the argument that convergent expectations may be partly responsible for the preponderance of alliances in some industries relative to others. This paper has shown that a useful theoretical approach to explaining the disproportionate incidence of alliances across industries is to look at industryembedded conditions. A combination of this approach and existing economic approaches that focus solely on self-interested behavior is capable of offering a more complete explanation of alliance formation and distribution across industries. This research therefore may offer a more comprehensive explanation of alliances formation by showing how industry conditions can transform the strategic interests and behavior of individuals rms into a macro phenomenon that diffuses across an industry. It is important to reiterate that while shared mindsets offer a comparative advantage so to say, it may not be the only guarantee for creating and beneting from alliance portfolios. Firms need to develop their internal and relational capabilities to more effectively utilize the pre-existing advantages that emanate from their institutional environments. It is clear that the very nature of competition has altered in the light of the emergence of an era of alliance capitalism (Gerlach, 1992). This and previous research shows that rms seeking to create value and benet from alliances need to

develop the internal capabilities required to successfully deal with the dualities of competition and collaboration. Amongst others, key competences and skills discussed in the literature are partner selection and relationship management issue (Claybond and Franwick, 2004). 4.1 Future research directions This research raises some issues that require future exploration. First, the propositional inventory generated here requires empirical verication. The variables discussed can be assessed with a survey instrument to determine managerial perceptions on the issues. Second and related, although the discussion focused exclusively on the positive aspects of shared industry mindsets, it is important to note that there may be dysfunctional consequences associated with shared expectations and some earlier research has raised that possibility (Bresser and Harl, 1988). Previous research has demonstrated that widely shared mindsets can breed strategic inexibility because rms may narrow their search for prospective partners to their industry. More importantly, extensively shared mindsets may also unnecessarily foreclose the ability of rms to recognize other opportunities. This may be so because industries with widely shared mindsets may nd it harder to trust those they consider as outsiders. For example, Yamagishi and Yamagishi (1994) found that while shared values made for trust in relations between people from Japan, this same mechanism made them less likely to trust non-Japanese. Their ndings imply that intense group ties often seen in collectivist cultures may prevent trust from developing beyond the group. This same thinking may apply to organizational elds such as industries. A greater exploration of both the positive and dysfunctional consequences of shared industry mindsets requires our research attention. Third, although this paper did not focus on the feedback mechanism that is highlighted, but not discussed, in the framework (the broken lines in Figure 1), this is a real possibility. In fact, research on network forms has shown that prior ties promote future relationships (Gulati, 1995) and an exploration of this issue will offer a more complete explanation of the feedback mechanisms that may exist in this type of situation. Finally, it will be of interest to see whether intra-industry alliances necessarily yield a more stable and satisfying relationship than cross-industry alliances. The theory developed here suggests so, but evidence is required to validate that theoretical claim.
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