Strategic Alliances and Their Motives

Strategic Alliances are partnerships that exists for a specific period with the goal to combine skills and expertise in pursuit of a cooperative venture.

Cooperative agreements between potential or actual competitors are formed for various strategic purposes, which include entry into a foreign market and the sharing of costs. It is also a way of merging complementary skills and assets that neither company could easily develop on its own.

The term ‘strategic alliance’ is often used to embrace a variety of arrangements between actual or potential competitors, which includes cross-shareholding deals, licensing agreements, formal joint ventures, and informal cooperative arrangements.

Licensing

Licensing can be described as an arrangement between a licensor, who grants the rights to intangible property to another entity, the licensee, for a specific period. Intangible property includes patents, inventions, formulas, processes, designs, copyrights or trademarks. In return for the intangible property, the licensor receives a royalty fee from the licensee.

Licensing is motivated by the fact that the licensee puts up most of the capital necessary to get the overseas operation going, which means that the firm does not have to bear the development costs and the risks associated with opening a foreign market. This type of alliance can also be an attractive option, when a firm is unwilling to commit substantial financial resources to an unfamiliar or politically volatile foreign market.

Licensing is frequently used when a firm possesses some intangible property that might have business applications, but it does not want to develop those applications itself.

Joint Ventures

Joint Ventures can be described as commercial companies that are created and operated for the benefit of the co-owners. The companies involved takes an equity position in one another (Pearce&Robinson, 2005).

The motivation behind a Joint Venture is that a firm benefits from a local partner’s knowledge of the host country’s competitive conditions, culture, language, political systems and business systems. It is also beneficial for a firm to establish a Joint Venture when the development costs or risks of opening a foreign market are high, in that they can share these costs or risks with a local partner.

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