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A Theory of International Strategic Alliance

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  • Zhiqi Chen

Abstract

As an alternative to exporting, a firm can enter a foreign market by forging a strategic alliance with its foreign counterpart. The alliance eliminates transportation costs and duplications in product distribution networks. At the same time, strategic alliance lessens competition between the firms so that it leads to smaller outputs and higher prices. The degree of lessening of competition depends on the firms’ ability to commit to output levels. In the case where the firms can credibly commit to output levels, the alliance effectively becomes a cartel, restoring prices to the monopoly level. On the other hand, if such commitment is not credible or not possible, prices will be lower than the monopoly level but will still be higher than that if firms had exported to each other's market directly. The welfare effects of the strategic alliance are in general ambiguous.

Suggested Citation

  • Zhiqi Chen, 2003. "A Theory of International Strategic Alliance," Review of International Economics, Wiley Blackwell, vol. 11(5), pages 758-769, November.
    • Handle: RePEc:bla:reviec:v:11:y:2003:i:5:p:758-769
    DOI: 10.1046/j.1467-9396.2003.00416.x
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    References listed on IDEAS

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    1. Nam-Hoon Kang & Kentaro Sakai, 2000. "International Strategic Alliances: Their Role in Industrial Globalisation," OECD Science, Technology and Industry Working Papers 2000/5, OECD Publishing.
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    Cited by:

    1. TAKECHI Kazutaka, 2008. "International Strategic Alliances for Local Market Entry: Direct Launches versus Marketing Alliances in Pharmaceuticals," Discussion papers 08022, Research Institute of Economy, Trade and Industry (RIETI).
    2. Kalu Ojah, 2007. "Costs, valuation, and long‐term operating effects of global strategic alliances," Review of Financial Economics, John Wiley & Sons, vol. 16(1), pages 69-90.
    3. Qiu, Larry D., 2010. "Cross-border mergers and strategic alliances," European Economic Review, Elsevier, vol. 54(6), pages 818-831, August.
    4. Colin Butler, 2006. "UK-Asian strategic alliances in the defence manufacturing industry," Asia Europe Journal, Springer, vol. 4(1), pages 43-52, April.
    5. Pinuccia Calia & Maria Ferrante, 2013. "How do firms combine different internationalisation modes? A multivariate probit approach," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 149(4), pages 663-696, December.
    6. Brooke, Jesse & Oliver, Barry, 2005. "The source of abnormal returns from strategic alliance announcements," Pacific-Basin Finance Journal, Elsevier, vol. 13(2), pages 145-161, March.

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    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L49 - Industrial Organization - - Antitrust Issues and Policies - - - Other

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