Escalation in International Strategic Alliances

Abstract * Casual observation provides numerous examples of alliances that continue for years despite failing to accomplish partner objectives. Why do firms often persist with alliance investments despite a steady stream of evidence that the alliance is producing little or no benefit? * We investigate the factors that contribute to a firm's persistence with failing alliances, using an escalation framework for strategic alliances. Key Results * We demonstrate the framework using a case study of an escalation situation. We also provide an exploratory empirical study as the first step towards deeper empirical analysis. * The variables that contribute to persistence include high alliance termination costs, high sunk costs, and high alliance visibility. ********** Much of the theoretical and empirical research on international strategic alliances has focused on instability (Yan 1998, Yan/Zeng 1999). Yet, there are numerous examples of alliances that are stable and persist despite failing to meet partner objectives. Consider the case of McDonnell-Douglas Aircraft (M-D) and its alliance experience in China. In 1975 M-D proposed a technology transfer project to the Ministry of Aeronautics in China. Over the next 21 years, despite repeated delays, setbacks, and disappointments, M-D invested in numerous alliances designed to create a profitable China business and to cement a foothold in China. In 1996, as M-D was acquired by Boeing, an M-D executive summed up the company's unproductive Chinese alliance experience, "In the end, we were betrayed." Another example is Global One, a three-way alliance between Deutsche Telekom, France Telecom, and Sprint, that was created in 1994. Only in the year 2000, after six years of higher than expected losses, internal turmoil, public conflict, and repeated assessments from outside analysts that the alliance was a mistake, did the partners dissolve the relationship. Both examples stimulate similar questions: Why did the alliances continue when the expected results were not being achieved? More generally, why do firms often persist with alliance investments despite a steady stream of negative feedback associated with partner interactions, the accomplishment of alliance objectives, and/or alliance financial performance? Research examining the reasons for alliance failure and instability has considered issues such as shifts in bargaining power (Inkpen/Beamish 1997), incompatibility of the partners, (Park/Ungson 1997), partner learning and commitment to cooperation (Doz 1996), trust (Nooteboom/Berger/Noorderhaven 1997), alliances as learning races (Hamel 1991), and agency costs (Reuer/Miller 1997). In this study, we examine international strategic alliances that fail to accomplish partner objectives, but we do not focus on why failure occurs. Rather, we are interested in why firms continue with an alliance even in the face of continued and persistent negative feedback. This type of question has been the focus of escalation research. Beginning with Staw (1976), escalation research has identified a variety of factors that lead individuals and organizations to persist with failing courses of action. Despite the wide range of real-world organizational escalation events that exist, the current empirical base remains limited. One area that has not yet received attention from escalation theorists is international strategic alliances. Hence, we investigate why escalating commitment to a failing course of action occurs in international alliances. In doing so, we identify factors that increase the likelihood of organizations to persist with international alliances despite negative feedback. In this study, we first examine previous research in the escalation area. After a discussion of alliance failure and instability, we describe a case study of an unsuccessful strategic alliance. With an emphasis on alliance and partner specific, as opposed to interfirm, variables, we use the case to demonstrate how escalation theory can enhance alliance understanding. …