GLOBALIZATION, STRATEGIC ALLIANCES AND INSURANCE SECTOR
SOME ISSUES FOR THE INDIAN FIRMS

Ashish Nath

Abstract : Globalization is altering the world economic landscape in fundamental ways. Globalization has profound implications for developing countries. It creates important new opportunities—wider markets for trade, an expanding array of tradables, larger private capital inflows, improved access to technology. In a globalising economy, alliances are a means of expanding internationally more rapidly. Alliances make it possible to enter new markets using the distribution networks and the specific knowledge of the local partners. Joint ventures between domestic companies in developing countries and foreign companies have become a popular means for both managements to satisfy their objectives. India is a marginal player in global insurance market. India is a grossly underinsured nation. For a nation with huge budgetary deficits, the insurance sector – if properly exploited – could have mobilized valuable financial resources for the government. This paper is divided into four parts. First part focuses on globalization and its lesson for the developing countries. The Second part addresses the various facets of strategic alliances. The Third part deals with the importance of alliance for the Indian insurance sector in the emerging knowledge based economy. The Final part suggests some policy measures to make joint venture stable and successful.

As the new millennium dawns, the role of knowledge and information has become increasingly salient in the structure, growth and organization of economic activity all around the world. The rapid pace of scientific and technological development is a major factor behind the fairly dramatic economic restructuring occurring globally. It is also widely recognized that the creation, diffusion, adaptation and effective use of knowledge and technology is the major factors behind the growth and development of any economy. 

Globalization is altering the world economic landscape in fundamental ways. It is driven by a widespread push toward the liberalization of trade and capital markets, increasing internationalization of corporate production and distribution strategies, and technological change that is rapidly dismantling barriers to the international tradability of goods and services and the mobility of capital.

Globalization can be defined in several different ways depending on the level we choose to focus on.

§         At a Worldwide level Globalization refers to the growing economic interdependence among countries as reflected in increasing cross-border flows of goods, services, capital and knowhow.

§         At the level of a specific country Globalization refers to the extent of the interlinkages between a country’s economy and the rest of the World. Some key indicators to measure the global integration of any country’s economy are exports and import as a ratio of GDP, inward and outward flows of foreign direct investment and portfolio investment, and inward and outward flows of royalty payments associated with technology transfer.

§         At the level of a specific industry Globalization refers to the degree to which a company’s competitive position within that industry in one country is interdependent with that in another country. Key indicators of the Globalization of an industry are the extent of cross-border trade within the industry as a ratio of total worldwide production, the extent of cross-border investment as a ratio of total capital invested in the industry, and the proportion of industry revenue accounted for by companies that compete in all major regions.

§         At the level of a specific company Globalization refers to the extent to which a company has expanded its revenue and asset base across countries and engages in cross-border flows of capital, goods and knowhow across subsidiaries. Key indicators of the Globalization of a company are international dispersion of sales revenues and asset base, intra-firm trade in intermediate and finished goods, and intra-firm flows of technology.

Therefore, in short, economic globalization is a set of processes leading to the integration of economic activity in factor, intermediate, and final goods and services markets across geographical boundaries and the increased salience of cross-border value chains in international economic flows. The increased competition that is driving globalization will always produce both winners and losers. It is therefore not surprising that some managers see current trends as a great threat while others view them as a challenge and an opportunity. Four forces are behind the increase in global competition:

§         Changes in consumer expectation: Consumer expectations of quality, service and price are higher than ever and still increasing. At the same time, future consumer preferences are becoming extremely difficult to predict.

§         Technological change: New information technology allows many companies to run their business in a way that was impossible yesterday and at a fraction of the price.

§         Deregulation: In recent years, the global trend – with the notable exception of environmental regulation – has been towards deregulation and less government intervention. In newly, deregulated industries, competition has increased dramatically.

§         Regional forces: There are huge regional differences in cost structure and growth rates in the world. At the same time, politically motivated regional trade blocs, such as the European Union and the Association of South East Asian Nations are being formed. The objective of a trade bloc is to maximize trade within the bloc and limit trade between blocs to items that cannot be produced locally. The rules of the game are changing.  

In this context, two divergent historical facts need to be noted at the outset. First, Globalization is not a new phenomenon, and indeed, until 1913, trade was gradually free. So was capital movement. What is more significant, even the movement of labour across countries are free. Secondly, capital recognizes no geographic boundaries. It is an inherent feature of capital that it should seek to maximize profits, wherever and howsoever that can be done. The only difference between 1900-01 and 1985-95 are (a) that there now exist universal restrictions on the cross-country movement of labour, and restrictions of diverse types in different countries in regard to the movement of capital, and (b) the revolution in communications has made the world a sort of global village. What we are witnessing, instead, is one-sided Globalization, of the co-option of a few compradors in the developing countries by the industrially developed, militarily powerful countries. Two final points need to be emphasized. First, isolationism and autarky are no answer to the problem of economic development or the problem of global cooperation and peace. The advantages of science and technology need to be availed by all countries, by all the peoples of this world. This way, the development process can be speeded up. But, in order to do so, one cannot simply rely on the market process. There is imperative need for purposive state intervention. The issue is we must address is not whether to globalize but on what terms do we globalize. Second, and importantly, the problem of unequal gains of development in an unequal world is as true nationally as internationally. Hence, the first step in the process of development has to be greater egalitarian development. Again, state intervention is essential for this purpose. This is an important precondition for any kind of sustained development. In the absence of such a new direction, all advantages of development, of Globalization, are likely to be highjacked by a small section of the population.

Corporate responses to globalization

In response to the new context, most firms have adjusted quite rapidly to the new types of competition. The largest firms have adopted strategies that are increasingly global, with two main objectives in mind:

§         to improve profitability by reducing costs and

§         to strengthen their technological capability.

Corporate profitability is improved by spreading fixed costs between the parent company and its new partners. To strengthen their technological capability, firms can either continue to internalize activities via mergers or acquisitions of other innovative firms, or adopt an external approach and conclude co-operation agreements or alliances based on co-operation between independent firms around a common programme. With the growth of alliances, the R&D centres of major firms have opened up to a certain degree and knowledge has started to flow between them, although the technology transfers involved relate to pre-competitive programmes and are tightly controlled and reserved to member of the network. A firm can externalize some of its activities in sectors that have attained a certain degree of maturity, and simultaneously enter into technological alliances to develop new products or processes. If this two-fold trend continues, it could reshape the world economy.

Government responses

Globalization is seen as a disciplinary force for governments that undertake unsustainable economic policies. High fiscal deficits and unsound financial policies that lead to inflationary pressures, current account deficits and/or high real interest rates, sooner or latter, tend to be penalized by international investors and global capital markets. The room for populist and/or unsustainable policies is much narrower in a globalized world. However, the other side of this is that fiscal policy tends to lose its capacity to act as a counter cyclical instrument oriented to maintain full employment. The fact is that international financial markets are very sensitive on the stance of fiscal policy of a country and uses it as an indicator of the degree ‘macroeconomic responsibility’ of governments. This, tend to encourage governments to follow persistently austere fiscal policies in order to satisfy financial markets and gain credentials of serious fiscal behaviour. The ‘classical’ role of fiscal policy to maintain a high level of aggregate demand when private investment or private consumption declines is substituted by restrictive fiscal policy oriented to gain credibility and induce a recovery only through a reactivation of private spending. In short, Government authorities have been slower to respond to globalization. Their response has taken three forms:

§         adjustment measures

§         policies to promote international co-operation and

§         a reluctance to accept certain consequences of globalization.

First, they have realized that the degree of interdependence is now such that solutions are needed which go beyond national boundaries. The number of international agreements on the health, environment, research and technical standards has thus increased in recent years. Second, the authorities have sought to correct certain ill-controlled instances of globalization. Also, the authorities have become increasingly aware that, because of growing interdependence, national policies are less effective when they are out of line with one another. This an aspect of globalization that may often be perceived as a constraint on national independence and a loss of sovereignty.

If the rate of Globalization is indeed accelerating, the global economic landscape will undoubtedly look very different 20 years from now. Companies will need to adapt to this changing landscape and those that choose to move first will have a better chance of turning these changes into competitive advantage. The events of the last two years in the global economy indicates as a main challenge, the seizing the opportunities open by globalization while at the same time managing the tensions and problems it poses particularly, for developing countries.

National prosperity is created, not inherited. It does not grow out of a country’s natural endowments, its labour pool, its interest rates, or its currency’s value, according to Classical Economics. A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the world’s best competitors because of pressure and challenge. They benefit from having strong domestic rivals, aggressive home based suppliers, and demanding local customers. In a world of increasingly global competition, nations have become more, not less, important. As the basis of competition has shifted more and more to the creation and assimilation of knowledge, the role of the nation has grown. Globalization has profound implications for developing countries. It creates important new opportunities—wider markets for trade, an expanding array of tradables, larger private capital inflows, improved access to technology. The outward-oriented reforms being adopted by more and more developing countries make the latter both agents and beneficiaries of globalization—these reforms both contribute to globalization and expand opportunities for developing countries to participate in its benefits. The new opportunities are accompanied by tough new challenges of economic management. Integration requires adopting and maintaining a liberal trade and investment regime. Policy-makers are confronted more and more with a new discipline—the need to maintain the confidence of markets, both domestic, and, increasingly, international. In this setting, sound economic policies command a rising premium; the payoffs are larger, but so are the penalties for policy inaction or errors. What is more, globalization increases competition between policy regimes; with greater capital mobility, investors increasingly are exploring opportunities worldwide and assessing a country’s policies not only in the absolute but also relative to those in other countries.

Economic policies all over the world, and especially in the developing world, are being liberalized. This was resulted in an increase in competitive pressures, both in the domestic and international markets. The long term efficacy of these liberal policies for the developing countries will largely be determined by the impact these policies have on the development of technological capabilities among firms in these countries. The policy makers will have to gradually evolve instruments most conducive to technological dynamism and the enterprises will have to explore various methods of technology acquisition/management to face the competitive challenge. An understanding of the determinants of technological change and processes which result in the development of technological capabilities will be very crucial in this context. The literature in the late 1980s and 1990s has clearly shown that development of technological capabilities is a very complex process and there are no ready made policy recipes which the developing countries can follow to facilitate this process. The drastic reductions in barriers to international trade have opened the door for export-led growth. In fact, for small and medium size economies with limited internal markets, the possibilities for rapid economic growth lie, to a large extent, in production oriented towards international markets.

Globalization creates, through export-led expansion, the potential of rapid overall output growth, increasing national wealth and contributing to improve living standards in developing countries.

Another benefit of globalization is the access to a wide variety of consumption goods, new technologies and knowledge. Globalization allows the access to ideas and international best practices in different fields and realms. Of course the mere acquisition or imitation of foreign products, technologies or foreign social models to local conditions with all their specificities and idiosyncratic features is not a guarantee of success. It is just a potential benefit derived from broadening the choice open to the participants of the global economy.

Tensions and Dilemmas of Globalization      

Globalization also poses tensions and dilemmas to countries integrated to the world economy. One tension of globalization associated with the fact that in a more interdependent and inter-linked world economy any adverse global or regional shock is rapidly propagated to other economies. The import mechanisms at work can be a decline in the import volumes and/or changes in the real price of commodities. Economies that depend heavily on a few main commodities as their main source of export earnings and fiscal revenues can be hit hard by these shocks. Another transmission mechanism is asset markets. Highly integrated financial markets tend to transmit global, regional or local shocks much more rapidly than in past decades when financial markets were less integrated. Portfolio shifts affect exchange rates, interest rates and economic activity. As the volumes of financial intermediation and currency transactions are enormous nowadays, shocks can be greatly amplified in more or less synchronized fashion with destabilizing effects on many economies. This source of financial volatility was largely absent in the world of the 1950s, 1960s and early 1970s when multilateral lending, aid and foreign direct investment dominated global capital movements.

There is ample empirical evidence showing that uncertainty and volatility penalize capital formation and productivity growth with adverse effects on economic growth. Thus, instability and volatility can be ultimately viewed as a tax on growth and prosperity. In many instances, this instability originates from abroad. Hence, the quality of the domestic policy response in the face of adverse external shock matters. The nature and timing of the domestic policy response can soften or increase the impact of these shocks.

Another tension of globalization lies in its social effects. As globalization is often associated with increased instability of output and employment, this affects, among other things, job security. As labour income is the main source of earnings for the majority of population under capitalism, job insecurity is socially disruptive and brings tension to the fabric of society. In addition, flexibility in labour markets required to compete, successfully, in international markets, tends to erode long term work and personal relationships between firms and employees, workers and managers that traditionally give a sense of security to people. Another open discussion is whether foreign trade and globalization narrow or widen income disparities. Traditional trade theory suggesting factor price equalization across countries seem of little relevance in a world of large per capita income differentials, moreover, convergence in income levels is very weak across regions and nations. 

In addition, globalization gives a premium to people with sophisticated skills, high levels of education, and entrepreneurial traits. These are people better equipped to survive and succeed in the more competitive world brought about by globalization. The mirror image of this is that unskilled labour, uneducated workers and marginalized population are likely to benefit less in more competitive world economy. Thus, income and wealth inequality can be amplified, underscoring the need for public policy to correct these inegalitarian trends.

Another critique of globalization is that it tends to transmit the cultural patterns of large countries to the rest of the world through imitation of consumption patterns, global mass media and other means of influence. This trend would, eventually, lead to homogenization of values, thereby reducing cultural diversity and national identities.

The economy’s entry into its globalization phase has radically altered the nature of competition. Now, numerous new actors from every market in the world are simultaneously in competition on every market. This new competition has accentuated the interdependence of the different levels of globalization (trade in goods and services, direct investment, technology transfers, capital movements), with direct investment becoming a central factor in the process of industrial restructuring and the development of genuine world industries.

To contend with the challenges of globalization, firms have altered their strategies, strengthening the activities in which they were in a dominant position (refocusing), seeking to achieve critical size and attracting priority to external growth (mergers and acquisitions). At the same time, they have multiplied the number of co-operation agreements and alliances and changed their internal organization. Globalization has obliged all countries to raise their standards of economic efficiency, whence the growing interest in and concern about competitiveness. Analysis of globalization has also revealed the change in the context in which most traditional indicators of competitiveness are interpreted, and demonstrated the urgent need to develop a new generation of indicators based on new information, so as to able to throw new light on the more traditional indicators.

One of the main difficulties in defining and measuring competitiveness is that the two reference levels – the firm and the nation – have differing objectives. While for a nation, the aim is to maintain and improve its citizens’ living standards, for a firm the object is to deal successfully with international competition by making profit and increasing its market shares. India ranked 49^th out of 50 developed and key developing countries in terms of depth of globalization achieved. At Kearny, a foreign policy magazine, which produced an index to measure the extent of globalization in the world, has put India almost at the bottom in globalization but says NRIs play an extremely important role in sustaining its economy.

In 1994, developing countries accounted for 24 percent of world imports; this share could rise to 30 percent of by 2010. Over the same period, their share of world exports of manufactures could increase from 17 to 22 percent. Developing countries currently buy roughly one-fourth of the industrial countries’ exports; on present trends, that share could rise to more than one–third by 2010. The main factors driving this increase in trade are the reduction of trade barriers through trade liberalization and other reforms, lower transport ad communication costs, and relatively high GDP growth in developing countries.

Closer trade links between developing and industrial will generate gains for industrial countries at two levels. First, there will be specialization and efficiency gains from the exploitation of the traditional comparative advantages of trading partners, gains from the availability of greater variety of goods and possibly, efficiency gains from economies of scale and increased competition. Second, first round gains in efficiency ant output will provide a second-round boost to output over the medium term. Increased efficiency in the first round will raise the return to capital, thereby leading to increased investment. Savings will also rise, either because of higher returns to savings or because part of the initial increase in output is saved or both. The Developing countries’ economic prospects have long been heavily dependent on the industrial economies. But the share of world output, trade, and capital flows that can be attributed to developing countries has been increasing over the past two decades. As a result, “reverse linkages” – the impacts of developing countries—are becoming more significant.

Growth of the developing countries’ output and trade—and of their share of world output and trade – has accelerated over the past five years. If this trend continues, over the next 10-15 years, developing countries can be expected to play a much greater role in the world economy—and have a much larger impact on industrial countries. Although the rising importance of developing countries in the international economy has so far been due to a relatively small number of countries, the recent acceleration of growth in the developing world has been broad based, and the trend is expected to continue.

To date, the debate on reverse linkages has focused almost exclusively on one aspect—the potentially adverse consequences of growing trade between developing and industrial countries on employment and wages in the latter. However, comprehensive analysis of the three factors responsible for the growing impact of developing countries—expanding trade between industrial and developing countries, increasing financial integration, and relatively rapid growth in developing countries—suggests that if the process of integration is properly managed, benefits will outweigh costs to industrial countries.  

The last two decades has seen a shift in government policies of LDCs in order to attract foreign direct investment. The opening up to foreign competition, the deregulation of a vast array of markets and the privatization of public sector firms have been inducing major changes in the structure and behaviour of many countries, especially India.

In most advanced countries, industrialization is a process of transformation from a traditional to a modern society. Knowledge and technology have played a crucial role in that process. Studies show that economic growth in advanced countries stems from technological innovation . That is, industrial development is the process of building technological capabilities through learning and translating them into product and process innovations in the course of continuous technological change. Technological capability refers to the ability to make effective use of technological knowledge in production, engineering and innovation in order to sustain competitiveness in price and quality. Such capability enables a firm to assimilate, use, adapt, and change existing technologies. It also enables a firm to create new technologies and to develop new products and processes in response to the changing economic environment. Technological learning is the process of building and accumulating technological capability. To increase competitiveness, both governments and firms should be concerned with capability building. Those activities take place largely at firms, but the government’s public policy can establish important infrastructure that facilitates such activities.

In advanced countries, technological capability is accumulated largely through “learning by research”, which expands the technological frontier. In the developing countries, in contrast, technological capability is built primarily in the process of imitative “learning by doing”. A few newly industrializing economies (NIEs) have made a rapid transition from “learning by doing” to “learning by research”.

In the current scenario of globalization of business, strategic alliance is emerging as a powerful management tool in business management. Though alliances are focused as the industrialization during the 15^th and 16^th centuries, they are refocused in the 20^th century. Strategic alliances are becoming one of the main drivers of Globalization. Business firms around the world have engaged in cross-national alliances to achieve certain competitive advantage in domestic as well as in international markets and resources dependency in various industries have also stimulated strategic alliances to response to increased competition, changing market conditions and rapid technological change. Strategic alliances are being regarded as the latest phase in the search for innovation, entrepreneurial spirit and Globalization among organizations. Despite extensive discussion in the practitioner and academic literature, little has been done to define what actually constitutes a strategic alliance. However, numerous examples of strategic alliance activity have been offered. Thus, it is difficult to find a definition of strategic alliances as most writers remain flexible and imply strategic alliance to be any kind of inter-firm links. However, the most comprehensive definition has been provided by Yoshino and Rangan (1995) in their book “Strategic Alliances: An Entrepreneurial Approach to globalization”, the first book to treat the new alliances comprehensively as instruments of long-term competitive advantage rather than as short-term competitive advantage and as short-term defensive maneuvers. They define strategic alliance as possessing simultaneously the following three necessary and sufficient characteristics:

(a)     Two or more firms unite to pursue to set of agreed upon goals but remain independent subsequent to the formation of the alliance.

(b)     The partner firm share the benefits of the alliance and control over the performance of assigned tasks – perhaps the most distinctive characteristics of alliances and the one that makes them so difficult to manage.

(c)     The partner firms contribute on a continuing basis in one or more key strategic areas (e.g. technology, products).

By this definition, Yoshino and Rangan (1995) exclude from the term strategic alliance mergers, takeover’s, acquisitions, joint ventures of overseas subsidiaries of multinational corporations undertaken for the purpose of entering new geographic markets, licensing and cross-licensing agreements, and franchising deals and include inter-firm links established through contractual agreements like joint R&D, joint marketing, joint product development, joint manufacturing, and shared distribution/service, equity arrangements without creation of any new entity like minority equity investments. Thus, in short, all partners for mutual benefit may define strategic alliance as cooperation between two or more independent firms involving shared capital and continuing contributions.

There is a wide range of types of alliances, reflecting various degree of inter-firm interdependency and levels of internalization. Alliances range from relatively noncommittal types of short-term project-based co-operation to more inclusive long-term equity-based. They may be placed on a continuous scale between, on the one hand, complete interdependency and total internalization and, on the other hand, free market transactions. At one extreme lie wholly-owned subsidiaries representing complete interdependence between firms and full internalization. At the other extreme are free market transactions, where firms engage in arm’s-length transactions, while remaining completely independent of each other. Under this conceptual framework, strategic alliances can be categorized into two broad groupings of agreements – equity and non-equity alliances – which represent different levels of internalization and interdependency. Both equity and non-equity forms of alliances can be long-term relationships that provide individual firms with the means to broaden their scope and share risks without expansion.

Equity alliances include joint ventures, minority equity investments and equity swaps. A joint venture, the most common form of equity alliance, implies the creation of a separate corporation, whose stock is shared by two or more partners, each expecting a proportional share of dividends as compensation. More specifically, a joint venture is defined as a co-operative business activity, formed by two or more separate firms for strategic purposes, which creates a legally independent business entity and allocates ownership, operational responsibilities, and financial risks and rewards to each partner, while preserving each partner’s separate identity or autonomy.

Non-equity alliances include a host of inter-firm co-operative agreements such as R&D collaboration, co-production contracts, technology sharing, supply arrangements, marketing agreements, exploration consortia, etc. The non-equity alliance is often a preliminary step to creating a joint venture. It is therefore the most flexible and potentially the least committed form of alliance (at least at the outset). Companies can form a non-equity co-operative contract on a minimal basis to see how the enterprise develops and allow it to deepen and broaden by introducing new projects over a period of time. As the collaboration requires no major initial commitment, it has no limitations. It is probably the most appropriate form of cooperation when the extent of the relationship is impossible to foresee at the outset, when the alliance is not bound by a specific business or set of assets, and when joint external commitment at a certain level is not specifically sought. The non-equity collaborative form may be most appropriate if the activity concerned is a core activity of the partners; if it is non-core, a joint venture may be more appropriate.

Joint venture (JV) represent one of the most fascinating developments in international business. They are of particular interest to less developed countries, especially to those countries which are pursuing a policy of liberalization. This is because these less developed countries are trying to encourage foreign direct investment, and such investments often take the form of joint ventures. In the last two decades the rate of joint ventures formation has accelerated dramatically. Recent studies suggest that joint ventures are prone to frequent breakdowns. Even in India there have been several well documented cases of joint venture breakdowns. Developing country governments tend to favour joint ventures over other forms of foreign direct investment, since they believe that local participation facilities transfer of technology and marketing skills. During the last several decades, there has been a significant change in the attitudes of governments, especially in developing countries. Rather than viewed as evil exploiters, foreign investors are now welcomed as a source of new technologies, better management and marketing techniques and creators of skilled jobs. Not all types of foreign investment are perceived as equally beneficial to host countries. Faced with rapid technological advances, changing market structures, and increasing global competition, firms are motivated to form alliances with other firms to reduce risks, share technology, improve efficiency, enhance global mobility, and strengthen global competitiveness.

Buckley and Casson (1996) pointed out that international joint ventures flourished worldwide in the 1980s spurred by the rapid globalization of markets, rapid innovation and new technologies. In many LDCs, joint ventures were given a boost by the policy reviews towards privatization during the later part of the decade. Though hesitant, withdrawal of the state from business activities has meant in some cases the creation of JVs between the state firms and private firms within the host country and also with foreign firms. The establishment of a JV with a host partner increases the participating foreign firm’s potential for purchasing raw materials and intermediate products and for servicing final markets from the host country. The multiplier effect of the JV on the economy, such as developing indigenous entrepreneurial skills and stimulating economic and service activities in the particular regions or country, are among the motivations (Beamish,1985). JVs are also considered to be relatively better for ensuring the transfer and diffusion of technology. However, besides corporate intentions and strategies, many conditions in the host country affect the decisions of foreign firms in forming JVs, such as host government policies on foreign ownership of investment, availability of capable host partners, the socio-economic system, political stability, availability of local managerial talent and skilled manpower, etc. It is further pointed out that identifying and selecting an appropriate partner, particularly for the foreign partner, is not only the most important task, but also a difficult and time- consuming affair (Beamish, 1985).

Strategic alliances have emerged in recent years as a popular strategy in an environment in which fast access to up-to-date technology and emerging markets is more critical than ever (Yoshino & Rangan, 1995). Such an environment has been called hypercompetitive and appears to be the direction in which business is moving. The objective of the partners in strategic alliance is generally predicted upon two key dimensions – resource and risk. The resource dimension addresses what the firm contributes to the alliance, while the risk dimension portrays what the firm may fear most. Naturally, firms would attempt to obtain maximum returns from the resources they commit to the alliances, while paying close attention to the risks they are exposed to (Ring &Van de Ven, 1992). These two dimensions capture the critical concerns of prospective alliance partners. The significance of integrating the two dimensions is that many key issues of strategic alliances, e.g., opportunistic behaviour and interfirm trust (Gulati, 1995; Zaheer &Venkatraman, 1995), resource diversity (Parkhe, 1993), and structural arrangements (Osborn & Baughn, 1990), can be better understood through this integrated framework.            

There are also related other three theoretical approaches that are especially relevant in explaining the motivations and choice of joint ventures. One approach is derived from the theory of transaction costs as developed by Williamson (1985). The second approach focuses on strategic motivations and consists of a catalogue of formal and qualitative models describing competitive behavior. Though frequently these approaches are not carefully distinguished from one another, they differ principally insofar as transactions cost arguments are driven by cost-minimization considerations, whereas strategic motivations are driven by competitive positioning and the impact of such positioning on profitability. A third approach is derived from organizational theories, which have not been fully developed in explaining the choice of joint venture relative to other modes of cooperation. A transaction cost explanation for joint ventures involves the question of how a firm should organizes its boundary activities with other firms. An alternative explanation for the use of joint ventures stems from theories on how strategic behaviour influences the competitive positioning of the firm. The motivations to joint venture for strategic reasons are numerous. Though transaction cost and strategic behaviour theories share several commonalities, they differ fundamentally in the objectives attributed to firms. Transaction cost theory posits that firms transact by the mode which minimizes the sum of production and transaction costs. Strategic behaviour posits that firms transact by the mode which maximizes profits through improving a firm’s competitive position vis-à-vis rivals. A common confusion is treating the two theories as substitutes rather than as complementary. Indeed, given a strategy to joint venture, transaction cost theory is useful in analyzing problems in bilateral bargaining. But, the decision itself to joint venture may stem from profit motivations and in fact, may represent a more costly, though more profitable, alternative to other choices. The primary difference is that transaction costs address the costs specific to a particular economic exchange, independent of the product market strategy. Strategic behaviour addresses how competitive positioning influences the asset value of the firm. Transaction cost and strategic motivation explanations provide compelling economic reasons for joint ventures. There is, however, a third rational explanation for joint venture which does not rest on either transaction cost or strategic behavior motivations. This explanation views joint ventures as a means by which firms learn or seek to retain their capabilities. In this view, firms consist of a knowledge base, which are not easily diffused across the boundaries of the firms. Joint ventures are a vehicle by which ‘tacit knowledge’ is transferred. Other forms of transfer, such as through licensing, are ruled out not because of market failure or high transaction costs as defined by Williamson and others, but rather because the very knowledge being transferred is organizationally embedded. The three perspectives of transaction cost, strategic behaviour and organizational learning provide distinct, though at times, overlapping, explanations for joint venture behaviour. Transaction cost analyzes joint ventures as an efficient solution to the hazards of economic transactions. Strategic behaviour places joint ventures in the context of competitive rivalry and collusive agreements to enhance market power. Finally, transfer or organizational skills views joint ventures as a vehicle by which organizational knowledge is exchanged and imitated – though controlling and delimiting the process can be itself a cause of instability.

The flexibility to evolve is a hallmark of successful alliances. Flexibility allows joint ventures to overcome problems and to adapt to changes over time. If they are to evolve, alliances also need the capacity to resolve conflicts. A partnership is best able to resolve or avoid conflicts when it has its own management team and a strong board with operational decision-making authority. Flexibility is important because it is inevitable that the objectives, resources, and relative power of the parents will gradually change. Even the most astute parent companies cannot anticipate these trends and other events that will occur during the life of the alliance. Flexibility is also needed to overcome problems, which many alliances encounter in one form or anothers. Many joint ventures have trouble meeting their initial goals, often because the expectations or projections at the outset were overly optimistic. Negotiating every aspect of the alliance in detail and spelling out the rules in legal documents will not guarantee healthy evolution. But there are ways to build in flexibility, namely by giving the alliance a strong president, a full business system of its own (R&D, manufacturing, marketing, sales and distribution), complete decision-making power on operating issues, a powerful board, and sense of identity. Parent companies typically retain responsibility for decisions about equity financing and overall governance structure, but operating decisions are best made by managers whose sole focus is the joint venture. This kind of hand-off approach requires that the parent companies structure and perceive the alliance as an entity in and of itself and not as part of either ongoing business. Ensuring that the alliance does not need to depend on either parent for basic operating functions reinforces the separateness and also simplifies coordination of those activities. Giving the alliance strong leadership further encourages autonomy. Managers of successful alliances embrace their authority and build employee loyalty to the joint venture rather than to the parent companies. Such loyalty is not always easy to cultivate in light of the fact that key employees usually are drawn from the parent companies and are likely to return there. But strong leaders can win the support they need to operate as a freestanding business.

In structuring alliances, the issue of financial ownership should be separated from managerial control. In contrast to the conventional wisdom that fifty-fifty ownership spells failure because of stalled decision making, alliances with an even split of financial ownership are actually more likely to succeed than those in which one partner holds a majority interest. When one parent has a majority stake, it tends to dominate decision making and put its own interests above those of its partner, or for that matter, of the joint venture itself. Both partners tend to be worse off as a consequence. The autonomy and flexibility most alliances need are easiest to achieve when neither parent’s investment outweighs the others’. when ownership is uneven, one parent typically exercises control, sometimes in ways that are not in the minority partner’s interests. Intellectual property rights and proprietary technologies are ticklish areas in an ongoing alliance, but they become even more sensitive when the partners separate. Legal protections go only so far. Successful alliance partners end to use several different structural tactics to meet this challenge. First, they isolate sensitive technologies from the venture. Second, some companies centralize contact points between the joint venture and the parents. This is relatively easy in highly centralized companies but poses a challenge in more open and decentralized organizations. Third, fixed costs that are so high they must be shared and complementary staff make it hard for either partner to succeed without the other.

DRIVING FORCES

Firms entering into international strategic alliances may be prompted by several motives, including economising on production and research costs, strengthening their market presence, and accessing the intangible assets of other firms such as managerial skills and knowledge of markets and customers. Alliances provide firms with strategic flexibility, enabling them to respond to changing market conditions and the emergence of new competitors. Innovation and the development of leading-edge technologies drive most alliances in higher-technology sectors. In other sectors, alliances may be aimed at more conventional co-operation such as sharing a partner’s sales and distribution networks. In all sectors, as deregulation and liberalization of markets proceed, competition is increasing at the international level and stimulating new and different alliances between enterprises. These driving forces behind cross-border alliances are discussed below in terms of economic, technological and governance factors.

Economic Factors

Intensified global competition in many manufacturing and service sectors and the consequent need to restructure at the global level are the main factors driving growth in international strategic alliances. In general, these alliances provide synergy effects and strengthen the international competitiveness of participating firms by consolidating overlapping capacities and business activities on a global scale. Multinational enterprises enter into cross-border alliances with other firms in their sector to cut costs, streamline operations and concentrate on a few core activities while outsourcing non-core functions. As a result, increased levels of both cross-border mergers and acquisitions and strategic alliances in the 1990s have been accompanied by intensified sectoral and product specialisation. A considerable portion of international strategic alliances are focused on consolidating and/or accessing tangible assets, such as production facilities and distribution networks. In this, many alliances are a defensive reaction to increased global competition. Alliances are also formed to combine and/or access intangible assets, such as management skills, technical know-how or brand names. Such agreements are aimed at long-term profit optimizing by attempting to enhance the value of the firm’s assets, rather than at shorter-term cost-cutting. Alliances between firms for “affinity marketing” build on a partnership with a company with a well-established product or brand name to boost sales of a different product. Other alliances are between manufacturing firms and Internet service providers which have a rich and valuable customer database. Electronic commerce and the spread of online shopping enable firms to approach customers, regardless of their resident country, more directly via Internet. As these new trends have greatly reduced the transaction costs of bringing products to market, companies are paring down to what they do best and outsourcing the rest through a proliferation of alliances among companies that contract with each other for specialized products and services.

Technology Factors

Technology is driving the formation of strategic alliances at the international level in several different but intertwined ways, reflecting the growing ease of communication, cost of research, and need for international standards. The emergence of new communication tools such as the Internet, electronic mail and electronic data interchange (EDI) make cross-border collaborations far easier and more practical than ever before, even compared to five years ago. These information technologies have changed the manner of doing business in many sectors and have enabled firms to share know-how, information, distribution networks and other assets in different locations simultaneously. The knowledge assets of one firm such as new product designs and ideas, can be enhanced and adopted by firms in a distant country without delay. Rapid advances in information and communication technology have provided a more conducive business environment for partnerships and spurred growth in international strategic alliances and in phenomena such as cross-border patenting. At the same time, alliances are being driven by multiplying research costs accompanied by shortening product life-cycles which prompt the need to share resources and risks. Technology-related alliances among firms are generally aimed at gaining economies of scale and scope in research and development. This is in contrast to alliances for production, marketing and distribution whose major objective is to gain access to new markets through sharing facilities and networks. R&D alliances are also effective in developing global product and system standards with potential competitors and steering the path of technological change. In high-technology sectors, such as electronics and information technology, studies show that the rate of alliances tends to have a cyclical dimension. The early formative periods of new technological systems, during which no dominant design or standards exist, are characterized by high technological uncertainty and a large number of strategic alliances among firms. In later periods when a dominant design emerges and economies of scale and standardization become more evident, co-operative ventures diminish. Creating a new global product standard and being one of the original patent-holders enhances the long-term prosperity of firms in high-technology sectors. Co-operation is particularly sought with leading multinationals due to their global brand name recognition and marketing power. Once a breakthrough product or system (and possible candidate for a new global standard) is developed, an allied company can exploit its partners’ assets including sales and marketing networks.

Governance Factors

The other major driving force of international strategic alliances is market liberalization and deregulation. In the 1990s, liberalization of international capital movements and foreign direct investment have promoted cross-border transactions on a larger scale and involving a wider range of countries. As Globalization heightens the interdependency and inter-linkage of economies, foreign ownership of national enterprises and cross-border business collaboration is becoming the norm. Deregulation has led to a flood of new entrants, adding competitive pressures on existing players and leading them to create a new web of alliances in order to compete. Integration of regional markets have encouraged firms to expand operations on a broader geographical base, leading to new sales and marketing alliances. Joining a winning network or alliance at the global level is becoming crucial to firms survival. Government regulations can also affect alliance formation. Globalization and liberalization are also prompting changes in corporate governance systems which are facilitating cross-border alliances. In countries (e.g. Japan, Korea, France, Germany) which previously had more tight-knit systems of corporate governance based on close relations with other firms, suppliers and banks and characterized by higher levels of cross shareholdings, there is a trend towards more widely-dispersed ownership and greater transparency. In addition to raising the level of competition in product markets, governance changes are enhancing the responsiveness and flexibility of firms. Enterprises may find it easier to access a wider range of financing, adopt new approaches to organization and management and realize savings through information technology. Their ability to restructure – downsizing to smaller units or upsizing to gain complementary assets – is also affected by corporate governance regimes; enterprises from a greater range of countries are now finding it easier to engage in strategic alliances.

POLICY ISSUES

Recent trends in international strategic alliances points out that private (firm-level) as well as social (economy-wide and consumer) benefits can be raised by raising efficiency and innovativeness. A fundamental question for policy makers is whether economic benefits and efficiency derive from a higher level of co-operation among firms or from a greater degree of competition or a combination of the two. In the current era, characterized by fast-paced technical change and higher levels of Globalization, traditional theories and measurement approaches concerning market concentration and efficiency are being called into question. The nexus of technological innovation, internationalization of industry, greater networking, global standards and intellectual property are fostering new debates about the benefits and costs of various forms of international coupling.

Competition effects

Co-operation among firms in international strategic alliances does not necessarily mean less competition. This is true even though international alliances as well as cross-border mergers and acquisitions are breaking all records in terms of pace and size in the 1990s and transforming entire industries. In order to reach scale economies in technology, production and marketing, enterprises are choosing among a number of paths to Globalization, e.g. foreign direct investment, mergers and take-overs and strategic alliances. These modes of internationalization tend to be combined in complex and complementary ways as firms seek to maximize efficiency and profits. As a result, co-operation in one alliance may be paralleled by intense competition in other product or technology areas, at a subsequent point in time and/or with rival alliances. Anti-competitive effects of strategic alliances are less of a danger where barriers to entry and expansion are low. Often, where alliances are formed to develop new technologies, one network of collaboration will lead to the formation of a competing alliance composed of different firms. In addition, there is a trend for international strategic alliances to include firms of different sizes. This could translate into disproportionate technology access benefits for smaller firms and result in a greater number of effective competitors in the market. Partnerships for product standardization may lower barriers to entry by enabling new entrants to use common standards at affordable prices. To the extent that firms participate in international alliances to remain globally competitive and innovative, co-operative agreements can preserve the number of competitors and levels of competition in terms of new product developments and possibly price levels.

Efficiency effects

Most studies point to the positive efficiency effects of strategic alliances rather than to negative competitive impacts. In general, these alliances can provide private (firm-level) benefits as well as social (economy-wide) benefits by raising efficiency, innovativeness and ultimately consumer welfare. Strategic alliances are typically intended to bring together complementary inputs and stimulate innovative activities to introduce new technologies and products (Parkhe, 1993). Benefits for firms entering into alliances include cost-economising in production and R&D activities and access to intangibles such as more effective managerial skills and knowledge of markets and customers, all of which can contribute to their short- or long-term performance and profitability. The ability of alliances and joint ventures to raise the profits and market value of participating firms has been verified in studies at the national level. Companies acquiring technology through alliances and those involved in R&D co-operation tend to have significantly higher profit rates. There is also positive efficiency effects of geographic and cross-industry diversifications in the presence of significant intangible assets. These results emphasize the importance of learning through alliances to improve corporate performance. Firm-level efficiency gains can prompt broader social and consumer benefits from international strategic alliances, which can yield dividends for each country where allied firms are operating. Alliances can help revitalize ailing firms and local economies and create jobs through technology transfers, economies of scale and related productivity growth. Learning effects contribute to raising social welfare at the global level, since international strategic alliances help equalize worldwide knowledge just as international trade tends to equalize factor prices. There is tangible evidence of benefits for consumers through better, and a wider range of, products and services at less cost. Strategic alliances may also have negative efficiency impacts on participating firms, and indirectly on other firms as well as on consumers, particularly when they fail. Strategic alliances involve certain risks since their implementation is beyond the control of a single party and the objectives and roles of allied firms may not be clearly set at the start. Unsuccessful ventures can mean a loss of finance, skills and management as well as foregone technological opportunities, since companies could have selected other partners or undertaken alternative strategies. Small contractors or other partners may be swept aside in the process although they could also share the gains when alliances succeed. Losses for consumers could occur, if an alliance creates a candidate for a global product standard but fails to promote it in regional or global markets. 

Joint ventures between domestic companies in developing countries and foreign companies have become a popular means for both managements to satisfy their objectives. They offer, at least in principle, an opportunity for each partner to benefit significantly from the comparative advantages of the other. Local partners bring knowledge of the domestic market; familiarity with government bureaucracies and regulations; understanding of local labor markets; and, possibly, existing manufacturing facilities. Foreign partners can offer advanced process and product technologies, management know-how, and access to export markets. For either side, the possibility of joining with another company in the new venture lowers capital requirements relative to going it alone. As attractive as joint ventures might seem, however, they frequently perform unsatisfactorily and are comparatively unstable.

Both sides are aware that payments for technology are an important means of transferring benefits from the venture and of indirectly maintaining control; which inevitably leads to prolonged discussion of technology transfer. Technology providers are interested in protecting their intellectual property and therefore, want to set limits on where and how the technology can be used by the joint venture and to place restrictions on who controls derivative technologies, no matter where developed. The developing country partners hope to set bounds on the royalties and fees they will have to pay providers, especially as the technology becomes older, and to broaden the joint ventures control over its use. 

There are other problems that frequently arise during alliance negotiations:

§         Valuation Problem:- Each partner brings financial and other assets to the joint venture, and it is often not easy to determine what these assets are worth.

§         Transparency:- Getting accurate data upon which to base valuations and other decisions can be very difficult in some countries, especially where accounting standards are quite different from international standards.

§         Conflict resolution:- Many joint venture agreements spell out how disputes between partners are to be resolved. These provisions are important, since disputes are virtually inevitable in a relationship as complex and dynamic as a joint venture.

§         Division of management responsibility and degree of management independence:- There is some evidence that protection of a joint venture’s management from parent company interference is an important determinant of the venture’s success.

§         Changes in ownership shares:- How should the ownership structure be changed as a joint venture matures? Although most partners agree that they should address this issue early on, rather than waiting for a crisis to occur, it remains a sensitive one. Developing country partners, especially, can be leery of such provisions, which they see as potential death warrants- that is, as vehicles that industrial country partners may, for one reason or another, use to take full control.

§         Dividend policy and other financial matters:- Dividend policy goes to the heart of why companies enter into joint venture, with some companies hoping to expand and gain market share rapidly while others are striving to achieve quick increases in cash flows that they can use to support other operations.

§         Marketing and staffing issue:-. Because marketing is so critical to the joint venture’s success, it should not be surprising that it can be a difficult matter to negotiate. From the view point of the local partner’s management, maintaining control over distribution channels and marketing is one way in which its continuing contribution to the joint venture can be assured. Such a view, however, may conflict with the plans of the multinational company (MNC) partner, which may see the joint venture as only part of a larger strategy to enter the developing country market.

§         Operational problems:-Once joint ventures are in operation, they may experience various problems, some of which might have been foreseeable at the time the agreement was negotiated, others of which could not.

§         Problems related to multinationality.:- Many joint ventures undertaken in developing countries involve large MNCs that participate in a variety of other joint ventures and run; wholly owned subsidiaries elsewhere in the world . The developing country firms that are their joint venture partners, though they may be quite large by local standards, are often dwarfed by their MNC partners. One possible source of difficulty is the differing basic objectives of the two types of firms. An MNC may hope that joint venture will operate in a way that will be optimal from the standpoint of its entire global network, not merely within the local market on which their domestic jointly venture partner usually focuses.

These differing objectives can lead to a variety of disagreements on issues like

§         Exports Rights.

§         Tax Issues.

§         Dividend And Investment Policies.

§         Partner Size.

§         Ownership And Control Problems. 

Agreements need to contain fairly detailed provisions covering dispute resolution and, in the event of failure to reconcile differences, the exit mechanism to be employed in terminating the joint venture. Negotiation of such provisions should not be avoided because of an optimistic belief that good relations will be maintained over the life of the venture, since trying to resolve disputes in an ad hoc fashion can be highly problematic. Although no joint venture agreement can serve as a substitute for the commitment of the partners, even deeply committed partners can expect to have conflicts. A suitable agreement, therefore, is a vital component of a successful relationship Such an agreement does not have to be an overly legalistic document to provide the basis for overcoming these future conflicts in an orderly manner. This agreement is best considered as a “living” document, in the sense that among its provisions should be procedures for changing the agreement 

Technology transfer is one of the more sensitive and difficult issues confronting joint venture managements. Although the relevant provisions of the venture agreement provisions are important in establishing an operational framework, technology is one area where formal provisions cannot serve as an adequate substitute for good will and understanding between the partners 

Paul Beamish and Peter Killing, the editors of the 1996 Journal of International Business Studies Special Issue on Global Perspectives on Cooperative Strategies suggest that it is time to “consolidate the current and future thinking” on international cooperation. With the rapid growth of research, it is a challenging task to review the instability literature both in breadth and in depth. Previous research has conceptualized and operationalized international joint venture (IJV) instability in two ways. An outcome-oriented approach characterizes instability as termination of international joint ventures through various avenues or as change in the sponsors’ ownership structure. A process oriented approach, however, defines instability as major reorganizations or contractual renegotiations.  

Instability as termination or changes in ownership structure: The dominant approach in literature treats instability as termination of the IJV or change in its ownership structure. This approach was originated in Franko’s (1971) pioneering study of US manufacturing IJVs abroad and was later adopted by a variety of scholars. Some scholars have defined the instability concept more narrowly, that is, instability as termination (Berg & Friedman, 1978; Harrigan, 1988; Kogut, 1989; 1991; Bleeke & Ernst, 1991).  

Instability as reorganizations or contractual renegotiations: Several studies have paid attention to the structural and operational aspects of IJVs. In addition to termination, Killing (1983) classifies IJVs as unstable when they experience a drastic shift in the venture’s parent control structure. The more process oriented perspective represented by Killing (1983) and Blodgett (1992) is important because the focus has migrated from documenting the ultimate destinations/death rates of IJVs to investigating factors triggering or contributing to instability in operating IJVs.  

FACTORS CONTRIBUTING TO INSTABILITY: In the majority of prior studies, instability has been treated as a dependent variable to signify the IJVs ultimate destination. Consequently, various factors contributing to instability have been identified, including conflicts in shared management, cross-cultural differences, ownership structures, characteristics of the sponsors and external environmental forces. 

Interpartner Conflict In Co-Management: A key feature of IJVs is shared management between partners from different countries. Partners could disagree on just about every aspect of an IJVs management. Therefore, interpartner conflict in co-management is often a driving force for instability (Killing, 1983; Kogut, 1989). Harrigan (1988) found that differences between the partners in founding goals, strategic resources and corporate cultures were responsible for shorter joint venture duration. On the other hand, joint ventures between direct competitors were found more likely to fail because potential interpartner competition and conflict undermined the partnerships. 

Cross-Cultural Differences: Cultural differences often influence the way in which the partners in an IJV make strategic decisions and solve problems. For instance, Japanese and American managers tend to see interfirm alliances very differently: the former treat them as primarily interpersonal relationships whereas the latter see them as enduring by design, irrespective of the specific managers involved. 

Control/Ownership Structure: The structure of parent control has been found to influence IJV instability, although the direction of this effect remains ambiguous. Killing (1983) found that a dominant management structure can minimize coordination costs and hence outperform shared control IJVs. However, an unequal division of ownership may give the majority holder greater power which may be used to the detriment of the minority owner. Therefore, a balanced ownership structure in which partners’ bargaining power is evenly matched is more likely to produce mutual accommodations (Harrigan, 1988). Performance suffered, however, when the foreign partner exercised dominant control. Nevertheless, at a more general level, the control-performance relationship is nonlinear and more complex and is likely to be contingent upon other organizational and interorganizational variables.  

Characteristics of Parents: Franko (1971) concluded that policy changes in the multinational enterprise (MNE) partner were responsible for IJV instability. When an MNE decides to tighten control over its foreign subsidiaries, it is likely to turn some IJVs into wholly owned subsidiaries. Other partner characteristics, such as a partner firm’s financial problems and the partners’ prior IJV experience (Harrigan, 1988; Makino & Delios, 1996) were also found to influence IJV instability. 

External Environments: Changes in external environments, such as local government policies and industry structures, may also influence IJV instability. It has been widely documented that unanticipated major changes in local political environments (e.g. changes in government policies regarding foreign direct investment in general and equity IJVs in particular) affect international business operations and contribute to IJV instability (Blodgett, 1992). The past several decades have witnessed such drastic changes in many countries.  

Most previous studies have not examined instability and performance simultaneously, and are therefore unable to establish an unequivocal relationship between the two variables. As an exception, Harrigan’s (1988) study included duration and sponsor-perceived success as well as stability as indicators of performance. Killing (1983) used both IJV longevity and parent assessments of performance to indicate IJV success. The two measures were found consistent in assessing the failure cases in his sample. Similarly, Geringer and Hebert (1991) argue that longevity provides a necessary condition and a good proxy for IJV success. Other researchers, however, have questioned the linkage between instability and performance. Using termination as a measure of instability, Berg and Friedman (1978) documented several cases in which a joint venture was terminated, not because of failure but as an outcome of success. They argue that a successful IJV can become critical to one of its parent’s overall businesses, therefore promoting this parent to turn the venture into a wholly owned subsidiary. Gomes-Casseres (1989) also argued that IJVs may be terminated because they have successfully accomplished their initial objectives. In fact, many successful IJVs were found to undertake structural changes, but they did so as adaptive actions to changed external environments or internal strategies of their parents (Gomes-Casseres, 1989). Hennart, Kim and Zeng’ (1998) recent study reported clear differences between different types of instability (measured as termination by selloffs versus liquidation). They found that variables that have been predicted to affect IJV instability only influence the possibility of sell-off, not that of liquidation. Therefore, it would be misleading to treat instability as synonymous with failure. Thus, most researchers conceptually agree that the linkage of instability to performance is more than complex, many used the former as a proxy for the latter. Little research has been done to investigate the relationship and the possible interactions between the two variables. 

These studies have not only appropriately identified instability as a critical issue for research, but also contributed to the understanding of the fragility of international partnerships. It is arguable that the investigation of IJV instability has become one of the most active domains of scholarly work in international management (Parkhe, 1993). However, the literature is deficient and limited in some important aspects. 

Conceptualization and Operationalization: While instability has long been a major subject in IJV research (Parkhe, 1993), until very recently, the literature lacked a theoretical definition for the concept. Most studies do not provide a conceptualization but define it by operationalizing it. Given the lack of theoretical work, not surprisingly, the empirical literature features a variety of measures of instability, ranging from dissolution and reorganization, to renegotiation of contracts. Multiple ways to terminate a venture are also documented. The use of different measures is not a problem per se. The problem rests in the fact that prior researchers have paid little attention to articulating the relationship between the specific measures they elect to use and the operational schemes adopted by others. Therefore, we know little about the relationships between the various measures of IJV instability.

 Relationships to Performance/Success: In the current literature, the instability-performance relationship remains unclear. While most researchers agree that instability is not equivalent to failure, operationally, many insist that longevity is a key measure of success and that termination indicates failure. Even Inkpen and Beamish’s (1997) definition, the most conceptual and comprehensive so far, treats instability as something undesirable as it stresses the “unplanned and premature” nature of instability. The lack of clarity in the relationship between instability and performance has created difficulty in understanding previous research results, has hindered communication among IJV scholars, and has undermined significantly the theoretical and practical value of prior research findings.  

Previous work on instability (and on IJV’s in general) has been dominated by a static approach (Parkhe, 1993; Doz, 1996) in which the focus is placed on the IJV’s end consequence, such as sellout, acquisition, liquidation or bankruptcy. The dynamic process by which stability or instability develops has been largely ignored. Using the end consequences of IJVs to conceptualize and operationalize IJV instability has value, if the focus is placed on tracing the contributing factors to instability rather than counting the death rates. However, this approach has significant limitations. First, it is conceptually problematic to assert that all terminated IJVs are unstable, because termination may be anticipated or planned by the partners at founding (Kogut, 1989; Inkpen and Beamish, 1997). It is equally problematic, on the other hand, to assume that all IJVs that have not yet been terminated are stable. Joint ventures do not change from stable to unstable the night before their termination. Second, most previous studies used ownership changes as a proxy for instability. This approach is limited because instability can be multi-dimensional, as reflected in changes in the IJV’s strategy, core business processes, key products and markets, and partner contributions of critical resources. Without considering the developmental process, it is impossible to gain a rich understanding of these multiple sources of instability. The nature of instability can only be ascertained with detailed knowledge of the actual evolution of IJVs (Doz, 1996).

Since the turn of this decade, several significant attempts have been made to explore the process in which IJV instability evolves. For instance, the interpartner competitive learning perspective (Hamel, 1991; Lyles, 1994; Inkpen & Beamish, 1997) has provided a powerful explanation for IJV termination. This perspective argues that IJV partners are engaged in a race for learning to acquire each other’s skills, resources and competencies. Once one of the partners has successfully accomplished its learning objectives, the race is over and the IJV is terminated. This view was originally advanced by Hamel (1991) and further developed by Inkpen and Beamish (1997). Building upon the bargaining power argument, it is argued that changes in bargaining power balance resulting from interpartner learning represents a key source of IJV instability. Conceptually, they define instability as “a major change in relationship status that was unplanned and premature from one or both partners’ perspectives” . This definition, arguably the first to be theory-based, has considered a wide range of changes in IJVs, going beyond shifts in ownership structures or termination. Another notable contributor is Doz (1996) who provided a detailed account of the interactions between initial conditions and organizational leaning and the subsequent impact on the evolution of cooperation within IJVs. The evolution of an IJV is characterized by cycles of learning, re-evaluation and re-adjustment. Initial conditions may determine alliance outcomes when these conditions are highly inertial and prevent meangingful learning between partners. Drawing upon the organization stability/change paradox, it is argued that unexpected environmental and organizational contingencies, undesirable venture performance, obsolescing bargain, and interpartner competitive learning are major sources of IJV instability. On the other hand, the initial conditions of the venture, for example, the political and legal environments at the IJV’s founding, its initial resource mix, the balance of partner bargaining power, and the pre-venture relationship between the partners serve as stabilizing forces for IJVs. It is argued that IJVs evolve under the effect of both sets of forces.

Thus, we can say that instability refers to the extent to which the IJV alters its strategic directions, renegotiates its contract/agreements, reconfigures its ownership and/or management structures, or changes the relationship with its partners or the relationship between the parents that may have a significant effect on the venture’s performance. 

Thus, Instability is a multifaceted concept. First, new contingencies may be created when the IJV redirects its strategic foci, changes its key objectives, repositions in the markets, or undertakes major growth or downsizing. These changes may be necessitated or prompted by environmental, interorganizational, as well as intraorganizational factors. Second, instability occurs when the partners renegotiate contracts. The IJV contract and major agreements on technology transfer or management licensing, define the legal and institutional frameworks in which the IJV operates. Any significant changes or attempts to change will make the venture unstable. Third, reconfiguration of the venture’s ownership/control structure represents a major source of instability, because such changes create new bargaining dynamics and/or alter strategic stakes of the partners. A fourth facet of instability concerns the IJV’s relationship with each parent and the relationship between parents. The IJV becomes unstable when changes occur in the amount of decisional autonomy rendered to the IJV management or in the IJV’s role in each parent’s overall business, i.e. the parent-venture quasi-internal transactions. Changes in the interpartner relationship may result from major shifts in their relative bargaining power, competitive learning (Hamel, 1991; Inkpen & Beamish, 1997), emergence/resolution of disputes and conflict, or building/deconstruction of trust between them (Madhok, 1995).

Globalization has affected all facets of the world economy. This includes services, which in most economies are the single largest contributor to economic growth and employment. However, despite its importance to national output, the impact of globalization on services is only recently receiving the attention of researchers and policy makers. A growing body of evidence and economic theory suggests that the close availability of a diverse set of business services is important for economic growth. The key idea in the literature is that a diverse set of business services allows downstream users to purchase a quality adjusted unit of business services at lower cost. The motive for liberalizing trade in services was to permit rationalization of service activities along the lines of comparative advantage. It was also intended to expand the sales and profits of service providers who were operating from the base of such a comparative advantage. Indeed, many have argued that the fundamentals of trade in services are really no different from trade in goods, and only the difficulties of measuring and monitoring trade in services make it distinctive, from a practical policy perspective. However, for many services the benefits from liberalization extend, in a sense, beyond this.

 Insurance is a service, which is sought to be commodified for better conceptualization in keeping with the other unification trends running across the world. The function of insurance is to protect a few against the heavy financial impact of the expected loss by dispersing the losses among many who are exposed to homogeneous risks. On opening up of the insurance market, who over can offer the same product at lowest premium would thrive and prosper. Full force of competition is yet to be understood in Indian market. Size of a country’s insurance market largely depends on the size of the economy but strongly modulated by numerous environmental conditions. With increasing economic development, income and assets increase. The demand to protect them also increases. Despite all apprehensions currently doing the rounds in India, domestic markets can benefit from Globalization. Globalisaton increases domestic capacity, enhances competition with the advent of foreign mega players, provide better customer value and choice. Sharing of knowledge brings product innovations, better value chain management, new techniques of underwriting and post sales claim settlement practices. Apart from the traditional concern for demand side trade, in the supply side there is better scope for harnessing capital at various tiers, creating technical and catastrophic reserves, harnessing investment and risk sharing opportunities in a wider geographic hinterland. General Agreement on Trade in Services (GATS) considers insurance services in particular as one of the most important constituent of economic development. Insurance help for economic growth in the following ways:

1.        insurance accomplishes the task of stabilizing the financial condition of individuals, families and institutions by indemnifying them from losses.

2.        greater private expenditure on insurance reduces government expenditures on social insurance programmes. This helps the government to concentrate on social security programmes of only socially challenged.

3.        insurance facilitates trade and commerce by insuring them against unforeseen liabilities. Most venture capitalists are encouraged to take more than usual risk only if tangible assets and life of the venturing entrepreneurs are adequately insured.

4.        insurance help to mobilize savings by reducing transaction costs between savers and fund users, in liquidity transformations for profitable maturities and taking advantage of the ability for size transformation to achieve economies of scale.

5.        insurance enables financial risks to be managed more efficiently.