Blog: Is your company ready to explore remote territories?

Vinci-researchers Florian Noseleit, Killian McCarthy and Isabel Estrada Vaquero

Imagine you plan holidays to a very distant country with an unfamiliar culture. Maybe Vietnam?! What do you do first? Probably check out some websites describing the country and its people and maybe buy a travel guide. And after the plane landed and you found your way to your hotel – how do you arrange your trip to the remote temple, the caves hidden in some national park, and the little town full of local artisans? A local guide that offers also transportation might just be what you need. Especially because it may also mean discovering places that are not mentioned in your travel guide. Often such unplanned stops here and there are just so much better than everything you have planned to visit beforehand. But how is this in a business setting?

Suppose your firms intends to go to a new place? For example getting access to new markets, sourcing knowledge for a new product from distant places, getting access to novel technologies abroad? And we are not talking about Belgium or Germany but all those places that may provide great opportunities but are juuuuust a little further away. Think about countries that are geographically far away – such as Australia – institutionally far away – such as Russia – or countries that are both geographically and institutionally far away – such as China.

Allying with a local firm might seem like the right thing to do; alliances give the firm access to (a set of) its partner’s resources and routines, meaning that through an alliance the firm can build up its knowledge of the foreign market. However, alliances are a far from perfect solution, as partners may share less, and talk less, in the alliance than they had promised, making the alliance less useful than had been expected.

Acquisitions are another option. Acquiring a local firm might seem like the right thing to do; mergers and acquisitions provide the acquiring firm with access to and control of a target firm in the host country. Research suggests, however, that up to 70% of acquisitions fail, and cross-border acquisitions are particularly risky; cultural and institutional differences cause more delays and disruptions than typically expected.

Increasingly, therefore, we see firms engaging in what are referred to as ‘transitional governance trajectories’. In a transitional governance trajectory, firms first start with a strategic alliance. They use this to learn about their partner, and their partner’s market. If the alliance partner proves interesting and if the firm decides that it requires both access to and control of the partner’s resources, the alliance evolves into an acquisition. In this way, the risk of an acquisition becomes more manageable.

This phenomenon is more common than one might think. We collected data on 2,578 alliances that turn into an acquisition during the time period 1990 to 2010 – it turns out that many of these transitional governance trajectories cross borders and large distances. The map above shows the events that we studied. As we can observe in this map it is very common that a transitional governance trajectory bridges large distances between two firms.

Of course what is distant to one firm isn’t necessarily distant to another. A Dutch acquisition in the US, for example, is likely to differ compared to an acquisition in India: despite geographic distances being similar, the institutional distances may differ vastly. These two types of distances present different challenges too. While geographic distance leads to operational problems -- for example because face-to-face interaction is difficult over distances -- institutional distance implies that cultural norms and institutional settings deviate from the known, which can lead to more severe difficulties.

So, when is a transitional governance trajectory more interesting compared to an outright acquisition? We identified three main reasons:

1. The primary location of business operations of the potential target is geographically far away.
2. Uncertainty in the local market of the potential target is high.
3. The location of the potential target offers relatively fewer alternatives to outright acquisition.

The common underlying mechanism behind these three aspects is relatively high uncertainty and, consequently, a low willingness to engage in outright acquisition. However, the factors causing the uncertainty differ. Uncertainty related to geographic distance is mainly because of limited availability of information. In contrast, the other types of uncertainty mentioned above (target’s local market and location) are also associated to different opportunities. Often higher uncertainty is paired with a higher novelty value of more distant opportunities. These tend to be places that not everyone knows well already. And these are the situations when transitional governance trajectories can be a particularly valuable strategy.

Talking practice. Doing business outside your home country is full of uncertainty but at the same time the higher novelty value of more distant opportunities makes it worth. However, while an outright acquisition is often too risky, transitional governance trajectories can be a valuable strategic alternative. By using transitional governance, we recommend that you let your alliance partner be your local travel guide.

Want to know more? Don’t hesitate to contact the authors of this post:
Florian Noseleit (f.noseleit@rug.nl); Isabel Estrada (i.estrada.vaquero@rug.nl); Killian McCarthy (k.j.mccarthy@rug.nl)

To read more: Estrada , I., Noseleit, F. & McCarthy, K. 2016 Advances in Mergers and Acquisitions. Finkelstein, S. & Cooper, C. L. (eds.). Emerald Group Publishing Limited, Vol. 15, p. 73-93 20 p.