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Chapter 1

Why Alliances Have Become So Important

Blood ties aren't that important when it's a matter of survival.

Japanese observer commenting on Isuzu and Fuji Heavy Industries, which broke a taboo against cooperation between companies in different groups

Wherever we look, cooperation is accelerating. Consider the evidence: Between 1979 and 1985 the number of alliances among American, European Community, and Japanese firms grew thirtyfold. In Eastern Europe joint venture startups have been doubling annually. In India, even while the tragic memory of Bhopal was fresh, the government was actively promoting foreign corporate links and forging stronger ties to world science.

Two basic forces are behind these striking developments: the rise of technology and the globalization of markets. This new thrust affects all firms, everywhere. The consequences are enormous.

Cooperation Is Growing — and Here to Stay

Technology is relentlessly changing our world. In the process it forges new links among us, makes us more alike, and demands more of our resources to keep moving ahead.

Expanding Technological Interdependence

Technology has become so important to our lives that, for several decades, R&D growth has outpaced economic growth in the major industrial nations. The more we invest in R&D, the more it makes sense to look around to see if someone else might be producing knowledge we can use. This practice has been increasing around the world.

Since at least the early 1970s, R&D cooperation between organizations — businesses, universities, and government labs — has been steadily rising for major nations. This trend is shown in the following graph, which displays the fraction of the world's science and engineering articles written by researchers from more than one organization. Simply put, joint publications are the fruits of joint research. Clearly, technological cooperation is already a strong and growing force.

One remarkable feature of this trend is that, except for the Soviet Union, cooperation in R&D is growing faster than investment in R&D, as shown on the facing page. An expanding share of these nations' R&D efforts is thus going into joint programs. Given the tremendous importance of technology to competitive advantage and economic growth, this is a fundamental change in global business and economics.

It is also significant that international cooperation is the fastest growing part of this thrust. This is illustrated on page 12.

The world has clearly been shifting to cooperation as a major vehicle for technical progress. Without cooperation — as the Soviets have apparently learned — technological advance becomes a less effective, almost brute-force process of spending more and more on R&D, in part to duplicate what others have already done.

World Markets Are Integrating

Growing technological interdependence is matched and reinforced by rapidly integrating markets. This raises the demand for cooperation even more.

Technology advances because new knowledge opens new paths for development, and because users' needs evolve to create new requirements. These complementary forces have increased living standards around the world. And since human needs are similar, markets in different places are becoming more alike.

Many consumer goods must be adapted for local tastes. It will probably always be this way. However, consumer needs and incomes are now close enough to justify a global scale in many facets of R&D, and a global or regional scale in manufacturing and distribution. For many industrial goods, which are less sensitive to cultural differences, R&D, manufacturing, marketing, and distribution are already global. Few firms can meet these challenges on their own.

The accelerating integration of world markets is evident in the way firms commercialize their technologies. Through the 1970s American firms' standard practice for introducing new products was to market them first at home and later abroad. In many consumer and industrial sectors the time lag has been reversed. Other markets have caught up or moved ahead.

Significantly, about 70 percent of U.S. manufacturing is now subject to foreign competition. And despite protectionist pressures, world trade has grown faster than national economies since the 1960s.

Global market integration has been supported by giant strides in the technologies of computers, communications, and transportation. The tremendous ease with which information, people, and goods move about has vastly expedited technology transfer. Newly industrialized countries have been quick to move up the learning curve. Korea, for example, has become a power in chemicals, metals, electronics, and other hightech fields.

The world is clearly becoming a single market. In the process, the intensity of global competition is growing dramatically, raising the standards for competitive success.

Cooperation Is Changing the Business World

The powerful currents of technological interdependence and integrating global markets are catalyzing changes in national policies to promote cooperation.

Suddenly, Nations Are Changing Their Ways

In the brief decade of the 1980s:

* British economic blueprints were rewritten to give high priority to technology transfer and cooperative research.

* China created its first-ever joint venture laws to bring in needed technology.

* The Soviet Union and East European nations launched sweeping policy changes to foster technological cooperation and economic integration with the rest of the world.

* The United States changed its antitrust laws to encourage shared R&D, and began more than two dozen university centers for joint research.

* Demands for more technological cooperation and a larger scale in the world market brought the European Community close to economic integration. Canada and the United States created their historic free trade agreement for the same reasons. Thailand, Vietnam, and other former adversaries in Southeast Asia launched similar moves.

The benefits of cooperation have caused nations to yield their economic independence in favor of global efforts to coordinate exchange rates, set trade and agricultural policies, adapt uniform practices for patents and trade secrets, and develop world telecommunications standards.

With their economies sadly trailing the rest of the world, less developed countries have launched an almost desperate effort to lure once-feared multinationals for jobs, investments, and technologies. While developing nations engaged in more than four hundred expropriations of foreign business assets in the 1970s, the number of such acts fell to around twenty during the 1980s.

Reflecting on the huge debts piled up by international development borrowing — with little progress to show — Francisco Swett, Ecuador's finance minister, notes "we feel it is better to have partners than creditors."

The Need to Cooperate Is Joining Old Adversaries

In Japan, where everything is group-oriented, it is almost unthinkable for companies in different groups to cooperate. Yet Isuzu and Fuji Heavy Industries broke this taboo because they believed they had little choice. Both needed an American manufacturing presence to stay in business.

For similar reasons entrepreneurial software firms Microsoft and Ashton-Tate, long regarded as bastions of independence, joined forces to develop a major new product that would have been hard for either to create alone.

Every Firm Is Affected

The growing drive to cooperate is not limited to high technology or global firms. For instance, local companies without foreign opponents feel cost and quality pressures from corporate customers that compete in global markets. For them and for other firms the logic of cooperation is hard to miss.

Aetna Life and Casualty, for example, formed a joint venture with Voluntary Hospitals of America — itself an alliance of several hundred hospitals — to provide cost-limiting group health care plans neither could offer alone. As another example, hamburger chain Wendy's International and ice cream vendor Baskin-Robbins formed an alliance to explore the drawing power of their combined product lines. To do this separately, each would have had to assemble the needed expertise.

Copyright © 1990 by Jordan D. Lewis