International alliance commitment and performance of small and medium-size enterprises: The mediating role of process control

Journal of International Management 14 (2008) 124 – 137

International alliance commitment and performance of small and medium-size enterprises: The mediating role of process control George Nakos a,⁎, Keith D. Brouthers b a

School of Business, Clayton State University, Morrow, GA 30260, USA b King's College London, University of London, London, UK

Received 18 September 2006; received in revised form 19 September 2007; accepted 30 November 2007 Available online 5 May 2008

Abstract Improving alliance performance is a critical issue that both managers and researchers have attempted to resolve. Recently scholars have suggested that firms can use alliance commitment and process controls to improve alliance performance. Yet research has only found weak support for these direct effects. In this paper we examine the mediating role of process controls on the relationship between alliance commitment and alliance performance. When tested on samples of SMEs we find support for our theoretical predictions. We then discuss the managerial implications of using commitment and process controls in SME international alliances. © 2008 Elsevier Inc. All rights reserved. Keywords: International alliances; Opportunism; Cooperation; Transaction costs; Knowledge sharing

Despite the popularity and importance of international alliances and the extensive scholarship devoted to them, research suggests we have a very limited understanding of how to manage alliances (Das and Teng, 2001). Firms involved in international alliances are mainly concerned with improving performance by focusing on issues of cooperation and opportunism (Brouthers and Bamossy, 2006; Das and Teng, 1998; Borys and Jemison, 1989). Recently scholars have suggested that applying commitment and control theories to alliance management might provide a clearer understanding of how to deal with these issues of cooperation and opportunism and as a result improve alliance performance (Skarmeas et al., 2002; Geyskens et al., 1999). Commitment theory suggests that taking a long-term view helps improve alliance performance because the expectation of continuity leads to a level of satisfaction in the alliance and a reduction in opportunism (Anderson and Weitz, 1992). Commitment may also lead to improved levels of partner cooperation (Muthusamy and White, 2005). Control theory suggests that firms attempt to reduce opportunism and increase cooperation in alliances through various control mechanisms (Bello and Gilliland, 1997). Output controls focus on alliance results and consist of monitoring the outputs (e.g., sales levels, profitability) of the alliance but may actually increase opportunism and

⁎ Corresponding author. Tel.: +1 678 466 4552; fax: +1 678 466 4599. E-mail addresses: [email protected] (G. Nakos), [email protected] (K.D. Brouthers). 1075-4253/$ - see front matter © 2008 Elsevier Inc. All rights reserved. doi:10.1016/j.intman.2007.11.001

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reduce cooperation (Celly and Frazier, 1996). In contrast, process controls focus on alliance behavior and consist of attempts by one partner (the focal partner) to influence the behavior of the other alliance partners; helping to alleviate problems of opportunism and enhance alliance cooperation (Aulakh et al., 1996). Empirical research examining the direct effects of commitment and process controls on international alliance performance has provided only weak support. Several studies applying commitment theory to alliance performance found support when examining samples of developed country MNEs (e.g., Aulakh et al., 1996). But studies examining developing country MNEs (Lee and Beamish, 1995) and developed country SMEs (Sherer 2003; Leonidou et al., 2002) found no support. Likewise there is little empirical support for the impact of process controls on alliance performance. Solberg (2002) found limited support for alliances involving SMEs from developed countries, but Bello and Gilliland (1997) and Aulakh et al. (1996) found no empirical support when they examined alliances involving developed country MNEs. We suggest that one way forward is to rethink the relationship between alliance commitment, process controls, and alliance performance. We theorize and test the idea that process controls may actually be a mediating variable that helps explain the influence of alliance commitment on alliance performance. Mediating relationships have been largely ignored in the management literature (Renn and Vandenberg, 1995; Venkatraman, 1990). Mediating relationships explain how one factor (the independent variable) influences another factor (the dependent variable) through a third factor (the mediating variable). Through the examination of a mediating effect we hope to gain a better understanding of how to improve alliance performance. More specifically, by conceptualizing the relationship between alliance commitment and process controls as a mediating relationship, as opposed to previous research that viewed these as being direct relationships with alliance performance, we hope to improve our understanding of how alliance commitment and process controls can be used to create better performing alliances. 1. Theory and hypothesis 1.1. Commitment theory Commitment theory has its roots in the organization behavior literature (Swailes, 2002). In that literature commitment is defined as a multifaceted construct that involves both attitudinal and calculative dimensions. The attitudinal dimension of commitment captures value congruence while the calculative dimension captures continuance (Siders et al., 2001; Swailes, 2002). Scholars have examined both organizational commitment to employees (e.g., Miller and Lee, 2001) and employee commitment to organizations (e.g., Siders et al., 2001). Findings from these studies suggest that commitment leads to behaviors that support organizational goals and improves cooperation (Siders et al., 2001; Miller and Lee, 2001). This research also suggests that control systems are often used to highlight the importance of various organizational objectives and align employee behavior with organizational goals (Siders et al., 2001). These studies suggest that commitment is an important driver of organizational and employee performance. In alliance research commitment is defined as the willingness of partner firms to maintain a stable relationship and the degree to which an alliance partner expects the alliance to continue into the future (Shamdasani and Sheth, 1995; Anderson and Weitz, 1992; Boyle et al., 1992). When alliance partners view an alliance as a long-term commitment they are less likely to take advantage of the other partner or withhold cooperation and are more likely to act unilaterally to benefit the long-term prospects of the alliance for all partner firms (Muthusamy and White, 2005; Cullen et al., 1996; Gulati et al., 1994). Early strategic alliance studies tended to underestimate the importance of commitment and to overemphasize the importance of trust as a determinant of performance (Robson et al., 2006). Morgan and Hunt (1994) were among the first to recognize the connection between trust and commitment; suggesting that commitment was actually the primary driver of alliance performance. Although commitment and trust have similar characteristics, they are not the same (Robson et al., 2006). Das and Teng (2001, 1998) defined trust as a partner's ability to perform (competence-based trust), or a belief in their intention to perform (character-based trust). On the other hand, commitment to an alliance entails a partner's intention to establish a long-term relationship. Spekman, Isabella and MacAvoy (2000) suggest that commitment to a relationship contains both a certain degree of trust and the perception that a long-term association with the partner will bring benefit to the company. Therefore, it appears that it may be essential for trust to exist in order for commitment to develop. This is confirmed in the meta-analysis study of Geyskens, Steenkamp and Kumar (1999) who show that trust is actually an antecedent to commitment.

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Even if trust exists in a venture, commitment may not develop because a company while it trusts a partner may believe that some other type of strategy or association will be more profitable in the long run. Although trust reduces the need for monitoring which leads to lower transaction costs (Aulakh et al., 1996), unlike commitment, trust does not necessarily lead to increased expenditures of time and resources needed to achieve the ventures outcomes (Shamdasani and Sheth, 1995). Without these commitments of time and resources ventures cannot be successful (Morgan and Hunt, 1994). Hence, even though commitment and trust share similar characteristics, trust influences venture performance through its affect on commitment suggesting that commitment may be more important than trust in determining how well an alliance performs. Commitment leads to an increased effort and concentration on the alliance by alliance partners helping the alliance achieve its goals and objectives (Johnson et al., 2002; Saxton, 1997). When a firm is committed it wants the alliance to work (Cullen et al., 1996; Anderson and Weitz, 1992). Morgan and Hunt (1994) found that commitment leads to increased interfirm cooperation. Interfirm cooperation may increase knowledge creation and learning leading to a more successful alliance (Muthusamy and White, 2005; Johnson et al., 2002; Skarmeas et al., 2002). Commitment can reduce partner interest in other activities or searching for other partner organizations (Aulakh et al., 1996; Morgan and Hunt, 1994). Commitment decreases opportunism because partner organizations have a longterm perspective and do not take actions that sacrifice long-term gains for short-term benefits (Aulakh et al., 1996; Shamdasani and Sheth, 1995; Morgan and Hunt, 1994). Both opportunistic and switching behaviors increase alliance costs. When a firm is committed to an alliance it will desire to keep such costs to a minimum (Shamdasani and Sheth, 1995; Morgan and Hunt, 1994). Alliance partners therefore tend to refrain from self-seeking behaviors, like shirking or withholding resources, and do not search for alternative partner organizations. In sum, commitment theory suggests that a higher level of commitment leads to increased cooperation and a reduction in opportunism which should result in better alliance performance (Muthusamy and White, 2005; Skarmeas et al., 2002; Cullen et al., 1996). However, previous scholarship has found relatively little empirical support for the direct association between alliance commitment and alliance performance (Sherer, 2003; Leonidou et al., 2002; Lee and Beamish, 1995). These weak results have led some researchers to suggest that there is more to the commitment-performance relationship than had originally been assumed (Robson et al., 2006; Hennart and Zeng, 2005). The reason that commitment by itself may not be as important to alliance performance as previous research has suggested is because it lacks a facilitating mechanism through which it can influence the overall performance of the alliance. Alliance based commitment theory (e.g., Voss et al., 2006, Robson et al., 2006) suggests that certain types of exchange systems help signal the importance of various organizational objectives and align alliance partner behavior with organizational (alliance) goals. More specifically, scholars have suggested that commitment can be “reinforced with supporting interorganizational linkages such as …control systems” (Beamish and Banks, 1987: 4; Aulakh et al., 1996). Based on this researchers have looked to control theory in an attempt to try to explain alliance performance. 1.2. Control theory Control theory stems from the organizational control literature (Ouchi, 1977; Ouchi and Maguire, 1975). Ouchi (1977: 95) states “Control can be conceptualized as an evaluation process which is based on the monitoring and evaluation of behavior or of outputs”. This literature focuses on how controls can be used to manage individuals and subunits. Two types of control have been identified; output and behavioral (Ouchi, 1977; Ouchi and Maguire, 1975). Research suggests that output and behavioral (process) controls are not substitutes for each other; firms may use either or both methods (Ouchi and Maguire, 1975). Alliance research has emphasized the importance of both output and process controls in determining the success of international cooperative agreements (Geringer and Hebert, 1989). Output controls focus on monitoring the results of partner efforts and tend to shift risk to the partner firm (Celly and Frazier, 1996). Because of this, partner firms often feel isolated and alone which encourages self-seeking behaviors that may damage the long-term prospects of the alliance (Aulakh et al., 1996). Output controls do not promote cooperation or knowledge sharing; firms do not have the incentive to work together to achieve alliance objectives (Bello and Gilliland, 1997; Celly and Frazier, 1996). Output controls are normally demotivational because of potential environmental uncertainties that create ambiguous cause and effect relationships; alliance partners are held responsible for factors outside their control (Celly and Frazier, 1996). Contrary to this, process controls are used by firms to monitor partner behavior and direct that behavior toward specific goals and objectives (Bello and Gilliland, 1997; Aulakh et al., 1996). Firms that use process controls assume

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some of the risks involved in international expansion which encourages long-term behavior from partner organizations (Aulakh et al., 1996). Process controls provide a supportive atmosphere in the alliance, reducing the motivation for selfseeking behavior and encouraging greater cooperation and knowledge sharing (Bello and Gilliland, 1997). Process controls provide an effective means to garner partner support, guard against opportunism, and develop a long-term relationship because this control method signals the importance of the alliance to the focal firm and the willingness to share risks (Celly and Frazier, 1996). Hence, research has suggested that the use of process controls can result in better performing alliances because of decreased opportunism and increased inter-firm cooperation (Bello and Gilliland, 1997; Aulakh et al., 1996; Celly and Frazier, 1996). Yet studies examining the impact of process controls on alliance performance have provided very little support (Solberg, 2002; Bello and Gilliland, 1997; Aulakh et al., 1996). 1.3. The mediating role While previous research has tended to indicate that firms can improve international alliance performance by considering the independent effects of commitment and process controls (Robson et al., 2006, Aulakh et al., 1996), the empirical results have not been supportive. We posit that these two factors do not act independently but that the relationship between commitment and alliance performance is mediated by process controls. Building on existing research we suggest that commitment and process controls work in concert with each other; process controls signal the commitment of the partner organization to the alliance. Contrary to this, research indicates that output controls tend to have the opposite affect, signalling a lack of commitment to the alliance (Das and Teng, 2001). Output controls simply examine the results of efforts in the venture. Several studies have noted that output controls tend to adversely affect the partner relationship hence reducing motivation (commitment) for partners involved (Bello and Gilliland, 1997; Celly and Frazier, 1996). We do not suggest that output controls are not useful; output controls do have their place as a means of measuring progress toward a venture's goals and objectives. However, the use of output controls may send the wrong signal to the alliance partner reducing their commitment to the venture and adversely impacting alliance performance. Firms have a choice about which control mechanism(s) they use, they can decide on output controls, process controls, or both. What our study suggests is that process controls provide a mechanism for reinforcing and signalling the importance of the alliance (the commitment to the alliance) to the alliance partners. This occurs whether or not a firm uses output controls. Commitment by itself tends to reduce or eliminate the opportunistic behavior of one partner, but when it is mediated by process controls it acts to reinforce the relationship, reducing opportunistic behavior of both partner firms and increases alliance performance. The reason for this is that process controls first signals the importance of the alliance to partner firms and second aligns partner behavior with alliance goals (Siders et al., 2001). By using process controls a company can influence the behavior of a partner and increase partner cooperation (Bello and Gilliland, 1997; Geringer and Hebert, 1989). Overall, process controls operate as a synergistic facilitator to the commitment that a firm has to the strategic alliance. Process controls appear to have the generative mechanism that allows commitment to an alliance to influence its performance in a positive way. Simply being committed to an alliance does not in and of itself result in improved alliance performance (although past studies have tended to suggest this is the case), it is actually the actions taken on the basis of being committed that influence performance (Robson et al., 2006; Voss et al., 2006). Being committed means an alliance partner takes an active role in the alliance. This role can take many forms, for example a firm may provide more resources, meet more often with partner organizations, or add alliance information to its company website. We suggest that one “role” that can have a positive impact on alliance performance is for firms to show their commitment to the alliance by instituting process controls. Hence it is through process controls that firms signal their commitment to the alliance. In addition, process controls provide the “relational quality” that may act to increase the overall commitment that an alliance needs in order to succeed (Arino et al., 2005). By using process controls a firm can influence the behavior of a partner and increase overall partner cooperation (Bello and Gilliland, 1997; Geringer and Hebert, 1989). Process controls, by facilitating commitment to an alliance, increases performance because partners using process controls tend to exchange knowledge directly and share information that can result in a better match between foreign market knowledge (possessed by one partner) and product specific knowledge (possessed by another partner). This exchange of knowledge and increased

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cooperation results in better performance than could be achieved by either alliance partner alone because each partner may lack knowledge in one or more critical areas (Bello and Gilliland, 1997; Robson et al., 2006). In sum, previous research focused on the influence of commitment and alliance performance (Sherer, 2003; Leonidou et al., 2002; Lee and Beamish, 1995). But the mixed results in these studies suggests that partner firms may be unaware of this commitment and worry about future opportunistic behavior, hence alliance performance may not be as good as it could be. We theorize that process controls is a mechanism that allows a partner to show its commitment, helps align partner actions, and is a tool that constantly reinforces the relationship. Based on these arguments we propose that process control use mediates the impact of commitment on alliance performance. Fig. 1 displays our proposed mediating relationship. In order to provide the reader with a more complete picture, it also includes several other antecedent variables – trust, cooperation, and communication – that previous research has shown to have an important influence on commitment (Parkhe, 1993; Robson et al., 2006; Geyskens et al., 1999) and variables – size of firm, international experience, alliance concentration, nationality, and alliance type – previously linked with alliance performance (Lu and Beamish, 2001; Aulakh and Kotabe, 1997). The possible existence of a mediating role for process controls is supported by previous research in organizational behavior (Ferrin and Dirks, 2003; Schippers et al., 2003; Stewart and Barrick, 2000). In these and other studies process has consistently been shown to act as a mediating variable by facilitating relationships in work teams. For example, Ferrin and Dirks (2003) discovered a mediating relationship for information sharing processes in facilitating trust development and increasing the performance of work teams. Likewise, Stewart and Barrick (2000) found that intrateam processes, such as communication and conflict resolution, play a mediating role in the team structure and performance relationship. While international strategic alliances are not exactly work teams they do involve human relations and since processes have been shown to act in a mediating way by increasing trust and commitment in diverse work teams, we suggest that it is very likely that process controls will also act in a mediating way in a strategic alliance. Moreover, a recent study (Voss et al., 2006) found that communication (a process control attribute) in alliances mediated the relationship between trust (an attribute related to commitment) and alliance performance. Based on this we hypothesize that: Hypothesis 1. Process control use will mediate the relationship between alliance commitment and performance such that firms that perceive greater commitment and have greater process control use will tend to have higher alliance performance.

Fig. 1. The mediating influence of process control.

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2. Methodology To test the relationship between alliance commitment, the use of process controls, and alliance performance, data were collected from small and medium sized enterprises (SMEs) from a number of different countries. SMEs were used because they tend to prefer alliances when expanding internationally; alliances provide market access and local knowledge; resources not usually available to a foreign SME (Brouthers and Nakos, 2004). Alliances may also provide other resources (a sales and distribution network) and expertise (government contacts) lacking in foreign SMEs. Alliances are preferred because they reduce the risks of international expansion (Saxton, 1997; Tallman and Shenkar, 1990). Finally, SMEs might not have the economic and political environment within their home country to provide support for international activities; alliances help provide such support (Cook, 2001; Weaver and Dickson, 1998). Recent research has shown that the majority of internationalizing SMEs consider alliances essential to the success of the company (Karagozoglu and Lindell, 1998). 2.1. Data collection We collected data from SMEs in Greece and English speaking Caribbean countries. We decided to use samples of SMEs from two very different regions of the world in order to increase the generalizability of our findings. When we initially collected data in the English speaking Caribbean we realized that this area possesses some very unique characteristics, mainly a very small domestic market. In order to overcome this shortcoming we decided to collect data from an additional area of the world, Greece, where market access is much greater. This decision also provided us with a larger sample size. Because there were no available lists of SMEs involved in international alliances, we decided to use lists of exporting firms. These lists would provide us with firms that (1) had international experience and (2) had as a minimum developed non-equity based alliances (but may also have other forms of alliances) through which they sold their products/services in foreign markets. Our sample of Greek firms came from two sources (1) the list of SMEs that participated in the 1997 Europartenariat hosted by Greece, and (2) a list of exporting firms provided by Greek chambers of commerce. From these 600 companies, 400 firms were selected randomly to receive our questionnaire. The questionnaire was translated from English to Greek, the language of the managing directors of the SMEs. Then it was back-translated into English by an independent translator to ensure its validity. The final questionnaire was mailed to the managing directors of the 400 randomly selected companies. Two more mailings of the questionnaire were sent out in the next seven weeks. Following the three mailings 119 usable questionnaires were collected, for a response rate of approximately 30%. We also examined companies from various industries and sectors in the Caribbean islands of Barbados, Dominica, Jamaica, Grenada, St. Lucia, and Trinidad and Tobago. Six islands were used to obtain an adequate sample size of exporting companies. Total population of these combined islands is approximately twelve (12) million inhabitants. A sample of three hundred and six (306) companies was identified from the Caribbean Exporters: A Directory for Caribbean Exporters, published by Caribbean Export Development Project, and the Trinidad and Tobago Exporters Directory, published by the Tourism Company of Trinidad and Tobago. Companies were selected based on every 5th company in the Directories, except in the case of Dominica where all of the forty (40) exporting companies were used. Caribbean data were collected with a questionnaire mailed to the Managing Director or General Manager of each company. Three weeks after the first mailing a reminder was sent along with copies of the previous correspondence and a questionnaire. Three weeks later another follow-up letter with questionnaire was sent. A total of 100 questionnaires were returned of which 83 provided usable responses (17 were returned because of bad addresses or because the firm was no longer active internationally), providing a usable response rate of 27%. As a result of our three mailings the total number of usable responses from both Greece and the Caribbean region were 202 (119 + 83). Respondent firms had on average 80 employees, ranging in size from 6 to 500 employees. Most of them were operating in traditional manufacturing industries like textile, chemical, food processing, and manufacturing of building materials. Respondents were asked to provide data on their largest international alliance and to clarify whether the alliance involved some type of equity participation or not. On average these (largest) alliances represented 38% of total firm sales. Hence, the alliances included in this study were extremely important for the economic well-being of these companies.

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2.2. Dependent variables All dependent and independent variables focused on the largest (sales volume) international alliance for each respondent organization. Our dependent variable, alliance performance was operationalized using four seven-point Likerttype questions taken from Aulakh and Kotabe (1997). Two financial indicators measured alliance performance relative to domestic performance for (a) sales and (b) profit contribution to the company. Two additional financial indicators measured alliance performance compared to competitors in the foreign market for (a) sales growth and (b) market share. Factor analysis confirmed that 2 performance measures existed Relative to Domestic (Cronbach alpha = .91) and Relative to Competitors (alpha = .87). 2.3. Independent variables There is some debate in the literature on the best way to measure alliance commitment. Some researchers use a single multi-item scale to measure commitment (Boyle et al., 1992; Morgan and Hunt, 1994). Other researchers examine multiple facets of commitment (Aulakh et al., 1996; Shamdasani and Sheth, 1995). While the debate continues, Kim and Frazier (1997: 149) found that the facet scales were highly correlated with each other and that the general multi-item scales “passed all tests assessing construct validity and are more parsimonious than the facet scales.” In our study alliance commitment or long-term orientation to the company's largest foreign alliance was operationalized with three seven-point Likert-type items adapted from Boyle et al. (1992). The items tested the companies' orientation toward the specific alliance by focusing on the continuity of relationships with the alliance partner; the type of relationship; and the expected sustainability of the relationship. Factor analysis confirmed that all three questions loaded on one factor (alpha = .86). We measured the level of process controls using questions derived from Bello and Gilliland (1997). Three sevenpoint Likert-type questions focused on the degree of influence the focal firm attempted on (1) promotional activities for the company's products; (2) methods for introducing new products; and (3) selling policies and procedures for new products. Factor analysis confirmed that these three questions all loaded on one factor (alpha = .95). 2.4. Control variables We included five control variables that have been shown in studies like Lu and Beamish (2001) to influence SME international performance. Because of the incompatibility of accounting practices and exchange rate fluctuations, Firm size was measured as the number of employees worldwide. Alliance sales concentration was measured as the percent of alliance sales in the biggest international alliance compared to total international sales. These indicators were adopted from Aulakh and Kotabe (1997) and Klein et al. (1990). International experience was measured as the number of years that the firm had been selling products outside its home country. We created a dichotomous variable, Nationality, to control for potential home country differences. Firms from Greece were coded one (1) while those from the Caribbean were coded zero (0). The respondent firms provided data on various types of international alliances including both equity (joint ventures and exports to company owned operations) and non-equity (license agreement and exports through independent organizations) based international alliances. To control for potential differences arising from these different alliance types we developed a control variable, alliance type. Respondents were asked to indicate the precise type of alliance organization in the foreign country representing their highest foreign sales. Equity alliances were coded one (1) while non-equity alliances were coded zero (0). 2.5. Analysis Following data collection we checked for non-response bias, late response bias, and common methods variance. Non-response bias occurs when the respondents that agree to participate in a study have different characteristics in comparison to non-respondents. In order to check for non-response bias we used t-tests to compare two descriptive variables, number of employees and sales, for our sample and the same variables from our response group. This test did not reveal a significant non-response bias, the number of employees and sales volume were similar for both groups. Following this we checked for late response bias by comparing the responses that we received after each one of the

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three mailings to see whether a significant difference existed on the responses of the three groups. No significant differences were observed. Common methods variance may occur when both dependent and independent variables are gathered from the same respondents at the same time. Common methods variance was tested by utilizing the single factor method described in Podsakoff and Organ (1986). They suggest that if all the variables in one study load onto one factor, or one factor explains the majority of the variance then common methods variance may occur. We performed a factor analysis with all the variables of the study and it resulted in a four-factor solution. The largest factor explained only 28% of the variance. Therefore, common methods variance does not appear to be a problem with our data set. 3. Findings Mediation hypotheses in management literature have traditionally been tested by the procedures outline in the seminal work of Baron and Kenny (1986). As Shaver (2005) reports, out of 14 articles in the 2001 and 2002 issues of Academy of Management Journal and Journal of Management that tested for mediation, all of them used this procedure. The Baron and Kenny (1986) methodology suggests that a variable acts as a mediator if it meets three conditions: (1) the independent variable is significantly associated with the mediator variable, (2) the mediator variable is significantly associated with the dependent variable, and (3) when both the independent and mediator variable are considered together, the value of the independent variable (the influence of the independent variable on the dependent variable) is reduced. Similar to Baron and Kenny (1986) and Venkatraman (1990) we used a two step procedure to test for mediation. In the first step we examined the relationship between commitment and the use of process controls using multiple regression analysis. The second step involved hierarchical regression analysis and explored the mediating relationship between commitment and process controls, and the two measures of alliance performance. Prior to running any of the analyses we prepared a correlation matrix. Table 1 contains descriptive statistics as well as the correlations between dependent, independent and control variables. Substantial variability was detected. None of the correlations appear to be large enough to warrant concern over multicolinearity (Hair et al., 1995). We began our analysis by examining the relationship between commitment and the use of process controls. We had suggested that in alliances where commitment was high, the use of process controls would also be high. To test this we prepared a regression analysis (Table 2) and included numerous control variables that might influence the use of process controls: firm size, international experience, nationality, alliance concentration, and alliance type. The regression analysis was significant (p b .01) with an adjusted R-square value of .20. We found that the level of commitment was significantly (p b .01) related to the use of process controls. Hence, this part of the analysis fulfils one aspect of mediation, finding a significant association between the independent variable (alliance commitment) and the mediating variable (process controls). We used hierarchical regression analysis to investigate the influence of commitment and process controls on alliance performance (Table 3). Our analysis involved two different measures of alliance performance: (1) compared to domestic operations and (2) compared to foreign competitors. In the first set of regression models we examined performance compared to domestic operations. Model 1 was our base model and examined the impact of five control variables (firm size, international experience, nationality, alliance concentration, and alliance type) on alliance Table 1 Correlation table Variable

Mean

S.D.

1

2

3

4

5

6

7

8

9

1. Size of firm 2. International experience 3. Alliance concentration 4. Nationality 5. Alliance type 6. Commitment 7. Process Control 8. RTD performance 9. RTFC performance

80.6 18.7 42.4 0.58 0.27 5.33 4.24 3.99 3.85

97.2 15.5 25.2 0.49 0.44 1.37 1.46 1.92 1.53

1 .27⁎⁎ −.06 −.03 .38⁎⁎ .17⁎⁎ .24⁎⁎ .23⁎⁎ .25⁎⁎

1 −.09 −.28⁎⁎ .07 .09 −.02 .09 .16⁎

1 .11 .03 .03 − .22⁎⁎ .32⁎⁎ − .05

1 .21⁎⁎ − .41⁎⁎ .06 − .13 − .09

1 .14* .25⁎⁎ .35⁎⁎ .27⁎⁎

1 .31⁎⁎ .43⁎⁎ .37⁎⁎

1 .30⁎⁎ .41⁎⁎

1 .42⁎⁎

1

RTD — Relative to Domestic, RTFC — Relative to Foreign Competitors, ⁎p b .05; ⁎⁎p b .01.

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Table 2 Regression analysis: determinants of process control beta

t-stat

.38⁎⁎

Commitment Control variables Size of firm International experience Alliance concentration Nationality Alliance type Constant Adjusted R-square F/significance

(4.72)

.01⁎ − .01 − .03⁎⁎ .63⁎⁎ .33 2.29⁎ .20 8.86⁎⁎

(1.70) (−0.63) (−3.87) (2.72) (1.34) (1.92)

⁎p b .05; ⁎⁎p b .01; Unstandardized betas reported; t-statistics in parentheses.

performance. The regression was significant (adjusted R-square = .26, p b .01); we found that nationality (p b .01), alliance type (p b .01) and alliance concentration (p b .01) were significantly related to alliance performance compared to domestic performance. In the second model we added the impact of process controls. Model 2 was significant (adjusted R-square = .33, p b .01), the increase in adjusted R-square (.07) was significant, and the variable process control was also significant (p b .01). This indicates that process controls have a significant positive impact on alliance performance and that the model including process controls does a better job of explaining alliance performance compared to the model containing only the control variables. Model 2 provides evidence of the second condition of a mediating variable, the significant association between the mediating variable (process control) and the dependent variable (alliance performance). The third model included the control variables and alliance commitment, but excluded the variable process control. Model 3 was significant (adjusted R-square = .36, p b .01), the increase in adjusted R-square (.10) was significant and the variable alliance commitment was significant (p b .01). These results indicate that alliance commitment has a significant impact on alliance performance and that the explanatory power of a model that includes alliance commitment is more robust than the model that just includes the control variables. Table 3 Regression analysis: performance Performance relative to domestic operations

Constant Size of firm International experience Alliance concentration Nationality Alliance type

1

2

3

4

1

2

3

4

2.80⁎⁎ (8.22) .01 (1.28) .01 (0.30) .03⁎⁎ (5.44) − .94⁎⁎ (− 3.57) 1.46⁎⁎ (4.72)

1.12* (2.21) .01 (0.63) .01 (0.64) .03⁎⁎ (6.59) − .99⁎⁎ (− 3.94) 1.25⁎⁎ (4.17)

1.77⁎⁎ (3.92) .01 (0.99) .01 (1.55) .01 (0.90) −.36 (− 1.63) .63⁎ (2.37)

.09

.38⁎⁎ (5.01) .20 .11⁎⁎ 8.6⁎⁎

1.10⁎ (1.80) .01 (1.20) .01 (1.60) − .04 (−0.63) .21 (0.84) .60⁎ (2.20) .41⁎⁎ (4.60)

.26

− .83 (− 1.27) .01 (0.40) .01 (1.00) .03⁎⁎ (6.14) − .42 (− 1.54) 1.06⁎⁎ (3.67) .43⁎⁎ (4.35) .25⁎⁎ (2.83) .39 .13⁎⁎ 17.5⁎⁎

3.51⁎⁎ (11.4) .01 (1.70) .01 (1.10) − .01 (− 0.35) − .30 (− 1.26) .84⁎⁎ (3.00)

.37⁎⁎ (4.34) .33 .07⁎⁎ 15.7⁎⁎

−.27 (− 0.43) .01 (0.76) .01 (0.84) .03⁎⁎ (5.46) −.27 (− 0.98) 1.14⁎⁎ (3.89) .53⁎⁎ (5.52)

.45 (0.73) .01 (0.81) .01 (1.84) .01 (0.44) .01 (0.06) .51 (1.93) .29⁎⁎ (3.17) .30⁎⁎ (3.76) .24 .15⁎⁎ 9.2⁎⁎

Commitment Process control Adjusted R-square Change in R-square F/significance

Performance relative to foreign competitors

13.7⁎⁎

.36 .10⁎⁎ 18.4⁎⁎

⁎p b .05; ⁎⁎p b .01; Unstandardized betas reported; t-statistics in parentheses.

4.7⁎⁎

.18 .09⁎⁎ 7.8⁎⁎

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The fourth model examined the mediating role of process controls on alliance commitment and performance. We found that when both process control and alliance commitment were added to the analysis, the regression results were significant (adjusted R-square = .39, p b .01) and the explained variance in performance increased significantly (change in adjusted R-square = .13, p b .01). Although we found that both variables – alliance commitment (p b .01) and process control (p b .01) – were significantly related to alliance performance compared to domestic operations, the influence of alliance commitment was reduced when the mediating variable process control was added to the analysis. Hence, this tends to provide support for the third condition of a mediating relationship, providing support for Hypothesis 1. Table 3 also shows the results of regression analyses exploring alliance performance compared to foreign competitors. A similar set of four hierarchical regression analyses were used to explore this performance indicator. First, in Model 1, the base model, we included only the control variables. Model 1 was significant (adjusted R-square = .09; p b .01); we found that alliance type (p b .01) was the only control variable significantly related to alliance performance compared to competitors. In Model 2 we added the influence of process controls. This analysis was significant (adjusted R-square = .20, p b .01) and the increase in adjusted R-square (.11) was also significant (p b .01); indicating an improvement in the explanatory power of the model. Model 2 provides evidence of the second condition of a mediating variable, the significant association between the mediating variable (process control) and the dependent variable (alliance performance). In Model 3 we included the control variables and the alliance commitment variable. This model was significant (adjusted R-square = .18, p b .01) and the increase in adjusted R-square (.09), over the base model, was also significant (p b .01). The results of this analysis indicate that alliance commitment is significantly related (p b .01) to alliance performance. The final model in our analysis examined the mediating role of process controls on alliance commitment and performance compared to foreign competitors. Regression Model 4 was significant (adjusted R-square = .24, p b .01) and the increase in adjusted R-square (.15) was also significant (p b .01). Again, both alliance commitment and process control were positive and significantly (p b .01) related to alliance performance compared to competitors, but the influence of alliance commitment was reduced when the mediator variable, process control, was present. Hence, the second set of analyses provides additional support for Hypothesis 1. Although the Baron and Kenny (1986) approach to testing mediation has been widely used in previous research, recent studies have shown (Shaver, 2005; Preacher and Hays, 2004; MacKinnon et al., 2002) that in certain cases a mediating effect may be suggested when none exists. In order to address this issue, and to make certain that mediation exists in our data, we employed two additional statistically rigorous methods; the Sobel method and bootstrapping. The Sobel (1982) method employs a direct approach that tests the significance of a ⁎ b paths, where “a” is the impact of the independent variable on the proposed mediating variable and “b” the impact of the mediating variable on the dependent variable. Many recent studies have suggested that the Sobel method provides a more accurate mediation result (Preacher and Hays, 2004). MacKinnon et al. (2002) in their comparison of 14 different methods of testing mediation concluded that the Sobel method appears to be the most accurate one. The Sobel method has a number of advantages over the Baron and Kenny (1986) method, yet it also possesses a major drawback. It assumes that the distribution of a ⁎ b paths are symmetrical and follow a normal distribution, something that is not always true especially with smaller samples (MacKinnon et al., 2004). In order to overcome this drawback, we used an additional test for mediation called bootstrapping; a nonparametric method that derives an empirical sampling distribution without making assumptions about the distribution of the variables being normal or symmetrical (Preacher and Hays, 2004). The big advantage of this mediation method is that it can also apply to asymmetrical smaller samples with a high degree of confidence. Results of the Sobel and bootstrap analyses are provided in Table 4 panels 1 and 2 respectively. Panel 1 shows that the Sobel method provides support for the findings we obtained using the Baron and Kenny (1986) method. The Sobel method indicates that process control is a partial mediator of the commitment — performance relationship. The existence of mediation is found for both measurements of performance; when alliance performance is compared to domestic performance, and when alliance performance is compared to international competitors' performance. Panel 2 of Table 4 shows the results of the nonparametric bootstrap technique. The bootstrap technique “is accomplished by taking a large number of samples of size n (where n is the original sample size) from the data, sampling with replacement, and computing the indirect effect, ab, in each sample” (Preacher and Hays, 2004: 722). As the bootstrap results show, the indirect effect is estimated to be in the 95% confidence interval (between .0099 and

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Table 4 Further tests of the mediating influence of process control on the commitment and alliance performance relationship Panel 1. the Sobel method Performance relative to domestic operations

Performance relative to foreign competitors

Formula: Sab = SQRT(b2s2a + a2s2b + s2as2b)

Coefficient

s.e.

t

Sig(two)

Coefficient

s.e.

t

Sig(two)

a = unstandardized regression coefficient for the relationship between IV and MV b = unstandardized regression coefficient for the relationship between MV and DV YM.X YX.M

0.65

0.09

7.10

0.00

0.42

0.08

5.45

0.00

0.34

0.07

4.54

0.00

0.34

0.08

4.55

0.00

0.22 0.57

0.09 0.09

2.52 6.06

0.01 0.00

0.34 0.31

0.07 0.08

4.86 3.96

0.00 0.00

Sobel test results

Value

s.e.

LL 95 CI

UL 95 CI

Z

Sig(two)

Performance domestic Performance international

.0737 .1169

.0341 .0356

.0069 .0471

.1404 1866

2.1632 3.2834

.0305 .0010

Panel 2. bootstrap results

Performance domestic effect Performance international effect

Mean

s.e.

LL 95 CI

UL 95 CI

LL 99 CI

UL 99 CI

.0754 .1175

.0386 .0343

.0099 .0577

.1596 .1910

−.0068 .0426

.1905 .2247

Sample size: 196, number of bootstrap resamples: 5000. LL 95 CI — lower limit 95% confidence interval. UL 95 CI — upper limit 95% confidence interval.

.1596) for performance measured in relation to domestic operations and in the 99% confidence interval for performance measured in relation to international competitors. Hence the results of the bootstrap analysis indicate a significant mediating effect exists at p b .05 (two tailed); providing additional support for the Baron and Kenny (1986) results. 4. Discussion, limitations and implications Research suggests that SMEs commonly use alliances when entering foreign countries because most SMEs are constrained by a lack of sufficient resources to employ other modes of international activity. Yet alliances tend to be highly unstable and performance often is lower than desirable. Previous scholarship has suggested that alliance commitment and the use of process controls may improve alliance performance, yet the empirical support for these suggestions is weak. In this study we take a different approach and suggest that alliance commitment and process control do not influence alliance performance independently, but instead process control facilitates alliance commitment and acts as a mechanism through which a committed partner can influence the overall performance of the alliance. Our findings provided strong support for the theoretical notion that process control use mediates the impact of alliance commitment on alliance performance. We found that the use of process controls tended to partially mediate the influence of alliance commitment on alliance performance leading to a more parsimonious explanation of alliance performance. This has important implications for researchers. For many years scholars have investigated the direct impact of commitment on alliance performance, yet have been unsuccessful at improving alliance outcomes. The same is true for research on process control use in alliances. Our results imply that the reason we have not made better progress in understanding alliance performance is that research has failed to acknowledge that commitment alone is not enough. Firms need to take actions to turn commitment into something more tangible. One such action is the use of process control. But process control appears to be an incomplete story, providing only partial mediation. This suggests that there may be other mechanisms that firms can use to facilitate better partner relations and hence improve alliance performance. Future research may wish to explore some of these additional mechanisms such as conflict resolution techniques and how these techniques also help mediate the relationship between alliance commitment and performance.

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Theoretically our results also have important implications. As we suggest in this paper commitment although an important theoretical construct may not be sufficient to drive alliance performance success. We theorized that process controls help facilitate commitment and found some empirical support for this idea. Other theoretical perspectives may also help us gain insights into the commitment-performance relationships. For example, two variables that previous studies indicate may play a mediating role in the commitment-performance relationship are equity participation in the strategic alliance and whether one partner originates in a developing or a developed country. Furthermore, the commitment-performance relationship may be moderated by such factors as the turbulence of the external environment and the cultural distance between alliance partners. Overall, our findings suggest that researchers need to revisit the commitment-performance relationship in strategic alliances and examine other theoretical perspectives that might help us gain a better understanding of this important relationship. 4.1. Limitations Our study possesses a number of limitations inherent in this type of research. First, although our findings were supported with data from two very different market environments – Greece, a member state of the European Union and the English speaking Caribbean, a collection of small island states – it is possible that other regions of the world, developed or developing, may not exhibit similar behaviors. Second, because of data collection issues alliance commitment and process control research tends to rely on the responses of one member of international dyads (Bello and Gilliland, 1997; Aulakh et al., 1996; Gencturk and Aulakh, 1995). This may limit the generalizability of findings since only one member of the alliance dyad provided responses. However, using single respondents may not be problematic since Anderson and Weitz (1992) found that neither side can disguise their true level of commitment in a relationship and that there is a strong concordance between individual respondents' evaluations of commitment and actual levels of commitment in alliances. Third, we examined only financial performance, yet the literature on alliances indicates that firms enter alliances for other, non-financial, reasons (Brouthers and Bamossy, 2006). While we carefully selected our sample to include firms whose objectives were financial, we cannot be sure that one or more partners did not have non-financial objectives in mind when they created the alliance. In the future, researchers may wish to examine both partners in a dyad and include financial and non-financial measures of performance (as in Brouthers and Bamossy, 2006) in order to provide us with a fuller understanding of what increases the performance of a strategic alliance. An additional limitation to our study stems from the lack of including an output control use variable. We suggested that process controls provide a mechanism for reinforcing and signalling the commitment of alliance partners to the alliance but that output controls, while useful for monitoring alliance activity, do not provide such a signal and may actually indicate a lack of commitment. For these reasons we did not include a measure of output control use in our study. However output control use might have an impact on our results and should be included in future research. 4.2. Implications Despite these limitations, our study has important implications for managers of SMEs that want to expand to international markets. Because the formation of an alliance with a foreign company is almost always a necessity for a SME, proper management of this relationship may lead to international success and improved SME performance. The issue that SME managers need to address is how to make these international alliances successful. Our study tends to provide several important insights into this process. First, to be successful SMEs need to make a commitment to the alliance and not search for alternative opportunities with new potential partners. Making a commitment helps create the long-term relationship necessary to achieve alliance success. Further, SMEs that use process controls in their alliances also improve alliance performance. Process controls tend to improve cooperation and reduce the likelihood of opportunism. Hence, SMEs can use either commitment or process controls to improve their international alliances. Second, our study tends to suggest that SMEs can use a combination of actions to make the greatest improvement in alliance performance. This appears to be true because commitment can be reinforced through other more tangible actions. SMEs can use process controls to help demonstrate that the SME is committed to alliance success. In addition, the SME can make an equity investment in the alliance showing partner firms that the SME is serious and in the alliance for the long-term. Thus, actions by the SME can reinforce the potential for alliance success by signaling to alliance partners that the SME has a long-term intent in the alliance.

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Moreover, our findings suggest that SMEs that derive most of their international sales from a few foreign markets tend to have better performance than those with less concentrated international operations. Companies with limited resources may not be able to establish committed relationships with too many foreign partners. Therefore, SMEs that want to succeed abroad may need to establish close relationships with fewer partners in key foreign markets, instead of trying to establish linkages with as many foreign markets and/or partners as possible. In sum, we found that the use of process controls was an important mediator of the relationship between alliance commitment and performance for internationalizing SMEs. We found that both alliance commitment and process controls were significant predictors of international alliance performance, for our sample of SMEs. 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