Chapter 20, Problem 18AA

To determine

To analyse: The reason for firms of different countries forming alliance.

Explanation of Solution

An alliance is a partnership between individuals, organizations, or states that have come together for mutual gain or to accomplish some shared goal, whether or not there is an explicit agreement between them. Allies are considered members of an alliance. In several settings, alliances form, including military alliances, political alliances, and business alliances.

These alliances are formed by companies from various countries for a variety of purposes, such as gaining competitive advantage, sharing expertise and resources, mitigating risks, lowering costs, and entering new markets.

By forming alliances, the market size expands with help in the development and growth of all countries that are part of the alliance. In one context, the firms in an alliance may be allies but rivals in another. For instance, when bidding on an international project, two consulting companies might form a consortium to obtain a competitive advantage. This alliance also helps the countries by sharing technological knowledge which helps in rising in the production process. Another strong reason for entering a foreign partnership is to reduce expenses. In developing countries, several goods are produced where the cost of production factors, such as labour is available at a lower cost.