East-West Industrial Cooperation: The Swedish Case

EAST-WEST INDUSTRIAL COOPERATION: THE SWEDISH CASE

BENGT HOGBERG* Linkbping Institute of Technology

CLAS WAHLBIN** Linkoping Institute of Technology

Abstract. Although industrial cooperation is an important means for the East to acquire Western technology, most of the Swedish companies interviewed are rather reluctant to engage in such cooperation. They often cooperate in order to protect a market or to promote exports of other products, and the partners seldom strive toward a common goal. This increases the risk of problems during the implementation of the agreements; problems of quality, delivery failures from the East, and management and coordination are especially frequent; the latter 2 are strongly associated with unsuccessful results. Complicated agreements involving several partners have a tendency to fail. The differences between the 2 economic and political systems manifest themselves in management styles, freedom to act, and so on, and make it difficult to integrate operations. East-West industrial cooperation, therefore, seldom leads to an intensive integration where the partners specialize and supplement each other.

* East-West industrial cooperation has become an increasingly frequent phe- nomenon during the past decade. The first agreements involving Swedish firms were signed with Hungarian industrial organizations in 1967. At approximately the same time such agreements were also entered into by firms in other Western countries. The number of agreements grew rapidly during the first half of the 1970s, but the rate of new agreements, including those involving Swedish firms, has stagnated since then. At the end of 1976 there were an estimated 1,000 cooperation agreements at the corporate level [ECE (U.N. Economic Commission for Europe) 1976; McMillan 1977]. One of the major reasons behind East-West industrial cooperation is the Eastern need for Western technology in order to improve economic growth and exports to the West [Bolz and Plotz 1974; ECE 1973; McMillan 1977; Wass von Czege 1977, 1978]. By making the Western firms accept return flows of resultant components and finished products ("product buy-back"), the Eastern authorities have expected to achieve both a reduction of hard-currency outlays or debts, and close contacts between the partners. One of the major problems with licenses and turnkey plants is the difficulties the East has with updating the purchased technology and obtaining the right to export resultant products to hard-currency countries.

INTRODUCTION

*Bengt Higberg is Adjunct Professor at the Linkoping Institute of Technology, Department of Management and Economics and Chairman of a development company, Connova Invest AB. He received his Ph.D. in 1978. His publications include studies of interfirm cooperation and East- West economic relations. Current research interests are interorganizational analysis and innovation. **Clas Wahlbin is Associate Professor at the Linkoping Institute of Technology, Department of Management and Economics. Wahlbin received his Ph.D. in 1975. He has published studies on industrial marketing, 2 textbooks on marketing research, and articles. Current research interests are diffusion of innovation and technology-based new business. The authors wish to thank Professor Andreas Adahl, University of Uppsala, who shared the project responsibility with Bengt Hogberg, and who is the co-author of Hogberg and Adahl [1980]-the full report in Swedish of the study. Furthermore, the authors wish to thank Reiner Folster, Josef Molnar, Willy Nemes, and Ann-Christine Strandell, who participated in the data collection, and Jan Johansson, who ran factor analyses used in the data analyses. The research was financed by The National Swedish Board for Technical Development.

Journal of International Business Studies, Spring/Summer 1984 63

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The Western firms often prefer to export their products instead of entering into cooperation agreements that will involve the transfer of know-how and production to the East. Several firms have made such arrangements, however, rather than lose a market. East-West industrial cooperation involves partners who belong to different economic systems. This adds a further dimension to East-West cooperation compared to interfirm cooperation in the West. There are differences between East- West partners with respect to their flexibility, incentives, administrative systems, and so on. These differences make joint decision making and coordination more difficult. Most of the literature published on East-West industrial cooperation is of a rather general nature and based either on the author's own experience or on aggregated data published by the ECE or the OECD [for example, Levcik and Stankovsky 1979; Ruhle von Lilienstern 1978; Stankovsky 1981]. The empirical research published on Western firms' experience is based on newspaper clippings and postal questionnaires [for example, Bolz and Plotz 1974; ECE 1973; McMillan 1977]. Less often, research is based on personal interviews in companies [Wass von Czege 1977].

AIM AND SCOPE Many factors may determine the outcome of a cooperation project. Although most OF THE STUDY of these factors may be situational, the patterns shared by many cooperation

agreements are of interest because they indicate those areas where potential problems are most likely to develop. An analysis of a sample of cooperation agreements, thus, may give clues as to which areas should be given particular attention when entering into a cooperation agreement and which areas should be monitored for potential troubles during the implementation of the agreement. In this study, 53 East-West industrial cooperation agreements that now exist or have existed between Swedish firms and Eastern counterparts are examined. Across-sample patterns are searched for, using standard statistical techniques (factor analysis and discriminant analysis).1 Only cooperation agreements that involve a return flow of resultant products, specialization of production, or a joint appearance on the market (for example, in a joint-venture firm) are included. Accordingly, licenses and turnkey deliveries without further cooperation have been excluded. The definition used is similar to those of the ECE [1973] and McMillan [1977]. In the study, 4 blocks of factors are examined: motives behind the cooperations; structural characteristics of the cooperations; problems encountered in the execution of the cooperations; and outcome of the cooperations. In addition to description of the agreements, motives, and so on, the following research questions are addressed: Which motives tend to go together? Which problem areas tend to go together? Is there any relation between the characteristics of the cooperation, the motives behind it, the problems encountered, and the outcome?

THE DATA The data were collected from personal interviews in 45 Swedish companies, representing partnerships in 53 agreements. Sixty-six agreements were located, but for various reasons only 53 could be studied. The search for cases was made through contacts with the ECE, The Swedish Export Promotion Council, Hungar- ian and Polish authorities, newspaper clippings, and the Swedish firms themselves. In the big firms, usually more than one person was interviewed-for example, a person in the sales department that negotiated the agreement, and in the purchasing department that received the return products. An interview guide was

64 Journal of International Business Studies, Spring/Summer 1984

used, specifying various characteristics of the firm and the agreement, and presenting questions about motives, potential problem areas, and outcome. A transcript of the interview was then sent to the company for possible corrections. Finally, all companies were once again contacted in order to check areas that were not included in the original guide but that had arisen during the interviews. Each interview lasted between 2 and 3 hours. The data collection and the follow-up phase took place between 1976 and 1978. The results below cover the development from the signing of agreements until the end of 1978. The paper ends with a discussion that takes into account the development of East-West economic relations during the succeeding period. The method of analysis is reported below in conjunction with the results.

The cooperation agreements studied are mainly with Hungarian (43 percent)2 and Polish (30 percent) counterparts; the remainder are more or less evenly distributed as to countries. In two-thirds of the cases, the agreement is an extension of earlier relations between the parties. The initiative is most often taken by the Eastern party (60 percent). This underlines the fact that the Eastern side has been most active in promoting industrial cooperation (motives are discussed below). The bulk of the agreements involve firms in the engineering industry (38 percent), the rest being rather evenly distributed in other industries. This pattern corre- sponds to an international sample analyzed by the ECE [1976]. The Swedish firms are also rather evenly distributed according to size. The median size for Swedish firms is 1,460 employees, with a range from 25 to 82,000, while the median size of the Eastern "firm" is larger-10,000 employees, with a size ranging from 400 to 75,000. This indicates that both small and very large firms are involved. Perhaps, contrary to expectations, there is virtually no correlation between the sizes of the parties (coefficient of correlation -0.13). On the Eastern side, there is often more than one organization signing the agreement, typically a foreign trade organization and an industrial organization. Sometimes, within an agreement, one foreign trade organization handles imports and another one exports. In some cases several industrial organizations and ministries are involved. Those cases with only one Eastern partner are found in the more decentralized countries, especially Hungary. (See Table 1.) It can be assumed that the larger the number of partners, the more difficulty there is with coordination, and the greater the risk is for conflicts.

TABLE 1

Number of Eastern Organizations in Each Cooperation

Number of Eastern Organizations 1 2 3 4 5

Percent of cases 21 48 13 12 6 (base:53)

The Western literature about East-West industrial cooperation generally states that the East's motives are to acquire Western technology and to improve its own exports-especially the commodity structure-without making inroads on scarce hard-currency reserves. With some minor differences these motives are ex- pressed in Bolz and Plotz [1974], ECE [1973], McMillan [1977], Stankovsky [1981], and Wass von Czege [1977]. The same literature sees the Western firms' motives for cooperation as less homogeneous, ranging from a need to use the only means by which the company can stay in the market (making through

MOTIVES BEHIND COOPERATION


THE COOPERATIONS STUDIED: SOME CHARACTERISTICS

cooperation a gesture of goodwill that should provide an advantageous position in the Eastern country), to an active interest in cost and resource advantages on the Eastern side. The Soviet and East European literature generally conveys the picture of equal partners who strive to optimize their allocation of resources through international division of labor. Industrial cooperation as a means to improve the commodity structure of the trade is also stressed [Tabascynski 1976; Wojnar 1981].

Frequencies of Motives

In order to take this diversity into account, 5 main categories of motives were defined:

Buildup of know-how means that one (or both) of the partners sought cooperation in order to gain access to the other's technology. Payment and financing denotes cooperation as a means to reduce the outlays in hard currency (Eastern side) or to finance development projects (both sides). Cost and availability advantages may be present in the East in terms of cheap labor and raw materials.3 Furthermore, the Eastern side might seek cooperation in order to reduce marketing or procurement costs. Better utilization of existing capacity refers, for example, to situations in which larger production runs can be achieved through cooperation, or complementary products can be sold by the existing marketing organization. Promotion of exports implies that cooperation makes it possible to increase the sales of products outside the agreement, to improve the commodity structure of exports, or to improve market knowledge and contacts. To determine motives, the Swedish firms were asked both about their own motives, and about what they believed to be the motives of their partners (or the authorities in the Eastern country). Thus there was no direct measurement of the Eastern side's motives. The frequencies of the motives thus revealed are shown in Table 2 (each firm could give more than one motive). The most frequent motive among the Swedish firms is to promote exports. Several firms rather reluctantly entered into cooperation for this purpose. The next most frequent motives are cost and availability advantages, and better utilization of existing capacity. The dominating Eastern motives, according to the Swedish firms, are to acquire technology, to reduce hard currency outlays for the technol-

TABLE 2

The Motives Behind the Cooperations

Motive Percent of cases where motive is valid

Eastern side Swedish firm

Promotion of exports 60 72 Buildup of know-how 79 15 Payment and financing 55 13 Cost and availability

advantages 21 47 Better utilization of

existing capacity 36 32 Other 19 30

Mean number of motives given 2.8 2.1


TABLE 3

Factors Behind the Stated Motives (Table shows factor loadings greater than 0.50)

Factor 1 2 3

West motives Promotion of exports 0.69 Buildup of know-how 0.80 Payment and financing 0.75 Cost and availability advantages -0.69 Better utilization of existing capacity 0.54

East motives Promotion of exports 0.71

Buildup of know-how 0.69 Payment and financing -0.62 Cost and availability advantages 0.81 Better utilization of existing capacity 0.58

Variance explained (percent) 19 19 19

ogy, and to expand exports of resultant (and other) products. Except for promotion of exports, therefore, the partners have different motives for cooperation. An important question then is whether the motives are complementary or conflicting, causing problems between the partners.

There are a number of significant correlations between pairs of motives. A multivariate analysis, however, is clearly more appropriate when analyzing the relations between the 10 motives (5 for each side) investigated. In such an analysis,4 3 latent factors emerge, all (as it happens) with the same variance explained. (See Table 3.) The separate motives, when combined into a factor, may have different frequencies in the sample. The pattern that is conveyed by the factors in Table 3 should therefore be combined with the frequencies shown in Table 2. The most frequent combination is represented by a high score on factor 3: promotion of exports from the West together with the buildup of know-how in the East. A low score on factor 35 means that cost and availability advantages sought by the Swedish side form a strong motive. This cost and availability motive is the third most frequent among motives or combinations of motives represented by the factor structure. Cost advantages on the Eastern side and promotion of exports are, to a degree, mutually excluding motives from a Swedish firm's standpoint. (Both motives belong to factor 3, but with loadings of different signs.) The second most frequent reason is the "classical" Eastern motive of payment and financing-here represented by factor 2 when it is low. Cooperation can then be regarded as a "cover" for buy-back deals. When the factor is high it represents a situation where the Swedish firm wants to build up know-how, and the Eastern firm wants to promote exports and utilize its capacity better; at the same time, the payment and financing motive is not present on the Eastern side. This situation is represented in a limited number of cases-for example, where a Swedish firm buys a license from its Eastern partner, and then adapts the technology to Western requirements and sells sublicenses or products.

Factors Behind the Motives


Factor 1 represents a combination of motives: better utilization of existing capacity plus payment and financing on the Western side go together with cost and availability advantages on the Eastern side. The situation when the value of factor 1 is high represents a rather small number of "advanced" forms of cooperation. A typical example is a Swedish firm that was developing a new technique for building cooling towers. The firm could not finance the development and marketing of the technique. Through cooperation with a Hungarian partner who had advanced knowledge in the same field, development efforts could be divided and the Hungarian partner could assume a large part of the costs. The Hungarian firm gained access to advanced computer resources.

Together, the 3 most frequent groups of motives-promotion of exports from the West together with the buildup of know-how in the East; East's payment and financing motive; and cost advantages in the East-seem to account for a very large share of the variance. The very frequent Eastern motive of promotion of exports is evenly distributed together with the 3 main reasons given above. All in all, the picture given of those motives that go together shows that there is a differentiation between cases, and that East-West industrial cooperation cannot-from the perspective of motives-be regarded as a homogeneous concept. For example, the 2 main motives on the Swedish side are promotion of exports and taking advantage of lower costs in the East. These 2 motives tend to exclude each other. Further, the first tends to combine with the most frequent Eastern motive, buildup of know-how. The second does not combine with any Eastern motive, and tends to exclude the Eastern motive of buildup of know-how. The other very frequent Eastern motives-payment and financing, and promotion of exports-combine with the Swedish motives just mentioned "as chance would predict," as well as to a certain degree excluding each other.

STRUCTURAL Table 4 shows that nearly all agreements (84 percent) involve a flow of "software" ASPECTS technology (such as, patents, know-how, and so on) from West to East. In half of

OF THE the cases the West also supplies production equipment. There is a very limited COOPERATIONS flow of technology in the opposite direction. This underlines the results regarding Flows between motives and the fact that most cooperation agreements are based on Western the Partners

technology, although there are a few cases of more "equal" partners. When technology is transferred and put into operation, continued cooperation mostly involves flows of components or finished products.

TABLE 4

Material and Immaterial Flows in the Cooperation

Direction of flow (in percent of cases) Percent of

Content of cases with From West to From East to flow such a flow East only West only Both ways

"Software" 91 75 6 9 technology "Hardware" 50 48 2 0 technology Parts and 64 30 17 17 components Finished 55 11 40 4 products


In the dominant pattern, such flows are in the direction of East to West. Components and finished products resulting from the technology transferred are delivered to the Western partner to be used in manufacturing or sold through the partner's market organization (these return flows are unloaded through third parties less often than in "ordinary" countertrade). According to the analysis of motives, return flows are sometimes desired by the Swedish partner, because they can mean cost advantages. In a fairly large number of the cases the Swedish partner delivers components or finished products. The delivery of components is sometimes the result of "tie-in clauses" through which the licensor can maintain control of production levels in the East but also compensate for a loss of previous exports of finished products (as in the promotion-of-exports motive).

A complementary dimension of the structural pattern of East-West industrial cooperation is shown in Table 5, which lists the functions covered in the agreements. In all cases involving production, the Eastern partner participates in the function: in half of the cases the Eastern partner is unilaterally responsible, while in the rest of the cases production is divided between the partners (except for one case of joint production). When the Eastern partner manufactures the cooperation product based on the Swedish firm's technology, the marketing outside the Eastern partner's domestic market is usually done by the Western firm. This case is typical for cooperation between "unequal" partners (with respect to technology and marketing resources). The construction of the cooperation is, in this respect, fairly simple from a management perspective. This type is defined as "2-phase cooperation." A more complex picture arises when the partners divide production and marketing or engage in joint marketing. Both the need for coordination of activities and the risk for conflicts over marketing rights are higher. On the other hand, such agreements might involve more experienced partners than in the case of 2-phase cooperation. Marketing is divided in almost half of the cases. This category is defined as "functional differentiation."

Purchasing is involved in a minority of the cases and then mostly concerns the procurement of raw materials and semifinished products not available in the East or manufactured by the Swedish partner. R&D appears in about one-fifth of the cases. Conventional contract clauses about updating of technology that has been transferred are not included in Table 5. Instead, it is cooperation in the R&D sector that is meant here. There are a limited

TABLE 5

Functions Covered by the Cooperations

Division of coverage (in percent of cases) Percent of

cases where One partner the function performs Both do Both do

Function is covered the function separately together

Research and development 21 9 8 4

Buying 21 11 8 2 Production 89 49* 38 2 Distribution 79 26** 47 6

* Always the Eastern partner. **Always the Swedish partner, in all markets except partner's home market.

Functions Performed by the Partners


TABLE 6

Problem Areas in the Cooperations

(a) (b) (c) Percent of Percent of Percent of

cases where cases in cases where Problem area problem column (a) problem has come

could appear where problem up and has (base 53) has come up been solved*

Quality of deliveries from East to 77 69 medium West

Delivery times: East side 77 66 low fulfillment

Management and coordination in 87 55 low East

Management and coordination 87 48 medium between the parties

Transfer of technology: education, 62 45 high mobility of educated persons

Deliveries: East side fulfillment 77 44 low Prices of East's deliveries 77 42 medium Transfer of technology: product 70 38 low

development Transfer of technology: 79 31 medium

documentation

Planning of deliveries from East to 77 29 low West

Buying: West side fulfillment 77 28 high Planning of deliveries from West 60 ** low

to East Market sharing 81 ** medium

Management and coordination in 87 ** medium the West

Deliveries: West side fulfillment 60 ** medium

Buying: East side fulfillment 60 ** high Trademarks 53 ** low

* 0-19 percent = low; 20-30 percent = medium; 40-100 percent = high. **Less than 10 cases; percentage smaller than 20.

number of cases where the partners draw upon each competences.

other's technological

Table 6 shows (in rank order) the problems encountered by the Swedish firms during the implementation of the agreements. Because not all problems are relevant to each firm (for example, deliveries from the Eastern partner are not included in all cooperation cases) the problem frequencies have been calculated only in the number of cases where the problem could occur. In the case of deliveries from the East, such deliveries are present in 77 percent or 41 of the agreements (column a). In 18 of these cases there were problems concerning the Eastern partner's fulfillment of deliveries-hence, a problem frequency of 44 percent (column b). Finally, the table shows the frequency of problems solved (column c). This column is especially interesting, because it suggests which problems are of a "systemic" nature, that is, outside the partners' control and a result of differences in economic systems. The most frequent problems concern deliveries from the East, followed by

70 Journal of.lnternational Business Studies, Spring/Summer 1984

PROBLEMS DURING

IMPLEMENTATION

problems with management and coordination. Product quality and the compli- ance with delivery times by the Eastern partner are the 2 most common individual problems. Although problems with quality have a medium clearance ratio, it seems much more difficult to improve the timeliness of the East's deliveries. Another rather frequent and difficult problem to solve is the East's negligence in fulfilling delivery obligations. The most frequent management and coordination problems are those that concern the relations between the partners and internal coordination problems on the Eastern side. The former have a medium rate of solution, while the latter remain unsolved in almost all cases. The transfer of technology, the Swedish companies' deliveries, and their performance in general seem to induce only moderate problem frequencies. This is not surprising, given that it is opinions of the Swedish companies that are reported here.

The tendency of problems to go together is conveniently studied by factor analysis. The result of such an analysis6 is given in Table 7. The first factor represents a latent problem complex that unloads into product development problems, documentation problems, pricing problems, and West side fulfillment of purchasing. This is a combination that includes moderately frequent problems that, with the exception of product development, can be solved relatively well. Just as a hypothesis, it may be that the factor represents a situation where the costs and time necessary for transfer of technology from the West were underestimated, where the Eastern partner was unwilling or unable to adapt the products according to improvements made by the Swedish company, and where as a consequence prices for the products appear too high. The Swedish company might be reluctant, therefore, to fulfill purchasing obligations.

TABLE 7

Factors behind Problems Encountered (Table shows loadings greater than 0.40)

Factor Problem encountered 1 2 3 4 5 6

Quality of deliveries from East to West 0.73 Delivery times: East side fulfillment 0.40 0.46 Management and coordination on East side 0.75 Management and coordination between the parties 0.77 Transfer of technology: education, mobility of 0.73

educated persons Deliveries: East side fulfillment 0.69 Prices of Eastern deliveries 0.83 Transfer of technology: product development 0.55 Transfer of technology: documentation 0.58 Planning of deliveries from East to West 0.84 Buying: West side fulfillment 0.72 Planning of deliveries from West to East 0.75 Market sharing 0.70 Management and coordination on West side 0.79 Deliveries: West side fulfillment 0.46 Buying: East side fulfillment 0.66 Trademarks 0.79

Variance explained (percent) 16 13 13 11 8 8 (total: 69 percent)

Factors behind the Problems


For example, a Swedish firm that had a shortage of capacity in 1970-74 planned to let an East European company manufacture some components. The transfer of technology turned out to be both costly and lengthy. When the Eastern partner was ready to deliver in 1976, the general business situation in the West had deteriorated, making deliveries from the East less desirable. The East European country had also acquired a considerable hard-currency debt, and all exporters were urged to increase their prices. The second factor represents coordination problems, both between the parties and within the Eastern side, possibly caused by lack of trained personnel. This was a very frequent problem, linked to inadequate organization of the cooperative activities on both sides as well as coordination problems between the Eastern partner and his suppliers, foreign trade organizations, and so on. Typically, coordination problems between the partners emerged when the contacts were spread out to several people in each organization. This was a very frequent situation and fairly difficult to solve. Factor 3 represents a "mixed bag" of problems with trademarks, division of market rights, and "bad morale" on both sides. It represents a situation of conflicting interests that is likely to lead to a general deterioration of the cooperation. The future of such an agreement does not seem very promising. Factor 4 represents bad delivery morale on the Eastern part: problems with planning of deliveries, delivery times, and fulfillment of deliveries. These problems were quite frequent and difficult to solve. For example, a Swedish firm had sold a turnkey plant, and expected to receive resultant products which it planned to sell on the European market. Disputes over such issues as raw materials to be used delayed the initial deliveries. The Swedish firm had already built up a marketing organization for the product, partly through contracts with agents. Deliveries were postponed several times, and the firm had to pay damages to its representatives. Finally, the cooperation broke down completely. Factor 5 is the infrequent problem of West side coordination and planning. Such problems typically concern the coordination between the sales and purchasing departments, but also the relations between the responsible managers and the

TABLE 8

Outcomes of the Cooperations

Subjective estimate Percent of cases

Very unsuccessful 15 Unsuccessful 15

Acceptable 26 Successful 28

Very successful 15

100

Factual outcome Percent of cases

Terminated 13

Scope reduced 15

According to plan 47

Agreement prolonged 2

Scope enlarged 13

100


technicians concerning the level of technology to be transferred. This problem tended to occur in the big firms. Its low frequency might be explained by the fact that only Swedish firms gave opinions. Factor 6 is a factor unloading strongly only into problems with quality of deliveries. Somewhat surprisingly, the problem of quality per se is independent of problems with transfer of technology and management and coordination. Problems of quality appear in two-thirds of the cases where they could appear. It should be remembered that the factors are independent of each other, that is, the latent factors interpreted blend into the actual sample, more or less as expected, by chance. All in all, the factor analysis of "which problems go together" has yielded a very natural picture of problem areas with a possible time order:

-Technology transfer and resulting problems (factor 1) -Coordination problems between the partners and in the East (factor 2) -East side product quality problems (factor 6) -East side delivery problems (factor 4) -General deterioration of the cooperation (factor 3)

Assuming that this picture represents a valid model of independent problem areas (which must be judged mainly from the general reasonableness of the interpretation), the conclusion is that the pitfalls are more or less evenly distributed during the phases of cooperation.

The outcome of each agreement was measured in 2 ways. One measure is a THE OUTCOME subjective estimate from the Swedish respondents on a verbal scale ranging from OF THE "Very unsuccessful" to "Very successful." The other is a more factual scale COOPERATIONS describing what has happened since the agreement was entered, ranging from AND ITS "Terminated" (broken down) to "Scope enlarged." The outcomes are shown in PREDICTION Table 8. There is a fair amount of correlation between the 2 measures (coefficient of correlation is 0.82). In both cases, the median answer is more or less right in the middle of the scale,7 meaning that, on the average, the outcome was regarded as acceptable. The question is then which variables predict success or failure.

In order to find possible predictors of success or failure, discriminant analyses8 Method of were run with both objective and subjective outcomes as dependent variables. Analysis The analyses were run with outcomes grouped in 2 and 3 groups. Generally, the results show that 3 groups are not warranted: the middle group and the best group could not be discriminated (group centroids are very close), and in the majority of analyses a second discriminant function was not significant (as measured by the significance of "increase in V"). Only 2-group analyses, therefore, are reported below. One group is either "Terminated" or "Scope reduced" (objective outcome), or "Very unsuccessful" or "Unsuccessful" (subjective outcome); the other group accounts for the rest of the cases: The groups are labeled "Failure" and "Success," respectively, below. A set of "partial" analyses were run with predictor variables from one of the blocks of variables: characteristics of the partners and of the agreement (see listing in Appendix A); motives; and problems encountered. In a "complete" analysis, all variables were used. Because the sample size is small, all cases that had a full set of values of all variables were used for finding the discriminant function. The number of cases analyzed was 34. The rest of the cases were classified by the discriminant function whenever those cases had values for the variables of the discriminant function. The predictive power of cases not included in the analysis is thus tested


TABLE 9

Variables Discriminating between Success and Failure for Subjective Outcome

Analysis (discriminating Discriminating variables found* variables tested)

Partial: characteristics of the Number of organizations involved in the East parties and of the s pent parties an of the Flow of parts and components (increasing probability of

success if present)

Partial: motives Western motive of promotion of exports (lessening probability of success if present)

Partial: problems encountered Eastern fulfillment of deliveries (whether solved or not) (whether solved or not)

Management and coordination in East

Complete analysis: All Problem of Eastern fulfillment of deliveries variables above Problems of management and coordination in East

Flow of finished products both ways (rarely occurring in sample)

Western motive of promotion of exports (lessening probability of success if present)

Eastern motive of benefiting from cost and availability advantages (lessening probability of success if present)

* Variables are shown in order of standardized canonical discriminant function coefficients. See footnote 8 for criteria used in the analysis. **See Appendix for listing.

on a sample varying in size, ranging from 10 to 12 cases for subjective outcome. Although the prediction sample is small, the results at least give an indication of the predictive powers on cases not used for finding the discriminant function.

The results for objective outcome and subjective outcome are much the same. The difference with respect to explanatory variables is only of a marginal magnitude. Only the results for the subjective outcome are shown, because this variable measures the respondents' opinions about their cooperation agreements. Such a measurement is more important than whether, for example, an agreement has been prolonged, which might indicate only that it is rather "harmless" and can be continued without any substantial risk. The discriminating variables found are shown in Table 9. As to the partial analysis of characteristics of the parties and the agreements, the main discriminating variable is the number of organizations on the Eastern side. The variable that identifies a flow of parts and components also discriminates. The first variable is an indicator of the complexity of coordinating the cooperative operations. This variable also correlates strongly with the 2 frequent problems of management and coordination (between the partners and within the Eastern side). The flow of parts and components concerns flows both westward and eastward. The Swedish firms often aim at continuing exports of components to their licensors (the motive to promote exports). It is also important to buy parts and components from the partner in order to give the partner an opportunity to earn hard currency. In this respect one can assume that it is easier to handle


Discriminating Variables

deliveries of parts and components than finished products. Those parts and components that are not subject to frequent market adaptations can be chosen. The finish might not be as important as with finished products. It is interesting that the size of the Swedish companies is not a discriminating factor for good or bad results. Both big and small companies seem able to achieve equally good results. The partial analysis also indicates that the functions performed within the agreement and the division of tasks between the partners have little impact on the outcome. One reason might be that the Swedish companies limit their ambitions concerning the scope of cooperation according to the partners' abilities.

Only one discriminating motive was found: the probability of success is lessened if the Swedish firm has the motive of promoting exports. This motive was present in 72 percent of the cases, whereas exports took place in about 50 percent. Consequently, this motive was not fulfilled in almost one-third of the cases in which it was present. As could be seen from the analysis of structural characteristics, flows of parts and components were positively related to successful cooperation. Such flows eastward constitute a share of the number of cases in which the export motive was said to be important. This further emphasizes the export motive. The problems discriminating between success and failure in a partial analysis are problems of Eastern fulfillment of deliveries and problems of management and coordination in the East. Both of these are frequent problems in the sample and prove difficult to solve. Other frequent problems-such as, quality of the partner's deliveries-could be solved in a fairly large number of cases. Delivery on schedule appears to be another frequent but difficult-to-solve problem; however, the problem could be handled "indirectly" by arranging for safety stock or stipulating deliveries earlier than needed.

Balancing the blocks of variables against each other in a complete analysis reveals that problems are the main explanatory factors. It should be noted, though, that correlations between variables explain why some variables do not enter the complete analysis. An example is that the complexity on the Eastern side is measured both by the number of organizations in the East and by whether problems of management and coordination actually occur. Only the latter enters the set of variables found in the full analysis. "Flows of finished products both ways" also entered the discriminant function. This variable, however, only relates to 2 cases and cannot be used as a basis for conclusions. Two motives also discriminate, but have a limited explanatory effect. In addition to the Swedish firms' export motive, their partners' attempt to benefit from cost and availability advantages affected the outcome negatively. This variable appears in about one-fifth of the cases and could indicate that the Eastern partner presses for a level of specialization that is unacceptable to the Swedish firm. Because the variable only applies to a limited number of cases and is the last one in the discriminant function, however, not too much importance should be attached to it. In summary, the main discriminating factors are: whether or not problems with fulfillment of Eastern deliveries are encountered (clearly a very important aspect of the functioning of the agreement); and whether or not problems of management and coordination in the East are encountered.

The predictive power of the discriminant functions is shown in Table 10. Generally The Predictive speaking, the predictive power is high: the "complete" function with its 5 Power variables classifies only 4 cases wrongly-one in the analysis sample, 3 in the prediction sample. The pure chance predictive power is 58 percent in the analysis


TABLE 10

Predictive Power of Discriminant Functions for Subjective Outcome

Correctly classified cases Number of variables in

In analysis In prediction discriminant Analysis sample sample Overall function

Partial: characteristics of the parties 29 of 34 6 of 11 35 of 45 2 and of the agreements 78 percent

Partial: motives 24 of 34 9 of 12 33 of 46 1 72 percent

Partial: problems encountered 28 of 34 7 of 10 35 of 44 2 80 percent

Full analysis: all variables above 33 of 34 7 of 10 40 of 44 5 91 percent

TABLE 11

Subjective Outcome Against the Main Discriminating Variables

Problem of East fulfillment of deliveries

Problem of management and coordination in East No Yes

No 1 of 14* 2 of 7

Yes 2 of 14 8 of 9

*Entry in cell shows number of failures and total number of cases in cell.

sample, 59 percent overall, compared to the 91 percent overall predictive power of the complete discriminant function. Another way to illustrate the results of the complete analysis and the predictive power is by cross-tabulating. Cells built up by the 2 main explanatory variables are shown in Table 11. Obviously, the combination of the 2 problems has spelled disaster, at least in this sample.

SUMMARY AND CONCLUSIONS

Industrial cooperation is a means for the East to improve the acquisition of technology in a wide sense of the concept. This study has shown that 9 out of 10 agreements between Swedish firms and Eastern partners involve a flow of technology from West to East. With the ambition of reducing hard currency outlays, the Eastern side has placed increasing importance on improving its export performance through industrial cooperation. Industrial cooperation thus represents an intensification of the technical and economic integration between the East and the West. This study is an attempt to analyze how well industrial cooperation has functioned from 1967 to 1978, according to the experiences of Swedish firms. The most frequent motive among the Swedish firms is the promotion of exports. Industrial cooperation, regardless whether it is "freely" entered or the result of Eastern demands, is mostly a means to create goodwill and to promote exports of components or other products. This motive "joins" with the Eastern motive to build up know-how in the most frequent combination of motives. This points to a


pattern of "unequal" partners who do not place the same importance on the same aspects of the cooperative operations. Only in a minority of the cases do combinations occur in which Eastern technology is an important basis for the partners' relations, or where "economic" motives-such as, "better utilization of capacity" or "cost or availability advantages"-appear on both sides. The Swedish firms gave an average subjective rating of the results as "acceptable." Although there is a considerable spread between total failures and very successful results, the Swedish firms' average experienced result was somewhat surprising in view of the frequent problems in the implementation of the agreements. One explanation of the fairly favorable rating could be the Swedish firms' practice of using industrial cooperation as a means to further other interests; that is, they are willing to pay a price in order to achieve other objectives. The most frequent problems concerned management and coordination and difficulties with Eastern deliveries, such as, quality, delivery times, and the fulfillment of Eastern deliveries. The problems of the East's fulfillment of deliveries and of management and coordination on the East side are also very strongly related to the Swedish firms' rating of the outcome of the cooperation, as well as to the objective outcome. It is then important to analyze whether these problems are systemic, that is, related to differences in the respective economic systems (over which the partners have no influence), or the result of the partners' own dispositions. It was found that the Swedish firms often were able to improve the coordination with their partners and the quality of the Eastern deliveries, but coordination problems in the East and nonfulfillment of deliveries from the Eastern partner seemed almost impossible to rectify. This explains the success/failure rating by the Swedish companies. The number of Eastern partners, a characteristic noted in the cooperation agreements, is also associated with the outcome. The importance of these variables indicates that the degree of complexity of cooperation is an important determinant of outcome. The systemic differences and the "inequality" in terms of commercial competence generally constitute barriers to ambitious scopes of complex cooperation.

Even though success or failure is most strongly related to the frequent and hard- Some Practical to-solve problems, Western firms can improve their outcome from industrial Implications cooperation with the East. The strategy would be to avoid in the beginning setups that might lead to such systemic problems, rather than to attempt to adapt operations during the implementation of the agreements. The following sugges- tions are supported by the empirical analysis. First, try to avoid complicated agreements that include several Eastern partners. This also applies to setups where the Eastern partner becomes dependent upon local subcontractors over which he has little influence. Such setups seem to lead to coordination problems and potential conflicts of interest. Second, be careful in the choice of partner. The ability to deal directly with industrial organizations varies among the Eastern countries depending on the degree of decentralization. Be on the lookout for administrative ability. Third, try to avoid agreements where each partner's benefits are separated in time. This study has shown that nonfulfillment of deliveries and pricing of the East's deliveries are hard-to-solve problems. With the present strained financial situation in most Eastern countries, the risk increases for such difficulties-for example, the East might require re-setting of prices in order to fulfill deliveries that the Western partner really wants. It has happened that the Eastern partner has argued that the authorities have issued directives to this effect which must be followed by industry and the foreign trade companies. Fourth, be careful about specialization in which the Western company makes


itself dependent on deliveries from its partner. Sometimes such specialization is one of the motives behind cooperation. It is then important to plan the setup of the cooperation carefully. Such agreements often imply that the Western partner transfers product improvements and updates technology. The ability and willing- ness to adapt to such demands, which might be necessary in order to sell the products in a changing world market, are not always present on the industrial level in the East. A further potential problem with this kind of setup is the risk of export embargos and restrictions imposed by the Western governments-notably the U.S. government. Fifth, choose parts or components, rather than finished products, for current deliveries during the implementation of the agreement. The reasons have been given above. It should be noted that, due to hard-currency shortages, the Eastern partner must have a possibility to earn hard currency. Finally, the Western firm should not have unrealistic expectations about the possibilities of promoting exports through industrial cooperation, although such possibilities do exist.

APPENDIX Variables measuring characteristics of the parties and the cooperation agreements: 1. Previous experience of the Swedish firm, measured as the number of previous

cooperation agreements. 2. Background: Cooperation preceded or not by exports to the East. 3. Initiative to cooperation taken by Swedish firms or not. 4. Size of Swedish firms: Number of employees. 5. Country: Cooperation with Hungarian partner or not. 6. Number of organizations involved in the East. 7. Value of technology and equipment in SKr. 8. Value of current deliveries in Skr. 9. Flows:

-Technology -Equipment -Parts and components -Finished products

Each flow variable is coded in 3 forms: whether or not there is a flow, whether or not there is a flow to the West or East only, and whether or not there is a flow both ways. 10. Functions covered by the cooperation agreement:

-R&D Production

-Buying -Distribution

Each function variable is coded in 3 forms: whether the function is covered at all in the cooperation, whether or not both partners perform the function, and whether they do it together or separately.

FOOTNOTES 1. A qualitative analysis of the same sample is reported in Hogberg and Adahl [1980]. 2. Where not stated, the base of the percentages is all 53 agreements. 3. The prices offered to an external buyer need not express a centrally planned country's comparative advantages.


4. Factor analysis was performed with programme BMDP4M, eigenvalue criterion, varimax rotation. 5. A low score on a factor means that the motives with positive loadings involved are non- present, not that they are "negative." 6. Factor analysis was performed with programme BMDP4M, eigenvalue criterion, varimax rotation. 7. "Up through Acceptable" was 77 percent for the subjective estimate, with 50 percent "Up through According to Plan" for the factual outcome estimate. 8. SPSS for DEC-10, Version H, Release 9.0 Stepwise Multiple Discriminant Analysis With Method = RAO and prior probabilities given by actual frequencies. Default values for parameters were used, except that the criterion for adding a variable was set to demand an increase in distance between group centroids significant at the 5 percent level (PIN = 0.05).

Bolz, K., and Plotz, P. Erfahrungen aus der Ost-West Kooperation. Hamburg: HWWA-lnstitut fur Wirtschaftsforschung, 1974. ECE (U.N. Economic Commission for Europe). Analytical Report on Industrial Cooperation among ECE Countries. Geneva: ECE (E/ECE/844 + Add. 1 and 2), 1973.

. A Statistical Outline of Recent Trends in Industrial Cooperation. Geneva: ECE (E/ ECE/TRADE /AC.3/R,8), 1976. Hogberg, B., and Adahl, A. Industrisamarbete med oststaterna. (Industrial Cooperation with the East, in Swedish). Stockholm: The National Swedish Board of Technical Development-STU, 1980. Levcik, F., and Stankovsky, J. Industrial Cooperation between East & West. London: The MacMillan Press Ltd., 1979. McMillan, C. H. East-West Industrial Cooperation: In East European Economies Post Helsinki. Washington DC: Congress of the U.S., Joint Economic Committee, 1977. RUhle von Lilienstern, Hans. Kooperation mit dem Staatshandel: Moglichkeiten und Grenzen. DBW 38 (1978)4:525-534, 1978. Stankovsky, J. "Industrial East-West Cooperation: Motivations, Development, and Prospects." In East-West Economic Interaction: Possibilities, Problems, Politics, and Prospects, edited by B. Huldt and A. Lejin, 1981. Selected papers presented to a conference at the Swedish Institute of International Affairs on 9-11 June 1980. Tabascynski, E. Kooperacja przemyslowa z zagranica. Warsaw: Panstwowe Wydawnictwo Economiczne, 1976. Wass von Czege, A. Erfahrungen deutscher Firmen beim Technologietransfer in Rahmen von Ost-West-Kooperationen-Ergebnisse einer Befragung. Working Paper. Hamburg: Institut fur Aussenhandel and Uberseewirtschaft der Universitat Hamburg, 1977. Wass von Czege, A. Die Ost-West-Kooperation als Technologietransfermechanismus und Instru- ment zum Strukturwandel aus ungarischer Sicht-Ergebnisse einer Befragung. Forschungsbericht Nr. 14. Hamburg: Institut fur Aussenhandel und Uberseewirtschaft der Universitit Hamburg, 1978. Wojnar, M. "Patterns of East-West Trade and Cooperation." In East-West Economic Interaction: Possibilities, Problems, Politics, and Prospects, edited by B. Huldt and A. Lejin, 1981. Selected papers presented to a conference at the Swedish Institute of International Affairs on 9-11 June 1980.


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East-West Industrial Cooperation: The Swedish Case

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