Understanding trust in international alliances.

Man is the only animal that makes promises. - Friedrich Nietzsche, German philosopher

The key ingredient in a successful alliance is trust. - James R. Houghton, Chairman, Corning Glass Works

International alliances have swept powerfully onto the global business landscape. In their wake, the familiar model of a single company doing all (or even most) things in-house is becoming increasingly obsolete. Moreover, the technological, political, financial, and competitive forces that have spawned the rapid growth of international alliances are likely to further strengthen, not abate, in the foreseeable future. And so the recent dramatic shift in global business, away from corporate loners and toward more alliances, seems destined to continue, and perhaps even accelerate, in coming years.

In successful alliances, trust is often touted as a prerequisite, a necessity, an absolute must (Byrne, 1993). The reverse is also true: a major contributor to failed alliances is lack of trust (Peng & Shenkar, 1997). As the above quotes suggest, interfirm cooperative relationships involve promises - both explicit and implicit - about future behaviors, and trust transforms such promises into credible propositions. Plainly, a systematic study focusing on trust in the context of international alliances seems timely.

As such, the main purposes of this article are to address the following intriguing questions:

* At the core, what is the role of trust in international alliances?

* What are the psychological, sociological, and economic components of trust, and how do they relate to each other?

* Are there basic differences internationally in interpreting the concept of "trust"?

* Can trust actually be "produced"?

Together, these questions are aimed at developing a deeper understanding of trust in international alliances, primarily before the start of a collaborative relationship. A follow-up article will focus on issues related to "Building Trust in International Alliances," primarily after a collaborative relationship has commenced. We begin with the first question.

TRUST AS A CENTRAL ORGANIZING PRINCIPLE IN ALLIANCE MANAGEMENT

It is useful to remember that despite their growing occurrence, alliances are generally the last resort, not the first choice, for most North American companies. Intensifying global competition, faster technological change, and rising costs and risks of developing new products have left companies unable to do everything for themselves. Alliances offer a partial, imperfect solution, by providing a way to pool costs and risks, trim product development times, penetrate new markets, and gain access to new technologies and economies of scale. In short, alliances involve interfirm cooperation, undertaken in the pursuit of global competitive advantage of each partner firm. Philip E. Benton Jr., president of Ford's automotive group, made this point nicely when he said that Ford linked up with Volkswagen in South America, creating Autolatina, purely to survive: "I'm looking for a competitive advantage. I'm not out there to make Volkswagen stronger" (Kraar, 1989, p. 68).

During the simultaneously competitive and cooperative life of such relationships, the internal and external circumstances of an alliance may change, often in unexpected ways. How partners adapt to these changing circumstances can determine whether an alliance prospers or flounders. However, it is impossible to predict and plan for all possible future contingencies beforehand. Successful adaptation therefore calls for a delicate balance between the twin virtues of reliability and flexibility. Flexibility is necessary for partners to have a viable relationship in the face of changing circumstances, yet unlimited flexibility affords companies the opportunity and incentive to cheat,(1) reducing the reliance partners can place on each other.

There are thus two types of uncertainty in alliances: Uncertainty regarding unknown future events, and uncertainty regarding partner's responses to those future events. It is in this environment of double uncertainty that trust emerges as a central organizing principle in alliances. Trust reduces complex and uncertain realities far more quickly and economically than prediction, authority, or bargaining (Powell, 1990), and thus improves performance (Baughn, Denekamp, Stevens, & Osborn, 1997).

Evidence of such trust-based performance improvement is found by comparing supplier relationships in the auto industry in Japan and in the U.S. (Barney & Hansen, 1994; Dyer, 1996). Toyota's relationships are deeply embedded in long-standing networks of social and economic relations that are characterized by higher levels of trust and lower fear of opportunism. Toyota and its suppliers feel freer therefore to engage in very specialized, vulnerable exchanges, which boost efficiency while substantially lowering reliance on formal contracts than at General Motors. Without this ability to rely on social embeddedness to constrain possible opportunistic behavior by its suppliers, GM has had to deal with the threat of opportunism by reducing the level of transaction-specific investment in its suppliers (i.e., by having multiple competing partners), by insisting on elaborate contractual protections, or by vertically integrating the supply relationship. As a result, report Cusumano and Takeishi (1991), buyer-seller relationships in the auto industry in Japan tend to be longer term, more stable, and with earlier supplier involvement in product development than in the U.S., where heavier reliance is placed on direct market forces among suppliers (competitive bidding).

The performance differences were striking. The Japanese enjoyed a significant advantage in several efficiency measures, such as total engineering hours required to develop a new car (1.2 million in Japan, versus 3.5 million in the U.S. and Europe) and in the number of months required to complete and deliver a new product (43 months in Japan, versus 58 months in Europe and 62 months in the U.S.). Further, because suppliers were trusted to maintain their level of defects at close to zero, Japanese firms generally did not inspect incoming parts and thus saved on inspection labor as well as losses from the costs of defects. Clearly, higher trust levels can enhance cooperative performance.

Defining Trust(2)

Numerous definitions of trust have been proposed in the literature, each focusing on particular aspects of a relationship. Consider the following: "Trust is the mutual confidence that no party to an exchange will exploit another's vulnerabilities" (Sabel, 1993, p. 1133). "(Trust) is the willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party" (Mayer, Davis, & Schoorman, 1995, p. 712).

Common thoughts stand out from these definitions.

1. Trust inherently involves uncertainty about the future, as argued above.

2. Trust implies vulnerability, that is, the risk of losing something of value. The magnitude of this potential loss from untrustworthy behavior is typically much greater than the anticipated gains from trustworthy behavior, as we discuss shortly.

3. Trust is placed in another whose behavior is not under one's control, so that each partner exercises only partial influence over alliance outcomes.

Trust and distrust do not share a direct, simple relationship. Violation of expected behaviors produces a sense of disruption of trust, of profound confusion, but not of distrust (Zucker, 1986). Distrust only arises when there is suspicion that expectations were violated intentionally, and that such violations are likely to occur repeatedly.

Role and Degree of Trust In a Relationship

The role that trust plays, and the degree of trust required, varies by relationship. To better appreciate this, consider the three common elements of trust definitions extracted above. The first element involves uncertainty. The greater the uncertainty surrounding future events and a partner's responses to those future events, the greater the trust required. Trust plays the role of reassuring partners of mutually adaptive behaviors in response to unknown future circumstances. The second element involves vulnerability. The greater the potential loss through an alliance, the greater the trust required. Trust lowers the perceived likelihood that opportunities representing significant vulnerability will be exploited by a partner, permitting better sharing and greater specialization of resources. The third element involves control. The lower the control exercised by one alliance partner over the other(s), the greater the trust required from that partner. There exists a "control gap" in managing alliances, as compared to managing hierarchical organizations. Full control is possible in the latter, but only partial control is possible in the former. Trust helps fill the control gap.

Conversely, trust plays a less significant role, and less trust is required, in alliance situations in which a company possesses relatively complete, accurate, and timely information (since such information reduces uncertainty and can be used in planning, structuring, and running partnerships); in which vulnerability is low (so the prospects of damaging one's interests are minimal); and in which a relatively high degree of control can be exercised (so that powerlessness over alliance outcomes is minimized).(3) As a practical matter, however, in real-life alliances there will always be some uncertainty, since even with the most thorough reporting and auditing systems and the most expensive scanning and surveillance mechanisms, there are gaps in information. There will always be some vulnerability, since the risk of loss of items of value (technology, knowhow, markets, personnel) through alliancing is …