Signals and international alliance formation: The roles of affiliations and international activities

Abstract

This paper extends signaling theory to the study of firms’ international alliances. Signals can be valuable in facilitating these collaborations because they reduce the risk of adverse selection surrounding cross-border partnerships. We specifically investigate whether firms’ affiliations with prominent financial intermediaries enable the formation of international collaborative agreements. We also argue and find that the signaling benefits of these affiliations diminish with the firm’s engagement in international activities, which can function as alternative signals by which firms convey the quality of their resources and prospects. Examining firms’ cross-border activities helps to identify new and important signals that are unique to the international setting. Moreover, this also helps contextualize prior theory and findings that exist in the domestic setting on the effects of affiliations with financial intermediaries such as venture capitalists and investment banks. We conclude that signaling theory offers a promising addition to existing theories of international alliances and other cross-border activities. We contrast some of the main arguments and predications of signaling theory with other theories used in international business, and we emphasize the research opportunities that exist for employing this perspective in international business studies in the future.