The increase in semiconductor alliances since 1985 requires explanation, because the semiconductor industry saw perhaps the highest level of activity across all industrial sectors (with the possible exception of biotechnology). What generic forces are at work propelling companies to forge alliances? What industry-specific factors have led to the proliferation of U.S.-Japan linkages in the semiconductor industry?
Perhaps the most obvious generic force is a trend toward the ''globalization of markets.''11 Companies cannot afford to confine themselves to domestic markets, no matter how large they may be. Instead, they must compete in all major markets around the world or risk falling out of long-run contention. For most products, mass volume sales, involving global markets, constitute the sine qua non of low-cost production. Those companies failing to compete worldwide will lose the advantages of rapid movement down steep learning curves.
If the world market cannot be partitioned into national units and if semiconductor producers aspire to survive in the crucible of world competition, it is essential that they find ways of getting close to foreign customers. Because the up-front costs and risks of breaking into foreign markets can be prohibitively high, there are strong incentives for companies to find foreign partners to distribute and sell their products through marketing agreements, one form of strategic alliance.
To compete effectively in foreign markets over the long haul, however, companies must establish their own physical presence abroad so that they can understand and respond to local needs. A physical presence makes it possible for companies to do what is necessary to succeed: communicate continually with local customers; learn how to operate in foreign environments; cultivate long-term relationships; develop, adapt, or custom-make products for foreign end users; manufacture locally; and offer timely delivery and reliable after-service. Doing this from a distance is impossible.
Very large corporations can project a physical presence in foreign markets by going multinational,12 this is what IBM, AT&T, NEC, Toshiba, Hitachi, Texas Instruments, Motorola, and others have done. They have built wholly owned subsidiaries that market, design, manufacture, and provide service for customers in their own local markets. However, because multinationalization of this type is beyond the reach of smaller companies, their only alternative is to develop a series of strategic alliances—such as marketing agreements and manufacturing licenses—that serve the same functional purpose. Such ambitious and fast-developing companies as Sun