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International collaboration of law firms: modes, motives and advantages.

INTRODUCTION

Access to quality international and local legal services has long been considered an important factor in enabling multinationals to do businesses in international markets. As the trend toward globalization continues, multinationals have found more and more business opportunities in the global market. However, different local legal systems may restrict entrepreneurial activities and affect the ability of multinationals to expand business into foreign markets. McDonald's, for instance, would not have been able to launch its business successfully in Taiwan in 1983 without the assistance of a local law firm. In fact, the characteristics of the legal services such as location bound, customization, local adaptation and government restrictions make it essential for multinationals to rely on local (indigenous) law firms for market penetration. Multinationals also need international legal services in order to deal with issues such as project finance, mergers and acquisitions, intellectual property rights and product liability, each of which may have serious impact on business in international markets. Consequently, the collaboration between law firms in host and home countries has become increasingly important in providing better services to multinationals. In spite of this importance, however, the international collaboration between foreign and local law firms has not been studied in the literature.

International scholars have recognized that the difficulties of conducting both conceptual and empirical research pertaining to the internationalization of service industries result from construct development, categorization, operationalization and data collection (Boddewyn, Halbrich, & Perry, 1986; Dunning, 1993; Enderwick, 1989). Because of the above-mentioned difficulties, the major focus of service-related studies has been placed on banking and financial services (Casson, 1989; Gray & Gray, 1981; Grubel, 1977, 1989), and trading companies such as the Japanese Soga Shosha and Korean Chaebol companies (Ozawa, 1987). Recently, the methods of international technology transfer in services (Grosse, 1996) and the internationalization of other service industries were also studied, particularly in the construction industry (Enderwick, 1989), the hotel industry (Dunning & McQueen, 1981), multinational news agencies (Boyd-Barret, 1989), the advertising industry (Terpstra & Yu, 1988) and the accounting industry (Chuang & Ko, 1993; Daniels, Thrift, & Leyshon, 1989). Nevertheless, the legal service industry remains a missing link in the literature.

The internationalization of legal service has become increasingly important because of the fast development of international business activities (Galanter & Palay, 1990). In recent years, international commercial activities such as trade and finance could not be pursued without knowledge of local and international laws acquired with the assistance of legal services from both international and local law firms. Given that dramatic national differences of cultures and legal systems do commonly exist, such a bartier of conducting international legal services could not be overcome without the collaboration between international and local law firms (Leontiades, 1985). Previous studies pertaining to other international service industries have centered on explaining the global environment, economic impacts and public policy (Boyd-Barrett, 1989; Daniels et al., 1989; Grubel, 1989), the determinants of foreign direct investment (Terpstra & Yu, 1988), and the advantages, motives, and delivery modes (Dunning & McQueen, 1981; Enderwick, 1989) of those firms in servicing foreign markets. However, no research has been conducted from the perspective of the host country.

Taiwan is a good case for such a study. Taiwan's economy underwent a successful transition from an agricultural to an industrial, modern economy. Since the early 1980s, firms in Taiwan's traditional labor-intensive industries such as textiles, footwear and toys have gradually gone offshore to Southeast Asia and China. In the 1990s, many industries such as electronics, computer peripherals and motorcycles also went offshore for both resource and market seeking purposes. The pace of Taiwanese multinationals' global expansion has been evidenced by dramatic increase of outward foreign direct investment (FDI) from Taiwan. An investigation conducted by the Chung-hua Institution for Economic Research estimates that Taiwan's total FDI in Southeast Asia was about $20 billion in the early 1990s (San, 1992). In 1995, Taiwan became 14th among the world's trading nations by attaining $215.2 billion (81.7% of GNP; including $111.7 billion exports and $103.5 billion imports) in international trade. Such great numbers in international trade resulted in a strong demand for international and local legal services that would help foreign multinationals to do business effectively in Taiwan. In addition, as more Taiwanese companies have become involved in globalizing their businesses, these firms have had a critical need for international legal advice (Chang, 1995; Shih & Lin, 1996). In the world market, British and American law firms have been very aggressive in globalizing their legal services (The Economist, 1996). Local law firms in a small and open economy, therefore, face increasing global competition (Marks, 1995). How can Taiwanese law firms capitalize on such a globalization trend in order to survive and grow? The answer lies in how well they can obtain and develop competitive skills through international collaboration with experienced international law firms.

The purpose of this paper is to examine the emergence of the global legal service industry, and to study exploratively the internationalization pattern of Taiwanese law firms. In the following sections, we first present the recent development in international legal services and explanations of the increasing collaborations between foreign and local law firms by using Dunning's eclectic paradigm (1988, 1993). We then focus on Taiwanese law firms and conduct exploratory research to understand: (1) The major characteristics of the legal service industry in Taiwan; (2) the major modes and motives of both foreign and Taiwanese law firms to engage in international collaborations in Taiwan, and (3) the major determinants that affect Taiwanese law firms in selecting their internationalization modes. In addition, we address managerial implications of the research findings, including: (1) the nature of collaborations between international and local law firms; (2) the bargaining position/power of international and local law firms, and (3) the transnational strategy of international law firms.

THE EMERGENCE OF THE GLOBAL LEGAL SERVICE INDUSTRY

Recent Developments in International Legal Services

International legal services have become increasingly crucial for multinationals to conduct business successfully in the global marketplace. Competent international law firms should be able to provide legal services that cope with market conditions in any of the international markets. In order to develop and grow in foreign markets, international law firms should be able to handle both international and local legal practices. In general, international law firms need to provide: (1) local legal services to clients doing business in the host country; and/or (2) a mix of international and local legal services to clients involved in international business. Consequently, international law firms should develop a competitive edge in order to deal with the various cultures and languages of international clients.

The internationalization of the legal service industry is still far behind other service industries. In addition to international collaboration, many international law firms have established foreign branch offices for leveraging their competitive position. However, as compared to that of other service industries such as accounting and management consultancy, the number of foreign branches established is still low. According to The American Lawyer (1993), among the top forty law firms in the world, only eleven have foreign branch offices as of 1993. With 39 foreign branch offices, Baker & McKenzie, the largest law firm in the world, generated foreign revenues that accounted for more than 60% of its total sales, while foreign revenues of the other ten international law firms were less than 20% of their total sales. Low foreign revenues indicate that the internationalization of the legal service industry is still far behind other service industries. For example, the foreign revenue of KPMG, the world's largest accounting firm, was about $6 billion in 1992, while Baker & McKenzie had only $500 million in the same year. Such a slow pace of internationalization has resulted from national differences in legal systems and business practices, which have made international commercial legal services less desired in the global market.

In Taiwan, the legal system is based on codified laws that are similar to Western laws. Taiwan's rapid industrialization has created a strong need for highly developed commercial laws. Currently, Taiwan is reforming its business laws, particularly as they relate to the activities of foreign businesses. Foreign law firms are allowed to open branch offices in Taiwan. However, because foreign lawyers are not admitted to the local bar in Taiwan, foreign law firms entering Taiwan have to work through a Taiwanese lawyer or law firm. In addition, renching and honor are the most important elements in developing business relations that significantly affect the legal aspects of business practice in Taiwan. Renching refers to a relationship characterized by trust and sympathy between parties, while honor means that both parties are true to their word. The effect of legal requirements on parties to a business transaction is determined by the manner in which the parties implement the law, not necessarily by the terms of the law. Thus, technical legal difficulties and minor contract breaches can be overlooked or settled amicably if, by renching and honor, the parties merely choose not to enforce the letter of the law so as to continue their business relationship. Because a lawsuit is considered an insult, a dispute should be resolved by negotiation. Parties involved in business dealings in Taiwan should, therefore, avoid initiating law-suits whenever possible if disagreements arise.

Modes of Internationalization

A firm's selection of entry modes is based upon its ability to internationalize legal service business subject to host country regulations. In general, such a selection is not a sequential choice that reflects the international involvement of a law firm. based upon the above-mentioned ownership-specific, location and internalization advantages of international law firms, we identify four major modes for the internationalization of such law firms as follows:

1. FOREIGN BRANCHES. Law firms should establish offices in foreign jurisdictions, carrying the identical company name. These offices use either expatriate lawyers or local lawyers or both, depending upon the characteristics of the legal services provided and the types of clients being served. Those offices staffed primarily by parent expatriate lawyers provide professional services of a globally standardized nature, such as international merger and acquisition, financing projects and privatization. In contrast, offices made up primarily of local lawyers are likely to provide extensive advice on local laws, and are able to cope with the culture, language and business practices of the country.

2. ASSOCIATION WITH LOCAL LAW FIRMS. When entering a foreign country where foreign branches of law offices are not allowed, international law firms usually seek association with local law firms in order to serve clients in a joint effort. Under this cooperation mode, local law firms usually possess a higher autonomy in decision making. Local law firms also have the option of joining as member firms, using the company name (i.e., brand equity) of an international law firm while performing legal services in their own country.

3. NETWORKING ARRANGEMENT. Without deep involvement in foreign operations, international law firms can choose to establish a network relationship with major local law firms in important countries providing client referrals and information exchange. The major benefit of such networking is to provide multinational clients with foreign services at a low cost. However, there is the possible drawback of lack of quality assurance.

4. INTERNATIONAL MOBILITY OF LAWYERS. Foreign lawyers may be hired by local law firms to provide the expertise lacking in local law firms, thus serving as substitutes for a foreign branch office when foreign law firms are prohibited in the host country.

Motivations for Internationalizing A Law Firm

Like firms in other service industries, law firms go international because of the following:

1. "FOLLOW-THE-CLIENT." By using international collaboration or establishing branch offices in foreign countries, international law firms can provide legal advice effectively on multi-jurisdictional cases to clients who conduct substantial international businesses.

2. "MARKET SEEKING." based upon their competitive (i.e., ownership-specific) advantages such as legal advice experience and corporate image and reputation, international law firms can expand their business into foreign markets in order to serve local clients.

3. "OLIGOPOLISTIC INTERACTION." In an attempt to maintain their competitive position in the global market, international law firms have to follow their competitors as they develop business in foreign countries.

4. "STRATEGIC ASSET SEEKING." In order to compete effectively with their rivals, international law firms must learn to exploit cost or marketing advantages rather than to rely upon their existing international legal service knowledge and/or know-how.

EXPLANATIONS OF THE INCREASING COLLABORATIONS BETWEEN FOREIGN AND LOCAL LAW FIRMS

In international business literature, two major theories, market power approach (Hymer, 1976) and internalization approach (Buckley & Casson, 1976; Hennart, 1982) stress different types of market imperfections that give rise to the emergence of multinational companies that possess firm-specific ownership advantages. While the former argues that multinationals with unique ownership advantages are the creatures of structural market imperfections in the final product market, the latter explains why the cross-border transactions of intermediate products are organized by hierarchies (i.e., internalization) rather than determined by market forces (Dunning & Rugman, 1985).

The eclectic paradigm (Dunning, 1988) synthesizes ownership advantage, location choice and internalization elements of these competing theories and provides an overall analytical framework for empirical studies of service industries. In this paradigm, three major factors - ownership (O-specific) advantages, location (L-specific) variables and internalization (I) incentive advantages - provide reasons for "why," "where," and "how" a multinational company will internationalize its value chain activities worldwide. This paradigm has been used to explain the international production of manufacturing multinationals for about two decades and has recently been introduced to study multinationals in the global service industries (Dunning, 1993; Enderwick, 1989). In the age of alliance capitalism, Dunning (1995) reappraises the eclectic paradigm and suggests that:

1. The O-specific advantages of firms should include the role of innovation, technological accumulation and learning in sustaining and upgrading the competitive advantages (Cantwell, 1989, 1994).

2. A "voice" strategy (Hirschman, 1970) which means to work with the market in order to reduce market failure is a viable alternative.

3. Theories of inter-firm cooperation or collective competition (Buckley, 1994) need to be widened to incorporate dynamic efficiency, such as market positioning.

4. Collaborative agreements with other firms could enhance a firm's O-specific advantages significantly, which questions the traditional ownership boundary assumption of the theory of industrial organization (Hymer, 1976).

According to Dunning, ownership-specific advantages refer to the extent and nature of the technological, managerial, and marketing advantages of international law firms vis-a-vis local law firms in the country in which they are producing or contemplating value-added legal advice. Location-specific advantages are those which combine ownership-specific advantages with immobile factor endowments in a foreign or home country in order to deliver value-added legal advice. Market internalization advantages are those which control and coordinate ownership- and location-specific advantages within an international law firm's hierarchy, rather than sell the right to use those advantages to local law firms.

Multinationals doing business in the global market often have to deal with various contracts in order to specify the conditions under which business transactions are conducted internationally. Contract laws, however, differ significantly in each country, and as such they affect the enforcement of international business contracts. A successful international law firm, therefore, has to familiarize itself with a multitude of legal, cultural and product aspects of local businesses. We identify four ownership-specific, four location-specific and two internalization advantages that are particularly relevant in the case of international law firms:

Ownership-specific Advantages of International Law Firms

1. PROFESSIONAL EXPERTISE AND EXPERIENCE. Legal services are highly professional and lawyers are expected to think creatively in providing international legal services. In today's world, there are two main legal systems, common law and civil law, which were developed originally in the U.K. and then in continental Europe. With cumulative traditional experiences, law firms from western countries have developed expertise in providing legal services associated with international business activities, and are able to apply such expertise in other countries demanding similar international legal services. Asian financial institutions, the main users of international legal services in the region, consider the top two criteria for "good" lawyers as: (1) having the leading edge of international legal practice, and (2) understanding the most up-to-date financial products (Asian Business, 1991).

2. REPUTATION AND CORPORATE IMAGE. The legal profession is highly technical, and since clients are not equipped with sufficient knowledge and information to distinguish good lawyers from mediocre ones, reputation becomes one of the major determinants for clients when choosing a lawyer or law firm. International law firms can develop competitive advantages by creating and sustaining a successful corporate image (and the good will attached to it), as well as by enhancing their capability to develop expertise on specific "niche" practices and to monitor the quality of international legal advice (Dunning, 1993).

3. EASY ACCESS TO INTERNATIONAL CLiENTS. The capabilities of international law firms to develop and offer quality legal services from multiple locations to their domestic or international clients can reduce the transaction costs of their clients, and thus become a competitive edge for these law firms to conduct international business expansion. A study shows that when the need for legal services in foreign jurisdiction arise, 54% of clients ask for referrals from their legal agents in the home country (International Corporate Law, October 1991). International law firms equipped with several foreign branches or with an international collaborative network, therefore, can attract international clients easily through such referrals.

4. COMPETENT INFORMATION SYSTEM. The development of a global legal information system is critical for international law firms to globalize their legal services effectively. With foreign branches or collaborative networking in major cities or financial centers around the world, international law firms can better utilize their information systems in order to provide timely international legal advice to their clients. Several American and British law firms have generated global business earlier than their competitors, and have enjoyed the first-mover advantage in the global market.

Location-specific Advantages

1. NEED FOR FACE-TO-FACE CONTACT WITH CLIENTS. Since many legal services are highly idiosyncratic and custom-tailored, face-to-face contact with clients is essential to delivering quality legal services that may satisfy clients.

2. LOCAL GOVERNMENT RESTRICTIONS. Foreign lawyers need to pass the local bar exam in order to practice in the host country. Usually, the host government imposes restrictions on the operation of foreign law firms in order to protect local lawyers and law firms. Collaboration with local law firms is therefore essential for the internationalization of legal services.

3. ADAPTATION TO LOCAL PROCEDURES AND CULTURE. In dealing with legal matters, lawyers need to understand the local legal procedures, language, customs, attitudes, conventions, and culture, and adapt their proposals to the clients. Participation of local lawyers or law firms in international legal practices becomes essential.

4. LOCAL BUSINESS OPPORTUNITiES. International law firms are mainly concentrated in the world's major cities and financial centers such as New York, London, Paris, Brussels, Frankfurt, Hong Kong, and Tokyo, where international business and finance activities are heavy. The European Community and emerging markets in the Pacific Rim are regarded as major markets for growth in the near future. Consequently, many American and British law firms are competing heavily in those markets (Economist, 1996; Marks, 1995).

Internalization Advantages

1. SERVICE QUALITY ASSURANCE. International law firms need to maintain quality service in foreign markets so as to retain corporate image. A consistent quality of legal services has been considered by clients the most important factor for selecting appropriate law firms. International law firms tend to internalize international legal services by establishing their own branches in foreign countries whenever possible. In the host countries where branch offices are not allowed, international law firms tend to develop collaboration with local law firms, and provide training and transfer know-how to local partners so as to assure for quality.

2. ONE-STOP SHOPPING. When they go abroad, multinational firms (i.e., clients) need various kinds of services that consist of legal, taxation, financing and management consulting. To better coordinate business operations internationally, multinationals tend to search for a competent international law firm that can provide a package of legal and other desired services. Therefore, international law firms must develop the capability to offer various service packages in order to satisfy their customer's needs. This trend of one-stop shopping for international legal services has encouraged international law firms to internalize legal advice across countries. Other professional service firms, such as international accounting firms and management consulting firms are also heading in the same direction.

THE INTERNATIONALIZATION OF THE LEGAL SERVICE INDUSTRY IN TAIWAN

Data Collection

According to the Directory of Taipei Association of Lawyers, there are 192 law firms (with a minimum of two lawyers) as of January 1994. In order to collect primary data for this study, we first designed a structured questionnaire in February 1994. We then interviewed senior partners of six randomly selected law firms in Taipei, pretested the questionnaire and collected suggestions of contents and wording for this questionnaire survey. A revised questionnaire was finalized in March 1994 which covered three major issues: (1) the current market conditions of Taiwan's legal service industry, including key factors for success; (2) major fields of practice, motives for, and considerations of, foreign and Taiwanese law firms doing business in Taiwan; and (3) major modes and contents of international collaborations between foreign and Taiwanese law firms. A five point Likert scale was used to measure the motives of sample firms' international collaborations. The measures of above-mentioned variables will be discussed in each section respectively. The mail survey was conducted from April to June 1994. The managing partners or senior partners of corresponding law firms were asked to fill out the questionnaire. In order to increase their willingness to respond to the survey, a cover letter and instructions were attached. In addition, follow-up contacts by telephone were made three days later. As a result, 43 usable questionnaires were collected, reaching a response rate of 22.4%. Given that the size of Taiwanese law firms is very small, only 27 firms out of 43 had established international collaborations with foreign law firms.

Major Characteristics of Taiwan's Legal Service Industry

1. SMALL FIRM SIZE. In our study, only the top 4 firms have more than 100 employees, while the fifth largest firm has 60 employees and the sixth firm drops to less than 30 employees. Among 43 respondents in this study, 22 firms have less than 3 lawyers in the office; 15 firms have 3 to 9 lawyers; and only 6 firms (the top 5 largest firms and the seventh) have more than 10 lawyers. Traditionally in Taiwan, firms tend to develop a mutual trust and a long-term relationship with their clients and/or business partners for further business expansion. Legal advice and services are not widely used by Taiwanese businesses. As a matter of fact, on average, there are 14 lawyers for every one hundred thousand people in Taiwan, while the number in the U.S. is 312. The number of lawyers, and therefore the size of law firms, is lower in Taiwan than in western countries. For the purpose of our analysis, we divided Taiwanese law firms into two groups: Large law firms having 10 employees or more, and small law firms with 9 employees or less.

2. MAJOR FIELDS OF PRACTICE. Unlike the United States, where commercial law is the major field of practice, in Taiwan, litigation cases still play a major role, especially in the small law firms. Large law firms and small ones differ in their major fields of practice. Litigation (57.5% of all cases), legal consulting (20.7%), and real estate (9.5%) account for 88% of the practice of small law firms. For large firms, fields of practice are more evenly diversified into litigation (37.5%), legal consulting (19%), shipping and trading (17%), patent and trade mark (16.3%), real estate (9.7%), corporate investment and taxation (8.5%). A closer look at the top 6 large sample firms in our study reveals that these 6 top law firms almost dominated legal services in the areas of patent and trade mark, shipping and trading, and corporate investment and taxation. Large Taiwanese law firms, therefore, are more inclined to specialize in international legal advice.

3. KEY FACTORS FOR SUCCESS. We use a five-point Likert scale, ranging from 1 (least important) to 5 (most important), to report key factors for success perceived by those Taiwanese law firms. As shown in Table 1, the most important factors influencing the effective management of law firms in Taiwan by descending order, are: (1) reputation and image of the law firm; (2) professional and management capability of the managing partner of the law firm; (3) professional expertise of lawyers; (4) team spirit; and (5) information gathering and processing. The major challenges to large Taiwanese law firms are quality management systems, international expertise and professional staff. Small Taiwanese law firms, however, consider price competition, high turnover rate and instability of business opportunities as critical.
Table 1

Key Factors to the Success of Local Law Firm

(N = 43)
                                                         Mean Values
Key Factors                                                (S.D.)

Company Reputation / Image                            4.571 (0.9548)
Capability of Managing Partner                        4.395 (0.9534)
Professional Expertise of Lawyers                     4.256 (0.9681)
Team Work / Spirit                                    4.238 (0.9715)
Information Gathering & Processing                    4.000 (0.9286)
Good Public Relations                                 3.744 (0.9463)
Management Systems of Law Firm                        3.582 (1.0623)
Size of Law: Firm                                     3.372 (0.9918)

Source: This Research; A five-point Likert scale was used.


International Collaboration Modes and Contents of Taiwanese Law Firms

As of June 1994, international collaboration between Taiwanese and foreign law firms is still limited. In our survey, only twenty-seven responding firms have either formal or informal collaboration with foreign law firms. As shown in Table 2, we have identified five types of collaborative modes. In the first two types, local law firms and foreign law firms have established a formal collaboration to define an exclusive relationship with each other. For the other three types of collaboration, the connection between local law firms and foreign law firms is not exclusive, and the details of such relationships are simpler. Type 1 represents the highest degree of international collaboration in which a Taiwanese law firm becomes a participating firm of a foreign law firm, and can use the corporate name of the foreign partner in conducting business in Taiwan. All the partners in such an arrangement share the same rights and liabilities. In addition, foreign law firms provide [TABULAR DATA FOR TABLE 2 OMITTED] local partners with client referrals, information and know-how, training, and the transfer of expatriate lawyers. Local partners still remain autonomous in their business operations and decision-making, but need to contribute a certain portion of profits to foreign partners. Type 2 also refers to a formal contract between Taiwanese and foreign law firms but differs from type 1 in that local law firms do not have autonomy in the decision-making of legal service operations. By using Type 3, a local law firm joins an international network to share information and obtains referred clients through the network. Type 4 and Type 5 refer to regular-based and project-based cooperation respectively, and the contents of collaboration are limited to client referrals and information sharing only.

Motives for International Collaboration between Foreign and Taiwanese Law Firms

In general, although foreign lawyers and law firms are prohibited from participating in litigation cases, they can provide business-related legal services in Taiwan. We asked the managing partners of Taiwanese law firms to evaluate the importance of each motive (see Table 3) on a five-point scale, ranging from 1 (least important) to 5 (most important), from the perspectives of both the recipient and the supplier. Like multinationals in other service industries, our survey indicates that foreign law firms primarily have three motives for entering Taiwan: 1) "follow-the-client," in order to serve their own clients who need legal service in Taiwan, 2) "market seeking," in order to exploit the Taiwanese market by using their expertise, and 3) "oligopolistic interaction," in order to establish a connection with Taiwanese law firms in response to a competitor's actions.

As their clients have established business in Taiwan, foreign law firms tend to follow in order to provide their clients with necessary international legal services. In business negotiation, for instance, lawyers of foreign multinationals are often asked to participate. In an international business contract that involves two jurisdictions or more, lawyers can communicate with the law office headquarters to quickly come up with necessary legal advice. Such legal services are location bound. Because of the local government restrictions and cultural differences, foreign law firms must establish collaborations with local law firms in order to provide legal services to their clients in Taiwan.

The fact that most Taiwanese law firms are unable to offer international legal advice to multinationals makes Taiwan an attractive market to enter. As discussed previously, the rapid increase of international business activities has created a strong demand, and, therefore, a high-profit market, for international legal advice. From our interviews, several foreign lawyers agreed that such a market-seeking motivation was one of the main reasons for foreign law firms to enter Taiwan. As a result, many foreign law firms have entered Taiwan, and the competition in the international legal service market has become intense. In order to keep their clients and/or expand their business, foreign [TABULAR DATA FOR TABLE 3 OMITTED] law firms have found it necessary to establish international collaborations with Taiwanese law firms. Currently, American law firms are the major players in Taiwan's international legal service market.

For the time being, Taiwanese law firms are unable to exploit foreign markets independently. Because more and more Taiwanese multinationals are going abroad, it is important for Taiwanese law firms to develop competitive edge for international legal service expansion via international collaborations with foreign law firms. From the interviews, three major incentives for Taiwanese law firms to cooperate with foreign law firms are: (1) to obtain business opportunities from the clients referred by foreign law firms; (2) to provide a way for their own local clients to get needed legal service in foreign countries; and (3) to acquire know-how in the field of international legal services.

As discussed earlier, among 27 Taiwanese law firms having collaboration with foreign law firms, two major forms of such international collaboration are: (1) a formal contractual relationship and (2) informal cooperation. As shown in Table 3, Taiwanese law firms establishing formal collaborations are very concerned about access to referred clients, international legal service information, professional skills for legal advice, management know-how and the brand equity of the foreign partner. It is interesting to see that Taiwanese law firms who have informal collaborations with foreign law firms are also concerned about access to international legal service information, but only to serve local clients and obtain referred clients.(1)

Factors Influencing International Collaboration of Taiwanese Law Firms

As discussed previously, Taiwanese law firms currently have little competitive edge to provide international legal advice to Taiwanese multinationals without the support of international law firms. In order to equip themselves better for capitalizing on the increasing demand for international legal advice, Taiwanese law firms need to acquire international expertise and know-how from international law firms. A formal international collaboration is important for Taiwanese law firms to obtain necessary "strategic assets" for enhancing their competitive edge. Our concern is: how would international and Taiwanese law firms establish such collaboration? With per capita imports/exports of $10,144 in 1995, Taiwan's economy has been internationalized substantially. Taiwan is a large market that requires more international legal services. Inasmuch as the business-related legal service industry is highly concentrated and is primarily dominated by a small number of law firms, international law firms who follow their clients and enter the Taiwanese market early will have a better chance to develop business contacts and "Guanxi" (connections) than their rivals. "First-mover advantage" and "follow-the-client" are essential to entering Taiwan successfully. Baker & McKenzie, for example, has been in Taiwan for more than 20 years, and with 60 lawyers in Taipei as of early 1998, has established its reputation as a localized foreign law firm. In recent years, one of its partners, James Tsent, has been appointed legal counselor to both the President and the Premier of the country. Such "Guanxi" strengthens Baker & McKenzie's position to promote its brand name and legal service business in Taiwan.

However, what kind of Taiwanese law firms would be able to establish international collaborations with competent international law firms (collaboration vs. no collaboration)? What are the major factors that influence such international collaborations (i.e., formal vs. informal collaboration)? In this paper, we applied logit regression analysis to examine the determinants influencing the international collaboration decisions of Taiwanese law firms: (1) whether to collaborate with foreign law firms, and (2) whether to establish a formal collaboration with foreign law firms. The logit regression equation is described as following:

Y = exp (-BX)/[1+ exp (-BX)],

where Y = 1 if there is a collaboration, (or Y = 1 if there is a formal relationship in the latter case), and,

-BX = B[.sub. 0] + B[.sub. i] X[.sub. i]

Bi (i = 0,1,2 ..., n) are regression coefficients. Xi(i = 0,1,2...,n) represent six independent variables for the first case (collaboration vs. no collaboration), and five independent variables for the latter case (formal vs. informal collaboration), which are shown in Table 4. In order to determine the firm's choice of internationalization, six variables were used, including the duration of establishment, forms of company, the firm size, the ratio of associates to partner lawyers, the ratio of lawyers to total employees and diversified fields of practice. In order to examine the firm's choice of collaboration modes, five variables were used, including the firm size, the ratio of associates to partner lawyers, diversified fields of practice, the strategic asset seeking motive and the market seeking motive. The standardized scores of these variables were used in the logit analysis.

Our findings indicate that Taiwanese law firms who have a high ratio of associates to partners and who have had experience in a variety of fields of practice will be able to collaborate with foreign law firms.(2) The chi-squared statistics of the likelihood ratio for this model is 17.89 (p [less than] .01), which indicates that the logit regression model can explain satisfactorily what kind of Taiwanese law firms tend to collaborate with foreign law firms. Two independent variables are significant, namely the ratio of associates to partners and variety of fields of practice. The ratio of associates to partners reflects leverage of human resources. A high ratio implies a good number of clients and a boost to the reputation and expertise of Taiwanese law firms. The variety of fields of practice reflects the capability of law firms to develop a full product line to meet the "one-stop shopping" demand of clients. In order to assure the quality of legal services in the host country, international law firms need to team up with competent local law firms to ensure the efficacy of necessary technology/knowledge transfer.

As shown in Table 4, the chi-squared statistics of the likelihood ratio for this model is 14.08 (p [less than] 0.01), showing a satisfactory explanation. Three factors (p [less than] 0.10) seem to influence international collaborations of Taiwanese law firms significantly: the ratio of associates to partner lawyers, strategic asset seeking motive and market seeking motive. In Taiwan's legal service industry, the reputation of partner lawyers in a law firm is a significant, intangible asset (see Table 1) which could attract clients for legal advice, resulting in a large volume of legal service business, which in turn would require more associate lawyers to handle legal services. In order to handle the increasing demand for international legal services, Taiwanese law firms with a high ratio of associates to partner lawyers tend to prefer formal international collaboration with international law firms. On the other hand, international law firms are also inclined to establish formal collaborations with such reputable local law firms in order to expand their businesses into Taiwan.

The motives of Taiwanese law firms for either "strategic asset seeking" or "market seeking" dominate their choices of collaboration modes with international law firms. Considering the sign of the regression coefficients in the logit regression model (see Table 4), it is interesting to find that local law firms seeking strategic assets (positive coefficient 1.974) tend to use formal contracts with foreign law firms more often, while local law firms seeking market expansion (negative coefficient -2.072) tend to use the informal association mode more often. When Taiwanese law firms are committed to acquiring strategic assets from foreign law firms, a formal collaboration would help them to transfer desired international legal expertise and know-how more easily than an informal collaboration. On the other hand, if their goal is market-seeking, Taiwanese law firms tend to use an informal collaboration to team up with foreign law firms. This finding confirms Erramilli and Rao's (1990) study in which they found that firms with a market-seeking motive tend to use a low degree of internationalization mode.

FINDINGS AND IMPLICATIONS

Internationalization Modes, Motives and Advantages of Taiwanese Law Firms

This research applies the eclectic paradigm to illustrate the emergence of the global legal service industry and to examine the internationalization of the legal service industry in Taiwan. Our focus is to discuss important internationalization issues such as the modes, the motives and the advantages of internationalization. Because none of the Taiwanese law firms has set up any foreign branches, Taiwanese law firms have used five types of collaboration with foreign law firms. We distinguish two major types of collaboration modes between foreign and Taiwanese law firms, "formal collaboration" and "informal collaboration," reflecting the various degrees of breadth and depth of collaboration between the two parties.

In this study, we identified two major types of motives for Taiwanese law firms to collaborate with foreign law firms. First, the "strategic asset seeking" motive applies to firms that rely on foreign law firms to enhance their competitive advantages through access to international legal service expertise and information, management know-how and the corporate image of foreign law firms. Second, the "market seeking" motive is for local law firms whose cooperation with foreign law firms is mainly for the purpose of gaining access to referred clients and for the expansion of market opportunities. Our findings show that Taiwanese law firms with "strategic asset seeking" motive tend to use "formal collaboration" to cooperate with foreign law firms, while those with "market seeking" tend to use "informal collaboration." We conclude that a formal collaboration provides more mechanisms, such as know-how transfer, training, and the presence of expatriate lawyers, thus providing greater efficiency in acquiring strategic asset than an informal association does.

The advantages to Taiwanese law firms in structuring collaboration with foreign law firms result from their ownership and location advantages. Our findings indicate that those who have established formal collaboration with foreign law firms are the seven largest firms in our sample. The key to their success in Taiwan's legal service market has been attributed to the following ownership advantages: company image, capabilities of managing partners, professional expertise of lawyers and effective teamwork. In order to acquire necessary strategic assets and to obtain sizable market, foreign law firms tend to team up with large local law firms. In addition, because foreign lawyers are not admitted to the local bar in Taiwan, foreign law firms entering Taiwan have to work through a Taiwanese lawyer or law firm. Taiwanese law firms, therefore, possess location advantages for purpose of negotiating collaboration with foreign law firms.
Table 4

Logit Regression on Choice of Collaboration Mode

(N = 27)

Variables                        Coefficient   Chi-square   P-Value

Intercept                          -1.5883        4.029      0.0447
Size                                -0.053        1.806       0.179
Associates / Partner Lawyers         1.714        2.709       0.098
Diversified Fields of Practice      0.2001        0.048       0.826
Strategic Asset Seeking Motive       1.974        2.931       0.087
Market Seeking Motive               -2.072        3.088       0.079
-2 Log (L)                                       14.078      0.0151

Source: This Research


As discussed earlier, the internalization advantages of international law firms are service quality assurance and "one-stop shopping" packaged legal advice. When the establishment of a branch office is not permitted or cannot help to provide quality legal advice to their clients, the next best choice of international law firms is to collaborate with qualified local partners. In this study, we found that Taiwanese law firms with diversified fields of practice and a high ratio of associates to partners are more likely than others to collaborate with foreign law firms and tended to leverage their human resources more effectively. The key to successful international collaboration for providing quality legal advice to multinational corporate clients is the efficacy of technology/knowledge transfer between international and local law firms. In a firm's value chain activities, human resource management spans the entire chain and entails the successful recruitment, training, development and retention of managerial and technical talents (Tung, 1994; Chang, 1996). In this study, we do not examine the efficacy of the technology/knowledge acquisitions of Taiwanese law firms. However, the importance of human resource management to successful international collaborations should not be overlooked (Pucik, 1988). In order to understand the efficacy of technology/knowledge transfer, it is necessary to examine the absorptive capacity and the organizational culture of the recipient, as well as the economic factors and societal culture of the host country (Tung, 1994).

The generalizability of our research findings is constrained because of the exploratory nature of this study and the small number of international collaboration cases we could find (not only in Taiwan but also in most of the other major countries). Despite such limitations, we have provided preliminary evidence to address important implications of the following issues: (1) the nature of collaborations between international and local law firms; (2) the bargaining position/power of international and local law firms; and (3) the transnational strategy of international law firms.

Nature of International Collaboration between International and Local Law Firms

The collaborations between international and Taiwanese law firms justify the competitive nature of such alliances. Unlike complementary ventures that take advantage of putting together each non-competing partner's competencies in order to diversify risks and generate mutual benefits (Hergert & Morris, 1988), competitive collaborations are formed by potential competitors who are interested in leveraging their partners' resources and competitive advantages in hopes of realizing disproportionate gains (Doz, Hamel, & Prahalad, 1989). The main reasons for such international collaboration between foreign and Taiwanese law firms are: (1) a promising international legal service market, and (2) the restrictions of local legal market. As discussed previously, Taiwan is a very attractive market in which local and foreign multinationals have a strong demand for international legal advice. Our research findings reveal that the motives of foreign law firms to enter Taiwan are follow-the-client, follow-the-competitor and market-seeking. Under the current regulations, foreign law firms are sanctioned in Taiwan only as consulting offices. At present, all foreign law firms are required to work through a Taiwanese law firm or lawyer, and as such, the local legal advice to their clients (i.e., foreign multinationals doing business in Taiwan) has to be supplied by their local partner.

Bargaining Position of International and Local Law Firms

What bargaining position could an international law firm have in order to establish such a collaboration with a local law firm? Our findings indicate that Taiwanese law firms are looking for strategic assets and market development ability in order to enhance their competitive edge in the international legal service market. International law firms that possess asset (ownership) advantages, such as international legal advice expertise, management know-how, international legal information systems and good brand equity, have a strong bargaining position to establish international collaboration with a "strategic-asset-seeking" local law firm. On the other hand, international law firms with a good number of multinational corporate clients can have a strong position in negotiating the collaboration with Taiwanese "market-seeking" law firms. These findings justify the importance of international law firms' expert power (i.e., tangible and intangible asset advantages) in structuring the collaboration modes with local law firms in Taiwan.

The bargaining power of Taiwanese law firms results from location and asset advantages. According to a report done by Baker & McKenzie's International Center for Commercial Law (1997), foreign investments into Taiwan has been ten times more than into Japan since 1994. In addition, during the 1997 Asian financial crisis, Taiwan was the only country in the region whose stock market went up. In comparison with Japan, Singapore, and South Korea, Taiwan is a much more open market for international law firms to leverage their competitive advantages. As of February 1998, Back & McKenzie, for instance, have 60 lawyers in its Taipei Office, as opposed to 41 in Tokyo, 38 in Singapore, and no presence at all in South Korea. Under current regulations, however, international law firms have to rely on Taiwanese law firms or lawyers in order to provide legal advice to their clients in Taiwan. This situation gives Taiwanese law firms a location advantage to negotiate a collaboration mode with international law firms from any country. Nonetheless, as discussed previously, international law firms who enter Taiwan's legal market may have the motive of "market seeking." Such international law firms tend to look for a potential partner who has asset advantages and who thereby can help them to expand their legal advice business to local clients.

Transnational Strategy of International Law Firms

Law firms in the international legal service industry experience high pressure both in local responsiveness and in global efficiency. Dramatic national differences of cultures, legal systems and government regulations have forced international law firms to cope effectively with the host legal environment in order to do business locally. In addition, international law firms have encountered strong competition not only from their rival law firms but also from international accounting firms and management consulting firms offering their multinational corporate clients packaged services including legal advice in the global market. International law firms doing business in such a competitive environment should apply transnational strategy for global efficiency, national responsiveness and global learning (Bartlett & Ghoshal, 1992; Ghoshal & Nohria, 1993). By using such strategy, the headquarters centralize certain core resources (i.e., international legal information systems and international legal expertise), while local affiliates (i.e., branch offices and associated law firms) provide local legal advice through the cooperation of both foreign and local lawyers. Such a strong interdependence of resources and responsibilities among affiliates worldwide can significantly enhance the global efficiency of an international law firm. As a result, we see evidence that law firms are interested in setting up overseas affiliates. Arthur Anderson, for example, has moved toward increasing its worldwide legal service affiliates (Banks, 1997). And, whenever possible, international law firms tend to open branch offices in host countries where international business is booming. Baker & McKenzie recently established branch offices both in Tokyo (1996) and in Beijing (1993).

In such arrangements, the capability of an affiliate in the host country determines whether it can have the autonomy to take initiatives in offering legal advice to its multinational and local clients. According to Bartlett and Ghoshal (1988), if the local legal market is significantly different from what the international law firms is used to, and if the affiliate has a good depth of knowledge in the area, the affiliate should then take the leadership in providing legal advice to its clients. However, if neither the parent nor the affiliate has the competence or the right to offer legal advice in the host country, then collaboration with a local law firm is necessary. In this study, we found that international law firms have to establish collaborations with local law firms in order to penetrate the market. In addition, if the local partner is competent, then a formal collaboration (including type 1 and type 2 collaboration modes) is preferred, allowing the local law firm to have the autonomy to make its own decisions for servicing clients in the host country. This finding appears to suggest that international law firms should adopt a low level of centralization (only for core resources), a moderate level of formalization and a high level of normative integration in a high complexity and high resource market environment (Ghoshal & Nohria, 1989, 1993).

SUGGESTIONS FOR FURTHER STUDY

The major research limitation of this study is the small sample size. Our objective, however, is to study the international collaboration patterns between Taiwanese and foreign law firms under a restrictive environment. In this study, we do reveal important motives and interesting patterns of international collaborations between Taiwanese and foreign law firms. Further research is suggested. First, a cross-country study of the legal industry in newly industrialized countries (NICs) in Asian-Pacific is necessary in order to understand whether there are differences in international collaboration among firms in areas such as Singapore, Hong Kong and Korea. Second, in order to explore the similarities and differences of the behavior patterns of law firms in different countries globally, a cross-country study of law firms from NICs in the non-Asian-Pacific and the same study of law firms from developed countries are recommended. Third, single country research pertaining to other professional service industries such as accounting, management consulting and medical service is suggested in order to understand whether there are industry-specific elements affecting the internationalization of those service firms. Fourth, we also suggest further research pertaining to the knowledge transfer between international and local law firms and the human resource management issues concerning such knowledge transfer. These studies will help us to understand the impacts of such collaboration upon the strategic positions of participating parties.

NOTES

1. We conducted a principal component factor analysis with a varimax rotation to further understand the internationalization process of these Taiwanese firms. Two different objectives for internationalization are identified: 1) strategic asset seeking and 2) market seeking.

2. These data are available upon request.

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Wen-Shiung Jan, Industry Analyst, Barits Securities Corporation, Taipei, Taiwan.
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Date:Sep 22, 1998
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