The Portfolio Ceiling in Asymmetric Alliances: Large Partners and the Internationalization of Japanese <scp>SMEs</scp>

Abstract Large partners are critical for small‐ and medium‐sized enterprises (SMEs) seeking to overcome resource constraints in internationalization. However, as an SME's portfolio of size‐asymmetric alliances expands, governance costs can increase during post‐formation alliance management. We develop theory on the resource benefits and governance costs of asymmetric alliance portfolios, arguing that the net benefit of access to large partners' resources is bounded by a portfolio ceiling. Initial alliances with large partners provide knowledge, legitimacy and network support that facilitate foreign direct investment (FDI) entries. As the portfolio expands, however, cross‐partner interfaces, safeguarding demands and partner competition consume scarce managerial capacity, limiting SMEs' ability to mobilize large partners' resources. Using a 30‐year firm‐year panel (1990–2019) of Japanese SME trading companies and their equity alliances with business‐group‐affiliated general trading companies, we identify an inverted U‐shaped relationship between the number of large partners and FDI entries, consistent with this portfolio ceiling. In line with our theory, competition among large partners is negatively associated with FDI entries. Overall, our study shows that, for resource‐constrained firms, the net value of asymmetric alliance portfolios depends on the balance between partner resource benefits and portfolio‐level governance costs.