Part 2 - Theoretical Perspectives on R&D Alliance Success

The theoretical perspectives underpinning hypotheses tested in this study are derived from both our review of prior literature on R&D alliance success, and from our exploratory interviews with participants in R&D alliances that received funding support from the Advanced Technology Program (ATP) at the National Institute of Standards and Technology (NIST). We conducted semi-structured interviews that focused on the question: What are the factors that contribute to, or inhibit, alliance success? The participants in these interviews consistently identified factors that related to knowledge sharing in the alliance, which in turn affected success in achieving technical objectives, generating research outcomes, and commercialization of technology (Dyer and Powell, 2001). Drawing on prior research and on these interviews, we developed the theoretical logic and hypotheses presented in the following sections.

Alliance Design Factors: Alliance Structure

Number of Alliance Partners

In alliance design, firms that initiate an alliance aim to optimize the number of partners to involve in the alliance. Additional partners may bring additional knowledge and resources to the alliance, but each additional partner also brings additional transaction and coordination costs (Gulati and Singh, 1998). Each additional partner firm must be included in negotiations regarding the goals of the collaboration, protection of intellectual property, control and ownership of research output, how to share knowledge and collaborate in R&D, etc. Adding more partners to an alliance may also hinder knowledge sharing by increasing the risk of unintended knowledge leakage (Oxley and Sampson, 2004). The greater the number of partners in an alliance, the more reluctant individual firms may be to share knowledge, fearing greater potential for unintended knowledge spillovers when more firms have access to the knowledge.

With each additional partner, the number of alliance partners increases linearly as N, but the number of dyadic relationships increases quadratically as N(N-1)/2. With two firms there is one relationship to manage; with three firms there are three relationships; with four firms, six relationships, and so on. In our interviews with R&D alliance participants, many observed that knowledge sharing and coordination was more difficult with more members. As one participant stated, "The more people you have, the more people you have to coordinate. It gets unwieldy at some point." (Dyer and Powell, 2001, p.14). Above some threshold number of partners, transaction and coordination costs become significant, and concerns about knowledge leakage inhibit the ability of alliance partners to share knowledge, which is critical to R&D alliance success. In the cost-benefit calculation for deciding how many partners to include in an alliance, if alliance designers err in optimizing the number of partners to involve, we expect that the tendency is to underestimate transaction and coordination costs. Hence, we expect that alliances with a greater number of partners will have lower performance outcomes.

Hypothesis 1: The greater the number of R&D alliance partners, the lower the performance outcomes of the R&D alliance.

Presence of Competitors

Prior research suggests that R&D alliances are fraught with risks because firms must simultaneously share knowledge and technology, as well as protect knowledge (Hamel, 1991; Oxley and Sampson, 2004). Firms must find the right balance between maintaining open knowledge exchange to further the technological goals of the alliance while also preventing unintended leakage of knowledge. Preventing opportunism within R&D alliances is a prime concern, and especially challenging for a number of reasons.

First, joint R&D often requires high levels of investment in complementary assets or knowledge by the participants. When a firm performs part of a research project, the knowledge it gains may be useless unless combined with the work of partner firms with complementary knowledge. This creates potential for opportunistic behavior on the part of partner firms that possess the complementary assets or knowledge. In effect, these knowledge assets are "transaction-specific" assets, and in this transaction relationship there is significant potential for opportunism (Klein et al, 1978; Williamson, 1985).

Second, R&D alliances are characterized by a high degree of uncertainty regarding both inputs and outputs. Monitoring inputs and "effort" on the part of one's partner is extremely difficult. R&D alliance tasks are largely intellectual in nature and, therefore, third party monitoring is inefficient. Under these conditions, effective self monitoring (Demsetz, 1988) is required because it is impossible to really know whether an alliance partner is truly sharing its most relevant knowledge. In short, the high degree of uncertainty regarding inputs and outputs provides numerous opportunities for opportunistic behavior on the part of alliance partners.

Finally, there are significant information asymmetries among partners in R&D collaborations. Each firm brings different knowledge to the table and may be reluctant to share information due to the desire to prevent unintended knowledge spillovers. Once technological information is revealed, the receiver of knowledge has no incentive to pay for the information. Thus, a primary challenge in R&D alliances is to figure out how to openly share knowledge that is relevant to the alliance objectives while preventing undesirable knowledge spillovers.

These challenges to knowledge-sharing in R&D alliances are exacerbated in the case of competitor collaborations where partners are ultimately engaged in a zero-sum game in the marketplace (one partner's commercial success ultimately has a negative impact on the commercial success of another partner). For example, the decision regarding the extent to which a partner should fully collaborate (sending the most high caliber researchers, sharing proprietary knowledge, etc.) may be characterized by a Prisoner's Dilemma game, where despite the fact that the two firms would be better off by jointly cooperating, both firms individually have the incentive not to share skills and information. Hamel's (1991) detailed examination of nine alliances revealed that firms typically try to internalize their partner's skills while protecting their own. As one manager in his study observed, "[Our partner] tries to suck us dry of technology ideas they can use in their own products. Whatever they learn from us, they'll use against us worldwide." (Hamel, 1991, p.87). In our interviews, an R&D alliance manager stated, "Having direct competitors in the [alliance] definitely inhibited information sharing. I don't take guys to the [alliance] meetings if they talk too much; sometimes I have to say to them 'That's enough. You are talking too much.'" (Dyer and Powell 2001, p.13).

Even if the outcome of research effort is not characterized as a zero-sum game, R&D alliances with direct competitors could lead to a collective reduction of research efforts. Katz (1986) demonstrates the possibility that when firms cooperate in cost-reducing R&D, but compete in product markets, the firms might collaborate to conduct less R&D to lessen the severity of competition in product markets. Branstetter and Sakakibara (2002) empirically examine Japanese government-sponsored R&D consortia and find that the research productivity of participating firms is lower when the degree of product market competition among participants is higher.

Hypothesis 2: If an R&D alliance involves firms that are direct competitors in product markets, then the performance outcomes of the R&D alliance are lower.

Geographic Distance between Alliance Partners

Prior research shows that geographic proximity plays an important role in facilitating interaction and knowledge-sharing between collaborating firms (Saxenian, 1994; Dyer, 1996; Almeida and Kogut, 1999). For example, Dyer (1996) finds a strong relationship between geographic proximity of automaker and supplier facilities, and the extent to which the firms engage in face-to-face interaction. He also finds that greater face-to-face interaction between supplier-customer engineers leads to fewer defects and higher overall product quality. Geographic distance presumably increases the cost of frequent face-to-face communication, thereby decreasing knowledge sharing and reducing coordination effectiveness (especially when tasks are highly interdependent).

Hypothesis 3: The greater the geographic distance between R&D alliance partners, the lower the performance outcomes of the R&D alliance.

Alliance Design Factors: Firm Attributes

General and Partner-Specific Alliance Experience

Prior research generally suggests that firms with greater partnering experience develop "relational capabilities" that enhance their ability to extract value from subsequent alliances (Anand and Khanna, 2000; Kale et al, 2002). Partner experience can be either "general alliance experience" or "partner-specific alliance experience." Whereas the former refers to experience gained from all prior alliances, the latter refers to prior alliance experience with a specific partner. Firms that engage repeatedly in an activity are able to draw inferences from their experiences, and store and retrieve such inferred learning for use in subsequent engagements in the activity (Levitt and March, 1988). In the alliance context, firms with substantial experience in alliances often have dedicated personnel charged with capturing, codifying, and communicating best practices in managing alliances. Similarly, when firms have repeated alliances with specific partners, the partnering firms may be induced to invest in relation-specific assets that reduce transaction and coordination costs. Moreover, learning accumulated through partner-specific experience may lead to the emergence of stable and efficient inter-organizational knowledge-sharing routines (Dyer and Singh, 1998; Zollo et al, 2002).

Most studies have found results consistent with the expectation that general and partner-specific experience lead to superior alliance performance. However, a recent study by Hoang and Rothaermel (2005) calls into question the relationship between partner-specific experience and R&D alliance performance. In their study of R&D alliances for new drug development, they find that general partnering experience has a positive effect on performance for small biotechnology firms, but not for their larger pharmaceutical firm partners. They suggest that larger firms have already acquired significant experience and capabilities at alliances, so there is little difference in capabilities of these firms. Interestingly, contrary to their expectations, they find that partner-specific experience has a weakly negative effect on successful drug development. Hoang and Rothaermel suggest that the reason for this counterintuitive finding may be that partners inappropriately generalize from their prior experience with that partner—but the next drug development project is not like the last one. The logic for this conclusion is similar to that in Haleblian and Finkelstein's (1999) study of acquisition and performance, which concludes that firms with a moderate amount of experience in acquisitions may be less successful in subsequent acquisitions if the new acquisition is significantly different in nature from prior acquisitions. Another plausible reason for this result may be that for firms pursuing innovation objectives in alliances, repeated transactions with the same partner—while promoting efficiency—may not result in novelty. Thus, previous findings of a positive relationship between partner-specific experience and alliance performance in general may not hold for R&D alliances in particular. Our study offers the opportunity to examine the effects of both general and partner-specific experience on R&D performance, using multiple performance measures.

Hypothesis 4a: The greater the general alliance experience of the firm, the better the performance outcomes of the R&D alliance for the firm.

Hypothesis 4b: The greater the partner-specific experience of the firm with its alliance partners, the better the performance outcomes of the R&D alliance for the firm.

R&D Capability

Generally, we expect that the overall R&D capability and total stock of knowledge of an R&D organization would have a positive impact on performance outcomes of an R&D alliance that the organization participates in. A proxy measure for an organization's overall R&D capability and stock of knowledge is the total number of R&D personnel at the organization. To realize benefits from participating in alliances, firms must identify, assimilate, and commercialize useful knowledge developed through collaboration. A firm's ability to take advantage of externally generated knowledge—its absorptive capacity—depends upon the stock of related knowledge accumulated by the firm (Cohen and Levinthal, 1989; 1990). Relatively few empirical studies have examined the impact of absorptive capacity on the benefits that firms obtain from participation in alliances. Mowery et al. (1996) find that pre-alliance technological overlap with alliance partners enhances a firm's absorption of technological capabilities, but a firm's R&D intensity has no effect. We also expect that economies of scale and scope in R&D characterize the R&D capability of a firm. We expect that "knowledge spillovers" between personnel within a firm enhance the R&D capability of the firm. Within a firm, R&D personnel working on any given project are able to learn from other technical personnel at the firm working on different projects. We hypothesize that firms with a greater R&D capability and stock of knowledge, as proxied by total R&D employment, are able to benefit more from R&D alliances, and therefore have better alliance performance outcomes.

Hypothesis 5: The greater the total R&D employment of the firm, the better the performance outcomes of the R&D alliance for the firm.

Alliance Management Factors

Number of Technical Personnel

A key management decision for a firm participating in an R&D alliance is to determine the number of technical personnel to allocate to the effort. The level of technical personnel resources that a firm devotes to an alliance project affects both the direct R&D output and the R&D learning benefits that the firm can expect to receive from participating in the alliance. For the firm, the allocation of R&D personnel is firstly related to direct innovation outputs as a result of the effort, and secondly related to R&D absorptive capacity and R&D learning (Cohen and Levinthal, 1989).

In regard to absorptive capacity, Lane and Lubatkin (1998) compare firm-level and firm dyad-specific measures of absorptive capacity and find that the latter is better in explaining learning outcomes from alliances. Thus, prior research indicates that alliance-specific measures of absorptive capacity, i.e. pre-alliance technological overlap (Mowery et al, 1996), or similarity of knowledge stock and management practices (Lane and Lubatkin, 1998), accounts for alliance benefits better than traditional firm-level measures of absorptive capacity, i.e., R&D spending or R&D intensity.

Prior research has emphasized that gatekeeping or boundary-spanning roles are important for absorbing external knowledge (Cohen and Levinthal, 1990). The more people that a firm positions at the "gate", the more receptive the firms become to external or alliance knowledge. By involving more R&D personnel in an alliance collaboration, a firm is able to transfer more individual and interpersonal knowledge, and is able to widen the conduit for knowledge flows from the R&D alliance to itself. Agrawal (2006) examines the impact of total amount of time that professors, graduate students, and research scientists work in collaboration or close communication with firms that license university inventions, and finds that as total collaboration time increases, both the likelihood of commercialization and the degree of commercialization success increases. Thus, we expect that firms that allocate more R&D personnel resources to an R&D alliance effort will receive greater benefits from the alliance, both in innovation outcomes and learning outcomes.

Hypothesis 6: The greater the number of technical personnel allocated to an R&D alliance by the firm, the better the performance outcomes of the R&D alliance for the firm.

Frequency of Communication

Prior studies suggest that when firms collaborate on complex problems, they are more likely to be successful if they develop processes that facilitate frequent communication (Clark and Fuji-moto, 1991; Dyer, 1996). Frequent communication results in greater knowledge-sharing between alliance partners, which increases the likelihood of success in collaborative efforts. Mohr and Nevin (1990) define communication as the process by which partner firms in an alliance transmit information, coordinate activities, prompt participatory decision-making, and encourage commitment and loyalty to the alliance. Some research suggests that partners that develop relation-specific know-how through frequent communication are less likely to misunderstand or misinterpret information (Nishiguchi, 1994; Clark and Fujimoto, 1991). More efficient communication and coordination should result in better performance. With greater complexity of collaborative tasks, direct face-to-face communication and work interaction is believed to be of greater importance relative to other forms of communication, such as email, telephone, or even video conference. Face-to-face interaction is described as having high knowledge carrying capacity because it presents immediate feedback opportunities and makes use of both visual and audio modes of communication (Daft and Lengl, 1986; Dyer, 1996).

Interestingly, the relationship between communication and performance has rarely been empirically tested in R&D alliances, and, based upon our review of the R&D alliance literature, the relationship between face-to-face interaction and performance has never been tested. Our hypothesis is that more frequent communication and interaction will result in greater knowledge sharing and better performance outcomes in R&D alliances.

Hypothesis 7a: The more frequent the communication among R&D alliance partner personnel, the better the performance outcomes of the R&D alliance.

Hypothesis 7b: The more frequent the face-to-face interaction among R&D alliance partner personnel, the better the performance outcomes of the R&D alliance.

Governance Arrangements

Governance arrangements play an important role in creating a transaction environment where alliance partners can cooperate and share knowledge or resources with assurance that they will also share equitably in the benefits from the collaboration. Prior studies on alliance governance and alliance success have examined the conditions under which collaborating firms prefer contractual versus equity ownership governance arrangements (Oxley, 1997; Oxley and Sampson, 2004; Sampson, 2004). These studies generally find that when hazards of opportunism are high in an alliance, equity governance arrangements are preferred. Conversely, when hazards are low, contractual governance is preferred (Sampson, 2004). R&D alliances are often viewed as alliances where the hazards of opportunism are high because of the challenges associated with both sharing, and protecting, knowledge. However, in an empirical study of contractual and equity governance arrangements in a sample of R&D alliances, Sampson (2004, p.486) concludes that "Contractual governance appears to be more efficient in all but the most extreme cases" due to the "excessive bureaucracy" associated with managing equity-based governance arrangements. In fact, ATP research "joint venture" projects are contractual joint ventures or alliances, organized under a contractual agreement, and not equity joint ventures where partner firms create a separate legal entity (with joint ownership by the parent companies).

Alliance partners have to rely on safeguards (e.g., contractual provisions, governance procedures) in order to prevent opportunism (Williamson, 1985). Williamson (1993) argues that contractual safeguards are necessary whenever there is the potential for opportunism within a transaction relationship. Since R&D collaborations entail risks with regard to intellectual property rights and knowledge spillover, they are more likely to be successful when the partners have crafted effective contractual provisions to protect intellectual property rights, monitor task performance, and resolve disagreements. Without satisfactory contractual protections or governance procedures, alliance partners may be unwilling to share knowledge that is critical to the venture. For example, without satisfactory protections one party may use or modify technology acquired during the alliance in ways that were not intended and which are injurious to a partner. Naturally, an unwillingness to share knowledge would severely hamper the ability of the collaborating firms to jointly develop valuable new knowledge.

Hypothesis 8: The more satisfied are R&D alliance partners with contractual provisions and governance procedures for protecting intellectual property rights and resolving disagreements, the better the performance outcomes of the R&D alliance.

Goodwill Trust

Although prior research on the relationship between governance arrangements and alliance success has typically focused on forms of contractual or equity ownership arrangements (Oxley and Sampson, 2004; Sampson, 2004), sociologists have long emphasized that informal social controls—e.g., goodwill trust—often substitute for formal social controls (Macaulay, 1963; Granovetter, 1985; Black, 1976; Ellickson, 1991). Prior work generally suggests that "contractual trust" and "goodwill trust" are substitutes (Sako, 1991). Thus, alliance partners may rely on personal trust relations as a primary governance mechanism in an alliance relationship.

We draw on prior literature in defining trust as one party's confidence that the other party in the exchange relationship will not exploit its vulnerabilities (Barney and Hansen, 1994; Zaheer et al., 1998; Dyer and Chu, 2003). This confidence, or trust, is expected to emerge where the "trustworthy" party in the exchange relationship: (1) shows good will and behaves in ways perceived as "fair" by the exchange partner; and (2) does not take advantage of an exchange partner even when the opportunity is available (Mayer et al., 1995). Our definition therefore characterizes interfirm trust as a construct based on goodwill or benevolence, and has frequently been referred to as "goodwill trust" (Sako, 1991; Dyer and Chu, 2003). Conceptually, organizations are not able to trust each other—trust is a phenomenon that has its basis in individuals. Trust can be placed by one individual in another individual or in a group of individuals (e.g., within an organization). However, individuals in an organization may share an orientation toward individuals within another organization. In this perspective, "interorganizational trust describes the extent to which organizational members have a collectively-held trust orientation toward the partner firm" (Zaheer et al, 1998, p.142).

In this study, we consider goodwill trust, this collective orientation of a company toward its alliance partners. Trust is likely to be important in R&D alliances, which represent situations of risk where there is potential for undesirable knowledge spillovers and opportunistic behavior on the part of partners. Higher levels of trust are expected to improve R&D alliance performance by lowering transaction costs or increasing knowledge sharing.

Trust lowers transaction costs and improves the effectiveness of coordination by reducing both bargaining and monitoring costs. When alliance partners trust that payoffs will be fairly divided, they do not have to plan for all future contingencies. They can be confident that equitable adjustments will be made as market conditions change. Trust therefore promotes negotiating efficiency by enabling each party to be more flexible in granting concessions because of the expectation that the partner will reciprocate in the future (Dore, 1983). Furthermore, negotiations are more efficient because partners have confidence that information provided by the other organization is not misrepresented. As observed by Zaheer et al. (1998, p.144), "Trust reduces the inclination to guard against opportunistic behavior (i.e. deliberate misrepresentation on the part of the exchange partner)."

Trust also influences the extent to which alliance partners are willing to share knowledge—especially proprietary knowledge. A company will share this information if it trusts that the partner will not steal its ideas or use them in a way that would be inappropriate or damaging. Without goodwill trust, alliance partners are less likely to share knowledge, which is critical to success in R&D alliances.

Hypothesis 9: The greater the goodwill trust among partners in an R&D alliance, the better the performance outcomes of the R&D alliance.

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Date created: August 29, 2006
Last updated: September 11, 2006

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