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Date created: August 29, 2006

Last updated: September 11, 2006

NISTIR 7323 - the Determinants of Success in R&D Alliances

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...

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…