Academic journal article Academy of Strategic Management Journal

Resource Value as a Source of Negotiating Power: Determinants of Alliance Funding Amounts in the Us Biotech Industry

Academic journal article Academy of Strategic Management Journal

Resource Value as a Source of Negotiating Power: Determinants of Alliance Funding Amounts in the Us Biotech Industry

Article excerpt

1. INTRODUCTION

This research focuses on the competition for benefits among alliances partners during the alliance formation process. Collaborating can create inherent tensions as partners balance the urge to appropriate the benefits an alliance creates against the desire to achieve collaborative goals (Coombs Mudambi and Deeds, 2006, Kogut, 1988; Patzelt, Shepherd, Deeds, and Bradley, 2008; Zeng and Chen, 2003). Competition among partners during the alliance formation process, no doubt, increases opportunistic behaviors in knowledge-intensive collaborations as firm position themselves to maximize their own returns on investments (Deeds and Hill, 1998; Gans & Stern, 2003).

There are two somewhat different opinions as to which partner is most likely to benefit more from alliance in the existing literature. Teece (1986) contends early stage firms developing innovative products often find it difficult to profit from the innovative product when the alliance partner controls specialized complementary assets. The apposing position contends early stage ventures developing innovative products should be able to profit from their innovative product because the early stage venture controls a valuable resource: the innovation (Das, Sen, & Sengupta 1998).

Teece observed in 1986 that it does not seem possible for one firm to keep up with every aspect of markets driven by ongoing technical advancements. Since 1986, several industries developed a relatively stable structure that includes smaller, usually younger, innovative firms collaborating on an ongoing basis with incumbent firms that appear to hold specialized/co-specialized complementary resources. For instance, pharmaceutical companies provide funding along with specialized and co-specialized complementary assets while the biotech firms tend to provide new early stage innovative products, in the biotech-pharmaceutical industry. Similarly the computer industry is characterized by firms specialize in chip, memory, or software development while the name brand companies assemble the components. If incumbent firms controlling specialized complementary assets consistently made it excessively difficult for early stage to profit from the innovations they develop, it would be difficult to explain why entrepreneurs would continue creating new startups in industries lacking a potential for making money and yet, entrepreneurs continue to start new companies in these industries. Thus, it appears as though Teece's (1986) seminal work does not fully explain some industries where highly technical and specialized firms continue to develop innovative products while established firms focus on specialized and co-specialized complementary assets.

In this work, I offer and test new theory to explain how the resource endowments of the firms involved in the alliance will predict remuneration offered the early stage technology venture when an alliance contract is signed. I combine concepts from resource dependence theory (Pfeffer, & Salancik, 2003), and the resource based view of the firm (Barney, 1986 & 1991) with Hamel's (1991 p. 99) observation that who benefits from an alliance is a function of who needs whom the most to propose: the relative value of the resource endowment of collaborating firms predicts the remuneration the funding firm is willing to offer an early stage technology venture in an alliance contract. This work addresses the need for more research on the benefits small entrepreneurial firms receive from the alliances they form (Alvarez et al., 2005; Coombs et al, 2006) and the need for more research on the alliance formation process (Ahuja, 2000) by examining initial negotiation position during the alliance formation process.

I use patent citation rates to operationalize the resource value the early stage venture brings to the alliance and variety of measures to operationalize the resource value the funding firm brings to the alliance. …

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