The Economics of Knowledge- Sharing Alliances Joanne Oxley Rotman School of Management University of Toronto ESNIE 2006, Cargese

The Economics of Knowledge- Sharing Alliances Joanne Oxley Rotman School of Management University of Toronto ESNIE 2006, Cargese New Institutional Economics

The Economics of Knowledge- Sharing Alliances Joanne Oxley Rotman School of Management University of Toronto ESNIE 2006, Cargese Transaction Cost Economics

Agenda What are knowledge-sharing alliances and why should we study them? What do (we think) we know about knowledge-sharing alliances? Examples from the literature Continuing areas of disagreement Future opportunities in alliance research Linking alliance research to the broader NIE

The Rise of Alliances International alliance formation exploded in the 1980s and continued apace through most of the 1990s Alliances are concentrated in high-technology sectors, but almost every industrial sector has some alliance activity Over 50% of alliances are international (i.e. linking firms from different countries) Europe, Japan and US together account for over 90% of global alliances Research suggests that between 50% and 80% of alliances fail to live up to expectations

What in the world is (not) a knowledge- sharing alliance? Equity joint venture R&D contract Patent license Co-production agreement Technology sharing Franchise Research partnership Joint development contract Technical training agreement Customer-supplier partnership Marketing agreement

A Baseline Definition A knowledge-sharing alliance is an arrangement where two firms agree to (jointly) undertake some task that requires non-trivial transfer of knowledge from one party to the other (often in both directions) Knowledge-sharing alliances exist in many domains; technology-sharing alliances are a useful – i.e., empirically tractable – example Can be useful to think in terms of alliance motives and extent of knowledge-sharing requirements…

Alliance Motives and Knowledge Sharing Requirements

Hazards of Knowledge-Sharing Alliances Appropriability hazards Hold-up problems Free-riding ◊Specifying transaction ◊Monitoring performance ◊Enforcing compliance All stem from problems with …

Alliances as Hybrids

“Pure” Market Exchange Merger or Acquisition XX Market-Hierarchy Continuum of Alliance Forms Unilateral Contracts Bilateral Contracts Equity Alliances and Joint Ventures Licenses Supply agreements Marketing and distribution agreements Cross-licensing Co-development / R&D agreements Reciprocal supply agreements Co-marketing agreements Oxley, 1997

Structuring Knowledge-Sharing Alliances Governance Partner identities Content / transaction characteristics

What Determines How? HOW? WHO? WHAT? Research or design activities Multiple projects ->More hierarchical alliance forms Pisano, 1989 Gulati, 1995 Garcia-Canal, 1996 Oxley, 1997

Who Determines How? HOW? WHO? WHAT? Pisano, 1989 Gulati, 1995 Oxley, 1997 Multiple partners increase need for hierarchical controls Overlapping or prior alliances reduce need for hierarchical controls

Different parts of the elephant? Difficult to specify & monitor Tacit / complex know-how Difficult to articulate and transfer Reduce contracting hazards Repeat interactions Increase common understanding KBVTCE

Different parts of the elephant? Difficult to specify & monitor Tacit / complex know-how Difficult to articulate and transfer Reduce contracting hazards Repeat interactions Increase common understanding ??? Overlapping capabilities ??? KBVTCE

Absorptive Capacity “…the ability to evaluate and utilize outside knowledge is largely a function of prior related knowledge.” (Cohen & Levinthal, 1990) Partner-specific absorptive capacity relates to a firm’s ability to absorb knowledge from a specific outside party, and depends on presence of overlapping knowledge bases (Mowery, et al, 1996; Dyer & Singh, 1998; Lane & Lubatkin, 1998)

Implications of Increased A.C. for Governance: Knowledge-based perspective: Increased absorptive capacity increases common understanding and ease of knowledge sharing -> reduces need for formal governance (equity structure) Transaction cost perspective: Increased absorptive capacity makes knowledge transfers easier, but also increases hazards of unintended knowledge transfers -> implications for governance not immediately obvious

An inverted U? (Sampson, 2002) High overlapping capabilities -> easy to share knowledge, but little danger of misappropriation -> contractual governance Intermediate levels of overlap -> absorptive capacity still sufficient to support knowledge sharing, but partners have greater incentive to act opportunistically and misappropriate partners’ knowledge -> greater need for hierarchical controls - > equity joint venture Low levels of overlap -> reduced absorptive capacity decreases appropriability hazards and reduces need for hierarchical controls -> contractual governance

Different parts of the elephant? Difficult to specify & monitor Tacit / complex know-how Difficult to articulate and transfer Reduce contracting hazards Repeat interactions Increase common understanding Increase OR decrease hazards Overlapping capabilities Increase common understanding Barrier to contracting Weak contracting law No effect? KBVTCE

From Who/What/How… …to “So What?”

Measurable impact? Do knowledge-sharing alliances have a measurable impact on a firm’s knowledge base?  Yes Mowery, Oxley & Silverman, 1996, 1998, 2001 – changes in patent citation patterns Sampson, 2006 – changes in patenting rates Does governance matter?  Yes Sampson, 2004, 2006 – “mismatched” governance in R&D alliance has patenting penalty Oxley & Wada, 2006 – joint ventures increase alliance- related knowledge flows, but unrelated knowledge flows are lower than in “bare” licensing agreements

Endogeneity (it’s everywhere…) If same concerns drive partner selection, alliance scope, and governance choice, then we have endogenous matching and selection bias And in fact we find that… Mowery, Oxley, Silverman (1998): Firms more likely to choose partners with overlapping capabilities (up to a point) Sampson (2002): Firms with overlapping capabilities more likely to choose equity structures (up to a point) Mowery, Oxley, Silverman (1996): Alliances where partners have greater overlapping capabilities have greater knowledge-flows, as do equity-based alliances. WHOOPS!

(Partial) Methodological Fixes 2-stage models (instrumental variables; Heckman correction) – Shaver, 1998; Hamilton & Nickerson, 2003 Panel data – Jaffe, et al, 2005 Quasi-experiments – e.g., regulatory changes – Branstetter, et al, 2004

Who Determines What? HOW? WHO? WHAT? Oxley & Sampson, 2004 Direct competitors -> reduced alliance scope Industry laggards; overlapping capabilities -> increased scope Reciprocal relationship between scope and governance

Beyond discrete forms to contractual terms & mechanisms Can we develop greater microanalytic detail to understand how specific contract structures “map” onto discrete structural alternatives used so far? Can we deepen our understanding of governance properties of specific alliance agreement terms? Reuer, Arino & Mellewigt, 2005 Ryall & Sampson, 2003 Reuer & Arino, 2002

Conclusions TCE has proven to be a productive lens for analyzing the organization and impact of knowledge-sharing alliances Alliances are a useful test-bed for issues at the forefront of TCE, including understanding the relationship with knowledge-based perspectives