The Economics of Knowledge-Sharing Alliances

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The Economics of Knowledge-Sharing Alliances

• Joanne Oxley
• Rotman School of Management
• University of Toronto

ESNIE 2006, Cargese
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The Economics of Knowledge-Sharing Alliances
New Institutional Economics

• Joanne Oxley
• Rotman School of Management
• University of Toronto

ESNIE 2006, Cargese
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The Economics of Knowledge-Sharing Alliances
Transaction Cost Economics

• Joanne Oxley
• Rotman School of Management
• University of Toronto

ESNIE 2006, Cargese
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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

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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

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What in the world is (not) a knowledge-sharing
alliance?
Equity joint venture
Franchise
Technology sharing
RD contract
Joint development contract
Patent license
Co-production agreement
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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

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Alliance Motives and Knowledge Sharing
Requirements
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Hazards of Knowledge-Sharing Alliances

• Appropriability hazards
• Hold-up problems
• Free-riding

All stem from problems with

• Specifying transaction
• Monitoring performance
• Enforcing compliance

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Alliances as Hybrids
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Market-Hierarchy Continuum of Alliance Forms

Pure Market Exchange
Merger or Acquisition
X
X
Unilateral Contracts
Bilateral Contracts
Equity Alliances and Joint Ventures

• Licenses
• Supply agreements
• Marketing and distribution agreements

• Cross-licensing
• Co-development / RD agreements
• Reciprocal supply agreements
• Co-marketing agreements

Oxley, 1997
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Structuring Knowledge-Sharing Alliances
Content / transaction characteristics
Partner identities
Governance
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What Determines How?
WHO?
WHAT?

• Research or design activities
• Multiple projects
• -gtMore hierarchical alliance forms

HOW?

• Pisano, 1989
• Gulati, 1995
• Garcia-Canal, 1996
• Oxley, 1997

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Who Determines How?
WHO?
WHAT?

• Multiple partners increase need for hierarchical
  controls
• Overlapping or prior alliances reduce need for
  hierarchical controls

HOW?
Pisano, 1989 Gulati, 1995 Oxley, 1997
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Different parts of the elephant?
KBV
TCE
Difficult to specify monitor Tacit / complex know-how Difficult to articulate and transfer
Reduce contracting hazards Repeat interactions Increase common understanding


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

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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 firms 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)

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Implications of Increased A.C. for Governance

• Knowledge-based perspective
• Increased absorptive capacity increases common
  understanding and ease of knowledge sharing -gt
  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 -gt implications
  for governance not immediately obvious

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An inverted U? (Sampson, 2002)

• High overlapping capabilities -gt easy to share
  knowledge, but little danger of misappropriation
  -gt contractual governance
• Intermediate levels of overlap -gt absorptive
  capacity still sufficient to support knowledge
  sharing, but partners have greater incentive to
  act opportunistically and misappropriate
  partners knowledge -gt greater need for
  hierarchical controls -gt equity joint venture
• Low levels of overlap -gt reduced absorptive
  capacity decreases appropriability hazards and
  reduces need for hierarchical controls -gt
  contractual governance

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Different parts of the elephant?
KBV
TCE
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?
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From Who/What/How

• to So What?

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Measurable impact?

• Do knowledge-sharing alliances have a measurable
  impact on a firms 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
  RD 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

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Endogeneity (its 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!
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(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

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Who Determines What?

• Direct competitors -gt reduced alliance scope
• Industry laggards overlapping capabilities -gt
  increased scope

WHO?
WHAT?

• Reciprocal relationship between scope and
  governance

HOW?

• Oxley Sampson, 2004

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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

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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

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