How do prior alliance experience simultaneous commitments impact future alliance extension

HOW DO PRIOR ALLIANCE EXPERIENCE & SIMULTANEOUS COMMITMENTS IMPACT FUTURE ALLIANCE EXTENSION? SAIRAH HUSSAIN (B.Sc., Monash; M.B.T., UNSW) A THESIS SUBMITTED FOR THE DEGREE OF MASTER OF SCIENCE (BUSINESS) DEPARTMENT OF BUSINESS POLICY NATIONAL UNIVERSITY OF SINGAPORE 2009 I ACKNOWLEDGEMENTS I would like to acknowledge Associate Professor Nitin Pangarkar and Assistant Professor Kim-Chi Wakefield Trinh for providing me with their valuable input and support on this research paper II TABLE OF CONTENTS BACKGROUND 10 THEORETICAL DEVELOPMENT & HYPOTHESES .12 a) Why firms form alliances? 12 b) Alliance Outcomes 13 i) Alliances may be completed 13 ii) Alliances may be terminated 14 iii) Alliances may be extended .16 c) Alliance Extension as an Alliance Optimization Measure .17 d) Theoretical Perspectives for Examining Alliance Extension 18 e) The Organizational Learning Perspective 19 i) What facilitates learning in alliances? 20 ii) How does learning impact alliance outcomes? 22 iii) How does learning from past alliances impact future alliance extension? 23 f) Transaction Costs Theory .25 i) Increased complexity in managing the simultaneous relationships .26 ii) Inability to invest sufficient resources in trust building for multiple alliances 27 iii) Increased vulnerability to opportunistic behavior in simultaneous relationships 27 g) Interaction Between Prior Alliance Experience and Simultaneous Alliance Commitments 29 METHODS 31 a) Context .31 b) Data 31 i) Case-Control Sample Selection Procedure 32 c) Measures 37 i) Dependent Variable: 37 ii) Independent Variables: .37 iii) Control Variables: 38 d) Statistical Analysis 41 RESULTS 42 DISCUSSION 46 a) Implications 46 b) Limitations .47 c) Further research 48 CONCLUSION 49 III SUMMARY This paper examines how the experience levels of partner firms impact alliance outcomes, specifically the likelihood of alliance extension We use the organizational learning perspective and transaction costs theories to argue that prior alliance experience (gained prior to focal alliance formation), will increase the likelihood of extension Conversely, using the transaction costs perspective, we argue that greater post-formation simultaneous alliance activity will reduce the likelihood of alliance extension We also test for the interaction effect of these primary independent variables We used the case-control methodology to select a sample of 185 alliances formed by 200 firms in the global biopharma industry After applying a prior correction method to correct for sample selection bias, we conducted a relogit regression analysis to test the hypotheses in a multivariate setting IV LIST OF TABLES Table Summary of causes for increased transaction costs due to simultaneous alliance commitments Cause: Increased complexity in organizational processes in managing the simultaneous relationships Inability to invest sufficient resources in trust building for multiple alliances Increased vulnerability to opportunistic behavior in simultaneous relationships Under conditions of: Constrained by: Uncertainty, Complexity, Asset Specificity Bounded Rationality Impact: Managerial decision making impeded Asset transfer difficult, assets difficult to value Complexity, Lack of Trust Small Numbers Bargaining, Asset Specificity Opportunism Lack of commitment to alliance implied Opportunism High costs of implementing deterrence mechanisms TABLE Operationalization of Variables Variable Type: Dependent Independent Controls Name: Alliance Extension Prior Alliance Experience Operationalization: Binary variable Average of the number of prior alliances formed by each partner before the formation of a focal alliance Continuous variable Count of the average number of alliances Simultaneous Alliance formed by the two partners between the date Commitments of formation and the date of extension of the focal alliance For the half of the sample which consisted of the ‘control’ alliances that were not extended, we used the extension date of the corresponding ‘case’ alliance, which was extended, as a benchmark Continuous variable Partner-specific Alliance Total number of relationships between the Experience pair of firms from before formation of the focal alliance up until the extension date (in the case of ‘controls’ the extension date was used as the end date) Log-transformed, continuous variable Duration of Alliance The duration of an alliance from formation (Months) date to extension/non-extension date Standardized, continuous variable Cultural Distance Based on Hofstede’s (1980) indices and Kogut and Singh’s (1988) formula Standardized, continuous variable Purpose/ scope of the Binary variable indicating a joint R&D alliance: Joint R&D alliance, indicating otherwise Governance structure: Equity Binary variable indicating an equity versus non-equity alliances alliance, indicating otherwise Industry of partner firms: SIC code comparison score; indicating all SIC similarity four digits of the pair of SIC codes were the same, indicating the pair of SIC codes were completely different Categorical variable Number of Employees Average of the number of employees in (000s) each firm Log-transformed, continuous variable Profitability (Mils) Average of the net income of each firm in millions of dollars (US) Log-transformed, continuous variable Year of Alliance Formation Dummies for three groups of years, covering 1984 to 2004 -0.006 24.32 32.85 0.58 0.39 2.56 Joint R&D Equity SIC Similarity 1.52 0.49 0.029 -0.082 0.075 0.286* -0.120 0.0003 0.107 0.117 -0.002 0.056 -0.297* -0.034 -0.032 -0.111 0.058 0.073 -0.142 0.156* 0.026 0.187* -0.254* 0.107 -0.181* -0.044 0.83 0.46 0.0 0.122 0.117 0.008 0.008 -0.113 -0.036 10 Profitability^ 0.00 1.00 -0.0471 0.135 0.114 0.047 0.042 0.127 0.068 11 Employees^ 0.00 1.00 -0.030 0.033 0.037 -0.026 -0.143 -0.003 0.010 ^ Mean & Standard deviation calculated for raw figures before standardization or log-transformation * Significant at 5% level Cultural Dist^ -0.086 0.51 0.16 0.49 -0.133 1.00 0.00 0.038 1.00 0.00 0.48 Std Dev 0.34 Mean Alliance Extension Prior Experience Simultaneous Commitments PartnerSpecific Experience^ Duration^ Variables Results for Year of Alliance Formation dummy variables not reported TABLE 3: Descriptive Statistics & Correlations 0.082 0.146* -0.060 -0.127 1 0.075 0.457* 10 11 TABLE 4: Results of Relogit Regression Analysis for Alliance Extension Variable Dependent variable: Alliance Extension Model Model Model 0.383 (0.223)* Prior Experience Simultaneous Commitments Model 0.372 (0.226)* Model 0.825 (0.287)*** -0.372 (0.180)** -0.370 (0.181)** -0.406 (0.183)** 0.703 (0.218)*** 0.359 (0.282) 0.355 (0.276) 0.313 (0.269) 0.309 (0.267) 0.333 (0.275) Duration 0.022 (0.178) 0.095 (0.190) 0.0327 (0.177) 0.104 (0.190) 0.207 (0.220) Joint R&D 0.346 (0.339) 0.484 (0.354) 0.338 (0.342) 0.484 (0.359) 0.583 (0.388) Equity -0.384 (0.329) -0.3971 (0.325) -0.333 (0.324) -0.351 (0.322) -0.288 (0.332) SIC Similarity 0.0407 (0.107) -0.005 (0.108) 0.0766 (0.113) 0.029 (0.114) 0.018 (0.122) Cultural Distance -0.137 (0.165) -0.173 (0.175) -0.224 (0.167) -0.255 (0.174) -0.245 (0.178) Profitability -0.073 (0.182) -0.104 (0.185) -0.027 (0.171) -0.061 (0.178) -0.084 (0.181) Employees -0.0189 (0.190) -0.026 (0.194) -0.033 (0.181) -0.044 (0.187) 0.011 (0.188) Year of Alliance Formation 0.601 (0.565) 1.295 (0.788) 0.761 (0.600) 1.451124 (.8183094) 1.626 (0.809) Year of Alliance Formation 0.504 (0.490) 0.972 (0.635) 0.633 (0.531) 1.109 (0.693) 1.070 (0.643) Prior Experience x Simultaneous Commitments Partner-Specific Experience 185 No of Observations Dependent variable: Alliance Extension Values in parentheses are standard errors ***p < 0.010, **p < 0.05, *p < 0.10; all tests are two-tailed TABLE Goodness-of-Fit Statistics Statistic R-Square Chi-Square Log-likelihood Model 0.03 7.26 (10) -115.03 Model 0.04 10.54 (11) -113.388 Model 0.05 12.32 (11) -112.4996 Model 0.07 15.49 (12) -110.913 Model 0.12 27.45 (13) -104.93 Trend Increasing Increasing Increasing Values in parentheses are degrees of freedom V LIST OF FIGURES FIGURE Overview of Research Objective Alliance Completion Alliance Termination Alliance Experience Focal Alliance Alliance Extension FIGURE Matrix Representing Results Simultaneous Alliance Commitments High Low Low ( ) Low (-/+) Low High (+++) High (+) High Prior Alliance Experience VI MAIN BODY OF THESIS BACKGROUND In this paper, we study the impact of alliance experience on alliance outcomes - specifically the likelihood of alliance extension We examine this topic through two lenses, the organizational learning perspective and the transaction costs theory Although there has been extensive research conducted on the role of prior alliance experience in achieving favorable outcomes (e.g., Barkema et al., 1997; Doz 1996), to our knowledge, the roles of learning gained from past alliance experience prior to alliance formation and of transaction costs after alliance formation on the likelihood of alliance extension have not been studied before We believe that our study makes a significant contribution to the extant understanding of strategic alliances in two ways Firstly, it addresses an underresearched issue: the extension of alliances as an alliance outcome Secondly, it advances the current strategic management and international business literatures by utilizing an interesting data sampling methodology Elaborating on the first point, studies on alliances have proliferated with the increased interest among researchers in the topic, which is attributable to the increased use of alliances as a strategy in the international business arena over the last several decades (Wohlsetter, Smith and Malloy, 2005) There are several aspects of alliance strategy that have been researched extensively including: motivations behind alliance formation (e.g., Mariti and Smiley, 1983), the choice of governance structure (e.g., Gulati, 1995; Pangarkar and Klein, 2001), and partner selection (e.g., Varadarajan and Cunningham, 1995) However, there has been relatively less research conducted on alliance outcomes Although several case studies (Arino and de la Torre, 1998; Doz, 1996) have been conducted, there are only a few large sample 10 are neutralized if a firm has too many simultaneous commitments That is, as the number of simultaneous alliance commitments increases, there may be a diminishing marginal utility in terms of the contribution towards learning Therefore, transaction costs of alliances are manageable up to the point that there are not too many simultaneous commitments So when can firms manage simultaneous commitments? Our results suggest that if firms are looking to achieve positive alliance outcomes, they should maintain a balance between prior alliance experience and the number of current simultaneous alliance commitments Over time as each successful alliance is either completed or extended, then the number of prior alliance experiences increases, so the recommended number of alliances to be formed or participated in simultaneously increases Therefore, more experienced firms may have the ability to manage a greater number of simultaneous alliance commitments We recommend that firms manage simultaneous alliance commitments in the manner proposed by Parise and Casher (2003) They suggest that firms adopt the alliance portfolio approach for managing their alliances This effort includes implementing alliance functions dedicated to allocating resources to specific alliances b) Limitations We acknowledge several limitations of our analysis Our measures for alliance experience are only a proxy for the extent of organizational learning, which we argue facilitates alliance extension That is, although forming alliances may provide partner firms with the opportunity to learn, several factors will influence whether or not this learning will actually occur Nonetheless, our approach is 47 consistent with several prior studies (e.g., Hamel, 1991; Mowery, Oxley and Silverman, 1996; Inkpen and Beamish, 1997; Dussauge, Garrette and Mitchell, 2000) Furthermore, our study assumes that alliance experience will have positive influences However, we must acknowledge that certain alliance outcomes can have negative impacts on partner firms, such as acquiring a negative reputation or loss of trust after an alliance termination The main limitation of our study is that we have used a secondary source of data to observe events, such as alliance extension Although this has been the approach adopted by several researchers in the past (e.g., Gulati, 1995; Dussauge, Garrette and Mitchell, 2000), perhaps a better alternative approach would be to use a primary data source For example, we could conduct detailed case studies of alliances in order to observe the nature of organizational learning directly (e.g., Arino and de la Torre, 1998) c) Further research This study suggests several areas for further research Our main finding that that the alliance experience of the partnering firms after the formation of a particular alliance has a negative impact on the likelihood of that alliance being extended requires further empirical validation in a diverse range of industries Future research might also perform a fine grained analysis of the reasons of alliance extension and the drivers of these outcomes Another fruitful avenue might include examining whether prior alliance extensions increase the likelihood of future alliance extensions We submit that extensions represent an opportunity for partner firms to introspect and accumulate knowledge which might help future alliance performance In order to more thoroughly demonstrate the presence of learning through alliances, future 48 research could be conducted on this topic by examining patent citations resulting from alliances Another option is to carry out a similar study but from the perspective of the firm, to see whether each alliance partner’s future alliances are extended or not Such a study could be conducted by measuring prior alliance experience and the number of simultaneous commitments at the firm level and examining the impact of these on each firm’s alliance outcomes CONCLUSION This study aimed to contribute to the literature by examining the impact of past alliance experience on the likelihood of the continuation of current, simultaneous co-operative relationships Our approach to this study has featured a number of different novel elements including: using alliance extension as an outcome measure; differentiating between alliance experience gained prior to and after focal alliance formation; proposing that transaction costs matter not just in terms of choosing exante governance structure but also in post-formation achievement of outcomes; and, lastly, the adoption of the case control methodology Our results suggest that firms can manage simultaneous alliance commitments better when they maintain a balance between prior experience, and current simultaneous alliance commitments The consequences of this are that firstly, the learning gained prior to the formation of a focal alliance is useful and can be applied to the current alliances that the firms are involved in Secondly, the transaction costs of participating in a focal alliance are manageable and allow firms to overcome increased complexity in organizational processes in managing the simultaneous relationships, the inability to invest sufficient resources in trust building for multiple alliances and the increased vulnerability to opportunistic behavior in simultaneous 49 relationships In conclusion, our study contributes to the literature by allowing us to understand the drivers of positive alliance outcomes 50 VII BIBLIOGRAPHY Ahuja, G 2000 The duality of collaboration: Inducements and opportunities in the formation of interfirm linkages Strategic Management Journal, 21: 317-343 Amaldoss, W., Meyer, R.J., Jagmohan, S.R and Rapoprt, A 2000 Collaborating to Compete Marketing Science, 19(2): 105-126 Anand B and Khanna, T 2000 Do firms learn to create value? 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Research, 10(1): 105-121 Zollo, M., Reuer, J.J and Singh, H 2002 Interorganizational Routines and Performance in Strategic Alliances Organization Science, 13(6): 701-713 61 ... facilitates learning in alliances? 20 ii) How does learning impact alliance outcomes? 22 iii) How does learning from past alliances impact future alliance extension? 23 f) Transaction... levels of prior alliance experience In fact, when prior alliance experience is low, high levels of simultaneous alliance commitments lead to negative alliance outcomes in the form of non -extension. .. examine how learning from past alliance experiences impacts future alliance outcomes We also refer to the TCE to demonstrate the high transaction costs of managing increased simultaneous alliance commitments,