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Article Excerpt
Introduction
Over the last 20 years, the alliance has become an increasingly prevalent organizational form, particularly for technology development activities in knowledge-intensive industries. Academic literature on alliances has grown apace as researchers seek to understand the mechanisms that link interfirm collaboration to enhanced innovation and profitability. Early work on alliances by management scholars posited a variety of benefits that could accrue to alliance partners, including learning, access to specialized resources, risk sharing, and attenuating competition (Porter and Fuller 1986). Over time, however, some of these hypothesized alliance benefits have received disproportionate attention in the literature, while others have been relatively neglected. Indeed, recent research on alliances has tended to focus almost exclusively on alliances as vehicles by which partners acquire or access new skills to become stronger competitors. It has become less fashionable in strategy research to consider the potential for firms to use alliances to shape competitive interactions, possibly attenuating competitive intensity in the industry as a whole.
When looking for evidence of learning and other competitiveness-enhancing benefits of alliances, researchers have frequently turned to event studies, examining the stock market's response to a firm's announcement of a new alliance. Most find evidence that alliance announcements are, on average, accompanied by a positive stock market response, and that the magnitude of this response varies with the capabilities and experience of the partner (e.g., McConnell and Nantell 1985, Anand and Khanna 2000, Kale et al. 2002; see McGahan and Villalonga 2005 for contrary results). These findings have usually been interpreted as support for the competitiveness-enhancing view of alliances, whereby an alliance raises a firm's value by providing access to additional resources that enable it to out-compete its product-market rivals. However, positive abnormal returns to alliance partners are equally compatible with the competition-attenuation view of alliances because in this case an alliance may increase total industry profits, some of which will accrue to alliance partners.
In this study, we seek to shed light on the different mechanisms underlying value creation in alliances by examining how alliance announcements affect the stock market's valuation of allying firms' rivals. If an alliance is expected to enhance the resource portfolio of partner firms, making them stronger competitors, then this should lead to negative abnormal returns for rivals when the alliance is announced. If an alliance is expected to facilitate a reduction in competitive intensity, however, then this should lead to positive abnormal returns for rivals because they will also benefit from the attenuation of competitive pressures (Eckbo 1983, Stillman 1983). Further, if an alliance is expected to make participants more potent competitors, then the magnitude of partner and rival abnormal returns should be inversely correlated (since the stronger that partners become, the more that rivals should be negatively affected); conversely, an alliance that is expected to soften competition should yield partner and rival abnormal returns that are positively correlated as all industry participants benefit from effective coordination by alliance participants.
We investigate the effect of firms' alliance announcements on rivals' stock market valuations through an event-study analysis of research and development (R&D) alliances involving firms in the telecommunications and electronics industries (seven four-digit SICs within SICs 366 and 367) announced during the period 1996-2004. We find that the abnormal returns accruing to rivals of the participating firms when a new alliance is announced are positively related to the returns accruing to the participants themselves. It is difficult to reconcile this finding with the idea that forming an alliance makes alliance participants more potent rivals. In addition, "horizontal" alliances, which link competitors active in the same product markets (and which we argue are particularly conducive to managing competition), have a positive impact on rivals' abnormal returns when compared with "vertical" alliances that link firms from different industries. In contrast, cross-border alliances--which we argue are less conducive to managing competition and more compatible with efforts to access new resources--are negatively associated with rivals' abnormal returns, indicating that such alliances generate greater competitive advantage for partners vis-a-vis rivals.
Our paper makes at least one theoretical and one empirical contribution to the alliance literature and another, broader contribution. Theoretically, our paper draws on literature in industrial organization (IO) and strategy to unpack the alternative mechanisms by which alliances create value for partners--either by facilitating interpartner learning and access to superior resources, such that the partners subsequently compete more fiercely with rivals, or by attenuating competitive intensity in the industry. Empirically, our study is the first examination of abnormal returns accruing to rivals upon the announcement of an alliance. The results of this analysis, although not definitive, suggest that the recent exclusive focus on learning and resource accumulation through interfirm alliances may be misplaced. By building on the work of forerunners in alliance research (e.g., Berg and Friedman 1977, 1981; Dixon 1962; Fusfeld 1958), we hope that this study will restart a conversation about the appropriate balance between competitiveness-enhancement and competition-softening motivations for alliances.
Finally, and more broadly, this study employs a methodology--examining the effect of one firm's action on the abnormal returns earned by its rivals--that is quite novel in strategy research and that can usefully be applied to inform a wide range of strategic actions. This method has been used only occasionally in prior studies in economics and very rarely in the strategy literature. (1) Analyzing rivals' abnormal returns has substantial potential, however, to shed light on other questions of competitive dynamics throughout the strategy field.
Alliance Motives and Outcomes for Participants and Rivals
When interfirm alliances emerged as a popular organizational form in the early 1980s, interest in alliances among management scholars also took off. Early studies were primarily exploratory, examining the various benefits that may accrue to alliance partners in an effort to better understand the increasing popularity of these collaborative arrangements. Porter and Fuller (1986), for example, posited a variety of benefits that could accrue to alliance partners, including learning, access to specialized resources, risk sharing, and shaping competition (see Contractor and Lorange 1988 and Lorange and Roos 1992 for similar lists of alliance motives). As the literature on alliance formation and management has developed, however, it has increasingly embraced a tight focus around a resource-accumulation role for alliances, to the exclusion of competition-shaping.
To some degree, this evolution of focus reflects a broader evolution in the economics and strategy literatures from anticompetitive to efficiency explanations of economic organization (Rumelt et al. 1991). In the 1950s through early 1980s, IO economists tended to see collusion as ubiquitous, and the primary motive ascribed to any "nonstandard" arrangement was the desire to soften competition (Williamson 1968). As this lens was applied to alliances, it is not surprising that such collaboration was viewed as a competition-softening device. Thus, for example, Fusfeld's (1958) descriptive study of joint ventures (JVs) in the iron and steel industry quotes from a 1952 Antitrust Law Symposium to the effect that "a joint venture between large competitors, regardless of its purpose and regardless of how small it may be in relation to their total business[,] will inevitably result in close association and collaboration between the parties" (p. 586); Fusfeld (1958) concludes that "... quasi mergers, like [joint ventures], should be immediately suspect ..." (p. 587). Similarly, Berg and Friedman (1977, 1981) include in their list of motives for R&D collaboration in the U.S. chemical industry the idea that "[j]oint ventures may also serve as agents which facilitate market power, through horizontal integration, input supply restrictions, or market foreclosure" (Berg and Friedman 1977, p. 1330); and they interpret elevated rates of return for JV partners as possible evidence of market power (see also Berg et al. 1982 and Dixon 1962 for similar commentaries).
Since the early 1980s, economists and strategists have increasingly favored efficiency explanations for most economic arrangements (Williamson 1985), and the application of an efficiency lens to alliances has contributed to the current focus on resource-based competitiveness-enhancement motivations for collaboration. (2) Studies of alliances as vehicles for interpartner learning have become particularly prevalent in the strategy literature. Prior work in this stream includes practitioner-oriented assessments (e.g., Hamel et al. 1989, Hamel 1991), theoretically motivated field research (e.g., Inkpen and Dinur 1998, Teece 1992), and large-sample empirical analyses (e.g., Mowery et al. 1996, Lane and Lubatkin 1998); all of these authors characterize alliances as vehicles for augmenting a firm's technological resource base. A basic (though often implicit) premise of these studies is that internalization of partners' skills as well as creation of new resources are key motives and important indicators of alliance success. Interpartner learning is thought to be particularly prevalent in alliances that include a research or technology development component (Mowery et al. 1996), leading many to cite R&D alliances as the epitome of learning alliances (e.g., Lane and Lubatkin 1998, Ahuja 2000).
Interpartner learning may not be the only motive, of course, even for R&D and other technology-related alliances. Other authors (e.g., Nakamura et al. 1996, Khanna et al. 1998, Dussauge et al. 2000) have highlighted a variant on the learning motive for alliances, whereby alliances facilitate co-specialization rather than interpartner learning per se. Here partners continue to pursue their respective areas of specialization, deepening capabilities in these areas, and the alliance serves as a vehicle for assembling complementary capabilities and resources without the need for significant technology transfer or interpartner learning. The European aircraft alliance Airbus Industrie is an oft-cited example because its member firms specialize in the design and manufacture of different components that are then brought together in the final aircraft (Mowery et al. 2002). The efficiency benefits ascribed to vertical alliances between suppliers and customers rest on a similar logic of deepening specialization and learning-by-doing while reducing information asymmetry in the vertical chain (Dyer and Singh 1998, Reuer and Koza 2000). Yet despite potentially different implications for alliance dynamics (Nakamura et al. 1996), learning and co-specialization alliances share a common premise, that successful alliances enable partners to augment their resource base, and so gain a competitive advantage over rivals. This premise also extends to risk-sharing or scale-based alliance motives, common in resource exploration industries where the elevated variance of returns from key activities motivate firms to share costs and hedge the risks of failure (Porter and Fuller 1986, p. 325). (3)
In addition to these capability- or competitiveness-enhancing benefits, alliances may also play a role in shaping competition in an industry, as the previous discussion of earlier work in industrial organization suggests. Moreover, it is important to note that explicit collusion is not a necessary condition for alliances to dampen competitive intensity in an industry. As emphasized in the IO literature on R&D cooperation (Katz 1986, Katz and Ordover 1990), for example, R&D alliances can in some circumstances lead to a reduction in the level of R&D expenditures by alliance partners without explicit collusion. The resulting reduction in R&D output in turn has the potential to "soften" competition, even with rivals who are not involved in the alliance. This is particularly true if R&D cooperation facilitates coordination in end product markets. (4)
These two broad views of alliance motives and benefits generate conflicting hypotheses about the effect on rivals of a firm's decision to form an alliance. Specifically, the competitiveness-enhancement view implies that, ceteris paribus, an alliance will lead to lower future profits for rivals; the competition-attenuation view implies that an alliance should lead to higher future profits for rivals. To the extent that capital markets accurately incorporate new information into the market values of publicly traded firms, the competitiveness-enhancement (versus competition-attenuation) view thus implies that the announcement of an alliance between two firms should lead to a decrease (versus an increase) in the market value of rivals to participating firms. Further, the competitiveness-enhancement view implies that the abnormal returns accruing to partners should be inversely correlated with those accruing to rivals, whereas the competition-attenuation view implies a positive correlation. These...
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