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Article Excerpt
1. Introduction
Interorganizational alliances are widely recognized as critical to product innovation. A notable trend is the rapid growth of new product development (NPD) alliances between large, well-established firms and small, growing firms. We term these alliances involving disparately sized firms as asymmetric alliances. In particular, in high-technology markets, during 1970-1990, approximately 2,300 asymmetric alliances were formed (Barley et al. 1991, Kogut and Kim 1991). Furthermore, asymmetric alliances in high-technology industries increased by over 250% during the 1990s (Cyr 2001).
In high-technology settings, larger, established firms seek R&D partnerships with smaller, growing firms because the latter are endowed with intangible resources and unique technological capabilities in niche areas (Chen and Hambrick 1995, Stuart 2000). Gomes-Casseres (1997) notes that although larger firms have been traditionally dominant players in the information technology and pharmaceutical industries, the advent of new technologies such as microelectronics and biotechnology presents unique opportunities for smaller entrepreneurial firms to pursue targeted innovation. Research on entrepreneurship (e.g., Eckhardt et al. 2006) suggests that ties with larger firms are vital to the growth of smaller firms for at least two reasons. First, smaller firms, being strapped for funds, use the alliances with larger firms to infuse the needed tangible resources for commercializing their NPD efforts. Second, partnerships with prominent partners such as larger, established firms buffer smaller firms from their liability of smallness, enhance their chances of survival, and boost sales growth (Baum et al. 2000, Stuart 2000). For instance, the stock price of Net2phone, a small Internet service provider, increased by 50%, following the announcement of a strategic NPD alliance with two larger firms, Compaq and Sprint (Business Week 1999).
The outcomes of asymmetric alliances, particularly changes in the shareholder values of partner firms, may be different across the firms. It is important to use stock-market returns as an outcome measure for studying the impact of NPD alliances because shareholder value is a forward-looking metric (e.g., Houston and Johnson 2000, Kumar et al. 2000). (1) A small body of literature has examined changes in the shareholder values of firms in partnerships involving disparately sized firms, albeit not in the context of NPD. For instance, evidence from the mergers and acquisitions (M&A) literature suggests that the acquired (the smaller) firm and the acquiring (the larger) firm experience positive and negative short-term abnormal returns, respectively (Asquith 1983). Prior research on interfirm partnerships in general (not in the NPD context) and firm value (Alvarez and Barney 2001, Chan et al. 1997, Das et al. 1998, Koh and Venkatraman 1991, McConnell and Nantell 1985) suggests that while strategic alliances do create value for firms, there is a lack of consensus on the division of financial gains between the larger and smaller partners. In many cases, much of the economic value created by smaller/entrepreneurial and larger firms is appropriated by the larger partner (Alvarez and Barney 2001). Examining a sample of 60 joint ventures, McConnell and Nantell (1985) observe that the investors in the smaller firm, on average, receive larger abnormal returns, but the absolute gains in shareholder value for both partners are more or less equivalent. Likewise, Chan et al. (1997) conclude that while smaller partners experience larger abnormal returns than do larger partners, the magnitudes of the gains are roughly equal. In contrast, based on an analysis of 60 nonequity alliances in the information technology sector, Koh and Venkatraman (1991) note that on average, the smaller partner gains substantially ($19.2 million) more than the larger partner ($2.3 million). An analysis of the cumulative abnormal returns of 50 firms involved in strategic alliances reveals that the gains to the smaller firm exceed those to the larger firm (Das et al. 1998). The divergent results in prior studies can be attributed to heterogeneity in the focus of the alliance (e.g., NPD, marketing, and licensing). Not much is known about how an NPD alliance affects the changes in the shareholder values of the partners and whether these changes are asymmetric.
More importantly, despite the recognition that an understanding of the factors contributing to the financial gains in such asymmetric alliances is beneficial to scholars and managers (Koh and Venkatraman 1991, McConnell and Nantell 1985), not much is known about the drivers of the financial gains for the partner firms. In particular, very little is known about differences in the drivers of financial returns to larger and smaller firms in an NPD alliance. We seek to fill this research gap.
Are the changes in shareholder values of the partner firms in an NPD alliance announcement significantly positive or negative? Is the NPD alliance a win-win or win-lose partnership? Are the gains or losses symmetric between the larger and the smaller partner firms? What are the determinants of the changes in shareholder values of the partner firms in an NPD alliance? The answers to these questions are important for both larger and smaller firms from the standpoint of alliance-related decisions such as partner selection, scope, and type of alliance, and the resources to be allocated for NPD. The objective of this paper is to develop and empirically test a model of factors influencing changes in shareholder values of partner firms following the announcement of asymmetric NPD alliances.
To address these important research questions, we follow a three-step process. First, we develop a conceptual model delineating the major determinants of the changes in shareholder values of partner firms in an NPD alliance. Second, we use the event study approach to determine the short-term changes to shareholder value that accrue to larger and smaller firms after an NPD alliance is announced. Third, we estimate a model comprising the effects of firm, alliance, and partner characteristics on shareholder value changes for larger and smaller firms in an NPD alliance using data from 167 asymmetric NPD alliances in the information technology and communication industries.
This paper contributes to the literature on NPD alliances in at least two distinct ways. First, to our knowledge, this study is the first to examine factors affecting the financial gains of both larger and smaller firms in an NPD alliance. In doing so, we seek to address concerns expressed in the literature regarding the limitations of focusing on the performance of one of the two firms in a partnership (e.g., Wuyts et al. 2004). Second, much prior empirical research examining the impact of alliances on firm performance has focused exclusively on either alliance characteristics (Bucklin and Sengupta 1993, Chan et al. 1997, Wuyts et al. 2004), or firm characteristics (Anand and Khanna 2000, Chan et al. 1997, Johnson et al. 2004), or partner characteristics (Baum et al. 2000, Stuart 2000). We extend the literature by developing and empirically testing a model that incorporates the effects of all three types of factors (i.e., firm, alliance, and partner characteristics) on changes in the shareholder values of the NPD alliance partners in a single framework. Our model accounts for selection correction, potential cross-correlation across the residuals from the models of firm value changes for the larger and smaller firms, and unobserved heterogeneity.
2. Conceptual Framework and Research Hypotheses
Figure 1 presents a conceptual model delineating the factors influencing the changes in partner firms' values in asymmetric NPD alliances. An event such as the formation of an alliance is likely to change a firm's asset price through a change in the anticipated cash flows as well as a change in the discount rate associated with the firm's future cash flows (Schwert 1981). Based on past research in related areas (e.g., Acs et al. 1994, Anand and Khanna 2000, Johnson et al. 2004, Oxley and Sampson 2004) and conceptual reasoning, we expect firm characteristics (alliance experience), alliance characteristics (alliance scope and alliance type), and partner characteristics (partner alliance experience, partner reputation, and partner innovativeness) to be the major determinants of changes to the net present value of each partner firm in an NPD alliance. We develop hypotheses about the effects of the potential drivers of shareholder value creation in an NPD alliance. Although not all hypotheses focus on asymmetries between the larger and smaller firms, our intent is to examine the differences between the partner firms in the results of the tests of the hypotheses.
[FIGURE 1 OMITTED]
2.1. Firm Characteristics
Among firm characteristics, we focus on alliance experience as the primary potential driver of changes in shareholder values of the partner firms in an NPD alliance in light of prior research which suggests that alliance experience is an important determinant of abnormal returns to strategic alliances in general (Anand and Khanna 2000, Sampson 2005). We treat firm size, firm age, firm selection, and other firm-specific factors as control variables.
2.1.1. Firm Alliance Experience. A firm's alliance experience exposes it to rich combinations of processes, inputs, and outcomes and enables it to better adapt to contingencies as well as acquire new related knowledge. Alliance experience may enhance the stock market performance of the firm involved in an NPD alliance in at least two ways (Anand and Khanna 2000, Sampson 2005). First, firms with alliance experience learn to better manage complex new alliances through the development of a general alliance management capability and the establishment of interorganizational routines that aid in partner selection and conflict management (Ireland et al. 2002, Kale et al. 2002). Second, firms accumulate valuable technological and product-market knowledge from past alliances that enable them to be more successful in subsequent new NPD alliances.
Although alliance experience is likely to have a positive impact on the financial gains accruing to both larger and smaller firms, we expect the gains to accrue to these partner firms through different mechanisms. Because more public information is typically available about larger firms than smaller firms, investors know more about the strategies of larger, well-established firms than about smaller firms. Therefore, while past alliances by a larger firm may not provide radically new information to investors, they provide information about the larger firm's experience in accessing intangible resources and reduce investor uncertainty about the new alliance through a decrease in the larger firm's risk profile (i.e., discount rate), resulting in a higher firm value. For a smaller firm, its past alliances with other firms provide information about its accessibility to tangible resources and social capital, which yields additional cash flows as well lowers its risk profile (see Baum et al. 2000 and Stuart 2000 for reviews). The ability to work with partners is a specific competence that plays an important role in an entrepreneur's success (Baron 2000) and thus the smaller firm's value. Through its experience and private information about new or emerging technologies, the smaller firm can bring valuable expertise to an alliance. We summarize our arguments through the following hypothesis.
HYPOTHESIS 1 (H1). The greater the alliance-related experience of a firm in an NPD alliance, the greater the financial gains to that firm.
2.2. Alliance Characteristics
Among alliance characteristics, we focus on alliance scope and alliance type as the predominant drivers of value creation from an NPD alliance because previous research on R&D alliances suggests that these two factors often produce asymmetric NPD outcomes for partnering firms (Dussauge et al. 2000, Oxley and Sampson 2004). We treat other alliance characteristics such as year of alliance formation and industry as control variables.
2.2.1. Alliance Scope (Broad vs. Narrow). The scope of the NPD alliance can influence changes in the value of the firms in the alliance. Alliance scope refers to the breadth of functional activities (e.g., R&D, manufacturing, and marketing) that the partners agree to undertake during the tenure of the alliance (Doz and Hamel 1998, Varadarajan and Cunningham 1995). Alliance scope can be construed as a proxy for the pre-commercial value of the alliance, which the investor community uses to estimate the future revenue streams of the firms. Broad scope alliances are likely to generate more revenues and financial gains than narrow scope alliances for at least two major reasons. First, an alliance that encompasses many functional areas of collaboration signals a greater financial potential than one that covers only a few areas. Second, a broad scope alliance also indicates greater commitment by the partners toward the alliance than does a narrow scope alliance.
Despite this perspective regarding the benefits of broad scope NPD alliances, narrow scope NPD alliances are quite common, particularly in high-technology industries. Firms in the information and communication equipment (ICE) industries routinely limit the scope of NPD alliances to prevent the loss of technological knowledge to partners competing in overlapping product markets (Oxley and Sampson 2004). Likewise, theory and evidence from the biopharmaceutical industry suggests that because the threat of knowledge spillovers and technology appropriation are higher in broad and complex alliances than they are in narrow scope alliances, the larger firm (i.e., pharmaceutical partner) is likely to appropriate a greater proportion of the revenues than the smaller firm (i.e., biotechnology partner) (Alvarez and Barney 2001, Lerner and Merges 1998). Therefore, we expect the...
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