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The Economics of Knowledge-Sharing Alliances

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.

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The Economics of Knowledge-Sharing Alliances

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

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

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

  4. 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

  5. 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

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

  7. 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…

  8. Alliance Motives and Knowledge Sharing Requirements

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

  10. Alliances as Hybrids

  11. 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 / R&D agreements • Reciprocal supply agreements • Co-marketing agreements Oxley, 1997

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

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

  14. 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

  15. Different parts of the elephant? TCE KBV

  16. Different parts of the elephant? TCE KBV

  17. 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)

  18. 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

  19. 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

  20. Different parts of the elephant? TCE KBV

  21. From Who/What/How… …to “So What?”

  22. 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

  23. 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!

  24. (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

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

  26. 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

  27. 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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