Do They Know Something We Don't? Endorsements from Foreign MNCs and Domestic Network Advantages for Start‐Ups

• DOI: http://doi.org/10.1002/gsj.1109
• Author: Daniel Tzabbar,Terry L. Amburgey,Barak S. Aharonson
• Published date: 01 February 2016
• Date: 01 February 2016

DO THEY KNOW SOMETHING WE DON’T?

ENDORSEMENTS FROM FOREIGN MNCs AND

DOMESTIC NETWORK ADVANTAGES

FOR START-UPS

BARAK S. AHARONSON,1* DANIEL TZABBAR,2and

TERRY L. AMBURGEY3

1School of Management, Tel Aviv University, Tel Aviv, Israel

2LeBow College of Business, Drexel University, Philadelphia, Pennsylvania,

U.S.A.

3Joseph L. Rotman School of Management, University of Toronto, Toronto,

Ontario, Canada

Plain language summary:This article examines the effects of alliances with foreign

multina-

tional corporations (MNCs) on alocal start-up’s attractiveness as a partner in its

domestic

research networks. We argue that such international strategic alliances enhance a start-up’s

subsequent alliance activity and its status in its domestic R&D network. The analysis shows

that, indeed, alliances with foreign MNCs signiflcantly enhance the start-upʼs

attractiveness

and its future alliance activity, especially when the start-up is young (uptotheageoffive).

Furthermore, alliances with foreign MNCs from a variety of different countries of origin (e.g.,

U.K.,Germany,and France) have stronger effects on a start-up’s subsequent alliance

activity,

supporting the argument that even in the age of globalization, location still matters.

Technical summary:This article examines the effects of endorsements from foreign

multina-

tional corporations (MNCs) on the centrality ofbiotech start-ups withintheir domestic research

networks.We argue that international strategic alliances enhance a start-up’s

subsequent

movement toward a more central position in its domestic R&D network. Analyzing

U.S.

biotech start-ups overtime,our findings show that endorsements from foreign MNCs signifi-

cantly enhance the subsequent network centrality of U.S. biotech start-ups. This endorsement

effect is magnified in the early stages of the start-upʼs life cycle. Furthermore,endorsements by

foreign MNCs from a variety of different countries of origin have stronger effects on a

start-up’s subsequent network centrality, supporting the contention that even in the ageof

globalization, location still matters. Copyright © 2016 Strategic Management Society.

INTRODUCTION

International alliances are an important mechanism

through which start-ups can access foreign markets.

Studies of international alliance formation com-

monly examine the activity of going global as well as

the international performance implications of inter-

national alliances (Lavie and Miller, 2008). Little is

known, however, about the impact an alliance with a

foreign company has on a domestic start-up. Of par-

ticular importance is the examination of how R&D

alliances with foreign MNCs1influence a domestic

Keywords: MNC; endorsement; network; centrality; interna-

tional alliances

*Correspondence to: Barak S. Aharonson, School of Manage-

ment, Tel Aviv University, Tel Aviv, 69978, Israel. E-mail:

aharonson@tau.ac.il

1In this study we define a foreign MNC as an MNC that was

originally incorporated outside of the U.S. (i.e., its country of

origin is any country other than the U.S.), as opposed to a

domestic MNC that was originally incorporated and based in

the U.S.

Global Strategy Journal

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1109

Copyright © 2016 Strategic Management Society

Global Strat. J., 6:3 (2016)

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start-up’s ability to become a more central player in

its home country R&D network. Network centrality

provides access to knowledge and resources that are

essential to a start-up’s survival (Bonacich, 1987;

Gulati, 1998; Podolny, 1993). However, to achieve a

higher level of network centrality,a start-up needs to

be attractive to potential R&D partners and to have

an established reputation (Dacin, Oliver, and Roy,

2007; Heide and Weiss, 1995; Lichtenthaler and

Ernst, 2007). Herein lies the conundrum. A young

start-up that has yet to develop its reputation or the

value of its core competencies and intangible assets

is less attractive to potential partners because of the

uncertainty associated with it (Dushnitsky and

Lenox, 2005). Furthermore, with no real social

defenses, the owners of these young start-ups are

concerned about divulging the intricacies of their

proprietary technology for fear of having it expro-

priated by larger, more capable network partners

(Hallen, Katila, and Rosenberger, 2014). These

factors lead to a rather significant problem of asym-

metric information that can be a substantial barrier to

the formation of an alliance (Katila, Rosenberger,

and Eisenhardt, 2008).

Domestic MNCs who already have relationships

in the local market have an established reputation

and status, and are sought after as alliance partners

by many start-ups and by established firms in the

industry. As such, they may not be inclined to rush

into forming an alliance with start-ups (especially

those with limited track records); they may not be

willing to take on the uncertainties associated with a

start-up. Foreign MNCs, however, , may be well-

known in their own country, but suffer from the

liability of foreignness when they try to function in

markets outside the one in which they were estab-

lished. As such, they are more motivated to collabo-

rate with the start-up to overcome this liability,

despite the uncertainties and risks of doing so. The

foreign MNC’s lack of a positive reputation in the

domestic market may reduce the likelihood that it

will behave opportunistically toward the start-up,

minimizing the latter’s concerns. This situation

increases the mutual dependence between the

start-up and the foreign MNC, reducing their power

imbalance (Casciaro and Piskorski, 2005) and, thus,

any potential asymmetries between them. Neverthe-

less, as we noted earlier, little is known about the

impact an alliance with a foreign company has on a

domestic start-up. Thus, the purpose of this study is

to investigate this issue by examining the effect of a

foreign MNC on a start-up’s ability to become more

central in its domestic network. More specifically,

we are interested in investigating the potential

endorsement effects of R&D alliances with foreign

pharmaceutical MNCs. In addition to serving their

main purpose, these ties act as quality signals and,

therefore, as a proxy for the information that other

potential network partners need to make decisions

about possible collaborations.

Endorsements are particularly effective when the

knowledge, resources, and experience of the endors-

ers enable them to conduct more comprehensive due

diligence and increase the validity of their findings,

especially when the endorsers put their reputations at

stake. We maintain that foreign MNCs fit both crite-

ria, as they have the knowledge and resources

needed to assess the viability of a start-up and

usually have excellent reputations. Thus, forming a

tie with a foreign MNC should provide a positive

endorsement that results in greater network central-

ity for a domestic start-up. However, we believe

there is a declining return from such signals because

over time, a start-up develops a publicly visible track

record that reduces the need for and impact of addi-

tional endorsements. By adolescence, a start-up may

have a track record that solidifies its reputation (e.g.,

Deeds, DeCarolis, and Coombs, 1997; Gulati and

Higgins, 2003). Thus, we propose that the effect of

R&D alliances and endorsements from foreign

MNCs will be greater if they are provided to a

start-up early in its life.

In addition, we suggest that the diversity of the

alliance portfolio in terms of the foreign MNC’s

country of origin matters. We posit that endorse-

ments from foreign MNCs from different countries-

of-origin may create a triangulation that amplifies

the basic signals. Scholars such as Noorderhaven

and Harzing (2003) explain that there are still sig-

nificant country of origin effects in that firms origi-

nating in different countries may evaluate similar

opportunities differently. Hence, collaborating with

foreign MNCs that represent a wide range of coun-

tries of origin will provide a stronger endorsement

signal, increasing the attractiveness of the start-up to

potential network partners and, subsequently,

improving its network centrality. Finally, in terms of

reputation and status, one of the dimensions of the

liability of foreignness is that foreign MNCs lack

domestic legitimacy and need a domestic anchor to

address this challenge. Furthermore, foreign MNCs

are often outsiders in terms of domestic networks.

These obstacles imply that when creating a tie with a

domestic start-up, a foreign MNC may have less to

B. S. Aharonson, D. Tzabbar, and T. L. Amburgey

Copyright © 2016 Strategic Management Society

DOI: 10.1002/gsj.1109

Global Strat. J., 6: 31 49 (2016)

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