How do pre‐entrants to the industry incubation stage choose between alliances and acquisitions for technical capabilities and specialized complementary assets?

• Date: 01 August 2020
• Author: Will Mitchell,Mahka Moeen
• Published date: 01 August 2020
• DOI: http://doi.org/10.1002/smj.3160

RESEARCH ARTICLE

How do pre-entrants to the industry incubation

stage choose between alliances and acquisitions

for technical capabilities and specialized

complementary assets?

Mahka Moeen

1

| Will Mitchell

2

1

Kenan-Flagler Business School, University of North Carolina, Chapel Hill, North Carolina

2

Rotman School of Management, University of Toronto, Toronto, Canada

Correspondence

Mahka Moeen, McColl Bldg., University

of North Carolina, Chapel Hill, NC

27599.

Email: mahka_moeen@kenan-flagler.

unc.edu

Funding information

Ewing Marion Kauffman Foundation

Abstract

Research summary: Focusing on the incubation stage

of a potential new industry, this article addresses a gap

at the intersection of the external sourcing and market

entry literatures by examining pre-entry external sourc-

ing of new resources. Besides drawing on their legacy

resources, pre-entrants during industry incubation

commonly use alliances and acquisitions to obtain tech-

nical capabilities and complementary assets, thereby

creating a portfolio of sourcing modes that collectively

shapes the firms' paths to potential market entry. We

identify a key pattern at the intersection of type of

sourcing mode and type of resource: pre-entrants to the

incubation stage are more likely to use alliances to

source technical capabilities, while using acquisitions

to source specialized complementary assets. Our empir-

ical context is the agricultural biotechnology industry.

Managerial summary: Firms typically seek new

resources when they begin exploring potential indus-

tries, before any products have reached the market, yet

the needed investments face substantial uncertainties.

This article highlights a pattern in how firms use alli-

ances and acquisitions for technical capabilities and

complementary resources during the incubation stage

Received: 26 February 2019 Revised: 29 February 2020 Accepted: 10 March 2020 Published on: 26 April 2020

DOI: 10.1002/smj.3160

1450 © 2020 John Wiley & Sons, Ltd. Strat Mgmt J. 2020;41:1450–1489.wileyonlinelibrary.com/journal/smj

of the agricultural biotechnology industry. We focus on

two key features of the external sourcing activity, differ-

ing based on the type of resource: developing new core

technologies, which often starts early, tends to leverage

external alliance partners; by contrast, establishing

complementary assets tends to start later through

acquisitions. The logic underlying these patterns can

help managers make effective decisions about their

external sourcing strategies during the incubation stage

of a new industry.

KEYWORDS

capability reconfiguration, entry mode, industry incubation stage,

nascent industries, pre-entry capabilities

1|INTRODUCTION

The incubation stage of a new industry, defined as the period before the first product in a poten-

tial industry reaches commercialization (Greenstein, 2015; Moeen & Agarwal, 2017), is fertile

ground for exploring technological and commercial activities. During the incubation stage,

despite immense uncertainty about an industry's future trajectory, its promise often attracts

investments by pre-entrant firms. Pre-entrants commonly invest in developing and obtaining

technical capabilities and complementary assets that they expect will be relevant in the poten-

tial industry (Mitchell & Singh, 1992; Teece, 1986). Because such pre-entry activity prepares the

ground for post-entry strategy and performance, important questions arise concerning how pre-

entrants during the industry incubation stage use external sourcing modes to obtain resources.

The literatures on market entry and on external sourcing provide relevant insights, though

only partial answers. Studies of entry to new industries note that firms often need technical

capabilities and complementary assets for commercialization (Teece, 1986), but with limited

attention to how pre-entrants obtain the resources. Technical capabilities are scientific and

technical expertise that contribute to creating new products (Helfat & Raubitschek, 2000), while

complementary assets are downstream resources that contribute to product delivery to cus-

tomers and value capture (Mitchell, 1991; Tripsas, 1997). Studies often attribute the origin of

technical capabilities and complementary assets to diversifying entrants' redeployment of inter-

nal resources from other industries (Helfat, 1997; Klepper & Simons, 2000) or startup founders'

experience (Agarwal & Shah, 2014). However, such legacy resources rarely provide all needs,

particularly given that the relevant technical capabilities and complementary assets of a poten-

tial industry may not be fully developed in the incubation stage (Cattani, 2005; Moeen, 2017).

Instead, as Helfat and Lieberman (2002, p. 740) note, “firms also may need to fill gaps in their

pre-entry resources,”which includes turning to external sources.

Extensive research on external sourcing in established industries has studied how firms

obtain resources via alliances (e.g., Arora & Gambardella, 1990; Mowery, Oxley, &

Silverman, 1996) and acquisitions (e.g., Ahuja & Katila, 2001; Capron, Dussauge, &

Mitchell, 1998; Karim & Mitchell, 2000). However, with few exceptions (Mitchell & Singh, 1992;

MOEEN AND MITCHELL 1451

Rothaermel & Deeds, 2004), we have limited understanding of whether and how pre-entrants in

new industries use external sourcing. This study addresses this gap at the intersection of the

market entry and external sourcing literatures.

We focus on pre-entrants during the incubation stage of a potential industry to study how

the choice between alliance and acquisition relates to whether firms are seeking technical capa-

bilities or specialized complementary assets. In developing our logic, we base our study on theo-

retical considerations that have been identified for choosing between alliances and acquisitions

as external sourcing modes. While these conceptual mechanisms arise in prior work, extending

the logic to the context in which pre-entrants to the incubation stage draw on external sources

to obtain technical capabilities and complementary assets is novel.

To preview, the article describes the path to entry as a process of creating a portfolio of tech-

nical capabilities and complementary assets. The process starts with a pre-entrant's initial

investment during industry incubation and potentially culminates in the first commercializa-

tion at the time or after the incubation stage ends. Pre-entry efforts often involve internal devel-

opment that is supplemented with alliances and acquisitions of firms with relevant resources.

Two key features of the incubation stage include uncertainty about the future industry trajec-

tory and underdeveloped state of needed resources. Juxtaposing these two attributes, which

tend to manifest differently for technical capabilities and specialized complementary assets,

with insights from studies of alliance versus acquisition choice leads to our hypotheses: pre-

entrants tend to use alliances for technical capabilities, while being more likely to use acquisi-

tions for specialized complementary assets. The logic is as follows: needs for flexibility, difficul-

ties in valuing technology, and needs for experimentation involving multiple knowledge bases

underpin the use of alliances for technical capabilities; in turn, delayed focus on complemen-

tary assets, their fixed supply in related industries, and needs to coordinate value chains under-

pin the use of acquisitions for specialized complementary assets.

Empirically, we study pre-entrants that initiated their investments during the incubation

stage of the agricultural biotechnology industry, from 1980 to 1995. Beginning with the time of

each firm's investment in the industry, we examine their subsequent choices between alliances

and acquisitions before they introduced their first product or as long as they remained in the

industry without a product. The statistical results are consistent with our hypotheses. Further, a

combination of statistical and descriptive evidence helps us to examine the theoretical mecha-

nisms underpinning the hypotheses.

The article contributes to the literature on strategy during industry emergence

(Greenstein, 2015; Hsu & Prescott, 2017; Moeen & Agarwal, 2017). In doing so, we draw on and

extend studies of types of resources (Helfat & Lieberman, 2002; Mitchell, 1991; Teece, 1986) and

of external sourcing (Lee & Lieberman, 2010; Mitchell & Singh, 1992; Rothaermel &

Deeds, 2004; Wang & Zajac, 2007). We show that firms' choices of alliances and acquisitions

vary systematically with the type of resource—technical capabilities or complementary assets—

that pre-entrants seek during the incubation stage of a new industry. Taken together, the article

sheds light on an important element of the pre-entry resource configuration process that can

shape the co-evolution of firms and new industries.

2|THEORETICAL BACKGROUND

This section describes the pre-entry sourcing process, discusses two key features of incubation

stage that shape firms' external sourcing mode choices, and summarizes the literature on the

1452 MOEEN AND MITCHELL