Innovators' gains from incumbents' exit options in R&D alliances: A reconciliation of real options and transaction costs logics

• Date: 01 March 2021
• Author: Jan Ende,Mahmut N. Özdemir
• DOI: http://doi.org/10.1002/sej.1393
• Published date: 01 March 2021

RESEARCH ARTICLE

Innovators' gains from incumbents' exit options

in R&D alliances: A reconciliation of real options

and transaction costs logics

Mahmut N. Özdemir

1

| Jan van den Ende

2

1

Koç University Graduate School of Business,

Koç University Entrepreneurship Research

Center, _

Istanbul, Turkey

2

Rotterdam School of Management, Erasmus

University, Rotterdam, The Netherlands

Correspondence

Mahmut N. Özdemir, Koç University Graduate

School of Business, Koç University

Entrepreneurship Research Center,

Rumelifeneri Yolu, 34450, Sarıyer, _

Istanbul,

Turkey.

Email: maozdemir@ku.edu.tr

Abstract

Research summary: The transaction costs logic suggests that

innovators cannot gain value from incumbents' unconditional

termination rights in their R&D alliances with them because

incumbents use these rights either to protect their own inter-

ests or as bargaining chips ex post. By contrast, the real options

logic suggests that innovators can gain value from these rights

because they provide them with an opportunity to release

their resources from their troubled alliances. We reconcile the

two logics by showing that incumbents' unconditional termina-

tion rights are their exit options in their R&D alliances and they

are value-enhancing for innovators; yet, innovators' gains from

them depend on the likelihood of their opportunistic uses by

incumbents at their exercises. The tests in the biopharmaceuti-

cal R&D alliances setting support our hypotheses.

Managerial summary: Incumbents form R&D alliances with

innovators to explore new technologies and innovators join

these alliances to commercialize their technologies. Yet,

innovators typically possess alternative commercialization

options activated once their alliances are terminated. In

such R&D intensive alliances, granting unconditional

termination rights to incumbents help innovators gain value

from their R&D alliances. This is because incumbents'

unconditional termination rights operate as their exit

options and they enable easy and timely terminations of

R&D alliances. This, in turn, allows innovators not to persist

[Correction Statement: Correction added on 12 February 2021 after first online publication: Table 5 footnoteis updated in this version.]

Received: 12 July 2016 Revised: 17 December 2020 Accepted: 3 January 2021 Published on: 8 February 2021

DOI: 10.1002/sej.1393

© 2021 Strategic Management Society

144 Strategic Entrepreneurship Journal. 2021;15:144–166.wileyonlinelibrary.com/journal/sej

in troubled R&D alliances and to begin with exploring alter-

native commercialization options. However, the likelihood

of opportunism at exit option exercises matters. The inno-

vators' gains from exit options are likely to be higher as

partner-specific alliance experience increases because the

joint history mitigates opportunism.

KEYWORDS

biotechnology, event study, real options, strategic alliances,

transaction costs economics

Affairs are easier of entrance than of exit; and it is but common prudence to see our way out before we

venture in. Aesop

1|INTRODUCTION

If an incumbent firm has an unconditional termination right in its R&D alliance agreement with an innovating firm, it

can terminate the R&D alliance at will at any time. While the transaction costs (TC) and real options (RO) logics agree

that incumbents gain value from this right, they give conflicting answers to the question of whether innovators gain

value from this right. According to the TC logic, incumbents use these rights either for safeguarding their interests or

ex post opportunistic bargaining (Ariño, Reuer, Mayer, & Jané, 2014; Chi, 2000). Thus, the TC logic suggests that

innovators can hardly gain any value from these rights. By contrast, the RO logic suggests that unconditional

termination rights are value-enhancing for innovators because easy and timely terminations of their alliances enable

innovators to rapidly explore alternative technology commercialization options (Folta, 1998; Tong & Li, 2011).

Reconciling the two logics is important for understanding the contractual choices in R&D alliances (Folta, 1998;

Trigeorgis & Reuer, 2017). The equilibrium-contracting notion of the TC logic pays limited attention to the transient

governance choices employed temporarily for increasing the responsiveness of firms (Williamson, 1991). Given that

unconditional termination rights are used to terminate alliances and bring alliance transactions back into the bound-

aries of partnering firms, it is important to understand why they are added to alliance contracts. On the other hand,

the RO logic has highlighted the importance of flexibility under uncertainty (Folta, 1998). However, it has paid limited

attention to the opportunism risks arising from the flexibility-increasing contractual rights (Miller & Folta, 2002).

To address these issues, we examine the relationship between the unconditional termination rights of

incumbents and the gains of innovators from their R&D alliances. When we examine this relationship, we, first,

explore the real option characteristics of incumbents' termination rights in R&D alliances and compare unconditional

termination rights with other severe termination rights to explain why unconditional termination rights operate as

the main exit options of incumbents in R&D alliances. Second, we explore how innovators gain value from these exit

options. We argue that unconditional termination rights as the main exit options of incumbents increase the chances

that innovators will not persist in R&D alliances with uncommitted incumbents. This makes their partners' exit

options valuable for them too because their unique technological resources deployed for their R&D alliances can

become easily and timely available for their alternative uses. However, the gains of innovators from the exit options

may vary depending on whether incumbents will behave cooperatively when they exercise their exit options. Thus,

we also explore whether and how potential partner opportunism is related to the gains of innovators. By building on

prior research, we identified partner-specific alliance experience as a factor determining the opportunism risks faced

by innovators in R&D alliances (Gulati, 1995; Ring & Van de Ven, 1994). We hypothesize that the positive

ÖZDEMIR AND VAN DEN ENDE 145