Strategic Alliances of Entrepreneurial Firms: Value Enhancing Then Value Destroying

• Author: Douglas A. Bosse,Kaveh Moghaddam,Mike Provance
• DOI: http://doi.org/10.1002/sej.1221
• Date: 01 June 2016
• Published date: 01 June 2016

STRATEGIC ALLIANCES OF ENTREPRENEURIAL FIRMS:

VALUE ENHANCING THEN VALUE DESTROYING

KAVEH MOGHADDAM,

1

* DOUGLAS A. BOSSE,

2

and MIKE PROVANCE

3

1

School of Business, University of Houston-Victoria, Victoria, Texas, U.S.A.

2

Robins School of Business, University of Richmond, Richmond,Virginia, U.S.A.

3

Growth Kinetics LLC.,Richmond, Virginia, U.S.A.

Research summary: Based on the RBV and dynamic capabilities, this study explains the

relationship between alliance formation and the private (pre-IPO) entrepreneurial firm’s

market performance. Findings show that while alliance formation positively and

significantly affects the market performance of venture-backed firms in the software industry,

forming a comparatively large number of alliances hurts these firms’market valuations.

Managerial summary: Entrepreneurial firms are better off entering a select number of

strategic alliances and focusing on enhancing the outcomes of those select alliances as

well as developing a dynamic alliance management capability. Such firms benefit most

from establishing a moderate number of alliances rather than depending on a small

number of alliances or becoming overwhelmed with a great number of alliances.

Copyright © 2016 Strategic Management Society.

INTRODUCTION

Forming alliances is a particularly popular strategy

entrepreneurial firms use to access resources in their

attempts to create value. Unfortunately, the efficacy

of this strategy remains unclear. A growing literature

largely based on applications of the resource-based

view (RBV) provi des mixed findings , suggesting the

effect of alliances on firm performance outcomes

might be negative(Alvarez and Barney, 2001;Golden

and Dollinger, 1993;Miles, Preece, and Baetz, 1999),

positive (Baum, Calabrese, and Silverman, 2000;

Chang, 2004; Li, 2013; Soh, 2003), positive and then

negative (Coombs, Mudambi, and Deeds, 2006;

Deeds and Hill, 1999), or nonexistent (Deeds, De

Carolis, and Coombs, 1997). These prior studies

examine the effect of alliances on a variety of firm

outcomes such as new product development

(Rothaermel and Deeds, 2006; Soh, 2003), revenue

growth (Goldenand Dollinger, 1993), R&D spending

(Baum et al., 2000), and speed to IPO (Chang, 2004).

While these outcomes are arguably associated with

value creation, there is little direct evidence regarding

the effect of alliances on the market assessment of

the entrepreneurial firm value creation potential.

Furthermore, the firms studied most in this literature

are biotechnology firms in alliances with large

pharmaceutical companies and firms that have recently

gone public (e.g., Bosse and Alvarez, 2010; Coombs

and Deeds, 2000; Deeds and Hill, 1996; Deeds and

Rothaermel, 2003; Welter, Bosse, and Alvarez, 2013).

One of the seminal articles about the dynamic

capability construct in the RBV uses strategicalliance

formation as a classic, even definitional, dynamic

capability (Eise nhardt and Martin, 200 0). A recent

systematicand comprehensive review ofthe empirical

literature on dynamic alliance capabilities shows the

construct is commonly operationalized as t he number

of alliances formed by the firm (Wang and

Rajagopalan, 2015). Over time, this literature on

alliancing as a dyn amic capability has examined other

aspects of the phenomenon, including differentstages

Keywords: alliances; entrepreneurial firm; market performance;

software industry; dynamic capabilities

*Correspondence to: Kaveh Moghaddam, School of Business,

University of Houston-Victoria, 3007 N. Ben Wilson St.,

Victoria, Texas,77901, U.S.A. E-mail: Moghaddamk@uhv.edu

Strategic Entrepreneurship Journal

Strat. EntrepreneurshipJ., 10:153–168 (2016)

Published onlinein Wiley Online Library (wileyonlinelibrary.com). DOI:10.1002/sej.1221

Copyright © 2016 Strategic Management Society

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in the life cycle of the capability (Helfat and Peteraf,

2003) and examinations of alliance process arti-

culation, codification, sharing, and internalization

(Kale and Singh, 2007). While these advanced ideas

are multiplying, the question remains about the basic

relationship between the number of alliances and an

entrepreneurial firm’s market performance. Using

RBV (Barney, 1991) and dynamic capabilities logic

(Eisenhardt and Martin, 2000), this article examines

the following research question: what is the effect of

strategic alliances on the market performance of pre-

IPO entrepreneurial firms? In this sense, this article

is a response to the recognized need for continued

attention on the effectsof alliances on entrepreneurial

firms (Alvarez, Ireland, and Reuer, 2006).

Results from our sample of 166 U.S. venture-backed

software firms suggest a curvilinear relationship

between the number of strategic alliances and the

market’s valuation of the entrepreneurial firm. In other

words, firms with alliances are seen as more valuable

than those without, but having too many alliances

reverses this positive effect. It is argued that the reversal

may be attributed to limited capability and capacity for

alliance management. This study makes at least two

main contributions to the strategic alliance literature in

the context of entrepreneurial firms. First, it strengthens

the explanatory framework based on RBV and dynamic

capabilities perspectives by examining the direct effects

of strategic alliances on the valuation of small entre-

preneurial firms. Second, this study examines the effect

of alliances on an important market-based outcome of

pre-IPO venture market performance, which has been

proven a more reliable value creation indicator than

accounting measures in firms with high levels of

intangible resources (Bonardo, Paleari, and Vismara,

2010; Shane and Stuart, 2002).

The remainder of this article is structured as

follows: we next review the literature that sets up

our research question. Hypotheses are then developed

using logic provided by the RBV and dynamic

capability perspective. Then, the methodology and

operationalization of variablesare presented, followed

by empirical results. Finally, the article concludes

with a discussion of scholarly and managerial

implications of key findings.

STRATEGIC ALLIANCES IN

ENTREPRENEURIA L FIRMS

Strategic alliances are ‘any independen tly initiated

interfirm link that involves exchange, sharing, or co-

development’(Kale, Dyer, and Singh, 2002: 748).

Alliance structures include a wide range of intero-

rganizational arrangements, from more formal shared

equity joint venture agreements to relatively informal

cooperative agreements (Judge and Ryman, 2001).

Appropriately structured alliance agreements provide

access to the partners’knowledge, skills, and reso-

urces while preserving control and limiting loss of

flexibility (Harrison et al., 2001).

Researchers have examined alliances at least since

the late 1970s when U.S. multinational firms started

to form joint ventures for international expansion

(Alvarez et al., 2006). The size of this phenomenon

is impressive. In 2000 alone, more than 10,200

strategic alliances were formed (Ireland, Hitt, and

Vaidyanath, 2002). The top 500 global business firms

were involved in an average of 60 major strategic

alliances each (Dyer, Kale, and Singh, 2001), and the

number of corporate alliances grows 25 percent a year

(Hughes and Weiss, 2007). While established, large

firm alliances have been studied extensively (e.g.,

Das, Sen, and Sengupta, 1998), small entrepreneurial

firm alliances are now starting to receive more

attention (Alvarez et al., 2006; Coombs et al., 2006).

In recent years,the growing literature on small and

entrepreneurial firm strategic alliances has suggested

that entrepreneurial firms pursue alliances to achieve

strategic goals that are different from those of

established firms; however, this literature is still in

its infancy and, in some cases, exhibits contradictory

results. Our examination of the extant literature on

entrepreneurial firm alliances can be organized into

four groups of studies based on their findings. First

is the group of studies that reported no significant

effect of alliances on entrepreneurial firms. Golden

and Dollinger (1993) examined the cooperative

alliances in small manufacturing firms and found that

many small firms do engage in different types of

alliances based on their different business strategies,

but the direct effect of alliances on firm performance

was not clear. DeCarolis andDeeds (1999) examined

the effect of alliances (as a knowledge flow

mechanism) on firm value (measured at the end of

the IPO day) and also found no significant

relationship. Although Deeds, DeCarolis, and

Coombs (2000) hypothesized that the number of

alliances has a positive effect on new product

development, they reported no statisticallysignificant

relationship.

The second group of studies in the literature suggests

a negative effect of alliances on entrepreneurial firms.

154 K. Moghaddam, D. A Bosse, and M. Provance

Copyright© 2016 Strategic ManagementSociety Strat. EntrepreneurshipJ. 10:153–168(2016)

DOI: 10.1002/sej