Structuring and Governing Alliances: New Directions for Research

• Author: Jeffrey J. Reuer,Farok J. Contractor
• Published date: 01 November 2014
• Date: 01 November 2014
• DOI: http://doi.org/10.1002/gsj.1082

STRUCTURING AND GOVERNING ALLIANCES:

NEW DIRECTIONS FOR RESEARCH

FAROK J. CONTRACTOR1and JEFFREY J. REUER2*

1School of Business, Rutgers University, Newark, New Jersey, U.S.A.

2Krannert School of Management, Purdue University, West Lafayette,

Indiana, U.S.A.

The purpose of this article is to identify a future research agenda relating to the structure and

governance of international alliances. Despite emerging research that is being carried out on

topics related to the structuring, management, and governance of domestic and international

collaborations, much remains unknown and warrants future work. The new directions in

alliance research partially stem from the recent greater availability of databases that contain

actual contract details. We also relate some of the contributions of the articles in the special

issue to the research agenda we are calling for. Copyright © 2014 Strategic Management

Society.

INTRODUCTION

The new direction for alliance research lies in the

analysis of agreement details as they relate to the

structuring, governance, and functioning of collabo-

rations. For too long, the field has been restricted to

overly broad categories of collaborations such as

‘equity versus non-equity’ or ‘relational versus con-

tractual’ without actually probing the details,

anatomy, or agreement structure of the alliance. In

part this was because agreement specifics were not

easily available, and many popular databases like

Securities Data Company (SDC) reported only

sketchy summaries of alliances, based on public

announcements, without agreement details. With

such publicly available data, conducting alliance

research was akin to practicing medicine without

dissection. Moreover, such databases used to capture

only a fraction of the actual number of collabora-

tions formed (Schilling, 2009). Today, scholars are

carrying out primary data collection and using richer

data from secondary sources that have information

on actual agreements, including Thomson Reuters’

Recap and the U.K.’s Pharmaprojects.

The strategic drivers for interfirm cooperation,

manifested in a variety of alliance arrangements

including equity joint ventures (JVs), are well

known and fall into four broad categories of motives:

(1) market growth or revenue enhancement as a con-

sequence of the cooperation; (2) efficiency or cost

reduction; (3) sharing or reducing risk; and (4)

access to knowledge or learning.1That alliances are

often temporary arrangements that can terminate

because the views of the partners will diverge over

time—in part due to bounds on rationality and the

lack of predictability of the future environment the

alliance will encounter (Williamson, 1981)—is also

Keywords: alliance governance; contracts; international joint

ventures

*Correspondence to: Jeffrey J. Reuer, Krannert School of Man-

agement, Purdue University, West Lafayette, IN 47907-2056,

U.S.A. E-mail: jreuer@purdue.edu

1Early work such as Contractor and Lorange (1988) focused on

the strategic rationales for forming alliances. Scholars later also

began to focus on the relational aspects (e.g., Dyer and Singh,

1998) and trust (e.g., Das and Teng, 1998). Attention began to

turn to contract details more recently, as exemplified in Poppo

and Zenger (2002) and Reuer and Ariño (2007).

Global Strategy Journal

Global Strat. J., 4: 241–256 (2014)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1082

Copyright © 2014 Strategic Management Society

received academic wisdom. Nevertheless, when

forming an alliance, negotiators almost inevitably

conclude an agreement between the prospective

partners, keeping in mind the ‘shadow of the future’

or future contingencies, to the extent they can be

envisaged (Parkhe, 1993). The fact is that virtually

all alliances—including equity JVs—have a legally

drawn up agreement that governs the future relation-

ship and activities of the joint operation. Academic

studies focusing on trust (e.g., Das and Teng, 1998),

or treating ‘relational alliances,’ or using secondary

data sources that summarize announcements of JVs

with no mention of side agreements between the JV

partners, should not lead scholars to conclude that

alliances formed with joint capital investments or

memoranda of understanding alone are common-

place. Hence, it has been surprising that, until a few

years ago, scant academic attention had been paid to

the details of agreements as they relate to the post-

formation governance of the alliance and the

exchanges between the partners.

Recent work such as Reuer and Ariño (2007),

Ryall and Sampson (2009), Adegbesan and Higgins

(2010), Lumineau and Malhotra (2011), and Ariño

et al. (2014) has begun to specifically examine con-

tract provisions in greater detail. These provisions

include criteria for the post-formation governance of

the alliance, such as which partner will make which

types of decisions (Lerner and Merges, 1998).

Studies have examined finer details in agreements

such as contingency planning clauses (Argyres,

Bercovitz, and Mayer, 2007), procedures for deci-

sion making and the resolution of disagreements,

and the appointment of key personnel (Robinson and

Stuart, 2007; Ryall and Sampson, 2009). Certain

safeguards, controls, and monitoring clauses exist in

most alliance contracts (Faems et al., 2008). Coor-

dination mechanisms (Lumineau and Malhotra,

2011) or mandatory information sharing and disclo-

sure are specified in the alliance contract to forestall

disagreements (Palay, 1984).As the essence of many

alliances is the distribution of tasks between the part-

ners, this is often specified ex ante. Call options exist

in both equity as well as non-equity alliances. The

contract can specify triggers, or thresholds, that give

one party the right to buy a certain number of its

partner’s shares in a JV or the right to acquire exclu-

sively for itself the intellectual property (IP) rights or

technology developed by the other partner (or

jointly) (e.g., Ziedonis, 2007). Termination clauses

of many varieties occur in agreements whereby one

of the allies can wind up their partnership. These

detailed alliance design parameters considered in

recent research are in sharp contrast to the large

literature examining trends and motives for collabo-

rations, discrete governance choices firms make

(e.g., equity versus non-equity alliance decisions),

and the usage of coarse indicators of control, moni-

toring, and incentives (e.g., equity stakes in JVs).

Alliance governance complexity

In the broadest sense, what determines the gover-

nance of an alliance, expressed in the level of detail,

complexity, and length of alliance agreements?

Moreover, what contract clauses are appropriate for

different types of alliances? Broadly, this depends on

four factors:

(1) the purview and mission of the alliance;

(2) deal-specific variables, or considerations

intrinsic to the collaboration, such as the nature

of the knowledge shared (Contractor and Ra,

2002), size of assets at stake and asset speci-

ficity, as well as agreement provisions;

(3) relational skills or alliance experience of the

parties involved (Mayer and Argyres, 2004;

Ryall and Sampson, 2009); and

(4) environmental variables that include institu-

tional, market, and country considerations such

as the level of IP protection, intensity of com-

petition, and market and political uncertainty

(Oxley, 1999).

Purview and mission of the alliance

The rubric ‘alliances’ necessarily includes a diverse

set of cooperative activities that varysubstantially by

mission or task, by their degree of consequence to

one or both allies, by size of investment (both finan-

cial and managerial), by the level of partner interac-

tions once the alliance is in progress, and by the level

of risk. Figure 1 gives merely examples of alliance

types and is not intended as a hard and fast catego-

rization or as exhaustive.At one end of the spectrum,

a transfer of patent or IP rights between two phar-

maceutical companies need not involve a very

detailed agreement, especially if there is a lump-sum

or one-time payment in cash or reciprocal rights

(e.g., Hagedoorn and Hesen, 2007). The ex post

interaction between the parties, commitment, and

risk (apart from the opportunity cost on the part of a

seller who misjudges the potential of the IP trans-

ferred, or buyer’s remorse) can be low.

242 F. J. Contractor and J. J. Reuer

Copyright © 2014 Strategic Management Society Global Strat. J., 4: 241–256 (2014)

DOI: 10.1002/gsj.1082