Alliance Portfolio Size and Innovation Performance: The role
of Equity Ownership in Acquisitions.
Prior studies neglected acquisitions as an option to change the configuration of the alliance portfolio. This thesis examines the impact of acquired alliances on firm innovation performance and whether governance modes, specifically equity alliances, moderate this relationship. I distinguish between direct minority equity investments, alliances in which less than 50% of the partner’s equity capital is acquired, and contractual alliances. The data for this thesis was obtained from several sources, such as SDC Platinum, Orbis, Compustat, Amadeus and annual reports, and combined into a panel dataset. I performed a negative binomial regression on a sample of 42 large biotechnology and pharmaceutical firms. These focal firms formed a total of 472 original alliances and acquired 51 alliances. The results indicate that the share of acquired alliances has a negative linear impact on firm innovation performance. Moreover, the results show that a high proportion of equity alliances within the acquired portfolio positively moderate this relationship. The main contribution of this thesis is the insight that the relation between share of acquired alliances and innovation performance is dependent on the governance structure of the acquired alliances. In doing so, I contribute to literature on alliance portfolio management, literature on alliance governance and their intersection.
Keywords: Acquisitions; alliances; alliance portfolio size; biotechnology; pharmaceutical; equity ownership; innovation performance; governance modes
Pieter Rutgers S2707977
MSc BA - Strategic Innovation Management
University of Groningen | Faculty of Economics and Business Supervisor: A.A. Oleksiak
Co-assessor: dr. W.W.M.E. Schoenmakers Groningen, June 2016
TABLE OF CONTENT
INTRODUCTION ... 3
THEORETICAL BACKGROUND ... 4
ALLIANCE PORTFOLIO AND INNOVATION PERFORMANCE ... 4
SHARE OF ACQUIRED ALLIANCES AND INNOVATION PERFORMANCE ... 6
THE MODERATING ROLE OF EQUITY OWNERSHIP ... 7
METHODOLOGY ... 9 DATA COLLECTION ... 9 SAMPLE ... 10 MEASURES ... 11 ANALYTICAL METHOD ... 13 RESULTS ... 13 DESCRIPTIVE STATISTICS ... 13 REGRESSION RESULTS ... 16 DISCUSSION ... 18 THEORETICAL IMPLICATIONS ... 18 PRACTICAL IMPLICATIONS ... 20
LIMITATIONS AND FUTURE RESEARCH ... 20
CONCLUSION ... 21
INTRODUCTION
Strategic alliances are a widely occurring phenomenon, especially in high technology industries such as the biotechnology industry (Rothaermel & Deeds, 2004). Alliances may provide firms with access to external knowledge and capabilities, which could not be competitively developed inside the focal firm (Cui et al., 2011). Duysters et al. (2012) indicate that external knowledge is the main driver of a firm’s innovativeness. By combining the external resources with internal resources, firms may generate value from resource combinations (Lavie, 2007). Firms are engaging simultaneously in multiple alliances with partners, which provide the firm with access to network resources (Gulati, 1999). Lavie (2007) defined the collection of these alliances as alliance portfolios. However, managing multiple alliances is extremely challenging considering that almost 50% of alliances fail to meet expectations (Parise & Casher, 2003). Accordingly, the attention of the academic literature has changed from the management of dyadic alliances to alliance portfolios (Wassmer, 2008).
Previous research of alliance portfolios has mainly focused on the emergence, configuration and management of alliance portfolios (Wassmer, 2008). Concerning the configuration, a significant amount of literature is focused on the size (Deeds & Hill, 1996; Shan et al., 1994) and diversity (Baum et al., 2000; Duyster & Lokshin, 2011; Jiang et al., 2010) of the alliance portfolio. In addition, managerial issues received valuable attention as well (Duysters et al., 1999; Hoffmann, 2005; Parise & Casher, 2003; Neyens and Faems, 2013). However, previous studies regarding alliance portfolios assume that the alliances in the portfolio are solely established by the focal firm.
By addressing the identified research gap, this thesis provides an insight into the underdeveloped concept of acquired alliances. In order to test the hypotheses, a negative binomial regression was performed on a sample of 42 large biotechnology and pharmaceutical firms. These firms formed a total of 472 original alliances and acquired 51 alliances. The data was obtained from several sources such as SDC Platinum, Orbis, Compustat, Amadeus and annual reports.
The results indicate that the share of acquired alliances has a negative linear impact on firm innovation performance. This finding demonstrates the importance of acknowledging the phenomenon of acquired alliances. The main contribution of this thesis is the insight that the relation between share of acquired alliances and innovation performance is dependent on the governance structure of the acquired alliances. Specifically, a high share of equity ownership reduces the negative relation between a high share of acquired alliances and innovation performance. In doing so, I contribute to literature on alliance portfolio management, literature on alliance governance and their intersection. Furthermore, the findings stress academics and managers to consider the complete alliance portfolio, including acquired alliances, instead of taking a dyadic perspective.
The remainder of this thesis is structured as followed. First, I discuss the theoretical background of this thesis and introduce two hypotheses. Subsequently, the methodical choices are described and justified. Next, the results of the empirical analysis are described, which is followed by a discussion of theoretical and managerial implications. The discussion ends with limitations and future research. Finally, I present a conclusion with the main findings of this thesis.
THEORETICAL BACKGROUND
In this section, I start by introducing the existing literature regarding alliances portfolios and innovation performance. Subsequently, relying on insights from the relational view, attention based view and transaction cost economics, I develop two hypotheses. The first hypothesis concerns the influence of share of acquired alliance on innovation performance. The moderating role of equity ownership is considered in the second hypothesis.
Alliance portfolio and innovation performance
Structural dimensions, such as the size and diversity of the alliance portfolio, have been of major interest in previous research (Wassmer, 2008). At first, scholars have found an inverted U-shape relation between the size of a firm’s alliance portfolio and firm innovation performance (Deeds & Hill, 1996; Rothaermel & Deeds, 2006). An explanation for the curvilinear relationship is that small alliance portfolios do not provide a diverse set of external knowledge, which reduces the likelihood of knowledge combinations. On the other hand, an abundance of alliances in the portfolio might leave knowledge underutilized due the absorptive capacity (Lahiri & Narayanan, 2013) and coordination costs. Furthermore, managerial challenges arise such as the alignment of partners to a common goal (Hoffman, 2005). Moreover, an increase in portfolio size reduces the ability of the focal firm to properly screen partners and monitor the portfolio. Therefore, scholars found that alliance portfolios are most beneficial with a moderate size. However, the specific portfolio size varies due to firm characteristics. Another research stream with significant interest focuses on the diversity of alliance portfolios (Duysters et al., 2012). Alliance Portfolio Diversity (APD) research examines the extent to which the differences across partners influence firm performance. Baum et al. (2000) argued that the diversity of an alliance portfolio is more relevant than the number of alliances. Previous research considered APD along several dimensions such as: functional, industry, national, organizational and governance diversity (Jiang et al., 2010) and from a variety of (theoretical) perspectives. Jiang et al. (2010) studied multiple dimensions of APD and found that a greater functional and organizational diversity and lower governance diversity were related with higher firm performance. Furthermore, Duysters and Lokshin (2011) argued that a diverse portfolio provides the firm with a broad perspective and creative thinking, which stimulates innovation. On the other hand, managing a diverse alliance portfolio increases the need for managerial time and effort (Goerzen & Beamish, 2005). Feams et al. (2010) indicated that the diversity of a technological alliance portfolio has a negative effect on financial performance. Moreover, Duysters and Lokshin (2011) argued that a diverse alliance portfolio increases the complexity of managing the alliances, which might result in negative financial performance. Overall, prior research agrees on an inverted U-shaped relationship between APD and firm innovation performance (Oerlemans et al., 2013; Duysters & Lokshin, 2001; Vasudeva & Anand, 2011). At low levels of APD, partners are connected to firms with similar resources, which reduces the possibility to gain advantage from synergies. On the other hand, the cost of managing a highly diverse alliance portfolio may not outweigh the benefits (Chen et al., 2011).
the corresponding strategic alliances. By having the acquired alliances in the total alliance portfolio, firms may be able to effectively change the configuration of their alliance portfolio.
Share of acquired alliances and innovation performance
As discussed previously, acquisitions are an option to change the configuration of the alliance portfolio. An acquisition refers to all inter-firm linkages that lead to integration of two entities (Vanhaverbeke et al., 2002). Sørenson an Reve (1998) argued that the selection of partners is one of the most important steps in the formation process. However, the contracts with the acquired alliance partners are not negotiated by the acquirer. This situation can result in a tension between the focal firm and the acquired partners, which might be amplified when the acquired alliances form a great proportion of the total portfolio. Additionally, moral hazard concerns might occur due to the unpredictability of the behaviour of the new partners and the possible opportunistic behaviour (Zaheer et al., 2010). Hence, the incorporation of acquired alliance into the alliance portfolio provides certain challenges.
The relational view posits that the context of alliances has significant impact on the creation, sharing and transfer of knowledge (Dyer & Singh, 1998). Building on the relational view, Liu et al. (2010) argue that relational capital is required to obtain knowledge from alliance partners. Combining the obtained knowledge with internal knowledge can create synergies (Lavie, 2007). Liu et al. (2010) further indicate that interaction and trust are important criteria for creating relational capital. The degree of interaction between alliance partners depend on the strength of their ties. Hoffman (2007) argues that only firms with strong ties are able to transfer in-depth knowledge. Prior research indicated that in order to form strong ties, firms need to develop trust over a certain amount of time (Zaheer et al., 2010). Strong relationships thus involve great levels of interaction in both quality and time. However, acquired alliances have not yet developed these strong ties with the focal firm and can be classified as rather weak ties. The second criteria for relational capital is a trusting relationship. Inter-firm trust is essential for the development of enduring alliances (Sarkar et al., 2001), enabling a firm to obtain new knowledge (George et al., 2001) and reducing opportunistic behaviour of partners (Lui & Ngo, 2004). Furthermore, trust stimulates comprehensive communication and information sharing (Faems et al., 2008). Besides, when one partner distrusts another, the other party will lose faith, which results in an increasing distrust of both partners (Graebner, 2009). Acquired alliances are incorporated after the formation phase, which limits their ability to create a trusting relationship over time. Hence, a low level of relational capital between the acquirer and acquired alliances may lead to a lower chance of knowledge recombination.
must be divided and becomes a scarce resource. Problems might occur when managers face challenges in integrating and appropriation acquired alliances, instead of exploiting original alliances. For instance, Ahuja and Katila (2001) indicate that firms with a relatively high acquired knowledge base experienced negative innovation performance. In this case, the acquiring firm used a significant amount of resources and time to absorb and assimilate the acquired knowledge. Managerial resources were not used to exploit the potential of resource combinations. Hence, it is expected that an increasing share of acquired alliances leads to lower innovation performance due to lack of attention. Besides, the division of attention might result in a lower degree of trust between alliances and the focal firm.
Further challenges in managing an alliance portfolio concern the avoidance of conflict (Gulati, 1999). Conflict might occur due to interdependencies between alliance partners. This situation could happen when alliances are added to the portfolio by means of acquisition, especially when total portfolio consists of a large proportion of acquired alliances. Moreover, the alignment of the complete portfolio to a joint goal (i.e. strategic fit) and monitoring and control of contributions are major challenges (Hoffman, 2005). According to Parise and Casher (2003), firm success generally depends on the fit of the total alliance portfolio. Besides, portfolio fit is important for access to a right mix of resources (Duysters et al., 1999). A portfolio with a large share of acquired alliances is expected to have a low portfolio fit, due to the fact that acquired alliances are not formed by the focal company. I argue that these challenges are even greater when the alliance portfolio consists of a large proportion of acquired alliances. According to the abovementioned arguments, I hypothesize that:
Hypothesis 1. The share of the acquired alliances portfolio has a negative linear effect on firm innovation performance. (i.e. as the share of the acquired alliance portfolio increases, the firm innovation performance decreases.)
The moderating role of equity ownership
major difference, equity joint ventures are excluded from this study. This thesis focuses on the direct minority equity investments, which hereinafter are referred to as equity alliances.
In the first hypothesis I argued that the share of acquired alliances has a negative linear effect on innovation performance. Uncertainty and unpredictability of acquired partner behaviour may exist due to the fact that acquired alliances are not negotiated by the focal firm. These effects are expected to be stronger when the portfolio consists of a large share of acquired alliances. A high uncertainty and unpredictability of partner behaviour increases the risk of opportunistic behaviour (Faems et al., 2008) and concerns for appropriability (Gulati & Singh, 1998). In order to reduce these risks and concerns, firms need to control and enforce the acquired alliances. I rely on insights from transaction cost economics theory to argue that the relationship between share of acquired alliances and innovation performance will be moderated by the share of equity alliances. Transaction cost theorists state that the governance structure of an alliance is determined by the expected transaction costs (Pisano, 1989). These transaction costs result from forming and maintaining alliances. When applying the theory of transaction cost economics to acquired alliances, post formation transaction costs such as control (e.g. monitoring and evaluation) and enforcement costs need to be considered. With a high share of acquired alliances in the portfolio, concerns for appropriation and risk of opportunistic behaviour of partners are likely to exist. Contractual alliances are the standard governance structure for alliances, equity ownership must be clarified (Gulati, 1995). Enforcing more contractual alliances (i.e. non-equity alliances) in the portfolio will increase the transaction costs to the focal firm. Chen and Chen (2003) argue that more hierarchical alliances (i.e. equity alliances) are desirable when transaction costs are high. Equity-based alliances are considered more hierarchical because they more closely simulate some characteristics associated with organizational hierarchies than other alliances, such as contractual alliances (Gulati, 1995). Equity alliances provide protection against opportunistic behaviour and alignment of incentives of partners (Pisano, 1989). Furthermore, Das and Teng (1996) state that equity alliances are adopted to control relational risk, which is present among acquired alliances. According to transaction cost economics theory, a high proportion of equity alliances is expected to be beneficial when the portfolio consists of a large share of acquired alliances.
the transfer and exchange of tacit knowledge (Teng & Das, 2008). The exchange of tacit knowledge is particularly important in knowledge intensive industries such as the biotechnology and pharmaceutical industry. Fourth, the presence of a contract leads to a wait-and-see strategy (Vassolo et al., 2004). Fifth, equity prevents partners to share information with competitors (George et al., 2001). Sixth, equity alliances promote a more active involvement and interaction of the partners (Chen, 2004). Finally, monitoring costs are lower because equity alliances rely on self-monitoring (i.e. equity) instead of third-party monitoring (Dyer & Singh, 1998).
According to these abovementioned arguments, I expect that firms with a high proportion of acquired alliance perform better when the acquired portfolio contains a high share of equity alliances. Hence, I hypothesize that:
Hypothesis 2. A high proportion of equity alliances1 within a firm’s acquired alliance portfolio will reduce the negative relation between share of the acquired alliance portfolio and firm innovation performance.
Figure 1. Conceptual framework
METHODOLOGY
The methods section is used to describe and justify the methodological choices made in this research paper. In order to understand the impact of acquired alliances on firm innovation performance and the moderating role of equity ownership, a longitudinal study is performed. The longitudinal study is chosen because it provides insight into the impact of the acquired alliances on firm innovation performance over a period of time.
Data Collection
The sample was obtained in the following way. First, a list of the largest biotechnology and pharmaceutical firms was provided by the department of innovation management & strategy at the
1
University of Groningen. The corresponding Standard Industrial Classification (SIC) codes are 2836 for biotechnology firms and 2834 for pharmaceutical firms (Rothaermel, 2001). Focal firms with less than two alliances within the main observation period of 2000 to 2005 were excluded from the list. This ensures that the size of the acquired alliance portfolio can be compared with the original alliance portfolio. Large firms are preferred due to a greater likelihood to correspond to these requirements. Besides, the emphasis on large firms is in line with previous research on acquisitions (Ahuja & Katila, 2001). Moreover, the focal firms and corresponding alliances were checked for any name changes during the collection period, which ranges from 1996 to 2005.
In order to collect information on acquired alliances, I generated a list of acquisitions made by the focal firm within the main observation period. Target firms that only contained certain assets or subsidiaries unrelated to the biotechnology or pharmaceutical industry were excluded from this list. Using the SDC Platinum database, records of original and acquired alliances were collected between 1996 and 2005. In order to build alliance portfolios, the records of acquired alliances were added to the original alliances and arranged per focal firm in separate Excel sheets. An assumption is made that each alliance lasted for five years (Jiang et al., 2010; Lavie & Miller, 2008). Therefore, the size of the portfolio is calculated by the number of alliances formed in a particular year plus the four preceding years. Data for the independent, dependent and control variables were obtained from databases such as Compustat, Orbis and SDC Platinum. In addition, the collected data was verified and/or supplemented by information from annual reports and Securities and Exchange Commission (SEC) forms. The final step was to include the attained data into a panel-dataset. The software selected for performing statistical analysis on the acquired data was STATA14.
Sample
Measures
The measures performed in this study are described below and include the dependent variable, independent variable and control variables. These measures are adopted according to prior literature.
Dependent variable
Firm innovation performance
Firm innovation performance is measured as the number of patents in a 5-year forward window, weighted by the number of citations (Sampson, 2007). I use a weighted measure of citations to give an impact factor to each patent (Lahiri & Narayanan, 2013). Citations indicate technology building relationships (Sørensen & Stuart, 1999). A one-year lag in forward window is used to account for the relation between Research and Development (R&D) efforts and patenting (Sampson, 2007). Therefore, the period for obtaining patent and citation data ranges from 2001 to 2010. Furthermore, only patents that are granted and issued in the United States of America are included in the analyses. Granted patents are selected because they relate directly to inventiveness (Ahuja and Katila (2001). Furthermore, Hagedoorn and Cloodt (2003) argued that the overlap with alternative innovation performance measures such as R&D inputs or product announcements is that great, that one measure of innovation performance is adequate. The number of patents and citations is a count variable and can only take integer values.
Independent variables
Share of the acquired alliances
The share of the acquired alliances is measured as the proportion of the acquired alliance portfolio in the total alliance portfolio (i.e. the size of the original acquirer’s alliance portfolio plus the size of the acquired alliance portfolio). The original acquirer’s portfolio is composed completely out of alliances formed by the focal firm. A similar method applies to the acquired firm.
Moderator
Equity ownership
Control variables
Industry diversity
Previous research indicated that industry diversity influences firm performances. Partners from the same industry are more likely to be competitors, which increase the likelihood of learning races and conflict of interest (Jiang et al, 2001). The effects of industry diversity will therefore be controlled. Industry diversity is determined by comparing SIC codes of the focal firm with the alliance partner. The corresponding coding is: (1) Same one digit SIC code, (2) same two-digit SIC code, (3) same three-digit SIC code and (4) same four-three-digit SIC code. The number are combined into a Blau Index of Variability (Blau, 1977), which indicate the level of diversity. The Blau Index of Variability is formally noted as:
i = category
k = total number of categories
"#= portion of category I in the alliance portfolio
Firm size
Previous research indicated that larger firms benefit from scale effects, which may result in higher performance. Firm size is measured as the natural logarithm of total number of employees (Lahiri & Narayanan, 2013).
Firm age
Prior research indicates that older firms have more time to acquire knowledge that can be widely applied (Gittelman & Kogut, 2003). Firm age is measured as the number of years from the date of founding (Phelps, 2000). The natural logarithm of firm age is used to normalize the distribution (Anderson & Eshima, 2013).
R&D Intensity
According to Lahiri and Narayanan (2013), R&D intensity significantly influences firm performance. R&D intensity is measured as R&D expenditures divided by sales of the focal firm (Laursen & Salter, 2006; Duysters & Lokshin, 2011; Hitt et al., 1990).
Total portfolio size
2008). The size of the alliance portfolio includes a combination of both the original portfolio of the focal firm and the acquired portfolio.
Analytical method
A longitudinal study is performed to understand the impact of acquired alliances on firm innovation performance and the moderating role of equity ownership. Our dependent variable, firm innovation performance, is a count variable and can only take non-negative integer values (Lahiri & Narayanan, 2013). Therefore, the Poisson regression and negative binomial regression are suggested (Hausman et al., 1984). As the descriptive statistics in table 1 show, the mean firm innovation performance is 457.9043 and the standard deviation is 800.4204. As the standard deviation is much larger than the mean, which is called over-dispersion, negative binomial regression is the preferred choice (Park et al., 2015). A fixed effect model will help to control for unobserved heterogeneity between firms and year dummies to control for macro-economic effects (Keil et al., 2008). Furthermore, fixed effects are used to explain within-firm variation in performance over time, instead of inter-firm variation (Lavie, 2007). In order to control whether fixed effects is appropriate, the Hausman-test was conducted. The results indeed indicate that fixed effects are most adequate (X2 = 15.08, p = 0.02). Therefore, for testing both
hypotheses a fixed effects negative binomial regression (xtnbreg in STATA 14) analysis is conducted. RESULTS
The results are presented in this section. First, the results of the descriptive statistics are shown. Hereafter, I will describe the outcomes of the negative binomial regression for both hypotheses.
Descriptive statistics
The main sample consists of 42 firms, with a total number of 229 observations. These firms conducted 472 original alliances and acquired 51 alliances. The total number of alliances examined in this thesis is 523 alliances. The maximum size of an original portfolio is 33 alliances, 11 alliances for an acquired portfolio and 36 alliances for a complete portfolio. The mean size of the original portfolio decreased from 5.26 alliances in 2000 to 4.88 alliances in 2005. On average, the original portfolio consisted of 4.98 alliances. On the other hand, the mean size of the acquired portfolio increased from 0.19 alliances in 2000 to 0.49 alliances in 2005. The mean size of the acquired portfolio is 0.37 alliances. The total portfolio size decreased slightly from 5.47 alliances in 2000 to 5.28 alliances in 2005, with an average of 5.35 alliances. Out of 42 focal firms, 31 firms acquired another firm during the main observation period of 2000 to 2005. However, totally 16 acquired firms formed alliances within the observation period of 1996 to 2005. These 16 firms are the basis for the sub-sample for testing hypothesis 2. Within the sub-sample, the share of acquired alliances increased from 9% in 2000 to 26% in 2005 (figure 2). The average share of acquired alliances is 17%. The data in figure 2 already illustrates that the phenomenon of acquired alliances is becoming more present in alliance portfolios.
Figure 2. Share of acquired alliances
The dependent variable, innovation performance, is measured using the number of patents and citations. On average, the focal firms were granted 8.75 patents per year with a maximum of 111 granted patents. The mean number of citations per year is 95.77 citations, with a maximum of 2030 citations. Considering the governance modes, five out of 51 alliances were structured as an equity alliance. Moreover, the mean share of equity alliances within acquired portfolios is 14% on average.
Table 1: Descriptive statistics and correlations (main sample: all firms)
Variable Mean S.D. 1 2 3 4 5 6
Firm innovation performance 457.9043 800.4204
Share of acquired alliances 0.0567 0.1497 0.1055
Industrial diversity 0.4982 0.3226 0.2682 0.2826
Total portfolio size 5.3511 5.0830 0.3312 0.0665 0.4523
Firm size (log) 6.3491 1.2407 0.2118 0.1811 0.4118 0.3653
Firm age (log) 2.5325 0.7742 -0.0375 0.2135 0.1808 -0.124 0.3091
R&D intensity 1.7980 5.0773 -0.0767 -0.0906 -0.1237 -0.0928 -0.22 -0.1229
Number of observations: 235
Table 2: Descriptive statistics and correlations (sub-sample: including firms that conduct acquisitions)
Variable Mean S.D. 1 2 3 4 5 6 7
Firm innovation performance 636.4167 911.1182
Share of acquired alliances 0.1656 0.2184 -0.0808
Industrial diversity 0.6873 0.2115 0.1002 -0.5015
Total portfolio size 7.1458 6.1865 0.1077 -0.4992 0.3596
Firm size (log) 6.8774 1.3818 0.1362 -0.4814 0.445 0.5027
Firm age (log) 2.7324 0.6242 -0.1205 0.1561 0.0555 -0.2345 0.1599
R&D intensity 1.3132 2.7320 0.0105 0.0429 -0.2795 -0.2077 -0.4292 -0.2785
Share of equity alliances 0.1656 0.2184 0.1273 -0.0469 -0.02 -0.1698 -0.1638 0.2442 0.3365
The mean industry diversity of 0.50 indicates that alliances on average had a moderate industry diversity. Concerning the sub-sample, the industry diversity slightly increased from 0.68 in 2000 to 0.70 in 2005, with an average of 0.69.
Regression results
Table 3 provides the outcomes of the fixed effect negative binomial regression used to test both hypotheses. All models include dummy variables for each year of the observation period. The first three models are used to test the first hypothesis. In model 1 only control variables are included. Total portfolio size and firm age influence firm innovation performance and are significant at the 0.01 level. The second model shows the relation between share of acquired alliances and innovation performance without control variables. As predicted, share of the acquired alliance portfolio has a negative linear relation with innovation performance (B = 0.884, p <0.01). The third model includes the full model, in which the control variables are added to the independent variable. For the first hypothesis, I predicted that share of acquired alliances has a negative linear effect on firm innovation performance. As shown in model 3, the share of acquired alliances negatively effects firm innovation performance (B= -1.095, p <0.01). Therefore, the first hypothesis is supported.
Model 4 and 5 are used to test the second hypothesis. The fixed effect negative binomial regression is conducted on a sub-sample that consists of firms that acquired at least one alliance. Model 4 includes the share of equity alliances as a direct effect on innovation performance. Model 5 includes the moderating variable of equity alliances. The moderating variable is calculated by multiplying the share of acquired alliances with the share of equity alliances. In the second hypothesis, I predict that a high proportion of equity alliances within a firms acquired alliance portfolio will reduce the negative relation between share of the acquired alliance portfolio and firm innovation performance. In support of the second hypothesis, model 5 reveals the positive moderating effect of equity ownership (B = 8.638, p <0.05) on the relation between share of acquired alliances and innovation performance. Accordingly, firms with a high share of acquired alliances perform better when the acquired portfolio consists of a high share of equity alliances instead of a low share of equity alliances. On the other hand, when a firm’s alliance portfolio consists of a low share of acquired alliances, a low share of equity alliances is preferred. Hence, the results support the second hypothesis. This phenomenon is illustrated in figure 2.
Table 3: Negative binomial regression results (Hypothesis 1: model 1-3, hypothesis 2: model 4-5)
Firm innovation performance Model 1 Model 2 Model 3 Model 4 Model 5
Full model Full model Full model Sub-sample Sub-sample
Share of acquired alliances -0.884*** -1.095*** -0.217 -0.528
(0.340) (0.289) (0.963) (0.647)
Industrial diversity -0.139 0.0309 0.791 0.708
(0.200) (0.196) (0.574) (0.616)
Total portfolio size 0.0729*** 0.0713*** 0.0295 0.0365
(0.0116) (0.0116) (0.0281) (0.0231)
Firm size (log) -0.214** -0.206*** -0.297 -0.0158
(0.0840) (0.0793) (0.493) (0.282)
Firm age (log) 0.605*** 0.741*** 0.199 -0.865
(0.131) (0.145) (0.888) (0.724)
R&D intensity 0.000398 0.000878 -0.0293 -0.00459
(0.00603) (0.00581) (0.113) (0.115)
Share of equity alliances 0.429 -0.151
(0.539) (0.487)
Share of acquired equity x share of equity alliances 8.638**
Figure 2. Moderating effect of equity ownership
DISCUSSION
In this section, I first discuss the main theoretical and practical implications of the findings. Subsequently, I identify the main limitations of this thesis and present opportunities for future research.
Theoretical implications
Prior alliance portfolio management literature has mainly focused on the configuration and management of alliance portfolios (Wassmer, 2008). Regarding alliance portfolio configuration, size and diversity were of major interest. However, scholars neglected acquisitions as an option to change the configuration of alliance portfolios. The overall aim of this thesis was therefore to understand the impact of acquired alliances on firm innovation performance and whether governance modes, specifically equity alliances, moderate this relationship. In order to test the first hypotheses, empirical analyses were performed on a sample of 42 large biotechnology and pharmaceutical firms. In total, these firms formed 472 original alliances and acquired 51 alliances. The second hypothesis is tested on a smaller sample, which only contained firms that acquired an alliance during the observation period of 2000 to 2005.
explanation for the negative relation is that acquired alliances impose significant managerial and knowledge recombination challenges. Challenges may occur due to a lack of trust and interaction between partners (Liu et al., 2010) or problems in allocating managerial attention (Ocasio, 1997). Prior literature claimed that inter-firm trust is critical for the success of an alliance (Faems et al., 2008). However, acquired alliances are incorporated after the formation face, which prevent acquired alliances from building trusting relations. Furthermore, the fact that contracts of the acquired alliances are not negotiated by the focal firm could explain a negative tension in the alliance portfolio. These findings suggest that scholars should consider the implications of acquired alliances when studying alliance portfolio management.
Second, the results demonstrate the important role of equity ownership in managing the relationship between share of acquired alliances and innovation performance. Relying on the transaction costs economics theory, I argued that equity alliances are beneficial for firm performance when the alliance portfolio consists of a large share of acquired alliances. The results of the negative binomial regression show that share of acquired alliances positively moderate the relation between share of acquired alliances and firm innovation performance. In line with the results, previous research on alliance governance show that equity investments reduce concerns for appropriation and opportunistic behaviour (Gulati, 1995; Pisano, 1989). Furthermore, previous scholars claim that equity investments stimulate inter-firm knowledge transfer (Liu et al., 2010), align the interest of alliances partners (Pangarkar, 2003) and reduce relational risk (Teng & Das, 2008). Interestingly, Bierly and Coombs (2004) claim that direct minority equity alliances have significant drawbacks in addition to their regularly discussed advantages. Equity alliances might be unstable due to the fact that only one partner invested equity in the alliance. Therefore, equity alliances experience lower commitment, trust and alignment of incentives relative to joint ventures (Das & Teng, 1998). However, few empirical research is performed on the (lack of) effectiveness of equity alliances (Bierly & Coombs, 2004). I contribute to existing literature on alliance governance by demonstrating the positive moderating effect of equity ownership on the the newly introduced phenomenon of acquired alliances. Specifically, the results showed that firms with a high share of acquired alliances perform better when the acquired portfolio consists of a large proportion of equity alliances. This finding suggest that equity alliances enable a firm to more effectively manage acquired alliances within the total portfolio.
terminate the relationship with the acquired equity alliance (Gulati, 1995). Future researchers could examine whether the positive moderating effect of equity alliances also hold for financial performance. Furthermore, Bierly and Coombs (2004) argued that considerable difference exists between different types of governance structures. Previous research included joint ventures in their analyses by threating joint ventures as equity alliances (Gulati, 1995; Kale & Puranam, 2004). However, I made a distinction between minority equity alliances and joint ventures and decided to focus solely on minority equity alliances. Future research could also make this distinction and investigate whether other organizational forms, such as equity joint ventures, provide similar positive effects on the relation between share of acquired alliances and innovation performance.
Regarding the control variables, Lahiri and Narayanan (2013) stated that larger firms perform better due to scale effects. Contrary to the expectations, firm size has a negative linear effect on firm innovation performance. In line with the results, Cui (2013) argued that large firms are more likely to face organizational inertia, resulting in less innovation than smaller firms. Another explanation could be that the sample consists mostly of large firms, with an average size of 1318 employees. Furthermore, R&D intensity was not significant in both the full model and the sub-sample. Meaning that innovation performance is not dependant on a change in R&D intensity. These results are in line with Lahiri and Narayanan (2013), who found an insignificant relation between R&D intensity and innovation performance. A possible explanation could be that a 10-year development time of drugs is common in the biotechnology and pharmaceutical industry (Deeds et al., 2000). Despite the five year forward citation, a substantial lag between current R&D and patenting might occur.
Practical implications
The findings present interesting implications for practitioners. Managers are advised to consider the complete alliance portfolio, including the acquired alliances, before performing an acquisition. A portfolio with a large share of acquired alliances would negatively influence the innovation performance of the focal firm. Managers are therefore stimulated to perform extensive due diligence into the alliance portfolio of the acquired firm. Furthermore, managers should consider the governance structure of these potential acquired alliances when performing due diligence. Managers should prefer to acquire a large number of potential alliances only when there is a high share of equity governance. On the other hand, equity governance is less important when firms acquire a small number of alliances. Hence, not considering the impact of the acquired portfolio might hinder the potential of the complete alliance portfolio.
Limitations and future research
Previous research confirms this limitation. Lavie (2007) used a sample of 367 software firms and identified 20,779 alliances. However, only 5,135 alliances out of 20,779 alliances were reported in the SDC Platinum database. Second, care must be taken when generalizing the findings of this thesis to other industries. The biotechnology and pharmaceutical industry are characterized by a frequent formation of alliances and acquisitions (Baum et al. 2000; Higgins & Rodriguez, 2006). Furthermore, the biotechnology and pharmaceutical industry comprise of a relatively high number of acquired alliances compared to other industries (Bierly & Coombs, 2004). Future researchers could investigate whether the negative linear relation between share of acquired alliances and innovation performance holds for other industries. Third, the number of observations used for testing the second hypothesis was, with a number of 46 observations, fairly small for a negative binomial regression. However, performing an alternative regression, such as a linear regression (xtreg), did not result in a substantial increase in number of observations (51 observations). Therefore, the most appropriate test is conducted on the (sub) sample, which is the negative binomial regression. Nevertheless, the full sample consists of 229 observations. Future research could increase the sample size in order to achieve more reliable conclusions on the moderating effect of equity alliances. Finally, citation weighted patents are used as a dependent variable to measure innovation performance. Although patents are an appropriate measure for innovation performance (Hagedoorn and Cloodt, 2003), firms might rely on other appropriation mechanisms such as secrecy.
CONCLUSION
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