Entrepreneurship has several social benefits including economic growth; increased productivity; the creation of new technologies, new jobs, products, and services (Stoner, Freeman, & Gilbert, 995). In 1986, for the first time, the US balance of trade in high-technology goods became negative. This statistic has focused attention on finding ways to improve US firms' performance in high-technology areas.
It is generally believed that small businesses may be better able to exploit small market niches and identify and diffuse technological innovations (NSF, 1987). There is some empirical evidence to verify this. While large corporations manufacture most high technology products, new ventures introduce a larger proportion of new products per dollar of their R&D spending (NSF, 1987). Employment in new ventures in technology-related industries grew by about 20% from 1980-84 compared to 6% in all new ventures. New ventures also demonstrate a tendency to become large either through internal growth or acquisition (NSF, 1987). The ability of new ventures to contribute to overall economic growth makes their study important.
Role of strategic alliances
A phenomenon receiving attention as an alternative growth strategy for firms is
strategic alliances. Two methods of organization have traditionally been examined by both
management and economics researchers: markets and hierarchies. Markets rely heavily on the
use of price as an external method of organization and control. Today, a new form of
organization has emerged on the scene that falls somewhere between hierarchy and markets.
This form is called a strategic
alliance (Powell, 1990; Hennart, 1993).
For purposes of this paper, I will use the term "strategic alliance" to refer to any long-term, formal linkage between organizations that offers actual or potential strategic advantage to both (Jarillo, 1988; Olleros & Macdonald, 1988). Theses linkages may include minority investment, joint ventures, long-term contracts involving supply, manufacturing, marketing, and technology exchange agreements.
Due to the proliferation of these alliances, management researchers from many disciplines have begun to closely investigate them. Besides the anecdotal information abounding in the news, studies show that both small and large firms use strategic alliances (Harrigan, 1988; Dollinger & Golden, 1992), and that the use of these cooperative arrangements is growing (McGee, Dowling, & Megginson, 1995). Yet, much of the research to date has focused on strategic alliances in large firms. This is also true of the theoretical literature. This paper will address this gap by studying strategic alliances in new ventures.
Using three different theories, this paper will focus on new venture motivations to form a strategic alliance and the alternative governance structures for these alliances. Resource dependency theory (Pfeffer & Salancik, 1978) suggests alliances as a way to manage resource scarcity. Transaction cost theory (Williamson, 1991) states that firms enter alliance type arrangements to reduce their transaction costs. And, finally, strategic choice theory (Kogut, 1988) suggests that firms enter alliances based on their competitive strategy and whether the alliance will improve the firm's profitability in the long run. These three theories also suggest how best to manage these alliances or what this governance structure should be. Governance structures, such as licensing or joint ventures, represent the way firms choose to find resources and organize their work when it involves an independent partner.
Researchers have suggested two broad categories of governance structures: non-equity representing contractual modes vs. equity modes involving more complex organizational modes (Hagedoorn, 1993; Pisano et al., 1988). Equity governance structure can range from total acquisition, minority investment to joint ventures (parents form new venture and each hold part-equity). Non-equity market based contractual agreements also cover a variety of arrangements of a long and short term nature offering less control than other arrangements (Osborn & Baughn, 1990). Other researchers suggest that there is a continuous scale from markets to total internalization (hierarchy) based on the degree of vertical integration with contracting representing the lowest level (Lorange & Roos, 1992).
Partial ownership represents more control for the partners, but with tighter control comes more organizational complexity and the loss of strategic flexibility (Bresser, 1988; Harrigan, 1988; Osborn & Baughn, 1990). The critical issue then for choosing a governance structure is the trade off between tight control achieved through partial ownership and strategic flexibility of the partners. These three theories imply that firms will be better off choosing different governance structures depending on the firm's situation. Yet, the research to date has failed to link firm motivation to performance. It has also not examined if different governance structures affect firm performance.
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