Chapter Listing | Return to 1997 Topical Index


Three theories, resource dependency theory, transaction cost theory, and strategic choice theory offer alternative explanations for the impact of alliances on firm performance, along with prescriptions for how best to structure the alliance. Resource dependency theory (Pfeffer & Salancik, 1978) suggests that no organization can survive alone. It must constantly interact with its environments either to purchase resources such as labor, supplies, or equipment, or to distribute its finished products. Organization seek to gain control over their environment through alliances. These alliances can insulate an organization from its external environment and lessen the effects of environmental uncertainty (Pfeffer & Salancik, 1978; Galaskiewicz, 1985; Miner et al., 1990) Strategic alliances guarantee more stable flows of resources in times of scarcity (Stearns, Hoffman & Heide, 1987; Miner et al., 1990) But there are drawbacks to these guarantees. Once an organization becomes dependent on another organization, it can no longer make decisions in a vacuum but must consider the other organizations' possible actions when making decisions (Pfeffer & Salancik, 1978).

The literature suggests that this interdependency will take three forms. The first type of interdependence is horizontal interdependence between competitors. These are alliances between organizations that compete for the same resources, such as customers or suppliers (MacMillan & Jones, 1978; Astley & Fombrun, 1983; Oliver, 1990). In horizontal alliances, the organizations exchange or pool their resources toward some overarching goal, such as in research consortia or trade unions. The second is a symbiotic interdependence hereafter called vertical alliances. These represent an alliance between a firm and those organizations supplying it inputs or using its outputs, such as suppliers, buyers, financial institutions, or the labor pool. The third type of interdependence is reciprocal, where firms exchange both inputs and outputs (Borys & Jemison, 1989; Oliver, 1990). An example would be joint R&D. In reciprocal alliances, firms exchange ideas, people and equipment, share lab space and pass designs back and forth.

As the alliance interdependence increases from horizontal to reciprocal, so does the need for close interaction and stability in the relationship. Given a less interdependent alliance, contractual forms of governance structure offer sufficient interaction. But as interdependence increases, so does the need for interaction, leading to governance structures with more institutional control, such as acquisitions or joint ventures (Borys & Jemison, 1989).

H1: New ventures using vertical alliances with non-equity structures will have higher performance than those using equity structures.

H2: New ventures using reciprocal alliances with equity structures will have higher performance.

Transaction cost theory primarily rests on an efficiency argument. Markets are the preferred method of transacting and the most efficient, but under conditions of uncertainty, high asset specificity and small numbers bargaining, transaction costs will rise and firms will look for alternatives to markets. When high levels of uncertainty surround the transaction, firms cannot write and enforce a contract that specifies all possible outcomes. This leaves the firm open to possible exploitation by their partner firm (Mosakowski, 1991). When these conditions occur, firms will prefer more control. They can gain this control through ownership (vertical integration) or internalization of the function or through strategic alliances with equity governance structures. Mosakowski (1991) found support for this. She found that the choice of ownership vs. contracting in the case of R&D and service can lead to differences in new venture performance.
H3: New ventures with high levels of uncertainty in their environment, specific assets, or small numbers bargaining choosing an equity governance structure will have higher performance than other structures.

While transaction cost theory suggests cost-minimization as a major motivation for firms entering into strategic alliances, strategic choice theory suggests that firms should choose an alliance as an alternative organizational over total ownership when the alliance will improve the firm's competitive position and have a positive impact on profitability (Kogut, 1988). This theory views alliances as alternatives to either diversification or vertical integration. Alliances can allow firms to capitalize on their functional expertise and contract for other needed functions. The choice of a governance structure is influenced by the strategic importance of the business strategy often represented by functional expertise and expenditures (Fagre & Wells, 1982; Kogut, 1988; Porter, 1980). When the alliance does not impact a firm's major functional area or major product line, firms will want the flexibility of non-equity contractual arrangements. When contemplating alliances involving the firm's functional expertise, firms will have a higher need for specifying performance and control. These are characteristics that are best suited to a joint venture or other equity arrangement (Kogut, 1988). Firms would prefer equity arrangements when the alliance impacts the firm's current business operations, otherwise non-equity. This would suggest that the closer the partner in the alliance is to the new venture, the more likely that the new venture would choose an equity structure. Mosakowski (1991) found that in new ventures, where R&D was a critical part of their strategy, a new venture's performance was lower when it contracted for R&D, but higher when it contracted for sales. She had similar findings for new ventures emphasizing marketing differentiation. New ventures with a customized service strategy had lower performance with sales and service contracts than do new ventures that did not have this strategy. Her findings provide support for the strategic choice model which suggests that assets and activities that are related to the new venture's strategy should be handled through equity structures while other function should be contracted.

There has been research on the effect of choice of governance structure but these findings have been conflicting. McGee, Dowling and Meggisson have found support for that theory that there was a relationship between business strategy and use of alliances. They found that new ventures following a marketing differentiation strategy and using a marketing cooperative arrangement were positively associated with sales growth. Mosakowski (1991), on the other hand, found that new ventures with a customized service strategy had lower performance with sales and service contracts than do new ventures that did not have this strategy. Neither study looked at how these alliances were structured. The following hypotheses will examine the interaction between choice of governance structure and motivation and its affect on performance.

H4: New ventures with alliances formed in functions outside the functional expertise with non-equity governance structures will have higher performance than those with other structures.

H5: New ventures with alliances formed within the functional expertise of the new venture and having a nonequity governance structure will have lower performance than those with other structures.

Top of page | Chapter Listing | Return to 1997 Topical Index

1997 Babson College All Rights Reserved
Last Updated 06/02/98