Network Effects in the Governance of Strategic Alliances in Biotechnology

This work examines how equity participation and the amount of funding pledged in strategic alliances vary with two features of the way alliance participants are positioned in the network of past deals to establish that the alliance network mitigates holdup problems in interrm transactions.

Abstract

Strategic alliances are commonplace in the biotechnology sector. We posit that the stock of prior alliances between participants in the biotech industry produces a network---a communications infrastructure established by past transactions---through which information is transmitted. We argue that this network serves as a governance mechanism that substitutes for other forms of control in inter-firm transactions. To test our hypothesis, we examine how equity participation and the amount of funding pledged in strategic alliances vary with two features of the way alliance participants are positioned in the network of past deals: (i) centrality, a measure of how deeply embedded a firm is in the alliance network; and (ii) proximity, a measure of how close two counterparties are to one another in the network. The results establish that the alliance network mitigates holdup problems in interfirm transactions.