Entrepreneurial alliances
Jeffrey J. Reuer
An entrepreneurial alliance may be defined simply as a collaborative agreement undertaken by a firm for an entrepreneurial purpose. Typic ally, these alliances will involve at least one entrepreneurial firm, but this need not be the case, just as some entrepreneurial firms might utilize alliances for more routine activities.
The first question that this definition raises, then, is what distinctive content does the adjective ‘‘entrepreneurial’’ add? For example, in what ways do entrepreneurial alliances differ from ‘‘strategic’’ alliances or other types of inter firm collaborations, and what insights might such distinctions yield?
Based on alliance investment patterns over the past few decades, one may argue that such adjectives are of no small consequence and are becoming increasingly relevant as alliances have become more pervasive and have also changed in character. Historically, the typical alliance tended to be an equity joint venture used for the purpose of entering a developing country while responding to a government’s restrictions on foreign investment. Technology transfer often was unilateral, from a multinational firm to a venture in the host country, and the foreign investor primarily sought access to the local market on a stand alone basis.
Today, however, alliances often crop up be tween actual or potential competitors, involve bilateral knowledge sharing while using more complex deal structures, and have global market objectives in a variety of sectors. Alliances often figure prominently in new ventures’ internationalization initiatives, are an investment vehicle by which corporate entrepreneurship proceeds, and are often an important means by which entrepreneurial firms can achieve their growth and financing objectives.
When thinking about how entrepreneurial alliances potentially differ from other types of alliances, it is useful to consider separately a number of differences in degree versus differences in kind. Both types of differences pose fruitful avenues of research that can enrich the entrepreneurship literature as well as the developing body of research on alliances.
Like other forms of collaborations, entrepreneurial alliances are becoming more important components of firms’ growth initiatives and are seen as risky endeavors. Although these characteristics apply to various types of collaborative agreements, they can take on particular importance for an entrepreneurial firm with a proclivity to take risks and assume a more aggressive competitive posture. Thus, research comparing and contrasting entrepreneurial alliances with other forms of collaboration should consider the focus of the collaboration, such as whether the alliance is with a foreign versus domestic partner, in a high tech domain or in a more tranquil environment, and so forth, in order to account for the risk taking propensities and more aggressive competitive stances of entrepreneurial firms. Like other forms of collaborations, alliances can also be instrumental for an entrepreneurial firm seeking to access complementary resources and leverage the upstream capabilities that it possesses.
Indeed, many of the features of other collaborative agreements can be more pronounced for 64 entrepreneurial alliances an entrepreneurial firm, often simply because an alliance represents a larger portion of the firm’s activities. As another example of differences in degree, research on alliance structuringempha sizes the need to develop an appropriate inter face between collaborators, and this can be especially challenging for entrepreneurial firms engaged in alliances with established firms. The entrepreneurial firm, for instance, might wish for the operational responsibility for the alliance to rest at a high level in a larger firm, while the latter for its part might have concerns that its complex organizational structure might provide ambiguities that the entrepreneurial firm can exploit.
These and other differences in degree can have several implications for how one thinks about and studies alliances. First, they raise the basic question of whether interpretations drawn from samples of non entrepreneurial firms can extend to the alliances formed by entrepreneurial firms. It may be the case that many of the insights obtained in other fields such as strategic management and international business are fungible, but bounds on generalizability are likely to exist for many issues and need to receive research attention.
Second, these differences suggest that some more fundamental theoretical issues might be overlooked by simply pooling together entrepreneurial alliances with other collaborative agreements rather than exploiting interesting sources of variance. For instance, consider a set of theories or variables that explain some important alliance phenomenon or outcome. When we consider the vector of differences that have been attributed to entrepreneurial versus established firms in many studies, it is then possible to investigate how these core theoretical mechanisms potentially play out differently for entre preneurial and other firms. For instance, due to their relative lack of administrative capabilities and slack resources, entrepreneurial firms may find it more difficult to operate their alliances efficiently and adapt these relationships as needed in the face of various exchange hazards (Leiblein and Reuer, 2004; Reuer and Arin˜ o, 2002).
Whereas many differences in degree might be identified and their implications traced out for entrepreneurial alliances, differences in kind are more challenging to isolate due to the substantial heterogeneity that exists in firms’ collaborative agreements, as well as in the motives that lead firms to engage in partnering. With this caveat in mind, however, it appears that entrepreneurial alliances have several fundamental features that do not figure significantly in prior writings on strategic alliances. Below I highlight two.
First, the impact of entrepreneurial alliances extends well beyond the collaboration itself, due to the signals conveyed to other organizations, whether potential bidders, customers, capital providers, etc. For instance, recent research relying on information economics to study firms’ exit strategies shows that firms with re sources that are difficult to value often find it useful to undertake an IPO prior to divestiture. Essentially, bidders find it valuable to rely on the stock market to serve as a screening device, and the direct and indirect costs borne by entrepreneurial firms going public enable them to signal their quality to would be buyers. However, such hard to value firms that also have been engaged in strategic alliances see less need to rely upon a two stage divestiture rather than an outright sale, since alliances themselves can reduce in formation asymmetries directly or mitigate the effects of adverse selection (Reuer and Koza, 2000; Reuer and Shen, 2004).
Second, the financial context of alliances looms large for entrepreneurial firms. Narrowly speaking, alliances may be used to obtain financial resources from a partner or indirectly substitute for shortfalls in capital. When the firm is not able to acquire the capital it needs, the alliance also may be designed in such a way that equity positions or other features reflect more transitory financial considerations in new ventures (Lerner, Shane, and Tsai, 2003). Outside of the scope of the alliance proper, because of the signaling aspects of collaboration for entrepreneurial firms noted above, alliances may also have longer term implications for the firm seeking to overcome liquidity constraints and make needed strategic investments.
Although these considerations are more speculative, they can have implications for how one thinks about and studies entrepreneurial alliances. For instance, the signaling considerations noted above suggest that attention to entrepreneurship and alliances can add new entrepreneurial alliances 65 insights to the literature on corporate strategy that has focused on buy side considerations in M&A without giving sell side processes their due. Such work could also contribute to the literature on IPOs that has often depicted the going public decision as an end state addressing a purely financial objective. In broader terms, the IPO, M&A, and alliance markets interact, just as capital markets, product markets, and markets for partners have potential spillover effects on one another, and these relationships are interesting to study in the entrepreneurship context. For example, giving attention to the financial context of alliances raises new questions concerning the interplay between financial markets and firms’ governance decisions, as well as the implications of alliances for financing choices. Although alliance research in strategic management and other fields has predominantly focused on ex post con tracting issues using the Williamsonian frame work, the discussion above on entrepreneurial firms’ alliances raises some new research possibilities on search processes and information asymmetries that are also very relevant sources of transaction costs in these markets.
Whether one emphasizes the differences in degree or differences in kind that exist across entrepreneurial alliances and collaborative agreements of other types, it is apparent that the developing literature on alliances has much to add to many issues of interest to entrepreneurship scholars (e.g., financing growth, exit strategies, corporate entrepreneurship, inter nationalization strategies, etc.), just as entrepreneurship scholars can enrich alliance research in new directions by emphasizing novel aspects of entrepreneurial firms and their collaborative agreements.
Bibliography
Leiblein, M. J. and Reuer, J. J. (2004). Building a foreign sales base: The roles of capabilities and alliances for entrepreneurial firms. Journal of Business Venturing, 19: 285 307.
Lerner, J., Shane, H., and Tsai, A. (2003). Do equity financing cycles matter? Evidence from biotechnology alliances. Journal of Financial Economics, 67: 411 46.
Reuer, J. J. and Arin˜ o, A. (2002). Contractual renegotiations in strategic alliances. Journal of Management, 28: 51 74.
Reuer, J. J. and Koza, M. P. (2000). Asymmetric information and joint venture performance: Theory and evidence for domestic and international joint ventures. Strategic Management Journal, 21: 81 8.
Reuer, J. J. and Shen, J.-C. (2004). Sequential divestiture through initial public offerings. Journal of Economic Behavior and Organization, 54: 249 66.