Uncertainty, governance alignment, and firm performance in biotechnology alliances

Abstract

Despite the importance of alliances in industries such as biotechnology, few studies have addressed how performance outcomes are affected by firm-level propensities toward alliance formation and alliance governance. We use transaction cost economics and real options reasoning to develop and test how uncertainties in alliance transactions affect firm performance, and how governance choices moderate performance outcomes. Data obtained on biotechnology alliances formed during the nine-year period from 1999 to 2007 involving 461 firms with 2,687 alliances were used in an empirical test of our model using hierarchical regression in a two-stage approach. Results support our argument that firm-level performance is negatively related to firm-level uncertainties from the firm’s alliances and the choice of alliance governance moderates these performance effects in distinctive ways. We then discuss the joint influence of transaction cost, real options reasoning on a firm’s alliance portfolio and its relationship to firm performance and offer implications of our findings for theory, research, and management practice.