Determinants and Consequence of the Alliance Partner Network Distance

Abstract

This dissertation consists of two essays on the determinants and innovation consequences of alliance partner choice. To narrow down the scope of alliance partner choices, I focus on how a focal firm and a partner firm are connected in their network. To understand the relational connection, I use the notion of alliance partner network distance, which refers to how far away the partner is from the focal firm in the network. Methodologically, the notion of alliance partner network distance is captured by the shortest alternative path to the partner firm from the focal firm in the time period prior to alliance formation. Theoretically, network distance explains the social mechanism and the characteristics of information flowing between the two firms. If there is a mutual partner between the two firms (i.e., a close partner), the relational risk is reduced (Coleman, 1988), and the novelty of information coming from an unconnected partner (i.e., a distant partner) is higher than that from a connected partner (Burt, 1992). This dissertation examines the effects of corporate governance on network distance as a determinant of alliance partner network distance in the first essay and the innovation consequences of alliance partner network distance in the second essay. Drawing on multiple managerial perspectives and an innovation perspective, taken together, the essays in this dissertation provide a comprehensive understanding of alliance partner choices. In the first essay, entitled "Determinants of Alliance Partner Choice: Alliance Partner Network Distance and Agency Theory," I argue that an agency problem is involved in alliance partner choice, in particular between distant partners and close partners, as a determinant of alliance partner selection. I ask if managerial opportunism may be a significant problem in the alliance partner choice and examine the role of corporate governance mechanisms designed to address agency problems in explaining alliance partner network distance. I propose that the increased relational risk of allying with distant partners may be mitigated by managerial incentives and monitoring by outsider directors. Using a sample of 310 alliances of U.S. firms from the pharmaceutical and biotechnology industries from 1996 to 2010, I find support for the presence and mitigation of agency hazards in alliance partner choice. Firms tend to form alliances with close partners to avoid employment and other risks, which are mitigated by managerial ownership and outside director ownership. In addition, managerial tenure moderates the relationship between network distance and managerial incentives, and the relationship between network distance and board monitoring. This study makes a theoretical contribution to the body of literature on alliance partner choice by adding a new lens of agency hazards. The second essay, entitled "How Does an Alliance Partner Network Distance Affect a Firm's Innovation?"� investigates how an alliance partner's network distance affects a firm's innovation. I propose that an alliance with a distant partner contributes to exploratory innovation and better-quality innovation with novel and non-redundant information from the distant partner, while an alliance with a close partner contributes to innovation quantity based on social capital with the close partner. Technological distance substitutes network distance for innovation quality. I test the effect of alliance partner network distance on innovation with 534 R&D alliances of 189 firms in the pharmaceutical and biotechnology industries in the U.S. between 1996 and 2009. This study makes theoretical contributions to the literature on innovation by addressing the conflicting theories about the benefits of social capital and the benefits of novel information.