Risk Control and Design of Deal-Making Structure in Interfirm Collaborations: he Cooperation between Large Pharmaceutical Firms and Young Biotechnology Corporations
Date Issued
2009
Date
2009
Author(s)
Chen, Chun-Han
Abstract
In recent years, strategic alliances between firms become a ubiquitous phenomenon. Their proliferation has led to a growing stream of research by strategy and organizational scholars who have examined some of the causes and consequences of such partnerships, mostly at the dyadic level. Although the establishment of long-term interfirm relationship has become more and more important, collaborating parties often worry about the uncertainty and opportunistic risk involved in the cooperation. Therefore, the design of transaction structure and appropriate arrangement of governance mechanism is a vital issue in the interfirm collaboration.n this thesis, I try to analyze the reasons and motivations which cause enterprise to choose different types of interfirm cooperation. Then I will proceed to discuss the risk and uncertainty firms may encounter during their long-term interaction. To solve these problems, collaborating parties would adopt some governance mechanisms to mitigate the risk and coordinate their tasks. The association between different types of interfirm alliances and modes of governance mechanisms will also be thoroughly examined in this thesis.trategic alliances exist in a bewildering variety of forms, ranging from unstructured collaborations, through consortia and joint ventures that superimpose new governance structures on existing firms, to transactions that restructure firm boundaries and asset ownership. In the second chapter, I explain the formation of long-term interfirm alliances from both economic and social perspective, based on Transaction Cost Theory, Resources Based Theory, and Social Network Theory etc. Through these theories, I try to come up with a unified and integrated analytical framework for further research. notable characteristic of the dramatic growth of strategic alliances in the last two decades has been the increasing diversity of such alliances. The nationalities of partners, their motives and goals in entering alliances, and the formal contractual structures used to organize the partnerships, called the governance structure, have all become increasingly varied. While alliances may be considered a distinct form of governance that is different from markets or hierarchies, there is also considerable variation in the formal structure of alliances themselves. The variety of organizing structures implies that firms face an array of choices in structuring their alliances. In the third chapter, I describe the risk and uncertainty involved in the interfirm collaboration, including information asymmetry, appropriation concerns, and hold- ups resulting from relationship-specific investment. To prevent these opportunistic hazard and manage the relationship between collaborating partners, several kinds of governance mechanisms must be adopted. I will compare the ads and cons of different transaction structures and mechanisms, trying to establish the connection between different types of interfirm collaboration and appropriate modes of governance mechanisms.ollowing the analysis in the second and third chapter, I take the collaboration between large pharmaceutical firms and young biotechnology corporations for example. Young firms with novel technologies frequently lack the financial resources to effectively introduce a new product and may find it difficult to raise equity or debt due to the information asymmetry surrounding the project. As a result, small, research-intensive firms usually rely on alliances with larger corporations. But the research outcomes of the alliances and the effort that the R&D firms devote to the project are often difficult to specify in an enforceable contract. So many mechanisms have been developed to overcome such risk and uncertainty, like through equity investment, upfront or licensing fees, milestone payments, and option clauses etc. Besides, the allocation of control rights has considerable practical importance. Case studies suggest that the allocation of control rights is a central issue in the negotiation of alliances. The prerogatives of the parties in every stage of the project, from the allocation of research dollars, to decisions about patent litigation against third parties, to marketing strategy, are painstakingly negotiated and carefully delineated in alliance agreements. All these measures are designed to align incentives of both parties and mitigate the risk of opportunistic behavior by either party so as to maximize performance of the alliances.o sum up, I conclude that the design of transaction structures and appropriate arrangement of governance mechanisms is worth of more attention in the interfirm collaboration. As long as the risk and uncertainty of the alliances can be carefully handled, strategic alliances between corporations will be more efficient and effective.
Subjects
strategic alliances
interfirm collaboration
transaction cost
relationship-specific investment
transaction structure
governance mechanism
control of opportunistic risk
hybrids
Type
thesis
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