STRATEGIC ALLIANCES AND THE RATE OF NEW PRODUCT DEVELOPMENT - AN EMPIRICAL-STUDY OF ENTREPRENEURIAL BIOTECHNOLOGY FIRMS

A key to success in industries populated by entrepreneurial high-techn ology firms is the rate at which the firm develops new products. Rapid product development creates significant advantages for entrepreneuria l firms, including access to early cash flows, external visibility, le gitimacy, and early market share. The higher a firm's rate of new prod uct development, the more likely the firm is to achieve and maintain t hese first-mover advantages. This is particularly true in industries s uch as pharmaceuticals, where the effectiveness of patent protections leads to patent races in which a ''winner take all'' scenario exists. But even in industries where patent protection is weak, the advantages of being first, in terms of market preemption, reputation effects, ex perience curve effects, etc., can still be of major importance. We arg ue that one way an entrepreneurial firm can increase its rare of new p roduct development is by entering into strategic alliances with firms that possess complementary assets.The basic proposition advanced is th at a firm's rate of new product development is a positive function of the number of strategic alliances that it has entered. However, the re lationship between strategic alliances and the rate of new product dev elopment may be nonlinear. Specifically, although strategic alliances may initially have positive effects on the rate of new product develop ment, this relationship may exhibit diminishing returns. Moreover, pas t some point it is possible that negative returns may set in. Thus, th e relationship between the number of alliances and the rate of new pro duct development may be an inverted U-shape. Two reasons can be given to support such a relationship. First, not all alliances will make an equal contribution to increasing the rare of new product development. The economic ''law'' of diminishing returns suggests that the more all iances a firm engages in, the more likely it is to enter some alliance s whose marginal contribution is relatively minor. Such a phenomenon o n its own is enough to suggest diminishing returns. Second, gaining ac cess to complementary assets through strategic alliances is not withou t risks. Malperformance may occur when the firm discovers that the com plementary assets provided by the partner are a poor march, fail to li ve up to the promises made by the partner, or a partner may opportunis tically exploit an alliance, expropriating the firm's know-how while p roviding little in return. These problems arise because the effectiven ess with which the firm can select and manage alliance partners is lik ely to be negatively related to the number of alliances the firm is ma naging. Due to information processing requirements, the quality of par tner search and the ability to monitor the partners' actions will decl ine as the firm increases the number of alliances in which it is invol ved. This reasoning leads to a prediction that past some point, allian ces will be increasingly vulnerable to malperformance. This raises not only the possibility of diminishing returns to the number of alliance s, bur also negative returns as the number of alliances increases past some critical point. This proposed relationship between alliances and new product development was rested on a sample of 132 biotechnology f irms. The results provide strong evidence to support the inverted U-sh aped relationship between the number of strategic alliances and the ra te of new product development. Therefore, at low levels strategic alli ances are positively related to new product development, but as the nu mber of alliances increases, the benefits begin to decrease, and at hi gh levels the costs of an additional alliance actually outweigh the be nefits.