Dl. Deeds et Cwl. Hill, STRATEGIC ALLIANCES AND THE RATE OF NEW PRODUCT DEVELOPMENT - AN EMPIRICAL-STUDY OF ENTREPRENEURIAL BIOTECHNOLOGY FIRMS, Journal of business venturing, 11(1), 1996, pp. 41-55
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.