The Effect of Contractual Complexity on Technology Sourcing Agreements

Hansen, Zeynep and Higgins, Matthew (2007): The Effect of Contractual Complexity on Technology Sourcing Agreements.

Abstract

Most research on strategic alliances ignores the underlying contracts that govern the terms of the relationship. This is problematic since it is how these contracts are structured that determines how firms will benefit from a relationship. We present a novel method to analyze contractual complexity in a multi-dimensional framework in an attempt to link together the contractual complexity and control rights literatures. We find that the stage of development, age and prevalence of the underlying technology most influence complexity. Contractual complexity also influences the allocation of control rights. We also explore the importance of prior relationships on the underlying contract.

• Item Type: MPRA Paper
• Institution: Georgia Institute of Technology
• Language: English
• Keywords: Contractual complexity; Control rights; Strategic alliances; Biopharmaceutical industry; Contractual design
• Subjects: L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior; G - Financial Economics > G3 - Corporate Finance and Governance

References

Acs, Z., Audretsch, D., 1989. Entrepreneurial strategy and the presence of small firms. Small Business Economics 1, 193-213.

Adegbesan, T., Higgins, M., 2007. Intra-alliance performance, control rights and today’s split of tomorrow’s value. Unpublished working paper, Georgia Institute of Technology.

Adegbesan, T., Ricart, J., 2005. Resource complementarity and the determinants of the distribution of value created by technological innovation. Unpublished working paper, University of Navarra.

Adler, P., 2001. Market, hierarchy, and trust: the knowledge economy and the future of capitalism. Organization Science 12(2), 214-234.

Aghion, P., Bolton, P., 1992. An incomplete contract approach to financial contracting. Review of Economic Studies 59, 473-494.

Aghion, P., Tirole, J., 1994. On the management of innovation. Quarterly Journal of Economics 109, 1185-1207.

Barthelemy, J., Quelin, B., 2006. Complexity of outsourcing contracts and ex post transaction costs: an empirical investigation. Journal of Management Studies 43(8), 1775-1797.

Bernheim, B.D., Whinston, M.S., 1998. Incomplete contracts and strategic ambiguity. American Economic Review 88, 902-932.

Bradach, J., Eccles, R., 1989. Price, authority, and trust: from ideal types to plural forms. Annual Review of Sociology 15, 97-118.

Cameron, A.C., Trivedi, P.K., 1998. Regression Analysis of Count Data. Econometric Society Monograph No. 30, Cambridge University Press.

Chan, S., Kensinger, J., Keown, A., Martin, J., 1997. Do strategic alliances create value? Journal of Financial Economics 46, 199-221.

Chesbrough, H.W., 2003. Open innovation: The new imperative for creating and profiting from technology. Boston, Harvard Business School Press.

Cheung, S., 1983. The contractual nature of the firm. Journal of Law and Economics 26, 1-21.

Ciccotello, C. S., Hornyak, M. J., 2000. Cooperation via contract: an analysis of research and development agreements. Journal of Corporate Finance 6, 1-24.

Coase, R.H., 1937. The nature of the firm. Economica 4, 386-405.

Cohen, W., Levinthal, D., 1990. Absorptive capacity: a new perspective on learning and innovation. Administrative Science Quarterly 35. 128-152.

Davidson, W. H. and D.G. McFetridge. 1984. International technology Transactions and the Theory of the Firm. Journal of Industrial Economics 32(3), 253-264.

Dessein, W., 2005. Information and control in alliances and ventures. Journal of Finance 60(5), 2513-2550.

DiMasi, J.A. 2001. New drug development in U.S. 1963-1999. Clinical Pharmacology and Therapeutics 69, 286-296.

Dyer, J., Singh, H., 1998. The relational view: cooperative strategy and sources of interorganizational competitive advantage. Academy of Management Review 23, 660-679.

Elfenbein, D., Lerner, J., 2003. Ownership and control rights in internet portal alliances, 1995-1999. Rand Journal of Economics 32(2), 356-369.

Graham, S., Higgins, M.J., 2007. The impact of patenting on new product introductions in the pharmaceutical industry. Unpublished working paper, Georgia Institute of Technology.

Granovetter, M., 1985. Economic action and social structure: the problem of embeddedness. American Journal of Sociology 91(3), 481-510.

Greene, W.H., 2003. Econometric Analysis. 5th ed. Upper Saddle River, NJ: Prentice-Hall.

Grossman, S.J., Hart, O.D., 1986. The costs and benefits of ownership: a theory of lateral and vertical integration. Journal of Political Economy 94, 691-719.

Gulati, R., 1995. Does familiarity breed trust? The implications of repeated ties for contractual choice in alliances. Academy of Management Journal 38, 85-112.

Gulati, R, Nickerson, J., 2007.Interorganizational-trust: the Choice of Make, Buy, or Ally; and the Performance of Interorganizational Relationships in the U.S. Auto Industry,” Unpublished working paper, Washington University in St. Louis.

Hart, O.D., Moore, J., 1988. Incomplete contracts and renegotiation. Econometrica 56, 755-785.

Heiman, B., Nickerson, J., 2004. Empirical evidence regarding the tension between knowledge sharing and knowledge expropriation in collaborations. Managerial and Decision Economics 25, 401-420.

Higgins, M.J., Rodriguez, D., 2006. The outsourcing of R&D through acquisition in the pharmaceutical industry. Journal of Financial Economics 80, 351-383.

Higgins, M.J., 2007. The allocation of control rights in pharmaceutical alliances. Journal of Corporate Finance 13, 58-75.

Holmstrom, B., Tirole, J., 1997. Financial intermediation, loanable funds, and the real sector. Quarterly Journal of Economics 112, 663-691.

Joskow, P., 1987. Contract duration and relationship-specific investments: empirical evidence from coal markets. American Economic Review 77(1), 168-186.

Joskow, P., 1988. Asset specificity and the structure of vertical relationships: empirical evidence. Journal of Law, Economics and Organization 4, 95-118.

Jensen, R., Thursby, M., 2001. Proofs and prototypes for sale: the licensing of university inventions. American Economic Review 91, 240-259.

Khanna, T., 1998. The scope of alliances. Organization Science 9(3), 340-355.

Khanna, T., Gulati, R., Nohria, N., 1998. The dynamics of learning alliances: competition, cooperation, and relative scope. Strategic Management Journal 19(3), 193-210.

Klein, B., 1980. Transaction cost determinants of “unfair” contractual arrangements. American Economic Review 70, 356-362.

Klein, B., Crawford, R., Alchian, A., 1978. Vertical integration, appropriable rents, and the competitive contracting process. Journal of Law and Economics 21, 297-326.

Klein, B., Murphy, K., 1997. Vertical integration as a self-enforcing contractual arrangement. American Economic Review 87, 415-420.

Leamer, E. 1983. Let’s take the con out of econometrics. American Economic Review 73, 31-43.

Leamer, E., 1985. Sensitivity analysis would help. American Economic Review 75, 308-313.

Levine, R., Renelt, D., 1992. A sensitivity analysis of cross-country growth regressions. American Economic Review 82, 942–963.

Lerner, J., Malmendier, U., 2004. Contractibility and contract design in strategic alliances. Unpublished working paper, Harvard University.

Lerner, J., Merges, R.P., 1998. The control of technology alliances: an empirical analysis of the biotechnology industry. Journal of Industrial Economics 46, 125-156.

Lerner, J., Shane, H., Tsai, A., 2003. Do equity financing cycles matter? Evidence from biotechnology alliances. Journal of Financial Economics 67, 411-446.

Luo, Y., 2002. Contract, cooperation, and performance in international joint ventures. Strategic Management Journal 23(10), 903-919.

McConnell, J., Nantell, T., 1985. Common stock returns and corporate combinations: The case of joint ventures. Journal of Finance 40, 519-536.

Mowery, D., Rosenberg, N., 1989. New developments in US technology policy: implications for competitiveness and international trade policy. California Management Review 32(1), 107-124.

Oxley, J., 1997. Appropriability hazards and governance in strategic alliances: a transaction cost approach. Journal of Law, Economics and Organization 13, 387-409.

Parkhe, A., 1993. Strategic alliance structuring: A game theoretic and transaction cost analysis of inter-firm cooperation. Journal of Law, Economics and Organization 13, 387-409.

Pisano, G., 1989. Using equity participation to support exchange: evidence from the biotechnology industry. Journal of Law, Economics and Organization 5, 109-126.

Poppo, L., Zenger, T., 2002. Do formal contracts and relational governance function as substitutes of complements? Strategic Management Journal 23, 707-725.

Reuer, J., Arino, A., 2007. Strategic alliance contracts: Dimensions and determinants of contractual complexity. Strategic Management Journal 28, 313-330.

Robinson, D., Stuart, T., 2007. Financial contracting in biotech strategic alliances. Journal of Law and Economics, forthcoming.

Rothaermel, F., Hess, A., 2007. Building dynamic capabilities: innovation driven by individual, firm, and network level effects. Organization Science 18, forthcoming.

Ryall, M., Sampson, R., 2006. Do prior alliances influence contract structure. In Strategic Alliances, Arino, A., Reuer, J.J. (eds), Houndsmills: Palgrave MacMillian.

Sampson, R., 2004. The cost of misaligned governance in R&D alliances. Journal of Law, Economics and Organization 20, 484-526.

Shan, W., Walker, G., Kogut, B., 1994. Interfirm cooperation and startup innovation in the biotechnology industry. Strategic Management Journal 15, 387-394.

Teece, D., Pisano, G., Sheun, A., 1997. Dynamic capabilities and strategic management. Strategic Management Journal 18(7), 509-533.

Uzzi, B., 1997. Social structure and competition in interfirm networks: the paradox of embeddedness. Administrative Science Quarterly 42, 35-67.

Williamson, O.E., 1985. The Economic Institutions of Capitalism, Free Press: New York.

Williamson, O.E., 1991. Comparative economic organization: the analysis of discrete structural alternatives. Administrative Science Quarterly 36, 269-296.