Network Prominence, Bargaining Power, and the Allocation of Value Capturing Rights in High-Tech Alliance Contracts

Abstract

We suggest and provide empirical evidence that the bargaining power of alliance partners stemming from their prominence in alliance networks influences the ex-ante allocation of value capturing rights in high-tech alliance contracts. Network prominence can enhance the availability of alternative partners for a firm and thereby elevates the firm’s bargaining power and enables the firm to receive (i) more value capturing rights vis-à-vis its partner (i.e., more net value capturing rights) and (ii) more rights to the unexpected outcomes vis-à-vis its partner. We empirically investigate the content of research and development (R&D) collaboration contracts between biotech and pharmaceutical firms and show that as the prominence of the client (i.e., pharmaceutical firm) increases, it is able to attain (i) more net value capturing rights to outcomes within the area of collaboration and (ii) more rights to unexpected outcomes. By contrast, increased prominence of the R&D firm (i.e., biotech firm) decreases both the number of net value capturing rights the client receives as well as the rights to unexpected outcomes that the client captures in an alliance contract. The bargaining power that the R&D firm attains from its prominent position in alliance networks becomes less important during hot IPO markets, which provide the R&D firm more outside options to obtain financial resources. By documenting the importance of firms’ network positions as sources of bargaining power during alliance contracting, our paper contributes to the literature on strategic alliances, bargaining, and contract design.

On the future of international joint venture research

“…The Virtues of Studying IJV Contracts and the Formation Process Guided by their individual objectives, partner firms need to work out and mutually agree on the details of a contract that codifies rights and duties, obligations, restrictions, exclusions, and conditions of providing resources and the distribution of added value among the parties. IJV contracts align the interests of partner firms subject to their bargaining power and negotiation skills (Ozmel, Yavuz, Reuer, & Zenger, 2017). Not only management consultants have suggested the need to analyze documented negotiation outcomes (contracts) to better understand subsequent organizational decisions and performance of IJVs (Ruggeri, Armstrong, Gala, & Fennessey, 2016).…”

“…This is important for a better understanding of the formation and governance of IJVs (Hennart & Zeng, 2005;Hennart, 2006Hennart, , 2019. The fact that IJV contracts are increasingly made accessible to scholars provides opportunities to answer many relevant research questions (e.g., Contractor & Reuer, 2014;Hofman, Faems, & Schleimer, 2017;Ozmel et al, 2017;Jennejohn, 2018).…”

“…For example, are IJVs an appropriate means to bind a firm with strategic resources closer to another firm, to increase commitment, and consequently reduce the probability that these resources are available to competitors? To what extent are the number, location and distribution of IJVs in a MNEs business network able to provide leverage to the MNE, similar to possible increases in bargaining power from other forms of alliances (Ozmel et al, 2017)?…”

Inter-organizational governance: a review, conceptualisation and extension

“…More recent studies on inter-organizational governance have moved towards exploring contractual governance in further detail. For example, the literature shifted its focus towards exploring issues pertaining to contract design (Bercovitz and Tyler 2014;Dean, Griffith, and Calantone 2016;Ozmel et al 2017), the content of the contract (Duplat and Lumineau 2016;Schilke and Lumineau 2018) and the link between contracting and a range of performance outcomes such as supply chain alignment (Selviaridis and Spring 2018), new product performance (Dean, Griffith, and Calantone 2016), exchange performance (Poppo and Zhou 2014) and dispute resolution (Lumineau and Malhotra 2011).…”

Interorganizational Imitation and Acquisitions of High‐tech Ventures

“…All the patent information was collected from the USPTO database. Additionally, we measured the focal venture's Alliance Prominence based on its eigenvector centrality in the alliance network (e.g., Baum & Silverman, 2004;Bonacich, 1987;Ozmel, Yavuz, Reuer, & Zenger, 2017).…”