A knowledge-based view of strategic alliances

Journal of the Academy of Business and Economics, Jan, 2004 by Yongliang Han

In Type III, when both the strategic value of external knowledge and partner's appropriability of the focal firm's knowledge are low, the firm may have a very weak incentive to form an alliance. Meanwhile, because the firm's knowledge is well-protected, transaction costs will be low.

Type IV does not seem to be a promising type of strategic alliances. While the strategic value of external knowledge is low, partner's appropriability of the focal firm's knowledge is high. Therefore the strategic alliance may mean a net loss for the firm. Usually a firm will not join such an alliance unless it misestimates either the strategic value of external knowledge or the appropriability of its own knowledge. In the worst cases, the firm may misestimate both. lf by accident or by mistake a firm does enter such an alliance, it will have to spend a lot of time and money haggling with its partner, which entails substantial transaction costs.

3. STABILITY OF KNOWLEDGE-DRIVEN STRATEGIC ALLIANCES

Previous research on stability of strategic alliances has been disproportionately focused on the equity-based alliances--joint ventures. Inkpen and Beamish (1997) defined joint venture instability as a major change in relationship status that was unplanned and premature from the perspective of either one or both partners. In the literature on joint venture instability, various factors have been identified as causes of instability, including changes in partners' strategic missions, changes in importance of the joint venture to the partners (Harrigan and Newman, 1990), the foreign investment climate of the host country (Blodgett, 1992), and the existence of prior relationships between the partners (Blodgett, 1992). Inkpen and Beamish (1997) developed a theoretical framework to analyze instability of international joint ventures drawn upon a bargaining power and dependence perspective. They argued that the instability of international joint ventures is associated with shifts in partner bargaining power. Shifts in the balance of bargaining power occur when partners of an international joint venture acquire sufficient knowledge and skills to eliminate a partner dependency and make the international joint venture bargain obsolete.

3.1 Stability of Knowledge-Driven Strategic Alliances--Case of Existing Knowledge

In the knowledge-driven strategic alliances, knowledge transfer will be the central purpose. From the property rights economists' perspective, how the partners use, transfer, and claim residual rights of knowledge will be the most prominent issues in these alliances (Alchian and Demsetz, 1973; Demsetz, 1967). When the acquired knowledge can be applied to a large number of product markets, or when competitive rivalry between the partners is intense, then these issues become even more serious.

Various legal mechanisms have been designed and enforced to protect intellectual property rights. However, as discussed before, some knowledge by nature is more imitable and redeployable; therefore it can not be tightly protected from leakage either by endogenous features or by legal instruments. We term this kind of knowledge as of "high leakage potential". In response to this problem, a firm may use contracts as a supplementary mechanism to protect its core knowledge. When a knowledge-driven strategic alliance is formed, restrictions on transferring certain knowledge may be incorporated into the contractual agreement. Such restrictions require a clear delineation of the relevant property rights and a mechanism for enforcing those rights. The knowledge owner must be able to claim ownership of specific technologies and, by virtue of its ownership, restrict the partner's right to transfer them to other uses (Demsetz, 1967; Pisano, 1990). However, a contract is confronted with the same problem that the legal mechanism faces: It is difficult and sometimes impossible to specify all the relevant intellectual property rights in a knowledge-driven strategic alliance. Whether a firm can effectively use the contract to protect its core knowledge during the intellectual cooperation depends on several factors: (1) how accurately does the firm estimate ex ante the potential uses of its knowledge by the partner; (2) how accurately does the firm estimate ex ante its partner's absorptive capacity; (3) how does the firm design enforceable and affordable protective mechanisms in the contract?