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Network Effects in the Governance of Strategic Alliances in Biotechnology

By Toby Stuart and David T. Robinson


Strategic alliances are commonplace in the high-technology sector. Biotechnology is a context in which this organizational arrangement has been particularly significant; hundreds of biotech alliances are established each year and these deals have become the primary source of financing for the young firms in the industry. We posit that the stock of prior alliances between participants in the biotech industry produces a network -- in essence, a communications infrastructure established by past transactions -- through which information is transmitted about the agents in the network. We argue that this network alleviates some of the incentive problems arising from incomplete alliance contracts and serves as a governance mechanism that substitutes for other forms of control in inter-firm transactions. To test our hypothesis, we examine how equity participation (i.e., when one rm in an alliance acquires an ownership stake in its partner) and the amount of funding pledged in strategic alliances vary with two features of the way alliance participants ar

Year: 2000
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