Maximizing Innovation in Alliances

Should birds of a feather flock together? Not if the goal is to promote innovation, says Rachelle C. Sampson, assistant professor of logistics, business and public policy at the University of Maryland’s Robert H. Smith School of Business. After studying hundreds of research and development (R&D) alliances, Sampson reports in her 2004 working paper R&D Alliances and Firm Performance: The Impact of Technological Diversity and Alliance Organization on Innovation that alliances work best when there are moderate differences in technological capabilities between the partners. What’s more, she finds, the organizational form of an alliance can have a significant effect on the amount of innovation it yields.

Alliances have become increasingly popular as companies look for a higher return on their R&D investments. Alliances provide access to complementary capabilities, as well as economies of scope and scale. They often offer a nimbler alternative to that of in-house development, while allowing companies to share risks and costs. But many alliances fall short of their founders’ expectations. Knowledge transfer is a tricky business, particularly when knowledge is complex or tacit. Moreover, mutual distrust often hinders learning within alliances. Today’s partner, after all, may turn out to be tomorrow’s competitor.

In order for alliances to succeed, Sampson observes, the partners must be both able and willing to share knowledge-based capabilities. Two factors, in turn, influence the odds that these conditions will hold. First, the level of technological diversity shapes an alliance’s potential payoff — if the partners are too different, they’ll have little to say to one another; if they’re too similar, they’ll have little to learn. Second, an alliance’s organizational form helps determine the likelihood that its potential will be achieved. Drawing on two complementary theoretical perspectives — transaction-cost economics and the “knowledge-based” view — Sampson argues that knowledge transfer is easier within more hierarchical organizational forms, such as equity joint ventures, which benefit from clear lines of authority and common routines. In addition, cooperation may be more likely in these types of alliance. Managers sometimes hesitate to invest in an alliance out of concern that it might be “captured” by the other side. Giving alliances greater organizational independence and more formal governance can help allay these fears.

These advantages are likely to be especially important when technological diversity is high.