Farok J. Contractor
Rutgers Business School



(Monday, 31st May 2010)

Title : Optimal Alliance Relationships and Governance Modes

Since the seminal article by Ronald Coase (1937) on “The Nature of the Firm,” scholars have been asking what constitutes the organizational boundaries of a company -- in a world where most larger firms are now part of a global network of alliances and outsourcing partners who perform functions that the focal firm itself does not wish to do in-house. Past ESNIE lectures (on subjects such as Transaction Costs) have sufficiently covered criteria used by companies to decide what activities to undertake internally and which may be externalized, or undertaken in cooperation with alliance partners.

While alluding to the broader context of the theory of the firm, in my lecture I propose to focus on two specific questions in alliance negotiations and management, “How tight or loose a relationship do we wish to have with our partner? ” and “What kind of governance structure is best?” The study is based on a sample of 95 technology transfer alliances. Alliance relationships can have loose, contractual links such as licensing agreements. Or they may be much closer in equity joint venture alliances where the managers and engineers of the two firms rub shoulders on a daily basis. Interaction with one’s partner is necessary in order to coordinate operations, to effectively transfer tacit knowledge, to monitor for opportunism, to maximize joint synergistic value, and to make sure that an appropriate share of the net benefit created by the alliance is appropriated by the technology developer who provides the technology to their ally. However, too high a degree of interaction between the allies can increase coordination costs, and increases the chances of unintended technology leakage. The study suggests answers to the question, “What type of alliance is best?” or “What is the optimum level of inter-partner interaction?”using explanatory variables such as (1) Characteristics of the technology and future technology policy, (2) Coordination costs and risks, (3) Agreement provisions, and (4) Firm and Sector Characteristics.

Bibliographical references :

Contractor, Farok, J. and Woodley, J., “Assessing the Relative Influence of Bargaining Power, Mutual Hostages, and Task Characteristics on the Governance Structure of Cross-border Technology Alliances,” International Journal of Technology Management,  Vol. 48, No. 3, 2009.

Abstract of Paper
When two prospective partners negotiate the formation of their alliance, one of the most critical issues is the selection of the alliance’s governance structure. This paper develops a “bargaining power” perspective on the selection. The preferences of the two sides is not identical, and is also influenced by other factors such as patent intensity, partner absorptive capacity, future technology development and future technology exchange intentions. Most studies of governance modes in cross border technology alliances treat contractual alliance forms and equity joint ventures as substitutes. Our sample allows us to explore when firms are likely to adopt licensing agreements without equity arrangements, in contrast to hybrid alliances that use equity joint ventures and licensing agreements together. Findings for our data provide little support for an often repeated--and yet seldom tested--hypothesis that equity joint ventures may be formed to serve as a “mutual hostage” for alliance participants, because of the fear of partner opportunism, and its consequences. Rather, our findings point more strongly in favor of equity-based alliances being formed when the primary technology holder has stronger bargaining power, when patents are of importance, and when the strategic objectives of the alliance envisage future technology transfers.

Farok J. Contractor, Vikas Kumar, Sumit K. Kundu, Torben Pedersen, “Reconceptualizing the Firm in a World of Outsourcing and Offshoring: The Organizational and Geographical Relocation of High-Value Company Functions,” Journal of Management Studies, Published in advance Online: 28 Apr 2010

Abstract of Paper
In the largest sense, Global Strategy amounts to (i) the optimal disaggregation or slicing of the firm's value chain into as many constituent pieces as organizationally and economically feasible, followed by (ii) decisions as how each slice should be allocated geographically ("Offshoring") and organizationally ("Outsourcing"). Offshoring and outsourcing are treated as strategies that need to be simultaneously analyzed, where just "core" segments of the value chain are retained in-house, while others are optimally dispersed geographically, as well as dispersed over allies and contractors. This amounts to a reconsideration of the nature of the firm that captures the dynamic changes in global configuration and a reconsideration of what constitutes "core" activities that need to be retained internally. The article proposes a new research agenda that searches for each firm's optimal degree of disaggregation and global dispersion given that further scattering of value chain activities entail benefits as well as increased complexity and costs.



(Thursday, 21st May 2015)

Title : Inter-Organizational Governance: Optimizing the Mode and Structure of Alliances

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Given the variety of possible collaborative arrangements, from simple licensing, to contracts with option clauses, to more interactive “relational” alliances, to equity-based alliances such as joint ventures, which alliance governance structure is appropriate? The objectives are (a) to maximize recombinant knowledge, (b) maximize synergistic commercial benefits accruing to both partners, while at the same time, each partner wishes to (c) increase their share of net benefits captured and (d) lower their transaction costs and risk. These objectives are not always congruent, and the optimum governance mode is also a function of type of technology, technological distance between the allies, and external factors such as market potential and the regulatory environment within which the alliance operates.

Bibliographical references :

“How the Alliance Pie is Split: Value Appropriation by Each Partner in Cross-Border Technology Transfer Alliances,” Journal of World Business, (forthcoming, 2015). Contractor, Farok & Woodley, James.

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“Structuring and Governing Alliances: New Directions for Research,” Global Strategy Journal, (forthcoming 2015) Contractor, Farok J. & Reuer, Jeffrey, J.

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“How Tight an Embrace: Choosing the Optimal Degree of Partner Interaction in Alliances Based on Risk, Technology Characteristics, and Agreement Provisions,” Global Strategy Journal, (August 2011), 1: 67-85. Contractor, Farok J., Woodley, James A. & Piepenbrink, Anke.

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“Alliance Formation Propensity in a Global Industry Network,” International Journal of Strategic Business Alliances, (January 2011), 2 (4): 245-270. Contractor, Farok J., Beldona, Sam & Kim, Changsu.

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