Network E ects in the Governance of Strategic Alliances in Biotechnology

Strategic alliances are commonplace in the high-technology sector. Biotechnology is a context in which this organizational arrangement has been particularly signi cant; hundreds of biotech alliances are established each year and these deals have become the primary source of nancing for the young rms 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 interrm 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 are positioned in the network of past deals: (i) centrality, a measure of how deeply embedded a rm is in the alliance network; and (ii) proximity, a measure of how close two counterparties are to one another in the network. We nd that equity control occurs less frequently in alliances with central biotech rms, and more central biotech rms receive greater funding from their strategic partners. The proximity of the two counterparties in an alliance decreases the use of equity and increases the amount of pledged cash. Further, these ndings are more pronounced among informationally sensitive transactions. The results establish that the alliance network mitigates holdup problems in inter rm transactions. JEL Classi cation Codes: G300, G340, G390, M130, O390