Asymmetric New Product Development Alliance: Win-Win or Win-Lose Partnership?

Interorganizational alliances are widely recognized as critical to product innovation, particularly in high technology markets. Many new product development (NPD) alliances tend to be asymmetric, that is, they are formed between a larger firm and a smaller firm. These asymmetric alliances typically result in changes in the shareholder values of the partner firms. Are the changes in shareholder values of partner firms significant? Is the NPD alliance a win-win or win-lose partnership? Are they symmetric for the larger and smaller partner firms? What factors drive the changes in shareholder values of the partner firms? These important questions remain unexplored as there is little empirical research on the effect of NPD alliance on shareholder value and on the apportionment of this value between the partner firms. We develop and empirically test a model of short-term changes in shareholder values of larger and smaller firms involved in NPD alliances, using the event study methodology on data covering 167 asymmetric alliances in the information technology and communication industries. In this model, we examine alliance, firm, and partner characteristics as potential determinants of the changes in shareholder values of the partner firms due to a NPD alliance announcement. Our model accounts for selection correction, potential cross-correlation across the residuals from the models of firm value changes for the larger and smaller firms, and unobserved heterogeneity. The results suggest that both the partners experience significant short-term financial gains, but there are considerable asymmetries between the larger and smaller firms with regard to the effects of alliance, partner and firm characteristics on the gains of the partner firms. The results relating to alliance characteristics suggest that while a broad scope alliance enhances the financial gains for the larger firm, a scale R&D alliance (relative to a link alliance) contributes positively to the financial gains for the smaller firm. With regard to partner characteristics, while partner alliance experience positively influences the financial gains for the larger firm, it has no significant effect on the financial returns for the smaller firm. Further, partner innovativeness is positively associated with the financial gains for the larger firm, but partner reputation is unrelated to the financial gains of the smaller firm. As regard firm characteristics, the magnitude of the financial gains accruing from a firm’s own alliance experience is considerably higher for the smaller firm than it is for the larger firm. We outline the implications of the research findings for management practice.