The Cost of Misaligned Governance in R&D Alliances

Transaction cost economics argues that aligning transactions with governance structures leads to more efficient outcomes. While empirical evidence demonstrates that firms choose governance consistent with transaction cost predictions, the performance implications of governance choices are less well explored. Here I examine the cost of misaligned governance in the context of research and development (R&D) alliances. Two costs of misalignment are evaluated: excessive contracting hazards and excessive bureaucracy. Using a sample of R&D alliances in the telecom equipment industry, I find that alliance governance selected according to transaction cost arguments improves collaborative benefits substantially over governance not so selected. Interestingly, governance misalignments imposing excessive bureaucracy reduce collaborative benefits more than misalignments imposing excessive contracting hazards. These results provide empirical evidence of the cost of misaligned governance and have implications for research on the limits of internal organization and links between organizational form and innovation.