Technological Diversity in Alliances

Research by Rachelle Sampson

Innovation is one of the drivers of success in the digital economy, and pursuing innovation means that many firms must make a substantial investment in research and development (R&D). Making that investment pay off, however, is not always easy. Research is very expensive, and there is tremendous pressure to create new knowledge and capabilities in a timely and cost-effective way.

R&D alliances are a common way for firms to share costs and reduce risk. There is evidence that many firms are disappointed with their alliances, however, because the alliances proved to be less profitable than they had hoped. Rachelle Sampson, assistant professor of business, logistics and public policy, found that the level of technological diversity between firms and the organizational structure of the alliance were two key factors in the success of an R&D alliance.

Sampson examined the alliance and patenting activities from over a thousand alliances within the telecommunications equipment industry. Technological development in this industry proceeds at such a rapid pace that firms frequently collaborate in R&D to spread the risk and expense of development. She used patents to track innovations using the Micropatent database. She tracked all alliances and joint ventures from 1991 to 1993 through information available on the Securities Data Company Database on Joint Ventures and Alliances. Calculating the degree to which partner’s patent portfolios overlapped allowed Sampson to determine the technological diversity between partners. During the course of the study she interviewed managers and attorneys from many large companies, such as Ford and Eli Lilly, for more insight.

Sampson found that firms benefit most from alliances when they have most, but not all, technological capabilities in common with their partners. The number of patents produced by a firm initially increased with the level of technological diversity within an alliance, but then sharply decreased—an effect that she didn’t expect. It appears that a moderate level of technological diversity was important because firms must be different enough from each other that an exchange of knowledge is profitable. “It’s much easier for a particle physicist to talk to another type of physicist than to a biologist, because there’s more common ground,” says Sampson. “But if they’re too close, they have much less to learn from each other.”

Firms that are too close also have problems with mutual trust, as there is a fear that knowledge belonging to one firm will be co-opted by the R&D partner. Just as firms should avoid R&D partnerships with direct competitors, alliances between firms that are too similar seem to have difficulty with effective knowledge sharing and knowledge transfer.

On the other hand, firms that were too technologically diverse were not able to reap the maximum benefits from their partnership. “It appears that if firms are too different in terms of technology capabilities, they just can’t work together effectively,” says Sampson.

The organizational structure of an alliance was also important to its prospects for success. “Some managers view this as a superfluous detail: ‘Just hand it over to the lawyers.’ But firms need to think ahead about what contingencies will arise out of the alliance, and map that out in an organizational structure,” says Sampson.

When partners are more technologically diverse, or when the alliance is more ambitious, involving a radical change rather than just a small project, joint ventures appear to be more successful, as they structure the mechanisms for information flow and coordination between partners. Because the cost of setting up and negotiating a joint venture is much higher than a simple contractual form of alliance, it should be reserved for very diverse partners or ambitious projects—designing the next generation of integrated circuits, say, rather than just adapting a type of fiber optic cable.

An effective organizational form will help the partners feel confident about combining their intellectual resources and can encourage cooperation. For example, an equity-joint venture has safeguards in place that protect against technology leakage, one of the barriers that can impede successful knowledge transfer between partners.

Sampson’s paper, “R&D Alliances and Firm Performance: The Impact of Technological Diversity and Alliance Organization on Innovation,” is forthcoming in the Academy of Management Journal. Partial funding for the study was provided by the Ameritech Foundation and the Center for International Business Research (CIBER) at the University of Michigan. For more information about this research, please contact rsampson@rhsmith.umd.edu.