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Knowledge misappropriation risks and contractual complexity in entrepreneurial ventures’ non-equity alliances

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Abstract

This paper explores the role of anticipated knowledge misappropriation risks in contract design in non-equity alliances involving high-tech entrepreneurial ventures. We argue that these ventures anticipate higher knowledge misappropriation risks, and are, thus, inclined to negotiate more complex contracts, when partner firms have greater ability and incentives to appropriate the ventures' technological knowledge, and knowledge misappropriation is more detrimental to the ventures. In the empirical sections of the paper, we consider 211 dyadic non-equity alliances involving Italian high-tech entrepreneurial ventures, and we examine the relationship between contractual complexity and a series of characteristics of partner firms associated to either higher ability/incentives to appropriate ventures’ knowledge or more negative consequences of misappropriation.

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Notes

  1. We define a “high-tech entrepreneurial venture” as a small or medium-sized enterprise (SME), not controlled by other companies, that is established to commercially exploit innovative technological knowledge in a high-tech industry.

  2. Of the sample of 66 alliances involving entrepreneurial ventures in telecommunication services considered by Reuer et al. (2006), only 9 were equity alliances (i.e., 14%). In their study of US small biotech firms’ alliances, Yang et al. (2014) find that the overwhelming majority of alliances are non-equity alliances. As shown later in this paper, of our sample of 237 alliances, only 26 (less than 11%) are equity alliances.

  3. Conversely, they do not find any evidence that greater exposure to the hold-up hazards associated with relation-specific investments leads to use more complex contracts, as Reuer and Ariño (2007) documented in a different context.

  4. Lerner and Malmendier (2010) examine research alliances between biotech start-ups, the research firms, and large pharmaceutical companies, the financing firms. To avoid that biotech researchers use the funds provided by the financing firms for other research projects, pharmaceutical firms negotiate the inclusion in alliance contracts of termination provisions that give them the unconditional right to terminate the collaborations and obtain broad property rights to the terminated projects. To prevent the financing firms from exercising the termination option to misappropriate biotech firms’ knowledge, the termination provisions associate termination with payments to the research firm, thus providing incentives for pharmaceutical companies not to behave opportunistically.

  5. It is worth clarifying here that technological relatedness is high when an entrepreneurial venture and its partner possess knowledge in similar technological domains, but this does not mean that the venture “duplicates” the partner’s technological knowledge. If that were the case, the partner would likely avoid forming the alliance. As we argue in the following, an entrepreneurial venture’s cutting-edge technological knowledge usually is the most attractive resource for partners. Prospective partners that already possess this knowledge are probably unable to create much value from alliances with the venture and, thus, have low incentives to ally with it.

  6. We defined an alliance as any relationship regulated by a contract in which two independent firms collaborate to carry out a specific project (activity) and which poses some constraints on the future behavior of the partners. If two firms already involved in an alliance started a new project and designed a new contract to regulate their collaboration, this new project was considered as a new alliance formed by the same partners.

  7. As we asked respondent managers to select a specific alliance, our sample of alliances is unlikely to be representative of the (unknown) population of alliances formed by entrepreneurial ventures. In particular, unsuccessful alliances are unlikely to be included in our sample. However, this situation is common to most (if not all) previous studies on alliances that used a key informant methodology, as we do. Indeed, the samples used in these studies include only the alliances for which information was disclosed by partner firms, and firms are generally eager to disclose information on success stories, while they are reluctant to advertise failures.

  8. Unfortunately, we could not build a precise measure of partner size. Many respondents (117) did not provide the name of their partner; hence, we could not use public sources of information to collect data on the size of partners. Therefore, we asked entrepreneurial ventures’ respondents to provide information on partner size. They found it difficult to provide the precise number of employees of their partners at the time of alliance formation; hence, we asked them to indicate their partners’ size category to reduce measurement errors. To check the reliability of the information provided by the respondents, for the 190 cases in which the name of the partner was available, we searched for the number of employees of the partner through public sources of information (i.e., annual reports and websites of the partners). All the data we collected through public sources were in line with the answers provided by entrepreneurial ventures’ respondents.

  9. As firms may have different objectives, we followed Yang et al. (2014) and coded alliances based on the perspective of the focal firm (i.e., the entrepreneurial venture, in our study).

  10. To gain further insights on the relationships between the explanatory variables and contractual complexity, we also included in the model specification the three way interactive term (1-DCompetitor) × Technological_Relatedness × DLarge_Partner. The coefficient of this term is not significant. Hence, the positive association between Technological_relatedness (DLarge_Partner) and contractual complexity that we detected when the partner is a competitor is not magnified at higher level of the other moderator.

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Authors and Affiliations

  1. Department of Management, Economics and Industrial Engineering, Politecnico di Milano, via Lambruschini 4/b, 20156, Milan, Italy

    Massimo G. Colombo & Evila Piva

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  1. Massimo G. Colombo
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  2. Evila Piva
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Correspondence to Massimo G. Colombo.

Appendices

Appendix 1

Table 5 Check of robustness: use of alternative dependent variables
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Table 6 Check of robustness: use of alternative estimation approaches
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Table 7 Check of robustness: focus on the alliances formed after 2002
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Table 8 Check of robustness: use of alternative explanatory variables and inclusion of additional controls
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Table 9 Check of robustness: control for alliance scope
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Table 10 Check of robustness: estimates on both equity and non-equity alliances
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Appendix 2

To build a control for alliance scope, we asked the managers of sample firms to evaluate through a seven-point Likert scale their agreement with three sentences concerning the size of the activities to be performed within the alliance. These sentences assessed whether, in order to leave less room for partner’s opportunistic behavior, the alliance initially focused (i) on a limited number of products/services or (ii) on a limited number of technologies compared to those that could have been focus of the alliance, or (iii) partner firms committed less human, financial and/or physical resources than the ones they could have engaged in the collaboration. In the Likert scale used to evaluate the degree of agreement with the sentences, 1 indicated that the interviewed manager totally disagreed with the sentence, while 7 meant that s/he totally agreed. Therefore, for each item, higher values indicated that the scope of the alliance has been reduced to decrease the risk of opportunistic behavior, thus decreasing knowledge misappropriation risks as well. Answers to the above questions were available for a sample composed of 115 alliances. Then, we carried out a principal components factor analysis with varimax rotation on the three items. One factor with eigenvalue greater than one was extracted (Alliance_Scope).

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Colombo, M.G., Piva, E. Knowledge misappropriation risks and contractual complexity in entrepreneurial ventures’ non-equity alliances. Small Bus Econ 53, 107–127 (2019). https://doi.org/10.1007/s11187-018-0062-0

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