How Outside Opportunities Affect Alliance Governance: Evidence from the Biotechnology Industry

In complex interfirm exchange relationships like alliances, firms that invest in relation-specific assets are likely to devise governance mechanisms, most prominently hierarchical control, to safeguard against various exchange hazards. However, if investing in relation-specific assets leads the focal alliance firm to discover new opportunities outside of the exchange relationship that can be exploited independent of its partner firm, then instead of seeking more control over the alliance, we may see such firms' incentives for seeking control over the alliance to be weakened. These different conditions are contrasted and explored empirically in the biotechnology alliance setting. Understanding the role of outside opportunities as an important driver of alliance governance can help to integrate the governance literature and the capabilities literature.