Information Disclosures and Knowledge Boundaries

- Bisui, Sandip; Reuer, Jeffrey; and McCann, Brian

With the advancements in technologies and the broader availability of information, do knowledge boundaries stll exist? Scholars in entrepreneurship and strategy have long emphasized that firms need to establish themselves in prominent clusters to access knowledge and resources. Further, a separate stream of research concludes that knowledge is embedded within organizations, and firms need informal and/or formal channels such as alliances to source knowledge. However, this study demonstrates that the agglomeration benefits are contingent upon external factors, and certain benefits related to knowledge sourcing diminish with wider disclosures of technological information. Empirical analysis also indicates that broader availability of technological information reduces the need for formal channels, such as alliances for knowledge sourcing. While disclosures of information impact knowledge sourcing behaviors for all startups, their impact is not uniform. These effects are reduced for startups already prominent, such as startups that are backed by prominent venture capitalists or that have previously formed strategic alliances.

Information Disclosures and Contracting for Technology Partnerships

- Bisui, Sandip and Reuer, Jeffrey

It is well-known that alliances may expose firms to the risk of appropriation by a partner, so firms rely on contractual and governance solutions to address such risks in alliance agreements. However, technology ventures also face appropriation and competition concerns when there are exogenous changes in their external information environments, for instance when information is disclosed by third-party intermediaries. In this study, we suggest that the disclosures of technological information by regulatory bodies exacerbate technology ventures’ appropriation and competition concerns and thereby can weaken their bargaining power in negotiating technology partnerships. Analysis of alliances in the bio-pharmaceutical industry reveals that an increased availability of information related to technological developments results in startups capturing less intellectual property rights in their alliances. This adverse effect of information disclosures is magnified for those startups already having a weaker bargaining position due to competition in their technology domains. By contrast, startups that have strategically positioned themselves with a stronger portfolio of patents are less exposed to the adverse effects of information disclosures when contracting for technology partnerships.

Innovation Disclosures and the Design of Technology Acquisition Contracts: Evidence from the American Inventors Protection Act

- Reuer, Jeffrey; Bisui, Sandip and Chondrakis, George

Material adverse change (MAC) clauses and contingent earnouts are important contractual mechanisms used to protect acquirers from the risk of adverse selection. Yet, the extant literature has not sufficiently explored the antecedents to their use, in particular within the context of technology acquisitions. In this study, we take advantage of the passage of the American Inventors Protection Act (AIPA), which disseminated information through the publication of patent applications, and explore the impact of innovation disclosures on the design of technology acquisition contracts. Our analysis suggests that deals disproportionately affected by AIPA have less expansive MAC clauses and are less likely to feature contingent earnouts. These results provide new evidence linking the use of MAC clauses and earnouts with acquisitions subject to information frictions.

Demystifying the Blackbox: Organizational Design and R&D Alliance Contracting

- Bisui, Sandip; Zhang, Kun; Reuer, Jeffrey; and Tadikonda, Harsha

We bridge current streams of research on internal organization design and alliance governance to investigate the implications of organizational design for alliance governance in technology partnerships. We propose that in an R&D alliance between a client firm and an R&D firm, the client firm’s internal structure of R&D plays an important role in alliance design and governance, specifically in determining the distribution of intellectual property rights, the vertical scope of alliance activities, the horizontal scope of alliance related technology areas, and interdependence of alliance work. Using data from alliances in the bio-pharmaceutical industry, we find that firms with centralized R&D decision-making are more likely to capture the upstream control rights to intellectual property. Further, we find that these firms tend to engage in alliances with broader vertical and horizontal scope, and higher technological interdependence. This study aims to extend research on alliance design and governance to underscore the implications of organizational structures on how firms design alliance contracts.

Searching Without & Within: R&D Centralization and Knowledge Search in Strategic Alliances

- Zhang, Kun; Bisui, Sandip; and Reuer, Jeffrey

We bridge current streams of corporate and cooperative strategy research to explore the interplay between the organizational structure of R&D and external knowledge search. We propose that in an alliance between a client firm and an R&D firm, the client firm’s internal structure of R&D plays an important role in the knowledge diffusion process of the alliance, specifically in determining the technological sourcing strategy in relation to their alliance partners. Using non-equity alliances data from the bio-pharmaceutical industry, we find that firms with centralized R&D structure tend to search more extensively from alliance partners. We further find that centralized firms conduct knowledge search more broadly from their alliance partners, and they are more likely to use such externally sourced technologies in a wider range of therapeutic areas.

Contingent Earnouts and Post-Acquisition Innovation Performance

- Reuer, Jeffrey; Cho, JaeYoung; and Bisui, Sandip

Technology acquisitions are subject to information asymmetries, and the resulting risk of overpayment can lead acquirers to use specific contractual provisions such as contingent earnouts as payment methods. It is well-known that earnouts can mitigate an acquirer’s overpayment risk by tying payments to a target’s performance following the deal’s closing, yet we also suggest that earnouts can hurt future innovations if a target adopts a short-term perspective and focuses on hitting milestones to the neglect of innovative activities. Empirical analysis of a sample of acquisitions in the biopharmaceutical industry confirms that the inclusion of earnouts in acquisition deals decreases targets’ post-acquisition innovation performance. We find earnouts to have negative effects on both innovation quantity and quality, and their adverse effects are especially pronounced for targets engaged in basic science in their innovative endeavors. This study contributes to acquisitions research by offering a better understanding of the contractual provisions that acquirers use and their consequences. We conclude that the innovation-related drawbacks we document for these provisions need to be appreciated alongside their potential merits emphasized in previous research.

Sue Me, Please! IP Litigation and International Alliance Formation

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While international alliances allow technology ventures to access resources and capabilities in their pursuit of growth opportunities in new geographic markets, they are characterized by information asymmetries and adverse selection risks. Existing studies that have examined how technology ventures can selectively signal their quality to attract potential foreign partners, primarily rely on the endogenous sources of technological resources and capabilities of the technology ventures. This study investigates how an exogenous event such as being involved in intellectual property litigation can disseminate valuable information about technology ventures’ resources and capabilities, mitigate certain risks associated with information asymmetry, and attract potential partners across geographic boundaries. While the informational benefits associated with IP litigation positively affect entrepreneurial ventures’ international alliance formation, the effect is not uniform across ventures. The strength of this effect reduces for the ventures that are already visible in the international context. Such ventures include ventures backed by prominent VCs, ventures that received higher media attention, ventures with prior international alliances, and ventures with a higher foreign sales intensity.