Do Prior Alliances Influence Contract Structure? Evidence from Technology Alliance Contracts

Abstract

We examine technology alliance contracts in detail, to explore if formal contract terms vary with prior alliances. Traditionally, formal governance has been viewed as the means to address the coordination difficulties inherent in alliances, via explicit contractual mechanisms. Formal contracting, however, is costly and not the only solution to the coordination problem. Relational governance, or discipline mechanisms outside the contract itself, can encourage cooperative behavior between partners. More specifically, repeated interactions can, through implicit mechanisms, reduce the threat of non-cooperative behavior in alliances. We use a case study approach to explore the contract mechanisms that reveal a possible interaction between contract structure and prior alliances. Based on our examination of contract terms, we devise a coding scheme to allow comparison of contracts empirically. Using our preliminary sample of 42 technology alliance contracts in the telecommunications equipment and microelectronics industries, we find that prior alliances are linked with contract structure. Interestingly, contracts are more complete or detailed when firms have prior alliances (whether with the same firm or other firms). This suggests that firms learn to draft more detailed contracts with prior alliance experience. In contrast, firms appear to draft less complete contracts when they have concurrent alliances with the same firm. Thus, concurrent alliances may represent the development of trust or the exchange of mutual hostages, both of which deter non-cooperative behavior and, thus, substitute for more formal governance.