The Effects of Identity and Capability Signals on Alliance Formation

Abstract

When moving into new business areas, it is helpful to have alliance partners to share risk and learning; however, potential partners may be unwilling to join an inexperienced firm. In this study, we explore this tension, arguing that the likelihood of alliance formation depends on the consistency between a focal firm¡¯s proposed actions and the signals it sends to potential partners. In particular, we argue that the consistency between a firm¡¯s proposed new activities and signals about its identity makes the firm more attractive as a potential partner. Similarly, the consistency between a firm¡¯s proposed new activities and signals about its capability also increases the firm¡¯s attractiveness as a partner. To test these ideas, we study alliance formation in China¡¯s venture capital (VC) industry. Using data about a VC firm¡¯s investments, its own statements about investment preferences, and its hiring of venture capitalists, we find that VC firms that propose to move into new areas that are consistent with their identity signals and capability signals give additional credibility to the move, thus contributing to higher likelihood of successful syndication.