'Will You Act Like We Have Never Kissed?' The Impact of Alliance History with Current Competitors on Innovation Races in the U.S. Pharmaceutical Industry (1985-2004)

Abstract

While much research has elaborated the immediate impact of strategic alliances on firm performance, this paper studies the long-term consequences of alliance-relationship history on later competition between former allies. Specifically, we conjecture that competitors that previously allied with a firm can have both positive and negative impact on the firm’s innovation performance when they race to develop potentially substitutable products. First, former allies are more familiar with the firm and may aggressively exploit such knowledge by blocking some paths essential for the firm to innovate. But the degree of aggressiveness may be constrained by the level of relational capital developed between them in former alliances. Second, prior alliances can also benefit the firm by increasing its absorptive capacity to learn specifically from the innovation output of former allies. Yet, the level of benefit may vary according to the degree of their innovations’ novelty with respect to the firm, which is also influenced by the nature of prior alliances. We tested our theory using a longitudinal dataset, containing 830 rounds of innovation races in the U.S. pharmaceutical industry, over two decades, 1985-2004. Consistent with our predictions, we found that the number of competitors in a race that allied with a firm in strong alliance relationships is associated curvilinearly with the firm’s innovation performance, taking a U-shape; while the number of competitors that allied with the firm repetitively in weak alliances is associated with the firm’s innovation performance in an opposite manner, taking an inverted U-shape. The numbers of non-repetitive former weak allies and other competitors in the race were not significantly associated with the firm’s performance in innovation races. The findings demonstrate the long-term impact of alliance activities on firm performance in competition with former allies. The alliance-history perspective complements traditional view towards alliance activities; it also suggests revisiting an implicit assumption in many strategy studies that competitors relate to a focal firm as if their alliance histories did not matter, thus shedding light on reconciling some important yet inconsistent findings regarding the impact of competition on firm performance.