Strategic Alliances and the Boundaries of the Firm

Abstract

Strategic alliances are long-term contracts between legally distinct organizations that provide for sharing the costs and benefits of a mutually beneficial activity. In this paper, I develop and test a model that helps explain why firms sometimes prefer alliances over internally organized projects. I introduce managerial effort into a model of internal capital markets and show how strategic alliances help overcome incentive problems that arise when headquarters cannot pre-commit to particular capital allocations. The model generates a number of implications, which I test using a large sample of alliance transactions in conjunction with Compustat data. Supporting the model, I find that alliances cluster in risky, high-growth, high-tech industries, and that they typically occur between industries with different risk characteristics. Likewise, among multi-division firms with alliances, the alliance activity tends to occur in an industry that is riskier, on average, than the other industries in which the firm operates. Alliances are used to pursue related diversification, and facilitate projects that are riskier than a firm's mainstream activities.

JEL Classification: G3, K22, L22