DISTANCE COSTS AND THE DEGREE OF INTER-PARTNER INVOLVEMENT IN INTERNATIONAL RELATIONAL-BASED TECHNOLOGY ALLIANCES

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1 Global Strategy Journal Global Strat. J., 4: (2014) Published online in Wiley Online Library (wileyonlinelibrary.com). DISTANCE COSTS AND THE DEGREE OF INTER-PARTNER INVOLVEMENT IN INTERNATIONAL RELATIONAL-BASED TECHNOLOGY ALLIANCES HANS VAN KRANENBURG 1 *, JOHN HAGEDOORN 2,3, and STEFANIE LORENZ-ORLEAN 2 1 Nijmegen School of Management, Institute for Management Research, Radboud University Nijmegen, Nijmegen, The Netherlands 2 School of Business and Economics, Department of Organization and Strategy, Maastricht University, Maastricht, The Netherlands 3 School of Management, Royal Holloway University of London, Egham, Surrey, United Kingdom This research studies the effect of specific institutional and distance cost issues, in particular the protection of intellectual property rights and geographic distance, on the preference of companies for different governance modalities in terms of the degree of their involvement in international relational-based technology alliances. In the sample, all technology alliances contain exclusive technology agreements. We find that international differences in intellectual property rights protection regimes between the home countries of partnering companies are a significant factor: the larger the difference, the more likely that partnering companies prefer to form an equity relational-based technology alliance with substantial inter-partner involvement. The degree of geographic distance between partners also affects the preference of companies for a particular form of relational-based agreement. Companies prefer to engage in deeper inter-partner involvement, albeit of a non-equity nature, in case of large geographic distance between the home countries of the partnering companies. Copyright 2014 Strategic Management Society. INTRODUCTION Keywords: technology alliances; licensing agreements; property rights; geographic distance; governance form; inter-partner involvement; exclusiveness *Correspondence to: Hans van Kranenburg, Nijmegen School of Management, Institute for Management Research, Radboud University Nijmegen, Nijmegen, P.O. Box 9108, 6500 HK, The Netherlands. h.vankranenburg@fm.ru.nl The alliance governance literature is moving beyond the more common dichotomies of governance types of alliances such as contrasting contractual to hierarchical or involving equity joint venture investments versus non-equity alliances toward a more subtle understanding of partner involvement. In that context, many scholars have used different governance types to examine the determinants of the legal or contractual form chosen by the companies at the time of alliance formation. However, the legal or contractual form of the alliance is not an end in itself. Contractor, Woodley, and Piepenbrink (2011) emphasize that the outcome of the negotiation and the design of an alliance agreement depend not only on the legal or contractual form, but also on the process and intensity of inter-partner involvement. They show that the interaction or involvement of partners is necessary to coordinate operations, improve the efficiency with which knowledge is transferred, monitor opportunism, maximize joint synergistic value, and make sure that an appropriate share of the net benefit created by the alliance is appropriated by the technology provider (Contractor Copyright 2014 Strategic Management Society

2 Distance Costs and Inter-Partner Involvement in Technology Alliances 281 et al., 2011). In general, the more complex the alliance, the greater the need for interaction or involvement of partners (Kale, Singh, and Perlmutter, 2000). Gulati and Singh (1998) find that the more hierarchical governance forms of alliances are associated with greater interdependence between partners and thus more involvement of partners. A small number of studies show a positive relationship between technology transfer and development of new technology and hierarchical governance complexity and, thus, the degree of involvement of allied partners. For instance, Lee and Cavusgil (2006) show that relational-based alliances are more effective in facilitating knowledge transfers and that these alliances require interactions between partners to design and manage them. Merchant (2014, this issue) also confirms that knowledge transfer between allied partners benefit from a higher degree of partner involvement. Colombo (2003) suggests that the direction and degree of the technology transfer influence the interaction of the partners. Alliances with bidirectional technological transfers are more likely to involve greater controls, hierarchy, and joint work teams as well as a greater degree of partner involvement than unidirectional or no technology transfer alliances. Contractor et al. (2011) confirm that deeper relational-based alliances, such as equity joint ventures, facilitate a higher degree of involvement between partners than more distant agreements, such as arm s-length licensing agreements, tend to do. In general, these deeper relational-based alliances also incur higher costs. While a formal contract for technology transfer, such as a licensing agreement, frequently or typically is drawn up, it is the degree or intensity of the relationship between the allies, beyond the legal agreement, that really matters. When companies enter into an arm s-length licensing agreement, there may not be much need for involvement of partners, especially if the technology recipient is fully capable and only awaits legal permission to use the technology provider s patent right (Contractor et al., 2011). However, companies can also decide to make the technology transfer through an agreement part of a broader alliance (Somaya, Kim, and Vonortas, 2011), which has other objectives than the single act of transferring technology from one company to the other. In that context, they can opt for an alliance that includes joint R&D, supply, manufacturing, and/or marketing activities or companies can choose a technology agreement within a joint venture. These technology alliances require a higher degree of involvement of the partners, more monitoring and control of the activities, ongoing negotiation between the allies regarding management issues, and they are more costly to set up and maintain (Blodgett, 1991; Hagedoorn, and Hesen, 2007; Hennart, 1988; Kaufman, Wood, and Theyel, 2000; Oxley, 1997; Pisano, 1989). The degree of involvement of partners also depends on the exclusiveness of the technology agreement between the technology provider and recipient. Companies can also engage in technology transfer through exclusive interfirm agreements. The use of the technology is generally restricted to a specific user, a geographical region, a specific length of time, and/or a specific field of use. An exclusive agreement increases the commitment and involvement of the allied partners. According to Sengupta (1995), the higher benefits that accrue from an exclusive technology agreement will make it possible for companies to undertake greater investments and to bear higher coordination costs associated with a higher degree of partner involvement. Although companies benefit from exclusivensess of the technology transfer agreements (Somaya et al., 2011; Contractor et al., 2011), little research has been done on the degree of involvement of allied partners. Contractor et al. (2011) is one of the few studies that investigates the relationship between exclusive partnership and the frequency and depth of interaction between partners. They show that exclusive alliances with respect to a particular technology are positively related to a higher degree of interpartner involvement. It is important to note that the international nature of these alliances increases the uncertainty and complexity for companies and the degree of involvement of alliance partners. For instance, enforcement of intellectual property rights is by no means assured, as the strength of protection regimes varies considerably between countries (Hagedoorn, Cloodt, and van Kranenburg, 2005; Oxley, 1999). Monitoring of the actual cooperation is more difficult and costly if there is a large institutional distance between the partners (Davidson and McFetridge, 1985). Besides monitoring the actual cooperation, there needs to be a sufficient degree of involvement of partners in order to effectively protect and transfer the technology or knowledge, especially when the technology or knowledge is complex (Teece, 1986) and the transfer is to occur across national and cultural boundaries (Contractor et al., 2011). The transfer of technology and the degree of partner involvement also depend on geographic distance between the partners (Ghemawat,

3 282 H. van Kranenburg, J. Hagedoorn, and S. Lorenz-Orlean 2001). In general, geographic distance between the partners is negatively related to the quality of information flows and the quality of knowledge transfers. This research, therefore, aims to increase our knowledge of companies preferences for the governance form of international relational-based technology alliances containing an exclusive technology licensing agreement. It makes a contribution by investigating the difference between the different governance modalities in terms of the degree of partner involvement in an international technology alliance. Whereas Contractor et al. (2011) use firm-specific independent variables to explain the selection between the governance modalities, this research uses exogenous country-specific variables to assess how, based on the degree of inter-partner involvement, institutional and distance cost issues in the international context influence the choice of governance. In this study, we pay attention to a number of specific institutional and distance cost issues in the international context that refer to the international differences in intellectual property rights protection regimes and the role that geographic distance plays in the companies choice for the different governance forms of these specific technology alliances with different levels of inter-partner involvement and relationships. Although geographic distance may seem to be an imperfect measure, it has served as a workable proxy for institutional, cultural, and other distance costs. Previous studies have shown that geographic distance functions as a proxy for distance costs such as search costs and costs of transportation, negotiation, communication, and monitoring and control of an alliance. Our contribution builds on a number of previous studies that show that the nature of the actual technology transaction within an alliance, the quality of the institutional environment for intellectual property rights protection, and geographic distance affect the preference for the governance form of an interfirm alliance (e.g.: Ghemawat, 2001; Hagedoorn et al., 2005; Oxley, 1999; Pisano, 1989). However, these studies did not investigate the effect of specific institutional and distance cost issues, in particular the protection of intellectual property rights and geographic distance on the preference of companies to engage in international technology transfer through exclusive interfirm agreements. In general, these studies used a dichotomy of governance types or focused on exclusive versus nonexclusive technology transfer agreements (Aulakh, Jiang, and Pan, 2010; Jiang, Aulakh, and Pan, 2007). In this research, the selection of tripartite governance modalities is explained through the degree of interpartner involvement. We analyze the effect of specific institutional and distance cost issues on the preference of companies for different governance modalities of relational-based technology alliances in terms of the degree of the involvement of alliance partners. Deeper relational-based alliances imply more resource involvement, commitment, a higher degree of inter-partner involvement, and higher cost exposure. We study a sample of nearly 140 relational-based technology alliances containing an exclusive technology licensing agreement made between U.S. manufacturing companies with international partners. HYPOTHESES International intellectual property rights protection regimes In the alliance literature, the strength of countries intellectual property rights protection regimes is emphasized as an important institutional and environmental factor for the choice that companies make when they engage in international interfirm technology agreements (Muralidharan and Phatak, 1999). An important reason is that countries differ substantially with regard to the intellectual property rights protection they offer. In general, economically more advanced countries offer better intellectual property rights protection than economically less advanced countries (Ginarte and Park, 1997; Marron and Steel, 2000). Although the protection of intellectual property rights is stronger in economically more advanced countries, these countries still have their own technology transfer laws that regulate the length of agreements, the minimum level(s) of technology transfer, royalty rates, remittances, and convertibility of royalty payments. These laws determine the level of protection that foreign companies can receive against a loss of their technology (Contractor, 1981). However, under a weak intellectual property rights protection regime, a partner could use the other partner s technology, even though it is protected by a patent, without paying appropriately for it (Kim and Vonortas, 2006). Hence, companies seeking protection for technology transfers across national borders face a complex variety of legal rules, regulations, and procedures (Oxley, 1999). The empirical litera-

4 Distance Costs and Inter-Partner Involvement in Technology Alliances 283 ture provides evidence that, while there is a reluctance of technology-providing companies to transfer advanced technology through interfirm agreements in countries with relatively weaker intellectual property rights protection than they experience in their home country, the stronger the intellectual property rights protection in the host country, the higher the probability that the technology-providing companies prefer technology alliances with low degree of partner involvement (Gambardella, Giuri, and Luzzi, 2007; Kim and Vonortas, 2006; Yang and Maskus, 2005). If technology providers from countries with relatively strong intellectual property rights protection engage in international technology transfer with technology recipients from countries that offer less intellectual property rights protection, these providers are confronted with higher appropriability hazards and potential subsequent costs for monitoring, controlling, and eventually enforcing the agreement (e.g., Hart, 1995). Deeper relational-based alliances offer the possibility to monitor, control, and align incentives of the partners in these agreements (Gulati, 1998; Pisano, 1989). The benefit of deeper relational-based alliances, in general more hierarchical governance forms (such as joint ventures), is that a deeper relationship and higher degree of interpartner involvement in the alliance reduce the incentives of either partner to act opportunistically (Lee and Cavusgil, 2006; Chi and Zhao, 2014, this issue). Joint managerial control and shared board membership enhance partners abilities to monitor and control the activity of interfirm agreement (Blodgett, 1991; Hennart, 1988). In general, a deeper relational-based alliance is also related to higher set up and management costs. Hence, a deeper relational-based technology alliance associated with a higher degree of inter-partner involvement governance decision should minimize the appropriability hazard by ensuring the adequate specification of property rights, the monitoring of the actual cooperation, and the enforcement of contractual terms. This implies that when technology-providing companies enter technology alliances with technology recipients from countries with weaker protection of intellectual property rights, they face increased appropriability hazards, which make them prefer to form deeper relational-based technology alliances rather than arm s-length technology agreements with companies from countries with less developed systems of intellectual property rights protection. Hence: Hypothesis 1: The larger the difference between the intellectual property rights protection regimes of the countries of the technology provider and the technology recipient, the more likely it is that companies will choose a deeper relational-based technology alliance associated with a higher degree of inter-partner involvement. Geographic distance To a large extent, distance between partners is one of the major concerns for companies in carrying out technology transfer activities. Although intangible flows are not affected by transportation costs in the same way as physical flows, the quality of information flows, communication, and partner involvement account for essential effects of geographic distance in cross-border technology transfer (Ghemawat, 2001). The distance exacerbates any information asymmetry problem between partners located in different countries. Previous research has shown the importance of geographic distance between the partners in their decision for technology transfer (Jaffe, Trajtenberg, and Henderson, 1993; Kim, 2009). These studies also emphasize that knowledge externalities are geographically bounded: companies near knowledge sources show better innovative performance. Moreover, an increase in physical distance makes it generally more difficult for companies to absorb and utilize transferred knowledge. The larger the physical distance between the partners, the slower the technology transfer and, in general, the less technology transfer is taking place (Galbraith, 1990; Hansen and Løvås, 2004). This can be explained by the fact that search costs to identify useful competences will increase with an increase in geographic distance between the companies (Sorenson and Stuart, 2001). Furthermore, communication becomes more difficult and the accuracy and richness of the information transfer declines given an increase in physical distance. Also, the communication costs for companies will increase (e.g., Rosenzweig and Singh, 1991). In general, an increase in geographic distance between partnering companies implies differences in technological, national, and macro-regulatory environments, which may lead to lack of a common knowledge base or shared practices and approaches to problem solving (Phene, Fladmoe-Lindquist, and Marsh, 2006). Consequently, an increase in geographic distance implies that difficulties encountered at any of the contracting stages will lead to an increase in appropriability

5 284 H. van Kranenburg, J. Hagedoorn, and S. Lorenz-Orlean hazards and a move toward more hierarchical governance forms of international interfirm partnerships (Gulati, 1998; Oxley, 1999). The larger the geographic distance between companies, the more need they have to monitor and control international interfirm agreements, as they are subject to increased asymmetric information as well as to an increase in the risk of opportunism (Bönte, 2008). Besides, monitoring of the actual cooperation and the resolution of conflicts is generally more difficult and costly if there is a large distance between the alliance partners (Davidson and McFetridge, 1985; Degryse and Ongena, 2005). Interfirm agreements, depending on their degree of relationship and inter-partner involvement, offer the possibility to transfer technology and knowledge and monitor, control, and align incentives of international partners in these agreements (Gulati, 1998; Hagedoorn, Lorenz-Orlean, and van Kranenburg, 2009). In general, deeper relational-based types of alliances associated with higher degree of interpartner involvement (such as equity interfirm agreements) are used in case of large appropriability hazards because they offer managerial and organizational control and increase the possibility of monitoring and controlling the partner (Teece, 1986). The possibilities and incentives to cheat are not entirely removed by choosing an equity interfirm agreement, but are reduced relatively to contractual agreements (Oxley, 1999). 1 All this suggests that increasing geographic distance between a technology-providing company and its technology recipient will make the monitoring and control of a technology agreement necessary as the risk that partners behave opportunistically increases and success of technology or knowledge transfer reduces. As a consequence, the allied partners prefer more a relationship-based governance form of technology alliance associated with a higher degree of inter-partner involvement. The degree of inter-partner involvement also depends on the total costs of the relational-based governance form. In general, there exists a positive relationship between the degree of inter-partner involvement and the costs 1 Moreover, moderating opportunistic behavior, deeper relational-based types of alliances associated with higher degree of inter-partner involvement also generally provide better opportunities to create and appropriate value or new technology in an alliance, to learn from partners, and to improve efficiency with which technology or knowledge is transferred. of the involvement for the partners. Therefore, we propose the following hypothesis: Hypothesis 2: The larger the geographic distance between the technology-providing company and the technology recipient, the more likely it is that companies will choose a deeper relational-based technology alliance associated with a higher degree of inter-partner involvement. METHODOLOGY We test our hypotheses on a sample of technology alliances between U.S. manufacturing companies with international partners. In our sample, the technology alliances contain exclusive technology licensing agreements. The technology-providing company restricted the use of the technology to a specific user, a geographical region, a specific length of time, and/or a specific field of use. Data were obtained from the Thomson SDC database. In the actual analysis, we apply a discrete choice model. As such, we consider the international technology partnering behavior of 136 U.S. technologyproviding companies for the period 1990 to It is worth noting the country of origin of the partners: 52 percent of the partners are from Asia, 42 percent from Europe, and 6 percent from Canada. Furthermore, 55 percent of the these technology alliances are made in the chemicals and allied products sector, 13 percent in the electrical and electronic equipment sector, and 11 percent in the instruments and related products sector. The remaining technology alliances are spread over a diverse group of sectors. Furthermore, 27 percent of these alliances refer to arm slength technology licensing agreements with almost no alliance partner involvement, 57 percent are non-equity relational-based technology alliances associated with a higher degree of inter-partner involvement, and 16 percent are equity relationalbased technology alliances, also with a higher degree of inter-partner involvement. We distinguish three forms of technology alliances: arm s-length licensing agreements, nonequity relational-based technology alliances, and equity relational-based technology alliances. An arm s-length technology licensing agreement allows the technology recipient to market the product/ technology of the technology-providing company (the owner of the technology) in the defined way in the determined set of countries. As such, this agree-

6 Distance Costs and Inter-Partner Involvement in Technology Alliances 285 ment is unilateral in nature. A non-equity relationalbased technology alliance refers to an agreement that, in addition to technology licensing agreement, includes joint R&D, supply, manufacturing, and/or marketing activities that are not governed through equity sharing. This can be described as a non-equity bilateral relationship between the technologyproviding company and the recipient. Finally, an equity relational-based technology alliance refers to an agreement that, in addition to a technology licensing agreement, includes an agreement in which either of the partners makes an equity investment in the partner company or in which a joint venture is formed to develop, manufacture, or market the licensed product. These agreements can be considered as equity-based bilateral relationships. more general intellectual property rights protection (Marron and Steel, 2000). Geographic distance captures the physical distance between the U.S. company and its partner s home country (Hypothesis 2). In line with previous research by Hansen and Løvås (2004), we take the logarithm of half of the miles distance between the capitals of the U.S. company s and its partner s country of origin. The reason for taking the logarithm is that, as demonstrated by Hansen and Løvås (2004), the perception of distances does not increase linearly with the actual distance in miles. We retrieved the distance between the capitals of the home countries of the partners from Dependent variable Our hypotheses associate the differences in the regime of intellectual property rights protection of the home countries between a U.S. technology provider and its non-u.s. technology recipient and the geographic distance between the partnering companies with the governance structure of technology alliances. The dependent variable represents the choice of the governance structure for each (relational-based) technology alliance from the perspective of the U.S. technology-providing company. The dependent variable, form of alliance, is coded 0 if the agreement is an arm s-length technology licensing agreement, 1 if the agreement is organized as a non-equity relational-based technology alliance, and 2 if the partnership is organized as an equity relational-based technology alliance. Independent variables Intellectual property rights protection difference indicates the basic international dissimilarities in intellectual property rights protection, as outlined in Hypothesis 1 (see also Oxley (1999) and Hagedoorn et al. (2005)). It is measured as the difference in the strength of intellectual property rights protection regimes between the U.S. and the home country of the technology recipient. This measure is based on the five-year interval country-level patent rights protection index of Ginarte and Park (1997) and data for the year 2000 provided by Walter Park based on the same sources of the data used by Ginarte and Park (1997). Previous studies showed that the level of patent protection provides a good indication of the Control variables We include a number of control variables for the specific characteristics of the two companies in each international relational-based technology alliance and for some general characteristics of the sector in which the agreement is made. Data for the control variables were obtained from the following data sources: Amadeus, Compustat North America and Global, Dun & Bradstreet s Hoovers, Osiris, Thomson SDC, Worldscope, and the U.S. Patent and Trademark Office. The literature indicates that companies experience with setting up interfirm agreements might play a role in their partnership formation process (Gulati, 1998; Contractor et al., 2011). The variable experience differential indicated the degree to which the technology-providing firm and the technology recipient differed in their actual experience with setting up relational-based technology alliances containing exclusive licensing agreements. Their experience refers to all forms of relational-based technology alliances including licensing agreements: unilateral and bilateral licensing agreements, exclusive and nonexclusive licensing agreements, and cross-licensing agreements during a period of five years before the agreement was signed. Hence, the variable experience differential is based on the difference between the number of all technology alliances including licensing agreements for both partners one year before the agreement was signed. It is calculated as the difference between the logarithmic experience from the technology provider and the recipient. Also, size differences can play a role in the risk perception of companies during the alliance formation process as

7 286 H. van Kranenburg, J. Hagedoorn, and S. Lorenz-Orlean well as during the life span of the alliance (Harrigan, 1988). Previous studies showed that small and large companies differ in their technology alliance strategies (Caves, Crookell, and Killing, 1983; Kolmer and Dowling, 2004). Size differential of companies is based on the difference between the revenues for both partners one year before the agreement was signed. It is calculated as the difference between the logarithmic revenue from the allied firms. The difference in innovative capabilities between the partners may also affect their preference for particular technology alliance governance forms because differences in the innovativeness of partners may create the risk of technology leakage beyond the improvement stipulated in the agreement (Caves et al., 1983). A technologically leading company might prefer a technology alliance with more hierarchical control (i.e., deeper relationship and more inter-partner involvement) in order to reduce appropriability hazards (Teece, 1986; Oxley, 1999). Hence, the variable innovative differential expresses the degree to which the allied partners have similar or dissimilar strength in innovative capabilities. This variable is measured as the difference in patent intensity between the technology provider and the recipient. The patent intensity ratio is based on the U.S. patent count for each company during a period of five years before the agreement was made and then divided by their overall size (see Patel and Pavitt, 1991). Previous research on alliances agreements has shown that partners operating in similar product markets prefer agreements with more hierarchical control (e.g., Oxley and Sampson, 2004). The variable market overlap refers to the degree that the allied partners operate in the same end product market. It is measured by the primary two-digit SIC code overlap between the partners. Market overlap is a dummy set at 1 if the allied partners are in the same market and 0 if they are not. The formation of relational-based technology alliances can also be affected by the similarity of partners in terms of technological overlap. Technological overlap between the partners means that it is likely that they draw on the same external pools of technological knowledge and, thus, may perceive each other as direct competitors in relevant resource markets (Oxley and Sampson, 2004; Contractor et al., 2011). The effect of technological overlap on the preference of companies for hierarchical control in an international technology alliance is similar as for market overlap. The variable technological overlap is a dummy with the value of 1 if partners had patent class overlap in a period of five years before the agreement was made and with a value of 0 if there was no patent class overlap during that period. This data is retrieved from the U.S. Patent and Trademark Office databank. We include a trend variable time to control for possible growth in the number of agreements and a gradual change in the distribution between three different kind of relational-based technology alliances (Hagedoorn and van Kranenburg, 2003). This trend variable was calculated by assigning a value to each particular year, which reflects the distance to the first year of the period under investigation. Both the rate of partnering (Anand and Khanna, 2000) and the actual partnering practices are known to differ between sectors (Arora and Fosfuri, 2003). Therefore, we control for possible sectoral effects with the variable sector dummies for the three largest sectors: chemicals and allied products, instruments and related products, and electrical and electronic equipment. RESULTS Table 1 presents the descriptive statistics and the correlation matrix. Correlation is very low for most variables, indicating that there is no multicollinearity between them. The maximum VIF value of 1.45 also indicates that multicollinearity is not a problem. Due to the fact that secondary data from the Thomson SDC database is not as detailed information as primary survey data, for example, as found in Contractor et al. (2011), we are able to classify the agreements only in three broad categories of interpartner involvement. The data do not provide enough information about the difference between the nonequity relational-based technology alliance and the equity relational-based technology alliance in terms of the actual degree of inter-partner involvement or its nominal or ranked scaling. Therefore, a multinomial logit model is employed to relate the governance form of agreement between the U.S. partner and the non-u.s. partner to the distance costs context variables and control variables. In addition, we also tested for possible endogeneity problems. All our tests rejected the existence of endogeneity. Table 2 provides the results for the stepwise multinomial logit analysis. Results for only non-equity relationalbased (Y1) and equity relational-based (Y2) technology alliances are provided due to the normalization

8 Distance Costs and Inter-Partner Involvement in Technology Alliances 287 Table 1. Descriptive statistics and correlations for all variables (N = 136) Variables Mean s.d Form of alliance Intellectual property rights protection difference 3. Geographic distance * 0.29** 4. Experience differential Size differential ** 0.33** 0.33** 0.32** 6. Innovative differential * Market overlap Technological overlap * 0.17* 9. Time * Chemicals and allied products * ** Electrical and electronic equipment * 0.43** 12. Instruments and related products ** ** 0.14 *Significant at 5% level. **Significant at 1% level. Table 2. Results of the multinomial logit model predicting the preference of companies for international arm s-length technology licensing agreement versus non-equity relational-based (Y1) or equity relational-based (Y2) technology alliance Variable Model 1 Model 2 Model 3 Y1 Y2 Y1 Y2 Y1 Y2 Constant 0.19 (0.67) 2.48 (1.32)* 0.03 (0.81) 5.84 (2.48)** 8.02 (3.49)** (7.31)** Intellectual property rights protection difference 0.16 (0.48) 1.80 (0.79)** 0.12 (0.52) 2.15 (0.90)** Geographic distance 1.02 (0.43)** 1.23 (0.79) Experience differential 0.18 (0.19) 0.25 (0.26) 0.19 (0.19) 0.16 (0.27) 0.24 (0.20) 0.25 (0.28) Size differential 0.06 (0.05) 0.14 (0.08)* 0.05 (0.05) 0.22 (0.09)** 0.00 (0.06) 0.15 (0.10) Innovative differential 0.18 (0.17) 0.20 (0.17) 0.16 (0.17) 0.19 (0.17) 0.22 (0.20) 0.24 (0.21) Market overlap 0.89 (0.50)* 0.35 (0.71) 0.93 (0.51)* 0.09 (0.76) 1.07 (0.54)** 0.02 (0.78) Technolgical overlap 0.30 (0.54) 0.10 (0.74) 0.34 (0.55) 0.14 (0.78) 0.48 (0.58) 0.04 (0.80) Time 0.01 (0.10) 0.20 (0.14) 0.01 (0.10) 0.20 (0.15) 0.03 (0.10) 0.25 (0.15)* Chemicals and allied products 0.34 (0.53) 1.91 (1.15)* 0.34 (0.53) 3.30 (1.78)* 0.73 (0.56) 4.15 (2.12)* Electrical and electronic equipment 1.01 (0.80) 2.45 (1.35)* 1.03 (0.80) 3.77 (1.88)** 1.34 (0.85) 4.53 (2.18)** Instruments and related products 0.55 (0.72) 0.27 (1.64) 0.55 (0.72) 1.08 (2.11) 0.17 (0.83) 2.27 (2.48) Log likelihood function Standard errors in parentheses. *p < 0.10 **p < 0.05 ***p < 0.01.

9 288 H. van Kranenburg, J. Hagedoorn, and S. Lorenz-Orlean of the coefficient of the arm s-length technology licensing agreements. The chi-square tests for the variables are significant at p-values of In terms of the overall fit of the model, the multinomial logit model correctly predicts 63 percent of agreements. Our first hypothesis suggests that companies would be more likely to establish a deeper relationalbased technology alliance with a relative larger (negative) difference between the strength of intellectual property rights protection regimes of the home countries of companies (from the perspective of the technology provider). The results show that the difference between the strength of intellectual property rights protection regimes is insignificantly associated with non-equity relational-based technology alliances, but there is a significant effect for equity relational-based technology alliances. This suggests that it is more likely that companies prefer equity relational-based technology alliances to nonequity relational-based technology alliances or arm s-length technology licensing agreements with a larger difference between the strength of intellectual property rights protection regimes in the home countries of partners. We also predicted that the geographic distance between the home countries of partners has a positive effect on the preference of companies for the deeper relational-based governance form of alliances (Hypothesis 2). Our results do indicate that geographic distance between the home countries of partners positively affects the likelihood that companies choose international non-equity relational-based technology alliances, although distance does not increase the likelihood of international equity relational-based technology alliances. 2 As for the effect of the control variables, the variables for time trend, experience, size difference, innovation difference, and technological overlap have no significant impact on the choice of governance form. We found a positive, significant effect for the degree to which partners are direct competitors operating in similar markets. It is more likely that partners with market overlap prefer to establish an international non-equity relational-based technology alliance than to set up an arm s-length technology licensing agreement or an equity relational-based one. Also, the preference for the particular form of 2 An unreported analysis of marginal effects was found to be in line with our general findings. agreement between international companies differs significantly among the sectors. It is more likely that companies in the chemicals and allied products sector and the electronic equipment sector prefer equity relational-based technology alliances to other forms of agreements. DISCUSSION AND CONCLUSION Technology-providing companies are confronted with the risks of incomplete contracting, the leakage of their valuable technological knowledge, and inefficiency of technology or knowledge transfer. In general, these risks will increase when the technology provider is involved with a foreign partner. Companies have an opportunity to reduce the risk of dealing with a foreign partner when they establish deeper relational-based interfirm agreements (Contractor et al., 2011; Oxley, 1997; Teece, 1986). Of course, a deeper relational-based technology alliance with a higher degree of partner involvement is also associated with higher set up and management costs. Our results indicate that U.S. technology providers do realize that in the context of technology transfer, the international context might create serious appropriability hazards, as they prefer technology alliances with deeper relationships and more inter-partner involvement to reduce the costs and risk of partnering with a foreign company. We find that technology-providing companies from countries with stronger intellectual property rights protection regimes that engage in international technology alliances with partners from countries with weaker intellectual property rights regimes prefer to form deeper relational-based international technology alliances. The larger this gap, the more likely they prefer an equity relational-based technology alliance. These alliances allow for continuous monitoring of the joint activities, since equity participation implies that partners share managerial control. This result is in line with the findings of Oxley (1999) and Hagedoorn et al. (2005), who found that companies prefer equity modes in case of large differences between the regimes of intellectual property rights protection of home countries of the partnering companies. Hence, our finding implies that in cases where patents (even when they are part of exclusive licensing agreements) are considered to offer little or no effective protection, an arm s-length licensing agreement is less preferred by companies, as the technology recipient can invent around the

10 Distance Costs and Inter-Partner Involvement in Technology Alliances 289 technology that is transferred. In these circumstances, a deeper relational-based technology alliance offers companies the possibility to monitor and control their technology transfer and their partners, as long as the costs of these deeper relational technology alliances are lower than the benefits of these alliances for the partners. The degree of geographic distance also affects companies preferences for a particular form of alliance. The larger the geographic distance, the more likely companies prefer non-equity relational-based technology alliances versus arm s-length technology licensing agreements. As a consequence, technology-providing companies are more inclined to set up a deeper relational-based form of governance associated with more inter-partner involvement, even when their technology transfer refers to exclusive licensing agreements. This implies that technology providers have the option to control the use of their technology by recipients. A deeper relational-based governance form not only increases the ability to monitor and control the technology agreement, but it can also increase the opportunity for technological learning of both partners (Zahra, Ireland, and Hitt, 2000). Chi and Zhao (2014, this issue) also show that deeper relationalbased technology alliances offer better opportunities to monitor and control the technology transfer and also stimulate more knowledge transfer between partners. However, deeper relational-based modes of interfirm collaboration do not come without costs (Gulati and Singh, 1998). In general, equity relational-based technology alliances are more costly than non-equity relational-based alliances and, as such, companies seem to prefer nonequity relational-based technology alliances rather than equity relational-based alliances in case of large geographic distance. Our research has a number of limitations. Our analysis is confined to U.S. companies and future studies could investigate the behavior of non-u.s. technology providers. The national culture perspective (Parkhe, 1993) proposes that companies of a certain nationality have a propensity to choose particular interfirm agreements. Although we pay attention to specific issues in the international context that refer to the international differences in intellectual property rights regimes and geographic distance, future research could consider more components of the international distance between companies. For instance, Ghemawat (2001) suggests that distance can be treated as a multifaceted construct that should include not only geographic distance, but also formal and informal institutional, administrative, and economic dimensions. Due to recent developments such as the expansion of modern communication techniques and the decline in transportation costs, the importance of distance may decrease for investment decisions. Furthermore, the corporate governance norms between countries can differ, which can have an effect on the behavior of allied partners and their preference for the governance structure of an international alliance (Perkins, Morck, and Yeung, 2014, this issue). Therefore, we recommend including the cross-country variations in corporate governance norms in further research on the preference of companies to engage in an international relational-based technology alliance. This study shows the effect of specific institutional and distance cost issues on the preference of the inter-partner involvement in international relational-based technology alliances. However, the degree of the involvement of partners can also change over time due to their learning and experience of the partners (Iriyama and Madhavan, 2014, this issue). To increase our understanding of preference of the degree of involvement of allied partners, the dynamics of the relational-based alliances should be included in further research. Also, this research uses secondary data for measuring the depth of relationship and inter-partner involvement. Although this research provides some interesting findings, it is important that future research should focus on the collection of more detailed information and primary data about the depth of the relationship. Finally, given the limited industry setup of the current research, it is also recommended that future research should address these important questions by involving a larger number of industries. ACKNOWLEDGEMENTS The authors would like to thank Margo Hoogenberk for research assistance. Furthermore, we are very grateful for the useful comments and suggestions from the reviewers and the guest coeditors, Frank Contractor and Jeff Reuer. REFERENCES Anand BN, Khanna T The structure of licensing contracts. Journal of Industrial Economics 48(1):

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