Choosing equity stakes in technology-sourcing relationships: An integrative framework

California Management Review

Volumn 46, Issue 3, 2004, Pages 77-99

  Kale, Prashant ^a   Puranam, Phanish ^b  

^a UNIVERSITY OF MICHIGAN   (United States)

^b LONDON BUSINESS SCHOOL   (United Kingdom)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 2942582216     PISSN: 00081256     EISSN: None     Source Type: Journal    
DOI: 10.2307/41166222     Document Type: Review

References (40)

1. See J. Hagedoorn and R. Osborn, "Interfirm R&D Partnerships: Major Theories and Trends Since 1960," in F.J. Contractor and P. Lorange, eds., Cooperative Strategies and Alliances (Boston, MA: Pergamon, 2002).
2. A PriceWaterhouseCoopers report released in 1999 estimated that about 80% of technologically motivated acquisitions in the time period of 1994-1997 had failed to achieve their objectives. Also, see J. Bleeke and D. Ernst, "The Way to Win in Cross-Border Alliances," Harvard Business Review, 69/6 (November/December 1991): 127-135; P. Kale, J. Dyer, and H. Singh, "Alliance Capability, Stock Market Response and Long-Term Alliance," Strategic Management Journal, 23/8 (August 2002): 747.
3. A PriceWaterhouseCoopers report released in 1999 estimated that about 80% of technologically motivated acquisitions in the time period of 1994-1997 had failed to achieve their objectives. Also, see J. Bleeke and D. Ernst, "The Way to Win in Cross-Border Alliances," Harvard Business Review, 69/6 (November/December 1991): 127-135; P. Kale, J. Dyer, and H. Singh, "Alliance Capability, Stock Market Response and Long-Term Alliance," Strategic Management Journal, 23/8 (August 2002): 747.
4. For some of the main ideas see Y. Doz, "The Evolution of Cooperation in Strategic Alliances," Strategic Management Journal, 17, Special Issue (Summer 1996): 55-83.
5. For some of the main perspectives, see G. Pisano, "The R&D Boundaries of the Firm: An Empirical Analysis," Administrative Science Quarterly, 35/1 (March 1990): 153-176; R. Gulati and H. Singh, "The Architecture of Cooperation: Managing Coordination Costs and Appropriation Concerns in Strategic Alliances," Administrative Science Quarterly, 43/4 (December 1998): 781-814; T. Folta, "Governance and Uncertainty: The Tradeoff between Administrative Control and Commitment," Strategic Management Journal, 19/11 (November 1998): 1007-1028; H.K. Steensma and K.G. Corley, "Organizational Context as a Moderator of Theories on Firm Boundaries for Technology Sourcing," Academy of Management Journal, 44/2 (April 2001): 271-291.
6. For some of the main perspectives, see G. Pisano, "The R&D Boundaries of the Firm: An Empirical Analysis," Administrative Science Quarterly, 35/1 (March 1990): 153-176; R. Gulati and H. Singh, "The Architecture of Cooperation: Managing Coordination Costs and Appropriation Concerns in Strategic Alliances," Administrative Science Quarterly, 43/4 (December 1998): 781-814; T. Folta, "Governance and Uncertainty: The Tradeoff between Administrative Control and Commitment," Strategic Management Journal, 19/11 (November 1998): 1007-1028; H.K. Steensma and K.G. Corley, "Organizational Context as a Moderator of Theories on Firm Boundaries for Technology Sourcing," Academy of Management Journal, 44/2 (April 2001): 271-291.
7. For some of the main perspectives, see G. Pisano, "The R&D Boundaries of the Firm: An Empirical Analysis," Administrative Science Quarterly, 35/1 (March 1990): 153-176; R. Gulati and H. Singh, "The Architecture of Cooperation: Managing Coordination Costs and Appropriation Concerns in Strategic Alliances," Administrative Science Quarterly, 43/4 (December 1998): 781-814; T. Folta, "Governance and Uncertainty: The Tradeoff between Administrative Control and Commitment," Strategic Management Journal, 19/11 (November 1998): 1007-1028; H.K. Steensma and K.G. Corley, "Organizational Context as a Moderator of Theories on Firm Boundaries for Technology Sourcing," Academy of Management Journal, 44/2 (April 2001): 271-291.
8. For some of the main perspectives, see G. Pisano, "The R&D Boundaries of the Firm: An Empirical Analysis," Administrative Science Quarterly, 35/1 (March 1990): 153-176; R. Gulati and H. Singh, "The Architecture of Cooperation: Managing Coordination Costs and Appropriation Concerns in Strategic Alliances," Administrative Science Quarterly, 43/4 (December 1998): 781-814; T. Folta, "Governance and Uncertainty: The Tradeoff between Administrative Control and Commitment," Strategic Management Journal, 19/11 (November 1998): 1007-1028; H.K. Steensma and K.G. Corley, "Organizational Context as a Moderator of Theories on Firm Boundaries for Technology Sourcing," Academy of Management Journal, 44/2 (April 2001): 271-291.
9. The level of equity stakes also has implications for the reported earnings of the investing partner since different accounting norms have to be followed for different levels of equity holding in partner companies; the reported earnings can vary significantly based on the accounting treatment used. Although it is necessary for managers to fully understand these implications, technology-sourcing relationships, by definition, are not primarily motivated by these accounting benefits. Our interviews with managers are consistent with the viewpoint that firms do not form partnerships and adopt particular designs in them with the primary intention of gaining some benefits (or obviating some costs) due to differential accounting treatment. For this reason, we decided not to focus on this issue while discussing the benefits or costs related to equity ownership in these relationships.
10. Company Law in many countries - such as Britain (Company's Act Sec 378(2), 1985), Canada (CIL Section, 4: 358), and India (Company's Act Section 189) - requires at least a 75% majority to pass any special resolutions related to such things as sale or purchase of major assets or increase in share capital. Thus, if any one shareholder or entity has a greater than 25% equity stake, it effectively enjoys the right to veto such resolutions if necessary. As a result, companies forming partnerships in such countries often seek greater than 25% equity to enjoy such benefits. In the U.S., however, which does not have a federal-level company law with such stipulations, veto rights linked to equity stakes are usually determined contractually on a case-by-case basis.
11. Jay Barney made one of the first basic statements of the Resource Based View of the Firm. J. Barney, "Firm Resources and Sustained Competitive Advantage," Journal of Management, 17/1 (March 1991): 99-120. For subsequent authors who extend this argument to organizational capabilities, see B. Kogut and U. Zander, "Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology," Organization Science, 3/3 (August 1992): 383-397; D.J. Teece, G. Pisano, and A. Shuen, "Dynamic Capabilities and Strategic Management," Strategic Management Journal, 18/7 (August 1997): 509-133.
12. Jay Barney made one of the first basic statements of the Resource Based View of the Firm. J. Barney, "Firm Resources and Sustained Competitive Advantage," Journal of Management, 17/1 (March 1991): 99-120. For subsequent authors who extend this argument to organizational capabilities, see B. Kogut and U. Zander, "Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology," Organization Science, 3/3 (August 1992): 383-397; D.J. Teece, G. Pisano, and A. Shuen, "Dynamic Capabilities and Strategic Management," Strategic Management Journal, 18/7 (August 1997): 509-133.
13. Jay Barney made one of the first basic statements of the Resource Based View of the Firm. J. Barney, "Firm Resources and Sustained Competitive Advantage," Journal of Management, 17/1 (March 1991): 99-120. For subsequent authors who extend this argument to organizational capabilities, see B. Kogut and U. Zander, "Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology," Organization Science, 3/3 (August 1992): 383-397; D.J. Teece, G. Pisano, and A. Shuen, "Dynamic Capabilities and Strategic Management," Strategic Management Journal, 18/7 (August 1997): 509-133.
14. For a recent study, see M.A. Schilling and H.K. Steensma, "Disentangling the Theories of Firm Boundaries: A Path Model and Empirical Test," Organization Science, 13/4 (July/August 2002): 387-401.
15. Some of these facts are drawn from Ashish Nanda and Georgia Levenson, "Vermeer Technologies (C): Negotiating the Future," Harvard Business School Case #9-397-081, 1997.
16. See O.E. Williamson, The Economic Institutions of Capitalism (New York, NY: Free Press, 1975); B. Klein, R.G. Crawford, A. Alchian, "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, 21/2 (October 1978): 297-326.
17. See O.E. Williamson, The Economic Institutions of Capitalism (New York, NY: Free Press, 1975); B. Klein, R.G. Crawford, A. Alchian, "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, 21/2 (October 1978): 297-326.
18. See Pisano, op. cit.; Gulati and Singh, op. cit.
19. See Pisano, op. cit.; Gulati and Singh, op. cit.
20. M. Tushman and M. Nadler, Competing by Design: The Power of Organizational Architecture (New York, NY: Oxford University Press, 1997).
21. A. Van de Ven and W. Joyce, Perspectives on Organization Design and Behavior (New York, NY: Wiley 1981).
22. Tushman and Nadler, op. cit.; P. Puranam and H. Singh, "Technological Coordination and Internal Firm Boundaries: The Case of Technology Grafting Acquisitions," London Business School.
23. Tushman and Nadler, op. cit.; P. Puranam and H. Singh, "Technological Coordination and Internal Firm Boundaries: The Case of Technology Grafting Acquisitions," London Business School.
24. Gulati and Singh, op. cit.
25. For example, R&D collaborations and minority equity investments may both involve similar extents of equity participation. However, they may differ very much in the nature of organizational integration mechanisms that connect the two firms. See Folta, op. cit., for these arguments. Similarly, all acquisitions involve complete ownership, but they may differ considerably in terms of the organizational integration that takes place between the acquirer and target after acquisition; see A. Pablo, "Determinants of Acquisition Integration Level: A Decision-Making Perspective," Academy of Management Journal, 37/4 (August 1994): 803-836.
26. For example, R&D collaborations and minority equity investments may both involve similar extents of equity participation. However, they may differ very much in the nature of organizational integration mechanisms that connect the two firms. See Folta, op. cit., for these arguments. Similarly, all acquisitions involve complete ownership, but they may differ considerably in terms of the organizational integration that takes place between the acquirer and target after acquisition; see A. Pablo, "Determinants of Acquisition Integration Level: A Decision-Making Perspective," Academy of Management Journal, 37/4 (August 1994): 803-836.
27. This section draws on some data from the H.W. Chesbrough and D. Lane, "Intel Capital: The Berkeley Networks Investment," Harvard Business School Case #9-600-069, 2000.
28. P. Puranam, "Grafting Innovation: The Acquisition of Entrepreneurial Firms by Established Firms," published dissertation, University of Pennsylvania, 2001.
29. It is also possible that shaping the trajectory of development of the technologies to suit Cisco would create specific investments and the danger of hold-up, thus creating another incentive to acquire.
30. See J. Reur and M. Koza on the problem of digestibility of partner firm's assets as a factor in choosing between joint ventures and complete ownership of foreign subsidiaries. J.J. Reuer and M.P. Koza, "On Lemons and Indigestibility: Resource Assembly through Joint Ventures," Strategic Management Journal, 21/2 (February 2000): 195; J.J. Reuer and M.P. Koza, "Asymmetric Information and Joint Venture Performance: Theory and Evidence," Strategic Management Journal, 21/1 (January 2000): 81
31. See J. Reur and M. Koza on the problem of digestibility of partner firm's assets as a factor in choosing between joint ventures and complete ownership of foreign subsidiaries. J.J. Reuer and M.P. Koza, "On Lemons and Indigestibility: Resource Assembly through Joint Ventures," Strategic Management Journal, 21/2 (February 2000): 195; J.J. Reuer and M.P. Koza, "Asymmetric Information and Joint Venture Performance: Theory and Evidence," Strategic Management Journal, 21/1 (January 2000): 81
32. T. Zenger and M. Marshall, "Group Based Plans: An Empirical Test of the Relationship between Size, Incentive Intensity and Performance," AOM Best Paper Proceedings, 1997.
33. Williamson, op. cit.; S. Grossman and O. Hart, "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, 94/4 (August 1986): pp. 691-719.
34. Williamson, op. cit.; S. Grossman and O. Hart, "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, 94/4 (August 1986): pp. 691-719.
35. Some cases in which such considerations motivate equity partnership rather than full acquisition have been documented by Y. Doz, "Technology Partnerships between Larger and Smaller Firms: Some Critical Issues," in F.J. Contractor and P. Lorange, eds., Cooperative Strategies in International Business (Boston, MA: Pergamon, 2002).
36. The seminal reference for the impact of job autonomy on employee motivation is J. Hackman and P. Oldham, "Development of the Job Diagnostic Survey," Journal of Applied Psychology, 60/2 (April 1975): 159-170.
37. A. Nanda and T. Mahmood, "Vermeer Technologies (A): A Company is Born," Harvard Business School Case # 9-397-078, 1997.
38. See Folta, op. cit.; T. Folta and K. Miller, "Real Options in Equity Partnerships," Strategic Management Journal, 23/1 (January 2002): 77.
39. See Folta, op. cit.; T. Folta and K. Miller, "Real Options in Equity Partnerships," Strategic Management Journal, 23/1 (January 2002): 77.
40. There was a slight difference in the relative weight given to these criteria by the two groups. While the student group gave it a weight of about 2.8%, the managers' group gave it a relative weight of almost 6%. There were no significant differences in the weights given to the remaining criteria by the two groups.