Strategic Complementarity of R&D Alliances

Another segmentation useful for determining partnership alignment can be derived from the patent portfolios that each participating entity owns. To help managers to determine whether a prospective partner has complementary technological resources and predict the prospect’s commitment level in allocating its resources, Yongrae Cho and Youngwoo Lee applied IP profiles to selecting and structuring R&D Alliances. Their method is a graphic with two axes as shown in the “Strategic Complementarity of R&D Alliances” figure. In this figure exemplary sample alliances were grouped wherein Strategic complementarity was defined as equal to 1/(1+tech. overlap)*(1+industry overlap). Tech. overlap is the overlap in IPCs between partner firms and Industry overlap is the weight of overlap in SICs between partner firms. The Status symmetry was defined as equal to 1/(Citation count gap + 1). The Citation-count gap is the absolute difference in patent citation counts between partner firms.

Four Types of R&D Alliances

As shown in the “Four Types of R&D Alliances” figure, R&D alliances can be segmented into four generic types. This segment is useful because it provides a high-level probability of success and also attributes needed for successful partnerships.

There can be (1) Isolated Partners, in which there is a low level of strategic complementarity and a low degree of technological symmetry, (2) Demotivated Leaders, in which there is a high level of strategic complementarity but little technological symmetry, (3) Race to Learn, in which there is a low level of strategic complementarity and a high level of technological symmetry; and (4) Invented Anywhere, in which both complementarity and symmetry are high. Alliances in which both the complementarity and symmetry of technological resources are present have the best chance of being successful. Thus Examining the two dimensions of a prospective partner’s technological capabilities allows general predictions regarding the characteristics and likely outcomes of different alliances.

“Isolated Partners” are alliances in which participants have a low degree of Technology & Business Overlap and dissimilar levels of technological capability. Such partnerships face strong barriers to success. Incentivizing strong firms to share their knowledge is very difficult for low-status companies as the overlapping capabilities mean they have little to offer in return. Furthermore, strong firms may be inhibited from sharing by the belief that knowledge transfer to weak firms that have similar end products could lead to knowledge leakage to potential competitors. In these relationships, royalties obtained from licensing agreements are unlikely to motivate knowledge sharing in this alliance type because low-status partners are potential competitors with similar end products. The similarity in technologies combined with the very high asymmetry in technology status suggests that the low-status partner may be both highly capable and highly motivated to assimilate critical know-how from stronger firms, thus becoming a competitor. There are a number of illustrative cases, including RCA Corporation’s significant loss in market share to Japanese partners such as Panasonic and Sony, which used licensing to assimilate the company’s color TV technologies. As a result, we do not recommend that companies pursue these types of alliances.

“Demotivated Leaders” partnerships occur when potential partners have a high level of resource complementarity but dissimilarity in levels of technological capability, the alliance may have high synergistic potential, but the dissimilarity in technological status may discourage active knowledge transfer, as high-status firms perceive little potential reward from sharing. Nevertheless, partnerships in this quadrant can produce mutually beneficial relationships if alternative motivations for knowledge sharing can be provided, for instance through royalty payments to the higher-status firm via licensing agreements. Although it can be difficult to develop a strong partnership when there is a large gap in technological capabilities between potential partners, companies can develop a mutually beneficial relationship as long as there is an appropriate governance structure that offers incentives to encourage the high status firm to share its knowledge resources. Licensing residual technologies to low-status firms, for example, earns high-status firms additional royalty income. The extra income enables high-status firms to invest in promising technological fields where they are competitively superior or where they see value.

“Race to Learn” alliances occur when there is a low level of strategic complementarity but a high level of technological status symmetry, firms may be encouraged to collaborate by the high level of symmetry. However, the hazards of knowledge sharing are generally most salient when firms compete on similar products with overlapping technological capabilities. The low strategic complementarity may thus induce reluctance to share core knowledge, mainly due to the perception of an increased risk that opportunistic partner firms could easily become competitors. Race to Learn alliances, which entail collaboration between competitors, have become more common as technology has become more complex. However, firms that form alliances with their competitors should always remember that their erstwhile partners could expropriate core knowledge and use it to develop more advanced products and take away market share from the focal firm. Therefore, the appropriate strategy for this type of alliance is to absorb the partner firm’s technological knowledge as rapidly as possible while preventing leakage of proprietary technologies to the partner. The key is to devise measures to prevent unwanted knowledge spillover, for instance, by employing gatekeepers to monitor knowledge leakage. Defining technologies that are strictly off limits in the initial agreement also minimizes knowledge. This type of alliance should be structured by bilateral contracts, such as cross-licensing agreements, which allow firms to reduce opportunism by fostering a “mutual hostage” situation—breach of contract renders damage to both licensee and licensor.

In the “Invented Anywhere” alliance, both complementarity and symmetry are high, resulting in an alliance with a high potential for synergy and a strong commitment to interfirm collaboration. The diverse and complementary technologies owned by the partner firms induce knowledge exploration, thus encouraging both firms to expand their knowledge bases. The similarity in technological capabilities between firms increases the level of commitment to interfirm collaboration, further inducing active knowledge transfer. This type of alliance has the highest potential for synergy. Therefore, the collaboration structure should provide for the greatest amount of contact possible and encourage free communication between communications to ensure effective knowledge transfer. The recommended governance structure for this type of alliance is the equity-based joint venture, with a jointly managed research laboratory. The joint management of a research lab more effectively facilitates interfirm communication and knowledge transfer than do bilateral contracts. This structure enables managers to reduce opportunism and increase the synergistic potential of collaboration by allowing them to assign their best engineers to a joint laboratory.

For companies seeking to acquire complementary technologies, carefully selecting and assessing potential partner firms for R&D alliances is essential. The reality is, however, managers often must decide on partners under significant time pressure and with limited information. This framework has the advantage of speed by using publicly available IP data. Understanding the selection process and the possible alliance type enables managers to deploy appropriate strategies and collaboration structures to support a successful outcome for the proposed alliance.