industry determinants of the “merger versus alliance… vs alliances.pdf · ·...

INDUSTRY DETERMINANTS OF THE “MERGERVERSUS ALLIANCE” DECISION

XIAOLI YINBaruch College, City University of New York

MARK SHANLEYUniversity of Illinois at Chicago

Mergers and acquisitions (M&As) and alliances are potential alternative choices formanagers. We propose that three dimensions of industry conditions are likely to beinfluential in such choices: (1) industry demands on firms to make significant com-mitment, (2) the environmental pressures for flexibility, and (3) the limitations on firmchoices stemming from industry concentration and institutional conditions. We de-velop propositions about how differences across these three dimensions influence thechoices that firms make between M&As and alliances.

When a firm decides to expand its operationsor develop new capabilities, its managers havechoices about how to proceed. Growth can beinternal or can involve joint actions with otherfirms. Important cooperative efforts with otherfirms will involve risky investments and tend tobe organized as contracts. Joint ventures andstrategic alliances (hereafter called “alliances”)are examples. Sometimes cooperative effortsmay be sufficiently complex and risky that par-ticipants combine under common ownership ina merger or acquisition. While firms can alsogrow through internal development, they do nottend to do so through making the particular con-tractual decisions to associate or acquire thatcharacterize alliances or mergers and acquisi-tions (M&As). This makes it more difficult tocompare internal development programs withM&As and alliances. Instead, in this paper wefocus on interorganizational collaboration andattempt to clarify the basis for a choice betweenM&As and alliances.

We refer to an alliance as an agreement be-tween two or more firms to jointly manage as-sets and achieve strategic objectives. Some al-liances involve the creation of a separate jointlyowned entity. This is a joint venture, which we

consider a form of alliance. We examine alli-ances that refer to a group of interfirm linkagesranging from joint ventures to a variety of con-tractual agreements. Alliances are to be distin-guished from M&As, which involve the combina-tion of all of the assets of participating firmsunder common ownership. This can refer to themerging of two more or less equal firms, as wellas acquisitions where one firm obtains majorityownership over another firm (Hagedoorn &Duysters, 2002).

M&As and alliances have only infrequentlybeen compared as substitutes. While there aremany differences in practice between M&As andalliances on such dimensions as size, industry,relatedness, riskiness, length of time, degree ofintegration, scope of overlap (whole versus partof the organization), and structural possibilities,the only fundamental difference concerns own-ership, since a merger or acquisition implies acontrolling ownership interest whereas an alli-ance or joint venture does not. There are largealliances and small acquisitions. There are re-lated alliances and diversifying M&As. Some-times, M&As can become alliances (and viceversa) through small changes in ownership.This suggests that the two types of deals cansubstitute for each other over some range ofactivity (Dyer, Kale, & Singh, 2004; Sawler, 2005).

Our concern is how industry-level factors in-fluence the choice of whether to merge or ally.There have been relatively few studies on theeffects of the industry environment on M&Asand alliances. The few studies at the industry

We greatly appreciate the helpful comments of formerassociate editor Anand Swaminathan and the anonymousreviewers. In developing this research, we benefited fromdiscussions with Don Palmer. We presented an earlier ver-sion of this paper at the annual meeting of the Academy ofManagement in Seattle, 2003.

� Academy of Management Review2008, Vol. 33, No. 2, 473–491.

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level of analysis have examined the effects ofresource dependence (Pfeffer, 1972), industryconcentration (Pfeffer & Salancik, 1978), marketpower (Burt, 1980; Galbraith & Stiles, 1984), in-dustry profitability (Christensen & Montgomery,1981; Park, 2003), and industry constraints(Palmer, Barber, Zhou, & Soysal, 1995) on mergerbehaviors (Finkelstein, 1997). Such factors as en-vironmental uncertainty (Dickson & Weaver,1997), technological complexity and volatility(Hagedoorn, 1993), industry growth (Devlin &Bleackley, 1988; Dickson & Weaver, 1997), anddemands for internationalization (Dickson &Weaver, 1997) have been identified as correlatesof alliances.

We propose that industry environment signif-icantly shapes how these decisions are made.Industry focuses the attention of managers onenduring patterns of behaviors across firms. In-dustry effects are persistent, relative to businessor corporate-parent effects (McGahan & Porter,1997). Persistent interindustry relationships alsohelp predict M&A activity (Finkelstein, 1997;Pfeffer, 1972). In addition, there is evidence thatfirms are constrained by the competitive dynam-ics (Aldrich, 1979; Scherer, 1980) and culturalnorms of their industries (Hirsch, 1985; Shear-man & Burrell, 1987).

Industry conditions shape decision contentas well. M&A and alliance decisions are com-plex and unusual (Peteraf & Shanley, 1997), withan informational context characterized by in-complete information, agency problems, rapidchange, and time pressures (Duhaime &Schwenk, 1985). This suggests that the presenceof standard industry practices, common regula-tory burdens, and shared values and normswork to reduce uncertainty and shape the con-tent of firms’ decisions (North, 2005). The featuresof a firm’s strategy often depend on industry/market characteristics, such as scale, scope, ordifferentiated demand (Shamsie, 2003).

We are interested in the effects of industryenvironment on the choice of M&As and alli-ances. We examine three dimensions of industryenvironment. The first concerns industry re-quirements for commitment. The second con-cerns the environmental pressures for flexibil-ity. The third dimension concerns the extent towhich firms’ choices are constrained by industryconcentration, regulatory, and other institu-tional forces.

LITERATURE REVIEW

Numerous explanations have been offered forM&As and alliances, including scale/scopeeconomies, resource dependence, transactioncosts, institutional pressures, network effects,and organizational learning (Gulati, 1998;Palmer & Barber, 2001; Salter & Weinhold, 1978).To address whether combinations are best orga-nized as M&As or alliances, researchers haveused resource dependence theory, transactioncost economics, industrial organizational (IO)theory, and institutional theory.

Resource Dependence and Transaction Costs

Resource dependence theory (Pfeffer & Salan-cik, 1978) and transaction cost economics (Wil-liamson, 1985) address why firms might chooseM&As or alliances rather than open markettransactions. Resource dependence theorists ar-gue that firms manage interdependence withother actors by reducing their dependence onothers while increasing others’ dependence onthem (Oliver, 1991; Pfeffer & Salancik, 1978). Thechoice of a governance arrangement (M&A oralliance) depends on how much control isneeded. M&A will be more likely the more con-trol over a partner is needed, such as controlover critical suppliers or buyers (Finkelstein,1997; Pfeffer, 1972). Transaction cost theorists ar-gue that the choice of M&As versus alliancesresults from a need to decrease the effects ofenvironmental uncertainty on a transaction, es-pecially effects stemming from the opportunismof partners due to market imperfections. In rel-atively efficient markets and absent asset spec-ificity, neither M&As nor alliances are needed.When market imperfections raise the costs oftransactions, alternatives to market transac-tions must be considered, including M&As andalliances (Williamson, 1985).

These theories have similar implications.Firms become vulnerable as they engage inasymmetric exchanges and come to depend onpartners for resources and services. This placesthem at risk of renegotiation or holdup by part-ners, who thus gain power. Factor market imper-fections give some firms power over others. Toreduce their vulnerabilities, firms engage innonmarket linkages ranging from long-termcontracts to M&As (Joskow & Schmalensee, 1988;Pfeffer, 1972; Williamson, 1975). These are often

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coupled with efforts to achieve scale or scopeeconomies (Williamson, 1985). These argumentshave received consistent research support at theindustry level regarding M&As (Burt, 1980;Finkelstein, 1997; Palmer & Barber, 2001; Pfeffer,1972; Pfeffer & Salancik, 1978).

Resource dependence and transaction cost ex-planations have also been applied to alliances(Hagedoorn, 1993; Pfeffer & Nowak, 1976). Alli-ances help firms reduce dependencies. Alli-ances have greater flexibility and the options toscale up or scale down the investment, depend-ing on the initial results of the collaboration.However, they provide less control over jointresources than do M&As. This creates gover-nance problems, since partners must cooperateto obtain performance benefits. These problemsincrease with alliance size and complexity, es-pecially when new governance structures areneeded for joint entities (Nooteboom, 1999).

Resource dependence and transaction costtheories are applicable at the industry level aswell (Davis & Powell, 1992; Finkelstein, 1997).This assumes that “the exchange patterns of themerging firms are reflected in the average of allfirms” (Pfeffer & Salancik, 1978: 116). We arguethat most firms in a given industry will be sub-ject to similar technological requirements andmarket dynamics. While these theories are firmlevel, it is not implausible to expect that firmswill look to firms in similar situations for guid-ance on complex decisions. Cross-industrymerger waves have proven difficult to explainwith firm-specific theories (Peteraf & Shanley,1997), since firms in one industry may have trou-ble learning from the experiences of firms fac-ing very different problems in unrelated indus-tries. However, firms within the same industrycan relate to common problems and situations,and industry proclivities toward homogenousstrategic changes are more understandable (Ar-mour & Teece, 1978).

There may, of course, be situations where theindustry in question is heterogeneous in the de-mands placed on firms. This would occur, forexample, in industries with highly articulatedniche structures or where there are significantstrategic groups (Dranove, Peteraf, & Shanley,1998). In such settings, it might be added, therecould be considerable disagreement regardingthe most appropriate industry definition. None-theless, we believe that an industry-level ap-proach to resource dependence theory and

transaction cost economics is useful as a start-ing point for understanding firm choices regard-ing M&As or alliances.

The choice of M&As versus alliances involvesa cost-benefit analysis of the relative trade-offsof commitment and flexibility. Commitmentbrings great benefits to firms (Ghemawat, 1991),but it does so at a cost, in terms of both theinvestment itself and the potential for loss offoregone opportunities due to inflexibility. Thesame comparison can be made regarding flexi-bility, in that more flexible arrangements allowfirms to take advantage of changed circum-stances, but at the cost of less capability to in-tensively exploit an opportunity. M&A possibil-ities in a situation can be compared withalliance possibilities to see if the net gain forone, in terms of benefits net of costs, is largerthan the net gain for the other. M&As involvegreater commitment but less flexibility than al-liances. Alliances might be preferred in indus-tries that do not require large investments orthat undergo such unpredictable periods ofchanges that large investments are too risky. Inthe first situation, interfirm cooperation can beachieved without the costs of M&As. In the sec-ond, M&A-related investments risk prematureobsolescence because of rapid industry change,making alliances relatively more desirable.

The Role of Industry Constraints:Concentration and Institutional Influences

The discussion so far has concerned decisionsmade by firms regarding their critical invest-ments in linking with other firms. Also of inter-est are the industry constraints that firms aresubject to when making their decisions. In mostcases, firm choices are understandable in termsof the common situations faced by industry par-ticipants. Firms will choose based on the indus-try requirements for commitment or flexibility,and firms in the same industry will tend tochoose similarly. In some industry contexts,however, firms may not have a full array ofchoices open to them. For example, M&As aremore likely where there are relatively largenumbers of firms competing and, thus, numer-ous potential partners. Where there are only afew large incumbents, there will be fewer poten-tial partners, and coming to a deal may be moredifficult. This aspect of industry constraints,concerning the number, size, and distribution of

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competitors, has been covered in studies of in-dustry concentration.

There is more to industry constraints than con-centration. Sociologists consider constraints byfocusing on rules and regulations governing anindustry, informal behavioral norms amongcompetitors, and other factors that establish andmaintain order, such as status, imitation, andreputation.

Industry structure. The IO literature suggeststhat industry structure determines firm conduct(Bain, 1968; Scherer, 1980). Many studies haveexamined the effects of structure on conduct andperformance. Concentration, for example, is oneof the most important market structure variables(Bain, 1951; Schmalensee, 1989). Industry concen-tration is the “combined market share of the’leading firms’” (Shepherd, 1979: 180). With highlevels of concentration, the expectation is thatleading firms will be able to coordinate theiractivities, especially pricing and output. Withlower levels of concentration, the expectation isthat the industry will be characterized by rela-tively autonomous and competitive firm behav-ior, leaving interfirm coordination of pricing andoutput sporadic and weak (Shepherd, 1979: 63–64).

Mergers, alliances, and concentration aremost commonly linked in the IO literature interms of the potential for collusion. When thereare fewer firms in an industry, it becomes easierfor incumbents to coordinate their pricing activ-ity to limit rivalry. Weiss (1989) reviewed twentyindustry studies and found that prices tended tobe higher in more concentrated markets. Thissort of collusion is often illegal, and, thus, merg-ers prompting greatly increased concentrationwill receive greater antitrust scrutiny for theirpotential anticompetitive issues. In more con-centrated industries, M&As are more difficultand costly to implement, and firms are morelikely to pursue alliances.

Overall, the IO literature shows the linkagebetween industry concentration and the inci-dence of mergers. Its particular lines of researchconcerning collusion and antitrust show howthe constraining influence of concentration mayaffect firms’ decisions to merge versus ally.

Institutional influences. Institutional theoristsargue that firms operate in a socially organizedenvironment. The factors that help to organizethe industry include collectively held frame-works of beliefs about how an industry or sector

operates, norms and rules that define the legit-imate forms of corporate behavior and sanctionsfor their violations, and common values regard-ing important and appropriate behaviors andoutcomes (Scott, 2001).

Conformity with institutional values, rules,and norms provides benefits to firms. Institu-tional frameworks simplify decision making byavoiding disputes or limiting the set of choicesthat are appropriate in a situation. Conformitywith institutional constraints also limits thestress of risky decisions by legitimating them.When there is substantial ambiguity regardingtechnological opportunities, industry change, orother factors, group-level learning processeswill be important influences on actors. For ex-ample, firms facing risky decisions without aclear basis for choosing between alternativesmay resolve their uncertainty by consideringwhat other firms in their industry have done(Peteraf & Shanley, 1997).

Industry provides a natural basis for socialcomparisons among managers and is likely tobe a focus for regulatory agencies (Fligstein,1990; Fligstein & Brantley, 1992; Haunschild,1993; Haunschild & Beckman, 1998; Hirsch, 1986).Firms will tend to be influenced by the sharedexperiences of others in the industry (Hambrick,1982; Huff, 1982), leading them to develop normsregarding appropriate behaviors (Spender,1987).

Institutional influences work to simplify theindustry environment and render it more regularand predictable (DiMaggio & Powell, 1983).While their ultimate effect may be to reduceindustry uncertainty, the direct effect of institu-tional influences may well be to make the envi-ronment more complex and constraining, espe-cially in times of change (North, 2005: 13–19). Forexample, if the added costs of regulatory com-pliance associated with a merger are too high, afirm may choose not to pursue the merger, evenif the business case for the combination waspromising.

How will incorporating economic and socio-logical perspectives on industry constraints af-fect our understanding of the choice betweenM&As and alliances? Institutional influencesmay be broadly linked to the underlying techno-logical and economic conditions in an industry(Scott, 1994). For example, it is likely that thelevel of industry concentration will be associ-ated with the institutional influences. The pat-


terns of norms and behaviors that developamong a few large competitors will be differentfrom those that develop among a larger numberof smaller competitors with more limited marketpower. Given the market power of larger com-petitors, it is also likely that regulatory regimeswill differ depending on the level of concentra-tion. These two aspects of industry constraintwill thus have a similar influence on the choiceof M&A versus alliance. As the industry contextbecomes more constrained, either through con-centration or through the proliferation of institu-tional forces, firms will be more likely to choosealliances over M&As. We develop these ideasfurther in the remainder of the paper.

M&A OR ALLIANCE?

The choice that a firm makes between M&Aand alliance involves balancing requirementsfor commitment with requirements for flexibil-ity. This balancing of commitment and flexibil-ity is subject to the further constraints of theindustry structure and institutional forces. Wepresent a framework based on these three di-mensions that provides the basis for a set ofresearch propositions.

M&As differ fundamentally from alliancesonly in degree of ownership, in that a merger oracquisition implies a majority or controlling in-terest whereas an alliance does not. While theremay be other factors that correlate more withM&As than with alliances, it is this differencethat is fundamental. This suggests that M&Aswill be preferred where unified ownership andcontrol rights permit more thorough exploitationof combined organizational resources thanwould be possible otherwise. This exploitation,however, comes at the cost of greater invest-ments—of physical, human, and intangible re-sources—and increased governance costs. Alli-ances generally do not permit as intensiveexploitation of joint assets as do M&As, but theyare easier to exit if necessary. Alliances alsowill be preferred where continuing cooperationamong partners is beneficial and where central-ized control could harm cooperation and destroya combination’s value.

For many transactions, it may not be clearwhether the centralized control of M&A is pref-erable to the flexibility and decentralized con-trol of an alliance, and the two could be viewedas substitutes. For example, a large alliance

may begin with multiple partners who discover,through experience, that centralized control andunified ownership are required for the combina-tion to be successful. Once enough partnershave exited, the alliance has become a mergedfirm. The reverse might also occur, as a firmcreated out of M&A breaks into separate butcooperating units. There have been few studiesto date assessing these transactions as substi-tutes (Dyer et al., 2004; Hagedoorn & Duysters,2002; Hennart, 1988; Robinson, in press; Sawler2005; Villalonga & McGahan, 2005; Wang &Zajac, 2007).

Hennart (1988) used transaction cost argu-ments to explain the choice between joint ven-tures and acquisitions. He argued that joint ven-tures are used to reduce management costs andshould be chosen over acquisitions if the de-sired assets each party needs are firm specificand only a subset of those held by its partner.The cost of acquisitions would be particularlyhigh in these circumstances and would behigher for large or extremely diverse targets. Inthese situations, purchasing the whole firmwould commit the acquirer to enter unrelatedfields or to suddenly expand in size, posingmanagement challenges for the acquirer inde-pendent of the immediate logic of the combina-tion. Joint ventures permit managers to avoidthese problems. In such circumstances, firmswill prefer the lower costs of sharing power inan alliance to the higher costs of ownershipthrough M&A. The relative size of the assetsdesired by each party is critical here. Firms willhave more at risk in collaborating with otherfirms when the assets involved are a substantialportion of those held by each partner. Undersuch circumstances, if there is substantialcausal ambiguity (Rumelt, 1984) about the coreresources, M&As will be preferable to alliances.

Hagedoorn and Duysters (2002) studied howenvironmental conditions and firm-specific con-ditions (i.e., appropriability and routines) influ-ence preferences for M&As or alliances. In high-tech environments requiring learning andflexibility, alliances are preferred as vehiclesfor acquiring innovative capabilities. In low-tech sectors with less technological change,M&As are preferred for acquiring innovative ca-pabilities. These results suggest that firms needto maintain flexibility in uncertain industry en-vironments with the more flexible organization-al arrangements provided by alliances.


Robinson (in press) sees an alliance as thechoice to alleviate agency problems brought onwhen target businesses are significantly riskierthan those of the acquirer. In such conditions,parent firm managers can underinvest in under-dog projects in the target to ensure their individ-ual performance results. This leads to agencyproblems, since managerial imperatives toachieve budget objectives override the strategicobjectives behind a deal. Governance by M&Asin such a setting may actually promote dysfunc-tional decision making in the combined firmbecause of perverse incentives. Alliances forceparent firm managers to commit investment andother support to the venture. The contractualnature of alliances is a sounder way to ensurepostcombination compliance than a bureau-cratic regime in which premerger promises maynot be fulfilled. Robinson’s results suggest thatalliances are preferred in high-growth, risky,and research-intensive industries.

Villalonga and McGahan (2005) studied thechoices among acquisitions, alliances, and di-vestures made by eighty-six Fortune 100 firmsbetween 1990 and 2000. They studied the impactof firm attributes, target/partner attributes, andtransaction attributes on the choice of differentgovernance forms. The authors found support forresource explanations—namely, that the targetor partner’s technological resources are associ-ated with the focal firm’s choice of acquisitionsover alliances. Study results also suggest theimportance of organizational learning explana-tions. A focal firm’s acquisition experience isassociated with the choice of acquisitions. Thenumber of prior alliances between the focal firmand the target also is positively associated withthe choice of alliances.

Dyer et al. (2004) developed a framework tohelp executives decide whether they should allywith or acquire potential partners. Their frame-work suggests that executives must analyzethree sets of factors before choosing betweenM&As and alliances: the resources and syner-gies they desire, the marketplace they competein, and their competencies at collaborating. Itsuggests that acquisitions are preferable to al-liances when firms intend to combine tangibleresources, such as manufacturing plants. If com-panies plan to generate synergies by combininghuman and intangible resources, then alliancesare preferable to M&As. When market uncer-tainty is high, firms should choose alliances to

limit their exposure while maintaining the op-tion to acquire if collaboration yields favorableresults.

An Industry Framework for M&A versusAlliance Choice

How does a firm’s industry environment facil-itate the choice of M&A versus alliance? Webelieve that three dimensions are influential.The first concerns the degree to which the indus-try context places demands on firms to makecommitments to a given strategic position. Thesecond concerns the degree of environmentaluncertainty firms face regarding likely paths ofindustry evolution, the riskiness of investments,technological uncertainty, and other factors. Thethird dimension concerns the degree of con-straint placed on industry participants by suchfactors as industry structure, regulatory re-gimes, and other institutional forces.

Requirements for commitment. Industry re-quirements for strategic commitments are theexogenous demands for investment that mostfirms in an industry need to meet in order tosucceed— common requirements for success.These requirements may concern the scale andscope of operations, expressed in such ideas as“minimum efficient scale” (MES). They also canrefer to the general levels of investment and thetypes of “asset specificity” (Williamson, 1985)common in the industry, including investmentsin specialized human assets or in intangibleassets, such as reputation and brand equity.These requirements also include investments ingovernance mechanisms, such as dual sourcingand other risk-sharing arrangements that aremade to reduce transaction cost risks.

Identifying a single dimension of industrycommitment is complex. Commitment involvestwo industry characteristics that imperfectlyparallel each other: scale/scope requirementsand asset specificity. Commitment certainly in-volves scale and scope requirements common inan industry. Highly capital-intensive indus-tries—for example, steel and autos—would cer-tainly qualify as high-commitment industries,since large amounts of productive assets mustbe deployed as a basis for competing. Commit-ment requirements, however, also concern assetspecificity, by which we mean the degree thatassets can be efficiently redeployed if their ini-tial uses prove infeasible (Teece, 1980, 1982). In-


dustries characterized by high asset specificityimpose commitment requirements on incum-bents, since once these assets have been de-ployed, they are costly to redeploy.

Scale/scope requirements and asset specific-ity are related, in that one refers to the volume ofassets committed and the other to the sunkness(Sutton, 1991) or “stickiness” (Ghemawat, 1991) ofthose assets. We expect that large-scale assetswill often involve considerable sunkness andthat small-scale assets will be more fungible.However, the association between these two as-pects of commitment is not a perfect one. Someassets, such as commercial airplanes, havecharacteristics conducive to scale and scopeeconomies but can be easily redeployed or evensold if their initial use, such as in new marketentry, proves unsuccessful. This is at the heart ofthe “contestable market” hypothesis developedby Baumol, Panzar, and Willig (1982). Other as-sets, such as specialized human assets inknowledge-intensive industries, may have highlevels of asset specificity and yet not be associ-ated with scale and scope requirements, sincefirms are not able to own and exploit humanassets as they can their physical capital. Thus,while we are generally associating scale/scopeand asset specificity, there are also midrangeindustry situations where the analysis of com-mitment is more complex.

The greater the requirements for commitment,the more likely it is that firms will pursue inter-firm collaborations through M&As. Firms inthese industries generally will produce at highvolumes and use significant specific assets.This means that the firms will have more to gainby scaling up their production and distributionvia mergers. They will have more at risk in col-laborating with other firms, especially wheresignificant relationship-specific assets are in-volved. This leads to an interest in greater con-trol, which is consistent with the predictions ofresource dependence and transaction cost theo-ries and suggests a preference for M&As overalliances. In industries with high commitmentrequirements, firms will wish to exercise controlthrough M&As.

How do the exceptions mentioned above re-late to this general logic? The exception regard-ing fungible assets with scale/scope potentialargues against our logic, provided there are noother bases for required sunk investments in anindustry. For example, in the airline industry

there are considerable scale economies associ-ated with the operation of commercial airlinersat full capacity. However, airliners can be easilyredeployed from unprofitable local routes toprofitable ones and can even be shifted fromcommercial to private or charter use. The fungi-ble nature of airliners would not by itself arguefor extensive merger activity. The evolution ofthe U.S. airline industry, however, was depen-dent on investments besides those in airliners,and many of these investments involved largespecialized assets. Examples of these includeinvestments in central hub facilities, specializedbaggage handling equipment, computerizedreservation services, local advertising, andhigh-volume maintenance facilities (Peteraf,1995; Peteraf & Reed, 1994). As the industryevolved in a “hub and spoke model” after dereg-ulation in 1978, it was these latter sets of sunkinvestments that arguably drove the extensiveM&A activity witnessed in the industry.

A second exception concerns the role of spe-cialized human assets in knowledge-intensiveindustries. While investments in generalizedhuman resources can be associated with signif-icant scale commitments, specialized human re-source investments, while often substantial, donot involve the same commitments. Specializedhuman resources—for example, expert re-searchers—can often move freely from firm tofirm and across industries. M&A transactionswhose value is predicated on combining spe-cialized human resources are especially vulner-able to the exit of key staff during integration.

The biotechnology industry is characterizedby smaller firms and relatively fewer M&Asthan alliances. This is due, in part, to the impor-tance of the specialized expertise of particularresearchers or research groups, coupled withthe difficulties of integrating such individuals orgroups into larger firms. Where specialized ex-pertise is a key objective, an acquirer will havedifficulties accessing the expertise of key indi-viduals and will risk their exit if those individ-uals become dissatisfied, thus placing the valueof the merger in peril. This suggests alliances asmore appropriate vehicles (Dyer et al., 2004).

Requirements for flexibility. Environmentaluncertainty refers to the clarity and predictabil-ity of the premises of industry incumbents. It hasbeen viewed as the most relevant environmen-tal characteristic affecting firms’ strategic deci-sion making (Dess & Beard, 1984; Emery & Trist,


1965; Lawrence & Lorsch, 1967). This uncertaintyis multidimensional: technologies and productsmay change, market acceptance of a productline may be unclear, and new products mayhave an impact on future industry operations.While any industry will be associated withsome uncertainty, high uncertainty implies thepossibility that the environment of an interfirmcollaboration may change enough that the fun-damental assumptions of that collaboration arechallenged or rendered obsolete. Such a changewould place the value of the entire collaborationin jeopardy.

Uncertainty has been linked to increased co-operation between firms (Daft & Lewin, 1993;Devlin & Bleackley, 1988; Dickson & Weaver,1997). When environmental forces create greaterturbulence, there is a greater need for interor-ganizational connections (Daft & Lewin, 1993).Industry participants, when choosing amongdifferent modes of interfirm linkages, will at-tempt to maintain their flexibility and avoidcommitments that would be put at risk by un-foreseen changes. Dickson and Weaver (1997)found that managerial perceptions of generaluncertainty, technological demands and volatil-ity, and demands for internationalization all in-creased the likelihood that firms would choosealliances. They found that perceived reductionsin uncertainty were associated with decreasedinterest in alliances. Other studies suggest thathigh uncertainty is associated with alliancesamong high-technology firms (Li & Atuahene-Gima, 2002; Shan, 1990).

Structural and institutional constraints. Theimplication of our first two dimensions is thatfirms will choose between M&As and alliancesbased primarily on requirements for commit-ment or flexibility. Firms often must also con-sider the reactions of their competitors, govern-ment regulators, and other stakeholders to theirchoices. In addition, firms tend to seek legiti-macy for their actions and, thus, tend to complywith implicit and explicit norms of industry be-havior, which might lead them to one choiceover another. This requirement to consider in-dustry constraints is different from firms’ need toconsider commitment or flexibility require-ments. It is a more general moderating conditionthat indirectly influences the merge versus allydecision by affecting the choices open to firms.

Our third dimension—structural and institu-tional constraints—concerns the limitations on

firm choices that stem from industry concentra-tion or institutional forces. For example, in moreconcentrated industries, acquisition options arescarcer and more costly. Moreover, competitorscan clearly observe an interfirm collaborationand respond to it such that the value of thecollaboration must account not only for its directcosts and benefits but also for the indirect costsof competitor responses.

By “institutional constraints,” we mean theimplicit and explicit social and regulatory or-ders governing industry participants. Theseconstraints come from the activities of govern-mental agencies, professional and industry as-sociations, and the broader social networks inwhich firms are embedded (Scott, 2001). Institu-tional constraints are not just regulatory de-mands and coercive pressures, however; theycan also involve more general demands onfirms to imitate industry leaders or other domi-nant firms. Firms care about their reputationsand their identities as well (Albert & Whetton,1985; Dutton & Dukerich, 1991; Fombrun & Shan-ley, 1990). They can gain reputation and statusby an extensive program of M&As (Peteraf &Shanley, 1997). Firms that are acquired ormerged often end up losing their identities alto-gether, as happened to Compaq, Amoco, andBank One. Industry demands for legitimacy, sta-tus, reputation, and identity can influence firmdecisions in directions different from those sug-gested by requirements for commitment andflexibility.

Certain institutional forces, such as the workof regulatory agencies enforcing rules backedby strong sanctions, may have a very distinctinfluence on firms’ choices of M&As versus alli-ances. Specifically, as regulatory scrutiny in-creases, firms tend to choose alliances becauseof the increased costs of regulatory complianceassociated with mergers. Other institutionalforces, such as the pressure to imitate high-status firms and the need to maintain legiti-macy and reputation, however, do not imply aspecific preference for M&As or alliances. In-stead, pressures for imitation and legitimacyimply a limitation on firm choices such that in-dustries characterized by M&As or alliances inthe past are likely to be similarly characterizedin the future.

We focus on the regulatory regimes and gov-ernment mandates for an industry when study-ing the constraining role of institutional forces


in firms’ decisions to merge or ally. The level ofregulatory scrutiny is broadly linked to the de-gree of industry concentration. We expect struc-tural and institutional constraints to influencefirm decisions when they are pronounced, suchas when an industry is significantly concen-trated, when it is subject to extensive regulatoryscrutiny, or both. Under high levels of structuraland institutional constraints, firms will be morelikely to choose alliances rather than M&As. Formedium or low levels of structural and institu-tional constraints, we are not expecting a dis-tinct influence for this dimension. Instead, thedecisions of firms regarding M&As versus alli-ances would be the same as those predicted byrequirements for commitment and flexibilitywithout reference to industry constraints.

An exception to our general predictions re-garding industry constraints is when there is nodominant influence of either commitment orflexibility requirements. In such a situation, weexpect that firms will decide between M&As andalliances based on the choices of other elite andhigh-status firms in the industry. Uncertaintyencourages imitation (DiMaggio & Powell, 1983),and firms will tend to model themselves onother organizations when there is significant

ambiguity regarding the merge versus ally de-cision.

Conceptual Framework

These three dimensions are represented inFigure 1, using a simple low/high distinction foreach dimension. The resulting 2 � 2 � 2 matrixsuggests eight situations in which the relativedesirability of M&A versus alliance may be as-sessed. Figure 1 provides the bases for the spe-cific propositions presented in the remainder ofthe paper.

Cell 1 represents a situation characterized bylow needs for flexibility, low requirements forcommitment, and low structural and institu-tional constraints. This condition is akin to thatof a competitive market. The economic conceptof a “perfectly competitive market” is an ex-treme example (Besanko, Dranove, Shanley, &Schaefer, 2003). In this context firms are unableto gain a sustainable competitive advantageand generally display “price-taking” behaviors.Firms in these industries will not possess sig-nificant strategic assets as a basis for competi-tion. The cell represents a context in which nei-ther M&As nor alliances are likely to create

FIGURE 1Typology of Industry Contexts


significant and sustainable advantage becauseof the fragmentation of the market and the factthat industry participants are not called on tomake strategic commitments or to adapt to un-certainties in the environment as a condition forsuccess. While both M&As and alliances canoccur in such situations, neither is preferable tomarket transactions, which are less expensive.

Cell 2 represents similar conditions to Cell 1in terms of low needs for flexibility and lowrequirements for commitment, with the excep-tion of a high degree of structural and institu-tional constraints. Such a condition might ariseout of first mover advantages, status or prestigedifferences among firms, location advantages,and restrictive entry regulation. In this situationM&As would not create significant advantage.Alliances, however, may be a preferred mode ofcollaboration to access reputation, location ad-vantage, or any other advantage to be obtainedfrom the structural and institutional context ofthe industry. Examples of industries in this cellinclude localized professional services busi-nesses, such as real estate brokers, booksellers,and dry cleaners, where product and servicequality, personal attention, and reputation arevaluable and customers are less willing to shoparound for additional providers once an accept-able seller has been identified.

For these sorts of businesses, industry con-straints may be important, even in the absenceof large scale or scope. Among these firms, per-sistent cooperative relationships, sometimes ofa systematic nature, are common. Real estatebrokers make agreements to share listings andsplit fees. Local bookstores often cooperate insponsoring special events to attract customers.Dry cleaners develop arrangements for sharingcapacity in busy times. These are similar towhat Phillips (1960) calls “linked oligopolies.”

Cell 3 represents an industry setting charac-terized by high needs for flexibility, low require-ments for commitment, and low structural andinstitutional constraints. This is a situationwhere value is obtained from investments in theindustry, although the best ways to exploitvalue creation opportunities are unclear, andinvestments, while entailing some risk, are nottoo substantial. In such situations interfirm col-laborations to manage industry uncertaintiesmay prove valuable, even though participatingfirms are not called on to make significant stra-tegic commitments and the industry is frag-

mented. Interfirm collaborations will be smaller,more exploratory, and more cooperative in na-ture. Flexibility will be desirable to accommo-date unexpected industry developments. Wewould expect more alliances than M&As in sucha setting.

Research-intensive, knowledge-based indus-tries, such as biotechnology, provide examplesfor this cell. In the biotechnology industry thereare numerous firms, most of them small. Al-though biotech firms make commitments in as-sembling and equipping their research teams,these commitments are small relative to those inother research-driven industries, such as semi-conductors and pharmaceuticals. The state ofknowledge in biotechnology changes rapidly,and biotech firms need to be flexible. Efforts toexploit scale and scope economies in biotech-nology have not been as successful as they havebeen in related industries, such as pharmaceu-ticals (Dyer et al., 2004). Not surprisingly, alli-ances have been more common than M&As.

Cell 4 represents conditions similar to those incell 3, with the exception of a high level of struc-tural and institutional constraints. This situa-tion might result from a heavy emphasis on in-novation and adaptation by industry members,with industry structure determined by the pres-tige or status of established firms or their trackrecords at innovating. Firms in these industriesneed to invest to gain a favorable market posi-tion, but the investments are likely to be smallerin scale and more adaptable than traditionalinvestments in scale- and scope-related capa-bilities. Examples include investments in spe-cialized human assets or in dynamic capabili-ties (Teece, Pisano, & Shuen, 1997).

We would expect more alliances than M&Asin these industries to maintain flexibility whenfacing industry changes. High industry uncer-tainty focuses the attention of firms on the needfor redeployable assets and the avoidance ofsignificant commitments. It also focuses the at-tention of firms on those practices and productsthat have succeeded in the past. This impliesthat status based on past performance is anasset in selecting partners for future alliances.Status and reputation become vehicles to betterinform potential partners about a firm’s capabil-ities and mitigate the risks and uncertaintiesinvolved in an association.

The venture capital industry provides an ex-ample for this cell. There are large numbers of


firms participating. These firms are generallysmall, and there is high turnover of industryparticipants. While the industry is not highlyconcentrated, there is evidence of clear statusordering among firms in the industry, based ontheir track records of backing successful ven-tures. At the threshold of innovation, venturecapital firms face extraordinary uncertainty andneed to constantly adjust to technological andeconomic changes. Venture capital firms oftencollaborate to share risks and enhance prestigethrough association with higher-status peers.

Cell 5 represents an industry context charac-terized by low needs for flexibility, high require-ments for commitment, and low structural andinstitutional constraints. While any industry un-dergoes change, low uncertainty here impliesthat the basic premises of the industry, in termsof its products, technology, distribution, and cus-tomers, are relatively stable. Firms in these set-tings can assume sufficient industry continuityto permit substantial commitments. There mayeven be opportunities for scale and scope econ-omies that have not been exploited by industryincumbents.

High commitment requirements here meanthat firms must make significant investmentsthat are costly to reverse as a condition of com-peting. This suggests that firms in these settingswill attempt to exploit scale and scope econo-mies. Flexibility and fluidity will not be as nec-essary in such situations. The assumed lowlevel of structural and institutional constraintssuggests that firms will tend not to be deterredfrom making necessary commitments on the ba-sis of market power considerations or institu-tional restrictions. In such a situation, we wouldexpect more M&As relative to alliances.

This situation is relevant for industries withcommodity-type products, such as agriculturalwholesalers and marketers. Firms such asCargill and ADM are examples. These indus-tries are characterized by fairly stable marketdemand and predictable technological ad-vancement. While there are many smaller firmsin these businesses, there is also potential forconsiderable scale and scope economies, espe-cially among industry leaders. Most of theseindustries are sufficiently large and global inscope that there are few problems with exces-sive concentration or with antitrust regulation.Price competition is significant, and cost advan-tages are important for achieving competitive

advantage. We expect M&As to be more preva-lent here than alliances because of the impor-tance of scale and scope.

Cell 6 represents similar conditions to those incell 5, with the exception of a high level of struc-tural and institutional constraints. This impliesthat there may be limitations on the ability offirms to link with other firms via M&As. Thehigher the level of structural and institutionalconstraints, the more likely that scale and scopeeconomies in the industry are present but al-ready being exploited. Furthermore, powerfulindustry leaders could possibly increase thecosts of M&As by tacit collusion or other cooper-ative interactions. In an industry that is highlyconcentrated and regulated, the potential anti-competitive effects of further concentration mayprompt regulators to increase their scrutiny andraise the costs of M&As over what they would bein more competitive and less constrained mar-kets. We expect alliances to be more likely thanM&As in these conditions because of the in-creased costs associated with M&As.

Examples for this cell would include tradi-tional, mature manufacturing industries, suchas steel and heavy metals, automobiles, andtobacco. These industries are highly concen-trated and regulated. Most scale and scope op-portunities are already exploited by incumbentfirms. The gains from industry consolidationthat motivate M&A activity are less likely tooccur in these industries. As a result, alliancesare more prevalent.

Cell 7 represents an industry context of highneeds for flexibility, high demands for strategiccommitments, and a low degree of structuraland institutional constraints. This could happenin an established capital-intensive industry inwhich innovation and new product developmentare important and where the industry is under-going an external shock because of deregula-tion or significant foreign entry. A newly dereg-ulated or expanded market would allow scaleand scope economies to be exploited. Firms par-ticipating in such a context will need flexibilitybut will also need to make significant invest-ments to exploit scale and scope opportunities.

This context places conflicting demands onfirms, leading to the expectation that both M&Asand alliances could be employed in such a set-ting. We expect that when firms face conflictingdemands between the needs for commitmentand the needs for flexibility, they will look to


other firms as a basis for making a decision.Industry-wide practices and institutional ruleswill therefore be relevant here. We expect thatfirms will tend to follow institutional cues re-garding the choice of M&As and alliances bywatching what other firms do, especially highlyvisible ones, and imitating their choices.

Examples for this cell include such industriesas entertainment and motion pictures. In the setof industries generally related to entertain-ment, there has been very substantial change,including deregulation, technological innova-tion, and diversification across traditional in-dustry boundaries (Fombrun & Astley, 1982). Theeffect of these changes has been to create alarge entertainment sector that has a strong po-tential for scale and scope economies, is subjectto almost continuous change, and lacks bothsignificant economic concentration and a uni-fied institutional framework. There have beensignificant mergers among these firms, withTimeWarner being an example of a large enter-tainment conglomerate. There are possibly evenmore alliances in this domain, however, asprojects and deals come and go. The clearestexample of the importance of alliances is in theincreasing dominance of small movie produc-tion companies that form and reform new asso-ciations with dozens of partners on each majorfilm project.

Cell 8 represents conditions similar to those incell 7, with the exception of a high level of struc-tural and institutional constraints. The couplingof high commitment needs, high flexibilityneeds, and a high level of structural and insti-tutional constraints will raise the costs for firmsto commit significant assets via mergers. Givenour expectations for the equal likelihood ofM&As and alliances for Cell 7, the increase incosts associated with M&As because of the con-strained industry environment will shift the bal-ance of options to alliances and away fromM&As.

Examples for this cell include the semicon-ductor and pharmaceutical industries. Thesemiconductor industry is heavily concentrated.Even though it is highly innovative, it alsoplaces significant demands on participants forinvestments in scale-intensive facilities. Alli-ances to set up dedicated generic manufactur-ing facilities, or “fabs,” are common in the in-dustry. The pharmaceutical industry is alsocharacterized by needs for significant commit-

ments in scale-intensive capabilities, as well asneeds for significant flexibility given the impor-tance of research and development. The indus-try is also extensively regulated and concen-trated. While there have been some largemergers in the industry in recent years (e.g.,Pfizer acquired Pharmacia in 2003, and Sanofiacquired Aventis in 2004), the extent of allianceactivity in the industry is much larger. This isdue to such factors as regulatory scrutiny, needsfor partnering across geographic markets, andneeds for securing distribution capabilities.

RESEARCH PROPOSITIONS

To develop the intuitions behind the concep-tual framework, it is necessary to further specifydifferent industry conditions characterized bythe three dimensions of the typology in termsthat can, in principle, be measured and tested.In this section we present eight sets of proposi-tions (eleven in total). The first five concern dif-ferent types of industry characteristics, includ-ing capital intensiveness, specialized humanasset intensiveness, combined capital and spe-cialized human asset intensiveness, the impor-tance of tacit knowledge, and the level of tech-nological uncertainty. The next six propositionsconcern aspects of the structural and institu-tional constraints.

Requirements for Commitment: Main Effects

Capital intensiveness. Capital intensity refersto the amount of physical capital used to pro-duce a unit of output. Firms in capital-intensiveindustries will have higher fixed costs and re-quire greater economies of scale and scope tosucceed (Chandler, 1977, 1990). Interfirm collab-orations in these industries will require unifiedcontrol over the combined firm, especially inlarger transactions with expectations for econo-mies of scale and scope. This will increase thedesirability of M&As relative to alliances. Theseconsiderations suggest the following proposi-tion.

Proposition 1: M&As will be morelikely than alliances in capital-inten-sive industries.

Specialized human asset intensiveness. Notall value-creating investments are amenable tocontrol through ownership. Investments in spe-


cialized human assets are an example, since itis difficult to control critical employees as onewould control fixed assets, intellectual proper-ties, or patents. Employees are free to leave afirm, and firms must secure their cooperation iftheir specialized human assets are to be put towork. This makes specialized human assets adifferent situation from traditional settings oflabor intensiveness and traditional human re-sources, which suggests that firms in industrieshigh in specialized human assets will be morelikely to use alliances than M&As.

This intuition is true for specialized humanassets, even if there is substantial causal ambi-guity (Rumelt, 1984) of the core resources of po-tential partners. Causal ambiguity exists whenthe precise reasons for success or failure cannotbe determined and it is impossible to producean unambiguous list of the factors of production(Rumelt, 1984). When there is causal ambiguity,firms may prefer ownership through mergersover alliances in order to have more control ofthe combined resources. However, firms cannotown or control specialized human assets as theycan control fixed assets. Value from cooperationbased on specialized human assets requiresmore investment in people, more retention oftrained people, and more cooperation betweenfirms over new resources.

Interfirm collaborations through alliancesbased on specialized human assets will be moreflexible and less susceptible to exploitationthan linkages controlled through hierarchy, asin M&As. Meanwhile, it has long been recog-nized that M&As tend to create cultural clasheswhen they are implemented (Haspeslagh &Jemison, 1991; Zollo & Reuer, 2003), which, cou-pled with the difficulties of exploiting special-ized human assets through hierarchical con-trols, might increase the turnover of valuableemployees from the acquired firms.

Proposition 2: Alliances will be morelikely than M&As in industries charac-terized by a high level of specializedhuman asset intensiveness.

Capital and specialized human asset inten-siveness. What about industries with high lev-els of both capital intensiveness and special-ized human asset intensiveness? Firms in suchindustries will face conflicting influences. Cap-ital intensiveness will promote M&As, in whichmajor investments can be controlled and scale

economies can be exploited. Specialized humanasset intensiveness will be associated with agreater likelihood of alliances because of theneeds for cooperation and flexibility. In indus-tries with significant capital and specialized hu-man asset requirements, we expect that manag-ers will be tempted to pursue both M&As andalliances to improve their asset productivity.Trying to fashion cooperation that balances therequirements of capital and specialized humanassets intensiveness may prove difficult. Theuniform control needed to exploit scale andscope opportunities may work against the flex-ibility, cooperation, and skill sharing requiredfor joint R&D or new product development (Paut-ler, 2003). These considerations suggest the fol-lowing proposition.

Proposition 3: M&As and alliances willbe equally likely in industries charac-terized by high levels of capital inten-siveness and specialized human assetintensiveness.

Tacit knowledge. Tacit knowledge is knowl-edge that is difficult to articulate and communi-cate and that often requires face-to-face contactfor effective transfer (Teece, 2000: 13). Tacitknowledge is also associated with ideas ofcausal ambiguity (Rumelt, 1984). The presence ofextensive tacit knowledge in an interfirm asso-ciation suggests a higher cost of transferringknowledge and a higher cost of contracting. Thiswill raise the cost of alliances, which depend oncontracts, relative to M&As. This may makeM&As preferable to alliances. As already sug-gested, this implies that the assets involved incollaboration are sufficiently large relative tothose held by each partner to justify ownershipinvestments.

Proposition 4: M&As will be morelikely than alliances in industriescharacterized by high levels of tacitknowledge.

Requirements for Flexibility: MainEffect—Technological Uncertainty

As the state of knowledge regarding an indus-try’s technology changes, firms will feel pres-sure to adjust. Technological change will stim-ulate firms to adapt, but the variability andpredictability of technological change will influ-


ence which adaptations are selected (Bourgeois& Eisenhardt, 1988). If technological change ispredictable, firms can forge new, long-lastingrelationships with other firms through M&As. Apredictable trajectory of change will make stra-tegic commitments for adaptation more defensi-ble. When the extent and uncertainty of techno-logical change are high and its trajectory is notpredictable, however, M&As will become lessdesirable because of the concern that the re-quired investments will be negated by subse-quent unforeseen changes. This will make alli-ances more desirable, since they are easier toarrange and reverse.

Technological change may be fairly continu-ous in some industries but discontinuous andless predictable in others. Research suggeststhat technological uncertainty contributes to al-liance formation (Dickson & Weaver, 1997; Hage-doorn, 1993). Dickson and Weaver (1997) foundthat high technological demands and volatilityincreased the odds of alliance use among Nor-wegian manufacturing firms. Other studies sup-port these expectations (e.g., Eisenhardt &Schoonhoven, 1996; Hagedoorn & Duysters,2002). These considerations suggest the follow-ing proposition.

Proposition 5: Alliances will be morelikely than M&As in industries wheretechnological uncertainty is high.

Structural and Institutional Constraints:Moderating Effects

Industry concentration. Industry concentrationconcerns the number of industry participantsand the distribution of their market shares. It isassociated with the relative advantage accruingto large firms owing to both scale and scopeadvantages and to the greater ability of largerfirms to restrict competition and benefit fromtacit collusion. Thus, we expect a positive asso-ciation between industry concentration and thelikelihood of mergers in the industry. Specifi-cally, a moderate level of industry concentrationwill be associated with scale and scope econo-mies and will signal potential benefits fromM&As.

At high levels of concentration, however, alli-ances may be more desirable. There may belimits to the gains from M&As. The number ofpotential merger partners will also be reduced

with increased concentration, and incumbentswill be better able to collude without bearingthe costs of merging. Antitrust authorities alsowill be more aware of potential market powergains from M&As among market leaders and,thus, will scrutinize high-concentration indus-tries more intensively.

These points are also consistent with the eco-logical model of resource partitioning (Carroll,1985) that, as concentration rises, generalistswill tend to compete vigorously for the center ofthe market, which will create opportunities forspecialists to thrive on the periphery. A study ofthe U.S. wine industry over the period of 1941 to1980 showed that a mature industry with a highdegree of concentration is subject to resourcepartitioning, with the emergence of distinct gen-eralist and specialist segments (Swaminathan,2001). In another study of the American brewingindustry, Carroll and Swaminathan (2000) sug-gested that alliances are one way in which firmsfrom these two segments can grow. For instance,Anheuser-Busch, a generalist, has equity stakesin a few microbrewing firms and distributestheir products. Previous empirical studies alsoshowed that acquisitions are less likely inhighly concentrated industries (Hennart & Park,1993; Yip, 1982).

Proposition 6a: M&As will be morelikely than alliances in industries withmoderate levels of concentration.

Proposition 6b: Alliances will be morelikely than M&As in industries withhigh levels of concentration.

Regulatory environment and coercive pres-sures. Firms are not only constrained by indus-try concentration but also by the institutionalforces of their industry. Institutional pressurestend to reduce the variation in firm behaviorsand to encourage conformity (DiMaggio & Pow-ell, 1983). We expect the degree to which firmspursue M&As or alliances to generally conformto the overall patterns and norms of their insti-tutional environments (DiMaggio & Powell, 1983;Fligstein, 1990; Haunschild, 1993).

One type of institutional force is the coercivepressure stemming from political influencesand the problem of legitimacy in the larger en-vironment (DiMaggio & Powell, 1983). Coercivepressures include force, persuasion, and impo-sition of organizational models on dependent


firms. These pressures are often linked with be-havior norms. One area where firms face thesechallenges is regulatory change, or governmentmandate, which affects many aspects of an or-ganization’s decisions and behaviors (DiMaggio& Powell, 1983). In this case, firms’ decisionsregarding M&As versus alliances should alsoconform to the prescriptions of the common le-gal environment. Where there is significant an-titrust scrutiny, for instance, M&As will be moredifficult and costly to complete, so alliances willbe more prevalent among firms in the industry.

Firms are also subject to coercive pressuresoutside the governmental arena, including theimposition of organizational models on depen-dent firms (DiMaggio & Powell, 1983). Whenfirms in a given industry are highly dependenton other organizations for funding or other re-sources, we expect that their choices regardingM&As versus alliances will conform to the re-quirements of funding sources and other re-source providers. For example, in start-up high-technology industries, it is common for influentialventure capitalists (VCs) to support new firms onthe condition that the recipient firms will even-tually be acquired. This helps the VCs recouptheir investments, even though M&As may notbe the optimal choice for new ventures to pur-sue. As Robinson (in press) suggests, joint ven-tures, rather than M&As, may be the best choicefor small, risky ventures. These considerationslead to the following two propositions.

Proposition 7a: Alliances will be morelikely in industries where there hasbeen recent regulatory activity, espe-cially antitrust activity. M&As will bemore likely in industries where recentregulatory activity, especially anti-trust activity, has been low.

Proposition 7b: Where funding andother resource requirements dictatethe choice of M&As versus alliance,firm behaviors will conform to thosedictates.

Other institutional factors. Institutional forcesare not just regulatory or coercive. Firms’choices will be influenced by other institutionalforces, such as industry history and the generaldemands to imitate high-status firms. Previousstudies on the antecedents of M&As supportthese institutional ideas. Palmer and Barber

(2001), for instance, found that a rising number ofacquisitions completed in the previous threeyears by other firms in a corporation’s primaryindustry increased the likelihood of an acquisi-tion by a focal firm. Haunschild (1993) found thatfirms tend to imitate the acquisition activity offirms with which they share board interlocks.Joint ventures and alliances can similarly beexplained in terms of imitation processes, sincefirms model themselves on their peers when fac-ing high environmental uncertainty (Kogut,1988). In making their decisions about M&As ver-sus alliances, firms will be particularly influ-enced by the high-status firms in the industry.Status or reputation signals the quality of thefirms, which inclines industry followers to payattention to their strategic moves (Larson, 1992;Podolny, 1994).

These considerations suggest that firmschoose M&As or alliances based on the choicesof other firms in the same industry, with a def-erence toward elite and high-status firms.

Proposition 8a: Alliances will be morelikely in industries where allianceshave been the dominant mode of col-laboration. M&As will be more likelyin industries where M&As have beenthe dominant mode of collaboration.

Proposition 8b: Alliances will be morelikely in industries where high-statusfirms predominantly choose alliances.M&As will be more likely in industrieswhere high-status firms predomi-nantly choose M&As.

CONCLUSION

While the choice of M&A versus alliance is adecision for a firm’s managers, practice sug-gests that the choice is complex and that thecontext in which firms find themselves loomslarge as an influence. The aggregate behaviorof firms making M&A versus alliance decisionssuggests the importance of industry-level forces.In this paper we have attempted to bring indus-try back into consideration as a theoretical focusby examining how firms’ decisions regardingM&A versus alliance may differ across indus-tries. We have presented a conceptual frame-work based on commitment, flexibility, andstructural/institutional constraints that providesthe basis for research propositions.


We have examined how industry-level factorsinfluence firms’ choice of M&A versus alliance,but we also recognize that the dichotomy be-tween M&A and alliance is perhaps simplistic.There are different types of alliances, rangingfrom technical agreements to R&D alliances tolong-term contractual agreements, includingsupply agreements and joint ventures. The pur-pose and intentions of different alliances vary.What’s more, the variety and complexity of alli-ances might differ according to specific industrycontexts.

For example, joint ventures would be morelikely than alliances in industries with highcommitment requirements (Casciaro, 2003). Cell6 of the conceptual framework, as in Figure 1,represents an industry setting characterized byhigh requirements for commitment, low require-ments for flexibility, and high structural andinstitutional constraints. Examples for this cellinclude mature manufacturing industries, suchas steel and automobile. In such circumstances,it is possible that long-term supply agreementsand joint ventures might be more prevalent thanother types of alliances, and they can be quitelarge scale.

Cell 3 of the conceptual framework, however,represents a context characterized by high re-quirements for flexibility, low requirements forcommitment, and low structural and institu-tional constraints. Examples for this cell includeresearch-intensive, knowledge-based indus-tries, such as biotechnology. In such situations,short-term technical agreements and R&D col-laborations might be better for maintaining flex-ibility.

But studying different types of alliances is notour focus. Future research should examine howdifferent types of alliances vary according toindustry-level factors. There is an enormous va-riety of possible alliance and joint venture struc-tures apparent from practice. Previous researchhas shown that contractual heterogeneity variesgreatly from one alliance to another, and thesedifferences are not well captured by the equity/nonequity dichotomy used in prior research onhybrid organizational forms (Reuer & Arino,2007). Reuer and Arino’s study calls for moreresearch “in moving beyond current taxonomiesof alliances to capture the richness of firms’ al-liance design choices that are reflected in theheterogeneity that exists within and across dis-crete governance structures” (2007: 328). There is

also little consensus among researchers regard-ing alliance types, which is apparent in thewide array of typologies proposed in researchon alliances and joint ventures (e.g., Borys &Jemison, 1989; Das & Teng, 1998, 2000; Gulati &Singh, 1998).

In this paper we emphasize the fundamentaldifference between M&As and alliances, in thatM&As have ownership control that allianceslack. With creative contracting, it is no doubtpossible to craft a contract that allows an alli-ance or joint venture to mimic an acquisition inthe degree of control provided. However, thevery industries where such joint ventures wouldbe observed, such as the automobile industry,are also the ones where further acquisition pos-sibilities would be limited because of industryconcentration and antitrust scrutiny. Althoughthis appears to be an exception to our logic, it isactually a reaffirmation of it, and, absent indus-try constraints, an acquisition well may haveoccurred rather than a joint venture.

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Xiaoli Yin ([email protected]) is an assistant professor of strategic man-agement at the Zicklin School of Business, Baruch College, City University of NewYork. She received her Ph.D. from the Kellogg Graduate School of Management atNorthwestern University. Her research interests include strategic alliances, mergersand acquisitions, governance structures, and franchising.

Mark Shanley ([email protected]) is a professor of management and head of theManagerial Studies Department at the University of Illinois at Chicago. He receivedhis Ph.D. from the University of Pennsylvania. His current research interests includemergers and acquisitions, alliances, and strategic decision processes.


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