R&D Alliances in the Biopharmaceutical Industry: The Determinants of Contractual Coordination Platforms

Abstract

When inter-firm alliance contracts are inevitably incomplete and include interdependent, though to some extent non-contractible, activities, contracting parties can device coordination mechanisms that both facilitate guidance of the alliance through communication and promote mutual adaptability and re-alignment of objectives in response to unanticipated contingencies. As we view an alliance contract as not only subject to legal rule but also as a framework that governs the relationship between firms, we focus on the number of coordination platforms stipulated in alliance contracts. These coordination platforms facilitate bilateral responses to disturbances unforeseen at the date of signing the contract, promote communication between alliance parties, and encourage joint decision-making. Extending previous research, our empirical analysis of a sample of about 300 R&D alliance contracts in the biopharmaceutical industry finds three conditions imperative in explaining the number of contractually specified coordination platforms. These conditions refer to the presence of contractual lock-in provisions, the transactional complexity of the alliance, and partner-specific learning. Parties to an alliance supported by contractual lock-in provisions value continuity and stipulate a larger number of coordination platforms in their R&D contract to promote continuity. Also, alliances characterized by high transactional complexity, thus limiting ex ante farsightedness of parties, are supported by more coordination platforms to allow for increased communication and flexible ad hoc problem solving. Finally, as parties learn about each other’s knowledge and skills over time, they increase their mutual coordination efforts by stipulating a larger number of coordination platforms in subsequent contracts.

Keywords: alliances, contracts, inter-firm coordination, coordination platforms

JEL Classification: K12, L14