Risk Types and Inter-Firm Alliance Structures (Das & Teng, 1996)

1. GOVERNANCE MECHANISMS
Risk Types and Inter-Firm Alliance
Structures
T.K. Das & B.S. Teng
1996
Iacopo Quarone
13/05/2010

2. Introduction
Various typologies of inter-firm alliances classifiable
in two governance structures:
•EQUITY alliances: transfer or creation of equity
ownership
(i.e.: direct investment or joint venture)
•NON-EQUITY alliances: none equity transfer
(i.e.: all kinds of contractual arrangements)

3. Introduction
Transaction costs theory as the traditional underlying
rationale for determing the choice:
•i.f. alliances as an intermediate of market and
hierarchy forms
•i.f. allaiances as a way to manage oppurtunistic
behaviours
Weakness:
•Does NOT take in account governance costs which
can make the overall impact of costs on i.f. alliances
unknown

4. Introduction
An integrated risk perspective as a newer and easier
accounting for the choice between equity and non-
equity allainces.
RISK, from a managerial viewpoint, is defined as the
negative outcome variance.

5. Relational risk and performance risk in
inter-firm allainces
The distinctive feature of i.f. alliances is the dependence
on cooperation among partners (only partially
overlapping goals).
In addition to the risk inherent of achieving the stategic
goals of alliance, firms have to face the risks regarding a
partner’s future behaviour.

6. Relational risk in inter-firm allainces
Relation risk addresses the possibility and the
consequence that partners may NOT work toward
the mutual interests and may NOT co-operate in the
manner specified in the alliance agreement or as
expected.
Opportunistic behaviours: all partners, given a
chance, would tend to maximize their own interest
at the cost of the other partners.

7. Relational risk: an example
The dissipation of the firm-specific advantage: very
often a technogly transfer agreement could be just a
cover for secretly capturing other partner’s know how.
From this viewpoint, having co-operative relationship
with others imposes additional relational risk which
inpacts on partner’s perception of risk
“The more difficult it is to protect one’s proprietary know
how, the higher will be the relational risk perceived by
the partners”

8. Performance risk in inter-firm allainces
Performance risk addresses the possibility that the objectives
of an i.f. alliance may not be sucessfully achieved although
all partners co-operate fully.
It embraces all kinds of hazard that can either lead with the
failure of an i.f. alliance or to an increase in the magnitude
of loss from an allinaces (such as commmercial,
technological, corporate and international risk)
Entering into i.f. alliances is one of the main way to share
this kind of risk.

9. Performance risk: some example
The most riskfull activities for firms are R&D and international
business.
R&D activities contribuite to a high level of performance risk
becouse it is costly, time-consuming and uncertain
International business because cross-border alliances are
related to a new set of environmental, industry and firm-
specific risks (i.e. a different legal system, market structure,
customs,….)
Performance risk will be perceived as higher in i.f. allinaces with
a shared R&D component or international alliances, as
compared to other kinds of alliances.

10. Equity alliances and non-equity alliances
When firms have to decide b/w equity or non-equity
alliances, they would naturally prefer the structure
that minimizes the sum of relational risk and
performance risk.
This decision has crucial implications on every aspect
of the alliances such as organization structure,
operation process, control mechanism and so on.

11. Equity allainces: pros
Since equity alliances involve the creation of new
entity, or ownership transfer of existing entities, they
are more like hierarchy and so the impact of relational
risk is less strong than in other governace strurctures.
Why?
• Transactions take place in a more formalized way
• Aligned interests, monolithic control and diminished
performance ambiguity

12. Equity allainces: cons
When it comes to controlling performance risk,
equity alliances are NOT the answer becouse of their
higher degree of performance risk.
Why?
•The special investment required in the joint task is a
non-recoverable cost and so makes the price of the
eventual failure greater
•High governance costs to manage the more
complex decision making process

13. Equity allainces: pros and cons
Pulling togheter pros and cons, the result is the
following:
“Inter-firm alliances are more likely to be equity
based when relational risk, rather than performance
risk, is perceived as the dominant threat to the
alliance”.

14. Non.Equity allainces: pros
Non-equities alliances are more like market-based
contracts rather than hierarchies and their main
characteristics are a lack of control and strategic
flexibility.
Just for that characteristic, this kind of alliance is
better able to face performance risk becouse:
• the level of commitment (money, time, resources)
is comparatively limited
•Partners can quite easily decide to get out of the
alliance

15. Non-Equity allainces: cons
Beyond the specifics identified by the contract ex-
ante, non-equity alliances rely too heavily on the
goodwill and voluntary co-operation from
indipendent firms.
The lack of shared ownership makes it difficult to
align the interests of the partners, to control their
behaviour and to distribute performance outcomes.

16. Non-Equity allainces: pros and cons
Pulling togheter pros and cons, the result is the
following:
“Inter-firm alliances are more likely to be non-equity
based when performance risk, rather than relational
risk, is perceived as the dominant threat to the
alliances”.

17. Conclusion
The joint value created by pooling the partners togheter
in a stategic alliances may be able to overcome the cost
and even the possible losses of an inter-firm alliance.
Alliances may be formed also if there are high level of
both tipes of risk, becouse is the relative levels of
relational risk and performance risk that determine the
choice b/w the governance mechansim of the alliance.