Innovators' gains from incumbents' exit options in R&D alliances: A reconciliation of real options and transaction costs logics

MN (Mahmut) Ozdemir, Jan Ende

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Research summary: The transaction costs logic suggests that innovators cannot gain value from incumbents' unconditional termination rights in their R&D alliances with them because incumbents use these rights either to protect their own interests or as bargaining chips ex post. By contrast, the real options logic suggests that innovators can gain value from these rights because they provide them with an opportunity to release their resources from their troubled alliances. We reconcile the two logics by showing that incumbents' unconditional termination rights are their exit options in their R&D alliances and they are value-enhancing for innovators; yet, innovators' gains from them depend on the likelihood of their opportunistic uses by incumbents at their exercises. The tests in the biopharmaceutical R&D alliances setting support our hypotheses. Managerial summary: Incumbents form R&D alliances with innovators to explore new technologies and innovators join these alliances to commercialize their technologies. Yet, innovators typically possess alternative commercialization options activated once their alliances are terminated. In such R&D intensive alliances, granting unconditional termination rights to incumbents help innovators gain value from their R&D alliances. This is because incumbents' unconditional termination rights operate as their exit options and they enable easy and timely terminations of R&D alliances. This, in turn, allows innovators not to persist in troubled R&D alliances and to begin with exploring alternative commercialization options. However, the likelihood of opportunism at exit option exercises matters. The innovators' gains from exit options are likely to be higher as partner-specific alliance experience increases because the joint history mitigates opportunism.

Original languageEnglish
Pages (from-to)144-166
Number of pages23
JournalStrategic Entrepreneurship Journal
Issue number1
Publication statusPublished - Mar 2021

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© 2021 Strategic Management Society


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