Surviving the split: the impact of R&D alliance breakups

Breaking up is hard to do, but when it’s a knowledge alliance between life science firms, splitting up has various effects on knowledge acquisition and innovation that are not entirely adverse.

So say Esade’s Jan Hohberger and Heidi Kruger (Esade) together with Paul Almeida (McDonough School of Business), who analysed R&D alliances in the life science industry over a 13-year period to identify the impact that premature termination had on knowledge acquisition.

The researchers set out to address the gap between plentiful research on alliance formation linked to knowledge acquisition and innovation, and the limited amount known about the impact of alliance termination in the same areas.

Breaking up an alliance between life science firms reduces innovation performance

Using a sample of terminated and non-terminated R&D alliances, their analysis suggests that termination reduces innovation performance, innovation output becomes less technologically diverse, and knowledge acquisition becomes more externally oriented.

However, they found no relevant drop in acquisition of knowledge from alliance partners after termination of the partnership.

Are premature breakups painful?

Knowledge is a key resource for firm innovation, performance and survival, and the importance of collaboration for knowledge acquisition and innovation is well-documented. But despite the fact that all alliances must eventually come to an end, little was known about the implications of alliance termination for firm knowledge acquisition and innovation.

Alliances are important mechanisms for knowledge acquisition and innovation, and these objectives often drive their formation. Understanding termination, particularly premature termination, is fundamental in building a realistic and complete understanding of alliances and determining their impact on knowledge acquisition and innovation.

To better understand the impact of alliance termination, the researchers posed two questions: to what extent does premature alliance termination affect external knowledge acquisition, and to what extent does premature alliance termination affect firm innovation outcomes?

Looking at the bigger picture

Knowledge acquisition and innovation goals often drive alliance formation. While previous research provides ample evidence of the positive effects of alliance formation, little was known about the implications of alliance termination.

The findings of Hohberger, Kruger and Almeida provide a complete and nuanced understanding of alliance activity, the associated innovation implications, and the underlying assumptions in the context of the knowledge-based view of the firm.

Premature termination of an R&D alliance decreases the technological diversity of the innovation outputs of a firm

Their results show that premature termination of an R&D alliance reduces innovation performance post-termination, in line with previous research. A more detailed analysis also suggests that the rate of decay accelerates as the number of years that have passed since termination increases, with no evidence that a decline in innovation was driving the termination.

Premature termination of an R&D alliance was also shown to decrease the technological diversity of the innovation outputs of a firm, supporting the notion that R&D alliances are tools for accessing and acquiring external knowledge that is distinct from that of the firm.

However, contrary to expectations, the study revealed that firms acquire more external knowledge after premature termination. Given that one of the main motivations for forming alliances is the ability to acquire knowledge, a reduction in this ability would be expected after a premature alliance termination.

However, even if the organisational context is removed, the social ties remain and continue to enable knowledge acquisition.

Let’s stay friends

When an employer/employee relationship ends, it doesn’t automatically result in a termination of knowledge acquisition. Interpersonal relationships endure even after the contractual relationship ends and this amicable connection allows for the communication and exchange of knowledge. On a similar level, employers are more likely to be interested in, and aware of, the activities of former employees, in turn rendering them more likely to acquire their knowledge even after they’ve moved to a new organisation.

This also applies to the geographical location of firms and the impact of social distance on knowledge acquisition. Enduring social relationships determine knowledge-flow patterns when inventors move to new locations and while termination of an alliance can bring the interorganisational context to an end, social ties endure between individuals. Similarly, even after the termination of an alliance, a firm is probably more aware of and able to monitor the activities of the former partner firm, also potentially enabling and fostering knowledge acquisition.

Prematurely terminating an alliance agreement may not necessarily reduce knowledge acquisition opportunities across the partner firms

A possible focus on alternative knowledge partners and sources could be a motive for the alliance termination. But at the same time, the organisation is still able to acquire knowledge, although most likely at a lower level, from a former partner. The result is a lower-than-expected change in the level of knowledge acquisition, even after a break-up.

Moving on

Alliances have long been regarded as an important managerial mechanism for achieving strategic ends, especially those linked to knowledge acquisition and innovation. Managers need evidence on the outcomes of termination to fully understand the value and impact of alliances and to better inform management decisions at the time of formation and throughout alliance and innovation management.

In this context, the research not only reveals the negative effect of the termination event on innovation outcomes, but also a non-finding for the decline in partner-specific knowledge acquisition post termination. This suggests that prematurely terminating an alliance agreement may not necessarily reduce knowledge acquisition opportunities across the partner firms, and managers should be aware of this potential continued "leakage" across firm boundaries and take steps to limit it.

Ultimately, learning from past relationships can help to reduce the uncertainty of future alliances. Firms should take this into account when selecting new partners.