A knowledge-based view of strategic alliances.

ABSTRACT

This paper presents a knowledge-based view of strategic alliances. Incorporating several approaches including transaction cost economics, property rights theory, and industrial organization economics into the analysis, this paper provides an integrative view of the knowledge-driven alliances, demonstrating that the motives and stability of these alliances are determined by the characteristics of markets, firms, knowledge, and contractual arrangements. Specifically, our main arguments include. (1) knowledge-driven strategic alliances are jointly motivated by the strategic value of alliance partner's knowledge to the focal firm and partner's appropriability of the focal firm's own knowledge," (2) if transfer of existing knowledge between partners is the primary concern, then the stability of alliances is determined by the leakage potential of knowledge and the strength of contractual protective mechanisms, and (3) if the property rights of knowledge generated during the alliances are the central issue, then the stability of alliances is a joint function of relative redeployability of the new knowledge between the partners and the regime of property rights regarding the new knowledge. We also discuss the relative transaction costs involved in each situation when analyzing the different types of knowledge-driven alliances.

1. INTRODUCTION

For many firms, strategic alliances have been an important interorganizational form to gain competitive advantage in their current industries, or to explore fresh opportunities in new areas (Hagedoorn, 1993; Pisano, 1990; Powell, Koput and Smith-Doerr, 1996). Previous research has basically concentrated on two issues: the motives for strategic alliances and factors leading to stability or instability of alliances.

From the transaction cost economists' perspective, strategic alliances as one of the hybrid forms, provide an alternative governance mode when transactions have to be conducted between markets and hierarchies (Teece, 1986; Williamson, 1991). Firms are involved in strategic alliances usually because they own interdependent or complementary resources. These resources may involve a high level of uncertainty and are not easily accessible in competitive markets. Therefore, the firm that is eager to obtain these critical resources has two options other than a pure market transaction: internalization (through internal development or acquisition) and intermediate forms such as strategic alliances. If internalization is denied because it is technologically infeasible or economically unreasonable, then intermediate forms become the only viable option. Compared with market transactions, strategic alliances provide the firm with timely access to critical resources and a better control of opportunism. Moreover, strategic alliances enjoy more flexibility and stronger incentive than internalized transactions (Williamson 1985, 1991).

Strategic alliances can serve a number of other functions such as spreading risk, increasing market power, preempting complementary resources, accessing new markets, and gaining organizational learning (Hagedoorn, 1993; Mitchell and Singh, 1992). Among the various functions, knowledge acquisition, transfer, and generation have been regarded as a primary motive for strategic alliances in certain industries, especially in high-tech industries. Teece (1992) argued that in contemporary competitive landscape, the global dispersion of industrial competence has stimulated cooperation between firms. Similarly, Powell et al. (1996) studied the interorganizational collaboration in the U.S. biotechnology industry and discovered that when the knowledge base of an industry is both complex and expanding and the sources of expertise are widely dispersed, the locus of innovation will be found in networks of learning, rather than in individual firms. In the knowledge-intensive industries, the prominent purpose of strategic alliances may no longer be saving on transaction costs. Instead, firms may try to generate entrepreneurial rents through pooling existing knowledge or creating new knowledge. Moreover, due to the unique characteristics of knowledge, firms may use knowledge acquired from their partners to fulfill other "strategic" purposes which go beyond the scope of current strategic alliances. In Figure 1, we classify strategic alliances into three types according to firms' perceived strategic value of the knowledge combined, acquired, and generated in the cooperation.

Type I is the typical learning alliance because both alliance partners regard the knowledge to be infused into the cooperation by the other firm as of high strategic value. In Type II and Type IV, the alliance partners are motivated by different reasons. One firm intends to take advantage of the knowledge brought into by its partner, while the other is attracted to the alliance for other reasons, such as obtaining complementary assets or accessing a new market, etc. Type III includes all the other alliances in which knowledge is not a driving force for either party to join an alliance. It is basically the Type I that is the focus of this article.

In this paper, we attempt to present a knowledge-based view of strategic alliances. Although various studies have examined the motives and stability of strategic alliances in general, few of them have paid sufficient attention to the knowledge-driven alliances in particular. We provide an integrative analysis of the knowledge-driven alliances, demonstrating that the motives and stability of these alliances are determined by the characteristics of markets, firms, knowledge, and contractual arrangements. Several approaches, including transaction cost economics, property rights theory, and industrial organization economics are incorporated into the analysis. This paper is organized as follows. First, we discuss how the motives of the knowledge-driven alliances are affected by two factors: strategic value of external knowledge to the focal firm and partner's appropriability of the focal firm's knowledge. We then analyze two key variables affecting the stability of the knowledge-driven alliances: endogenous leakage potential of the focal firm's knowledge and the strength of contractual protective mechanisms. In the same section, we also discuss a new type of knowledge--the knowledge that is newly generated during the alliances, and analyze how the features of the new knowledge and contractual arrangements affect the stability of alliances. We conclude the paper with some discussions.

2. MOTIVES FOR KNOWLEDGE-DRIVEN STRATEGIC ALLIANCES

There are different types of knowledge including product knowledge, market knowledge, process knowledge, and management knowledge, etc. Knowledge as a critical organizational resource, displays different characteristics from those of tangible assets. For tangible resources, their property rights can be clearly specified; therefore the use, transfer, transformation, and residual claims of those resources are unambiguous (Alchian & Demsetz, 1973; Demsetz, 1967). In contrast, except for some well-specified and legally protectable knowledge such as patents and copyrights, knowledge is usually embedded in complex systems. Therefore it is difficult to identify, monitor and protect the property rights of knowledge. Due to the unique characteristics of knowledge, firms involved in the knowledge-driven strategic alliances have two primary objectives: to extract maximum value from the knowledge brought into the alliances by their partners, and to protect their valuable knowledge from being appropriated by their partners. Hence the incentive to join knowledge-driven strategic alliances is a joint function of two factors: strategic value of external knowledge to the focal firm and appropriability of the focal firm's knowledge.

2.1 Strategic Value of External Knowledge to the Focal Firm

For firms operating in knowledge-intensive industries, the strategic value of the external knowledge brought into the alliances by their partners depends on the characteristics of knowledge, firms, and market (see Figure 2).

[FIGURE 2 OMITTED]

Knowledge characteristics. Some knowledge is critical for firms' survival and prosperity in competition. For example, the technology of manufacturing quiet and efficient engines is a central source of competitive advantage in the automobile industry, while knowledge of local markets is another critical resource for foreign companies entering a new market. Acquisition of key technical knowledge has been the driving force for American car companies to establish strategic alliances with their Japanese counterparts, such as the alliances between GM and Toyota, Ford and Mazda, and Chrysler and Mitsubishi.

Novelty of the external knowledge is another consideration before the firms establish knowledge-driven strategic alliances. Usually, more radical rather than more incremental technologies can help firms outpace their competitors, and therefore create substantial entrepreneurial rents. For example, some huge pharmaceutical companies such as Merck have built extensive networks of strategic alliances with new biotechnology firms (NBFs). The underlying reason is that "biotechnology represents a competence-destroying innovation because it builds on a scientific basis (immunology and molecular biology) that differs significantly from the knowledge base (organic chemistry) of the more established pharmaceutical industry" (Powell et al., 1996).

When the purpose of the firms participating in the knowledge-driven strategic alliances is to acquire knowledge from their partners, transferability and redeployability become important variables. Some knowledge can be easily transferred between organizations, if the knowledge is identifiable, separable, and not very complex. For example, the technology of manufacturing household electronic appliance has been frequently transferred in international joint ventures. However, some knowledge is by nature very hard to codify or is embedded in complex systems. Therefore, transfer of this type of knowledge will be difficult or even infeasible. For example, without making major adaptations, the technology invented by Japanese firms (e.g., JIT) to effectively manage supplier-manufacturer relationships would not find its niche in the United States.

Some knowledge is transferable between firms, but its value is constrained in the current alliances. For example, certain product-specific technology can hardly find other uses in the market. But firms often intend to acquire and generate knowledge that can be redeployed beyond the scope of current alliances. For example, in a strategic alliance between Motorola and a Chinese company, the two companies manufactured cellular phones for the local market. During the cooperation the Chinese company learned how to make microchips. This technology could be applied not only to cellular phones, but also to a number of industrial and consumer products. While higher transferability makes knowledge acquisition more efficient, higher redeployability increases the potential value of the knowledge acquired from alliances.

Firm characteristics: If the acquired or newly-generated knowledge is redeployable to other uses, then the relative scope of the firm determines to what extent the redeployable knowledge can realize its potential value. Khanna, Gulati, and Nohria (1998) distinguish between two qualitatively different kinds of benefits available to participants in knowledge-driven strategic alliances: private benefits and common benefits. Private benefits are those that a firm can earn unilaterally by picking up skills from its partner and applying them to its own operations in areas unrelated to the alliance activities. Common benefits are those that accrue to each partner in an alliance from the collective application of the learning that both firms go through as a consequence of being part of the alliance. In many alliances it is the private benefits that the firms seek more actively. If the scope of the firm is broad, then its ratio of private to common benefits will be higher because it has more opportunities to apply what it has learned to its businesses outside of the scope of the alliance than within the scope of the alliance. A firm may have a stronger incentive to join strategic alliances when its relative scope is broad and therefore more private benefits can be generated from the knowledge obtained from alliances.

When a firm participating in the knowledge-driven alliances gets the opportunity to transfer knowledge from its partners and redeploy it to areas outside of the scope of the alliances, the value generated from the knowledge will also depend on the firm's absorptive capacity. Cohen and Levinthal (1990) define absorptive capacity as "the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends". They further argue that a firm's absorptive capacity is largely a function of the firm's level of prior related knowledge. Therefore from the same knowledge infused into the alliances, different firms may perceive different strategic values, depending on their ability to absorb and reuse the knowledge.

Market condition: A firm's perceived strategic value of acquired or newly-generated knowledge is also affected by the market condition. Firms usually enter knowledge-driven strategic alliances to solve the technological or organizational uncertainty they face. Mody (1993) argued that greater uncertainty increases the value of information and thus makes experimenting through alliances more desirable. Uncertainty may be conducive to high alliance activity, which they potentially declines as the uncertainty is reduced or resolved. Hagedoorn and Schakenraad (1990) observed that the number of new alliances in segments of the information technology, biotechnology, and new materials may have started to decline as the technological complementarities are becoming clearer.

Firms may perceive great strategic value from alliances when they face intensive competition. In the industries where competitive pressure is less severe, a firm may have sufficient time to develop and accumulate necessary knowledge from inside the organization. However, when competition is intensified, a firm has to get quick access to key knowledge and can not afford long-time in-house development. Moreover, when there are a number of suppliers of the desired knowledge in the market, a firm may not perceive its strategic value as high as when the supply of knowledge is controlled by a small number of firms. Therefore the market condition of both the knowledge-acquiring firms and the knowledge-supplying firms may affect the perceived strategic value of knowledge, and further lead to different incentives to establish strategic alliances.

2.2 Partner's Appropriability of the Focal Firm's Knowledge

Teece (1987) defined a regime of appropriability as the environmental factors, excluding firm and market structure, that govern an innovator's ability to capture the profits generated by an innovation. In the knowledge-driven strategic alliances, the appropriability of the focal firm's knowledge means to what extent its partner can redeploy the acquired or newly generated knowledge to areas beyond the scope of the current alliance in an unintended way and how it may adversely affect the focal firm's competitive position. The most important dimensions of appropriability are the nature of the knowledge, rivalry between the partners, the efficacy of legal mechanisms of protection, and complementarity of assets.

As discussed above, some knowledge by nature is less identifiable, codifiable, transferable, or redeployable than others. For those types of knowledge, a firm's concern about being appropriated will be the least because it is technologically difficult for its partner to acquire the knowledge and apply it to unintended areas. Some knowledge may be more codifiable and transferable, but strong legal mechanisms such as patents and copyright law can prevent it from being appropriated. However, the nature of knowledge and the efficacy of legal mechanisms may vary across different types of knowledge, so is the intensity of appropriability problem. When the alliance partners are also competitors in similar markets, appropriability may become a serious problem because the knowledge acquired by a firm from its partner can be easily applied to competitive areas, which may substantially hurt the partner's competitive position. So firms are usually very cautious when they form strategic alliances with other firms operating in the same product markets.

For a firm to extract maximum value from alliances, it needs complementary assets to commercialize the acquired, combined or newly generated knowledge. Teece (1987) argued that in almost all cases, the successful commercialization of an innovation requires that the know-how in question be utilized in conjunction with other capabilities or assets. Whether the assets required for least-cost production and distribution are specialized to the innovation turns out to be important. Generic assets are general-purpose assets that do not need to be tailored to the innovation in question. Specialized assets are those with unilateral dependence between the innovation and the complementary assets. If the complementary assets are specialized and owned by other firms, then they may intend to appropriate rents from the innovators, therefore increasing transaction costs (Klein, Crawford and Alchian, 1978; Pisano, 1990; Williamson 1975, 1985, 1991). For example, when a new biotechnology firm (NBF) discovers a new drug, it has to depend on some large pharmaceutical firms for assistance in clinical testing procedures, regulatory process, manufacturing, marketing and distribution (Powell et al., 1996). As a result, the NBF may have to sacrifice a significant portion of the innovation's value. But if the innovator owns complementary assets, it can avoid most of the transaction costs related to negotiating and drafting contracts, designing protective mechanisms, and monitoring and disciplining its partner's opportunistic behavior. As a result, it can keep all the entrepreneurial rents inside the organization.

Recent observations are consistent with the above arguments. Mitchell and Singh (1992) found that when an industry incumbent enters a new product area in which many supporting assets retain their value, the firm will often limit its investment exposure and expand its knowledge sources by using alliances with other firms before undertaking standalone entry. Some implications can be drawn from this observation. First, an industry incumbent intends to acquire necessary knowledge from its partners instead of internal development. But once uncertainty is resolved, the incumbent may apply what it has learned from alliances to its own businesses, directly confronting its partners in the market. Second, owning complementary assets puts the industry incumbent on an advantageous position, making it possible that other firms with necessary knowledge will be willing to form alliances.

2.3 Analysis of Motives for Knowledge-Driven Strategic Alliances

In Figure 3, we classify the knowledge-driven strategic alliances into four types along two dimensions: strategic value of external knowledge to the focal firm and partner's appropriability of the focal firm's knowledge. Each type of strategic alliances involves a different combination of incentive and transaction costs. Williamson (1975; 1985) distinguishes between transaction costs of ex ante and ex post types. The first are the costs of drafting, negotiating, and safeguarding an agreement. Ex post costs of contracting take several forms. These include (1) the maladaptation costs incurred when transactions drift out of alignment, (2) the haggling costs incurred if bilateral efforts are made to correct ex post misalignments, (3) the setup and running costs associated with the governance structures (often not the courts) to which disputes are referred, and (4) the bonding costs of effecting secure commitments.

[FIGURE 3 OMITTED]

In Type I, the strategic value of external knowledge is high to the focal firm. But there is also a great likelihood that the focal firm's own knowledge will be appropriated by its alliance partner. Under such circumstances, the firm can expect to extract substantial value from the alliance. But on the other hand, during the cooperation the firm's own knowledge is exposed to its partner's exploitation. The partner can purposely acquire the knowledge and apply it to other areas, which may eventually hurt the focal firm in a competitive market. Furthermore, when the partner owns complementary assets, it may demand a large share of profit generated during the alliance. In this type of strategic alliances, substantial transaction costs will occur. Because the firm's knowledge has great leakage potential and is difficult to protect by legal mechanisms, it has to invest substantial amount of time and money to negotiate and draft the contract, trying to control its partner's opportunistic behavior by specifying the critical contingencies. When a leakage problem actually occurs, it has to make all possible efforts to keep its partner back on the right track. In some extreme cases, when the knowledge-leakage-related disputes can not be resolved between the partners, they have to go to court, which will lead to high transaction costs (Williamson 1975). Overall, in Type I a firm's incentive to form strategic alliances will be moderate, while transaction costs will be high.

In Type II, when the strategic value of external knowledge is high and the appropriability regime is tight, a firm has the strongest incentive to form an alliance. On the one hand, it can expect to extract great value from the alliance. Through a strategic alliance, the firm can get access to its partner's critical knowledge, absorb it, and apply it to a wide range of related areas; therefore the firm can resolve the technological or organizational uncertainties and substantially strengthen its competitive edge. On the other hand, because the firm's own core knowledge is either endogenously less codifiable by nature or exogenously protected by legal mechanisms, the firm has very little concern about leakage of its knowledge to the partner. Another advantage of Type II is that it involves very limited transaction costs. Since its core knowledge is tightly protected by technological nature or by the legal system, it neither needs to spend a large amount of time or money to draft a complex contract which specifies the most critical contingencies regarding the intellectual property rights, nor does it need much effort to design costly bonding mechanism or correct its partner's maladaptation during the alliance. Therefore Type II entails least transaction costs, both ex ante and ex post.

In Type III, when both the strategic value of external knowledge and partner's appropriability of the focal firm's knowledge are low, the firm may have a very weak incentive to form an alliance. Meanwhile, because the firm's knowledge is well-protected, transaction costs will be low.

Type IV does not seem to be a promising type of strategic alliances. While the strategic value of external knowledge is low, partner's appropriability of the focal firm's knowledge is high. Therefore the strategic alliance may mean a net loss for the firm. Usually a firm will not join such an alliance unless it misestimates either the strategic value of external knowledge or the appropriability of its own knowledge. In the worst cases, the firm may misestimate both. lf by accident or by mistake a firm does enter such an alliance, it will have to spend a lot of time and money haggling with its partner, which entails substantial transaction costs.

3. STABILITY OF KNOWLEDGE-DRIVEN STRATEGIC ALLIANCES

Previous research on stability of strategic alliances has been disproportionately focused on the equity-based alliances--joint ventures. Inkpen and Beamish (1997) defined joint venture instability as a major change in relationship status that was unplanned and premature from the perspective of either one or both partners. In the literature on joint venture instability, various factors have been identified as causes of instability, including changes in partners' strategic missions, changes in importance of the joint venture to the partners (Harrigan and Newman, 1990), the foreign investment climate of the host country (Blodgett, 1992), and the existence of prior relationships between the partners (Blodgett, 1992). Inkpen and Beamish (1997) developed a theoretical framework to analyze instability of international joint ventures drawn upon a bargaining power and dependence perspective. They argued that the instability of international joint ventures is associated with shifts in partner bargaining power. Shifts in the balance of bargaining power occur when partners of an international joint venture acquire sufficient knowledge and skills to eliminate a partner dependency and make the international joint venture bargain obsolete.

3.1 Stability of Knowledge-Driven Strategic Alliances--Case of Existing Knowledge

In the knowledge-driven strategic alliances, knowledge transfer will be the central purpose. From the property rights economists' perspective, how the partners use, transfer, and claim residual rights of knowledge will be the most prominent issues in these alliances (Alchian and Demsetz, 1973; Demsetz, 1967). When the acquired knowledge can be applied to a large number of product markets, or when competitive rivalry between the partners is intense, then these issues become even more serious.

Various legal mechanisms have been designed and enforced to protect intellectual property rights. However, as discussed before, some knowledge by nature is more imitable and redeployable; therefore it can not be tightly protected from leakage either by endogenous features or by legal instruments. We term this kind of knowledge as of "high leakage potential". In response to this problem, a firm may use contracts as a supplementary mechanism to protect its core knowledge. When a knowledge-driven strategic alliance is formed, restrictions on transferring certain knowledge may be incorporated into the contractual agreement. Such restrictions require a clear delineation of the relevant property rights and a mechanism for enforcing those rights. The knowledge owner must be able to claim ownership of specific technologies and, by virtue of its ownership, restrict the partner's right to transfer them to other uses (Demsetz, 1967; Pisano, 1990). However, a contract is confronted with the same problem that the legal mechanism faces: It is difficult and sometimes impossible to specify all the relevant intellectual property rights in a knowledge-driven strategic alliance. Whether a firm can effectively use the contract to protect its core knowledge during the intellectual cooperation depends on several factors: (1) how accurately does the firm estimate ex ante the potential uses of its knowledge by the partner; (2) how accurately does the firm estimate ex ante its partner's absorptive capacity; (3) how does the firm design enforceable and affordable protective mechanisms in the contract?

The above arguments lead to a classification of the stability of knowledge-driven strategic alliances into four types along two dimensions: leakage potential of the focal firm's knowledge and contractual protective mechanisms, as shown in Figure 4.

[FIGURE 4 OMITTED]

In Type I, the leakage potential of the firm's knowledge is high, but the contractual protective mechanisms are strong. The firm may to some extent prevent its partner from inappropriately transferring acquired knowledge to unintended areas. But as we have argued, terms about knowledge transfer may not be completely specified in the contract, so there is still room for the partner to exploit the knowledge that it has acquired from the focal firm. Under such circumstances the stability of the alliance will be moderate, while transaction costs will be high. Type I involves substantial transaction costs because when the leakage potential of the knowledge is high, the firm has to invest a significant amount of time and money to specify the contingencies, negotiate and draft the protective terms in the contract. On the other hand, when unexpected leakage of core knowledge actually occurs, the firm will have to take ex post actions to correct its partner's behavior and prevent the knowledge from further leakage.

Type II is a very unstable type of strategic alliances because while the leakage potential of the firm's knowledge is high, the contractual protective mechanisms are weak. Under such circumstances, the partner can easily transfer the focal firm's knowledge to other areas outside the scope of the current alliance without being disciplined. In such an alliance because there are only weak contractual mechanisms to monitor and control the partner's opportunistic behavior, transaction costs will be inevitably high.

Type III is a very stable type of strategic alliances, because the leakage potential of the focal firm's knowledge is low. Since only weak contractual protective mechanisms are present, moderate ex post transaction costs are involved in case disputes over intellectual property rights occur.

In Type IV the leakage potential of the firm's knowledge is low, while the contractual protective mechanisms are strong. Under such circumstances the alliance will be very stable, while transaction costs will be at minimum.

3.2 Stability of Knowledge-Driven Strategic Alliances--Case of New Knowledge

In the previous section we have discusses the issues related to existing knowledge. In the knowledgedriven strategic alliances, new knowledge will usually be generated by the participating firms. The problems related to the newly-generated knowledge are more complicated than those related to existing knowledge. First, the generation of new knowledge during the alliances may be unexpected; therefore the specification of its property rights may be unclear. Second, the new knowledge can be redeployed by the partners in an asymmetric way. In other words, one firm may apply the new knowledge to more areas and extract more value than its partner does. The level of asymmetry is affected by relative scopes and absorptive capacity of the partners. Third, even when the property rights of some new knowledge can be specified and claims can be negotiated ex ante in the contract, enforcement may be problematic. For example, after an extensive examination of the joint R&D activities in biotechnology industry, Pisano (1990: 159-160) observed:

An obvious problem arises in specifying all the relevant intellectual property rights. While it may be possible to identify specific elements (such as a particular molecule), much of the broader, application-level know-how and R&D capabilities that are generated cannot be clearly defined or adequately described in a contract. The know-how generated from one project may be so inextricably linked with that created in other projects that it may be impossible to agree on who owns what. As a result, the sponsor is unable to attach claims to much of the valuable intellectual property that is created during the R&D project.

The above discussion leads to a classification of stability of knowledge-driven strategic alliances into four types along two dimensions: relative redeployability of the new knowledge between the firms and regime of property rights of the new knowledge, in the case that new knowledge is generated (see Figure 5).

[FIGURE 5 OMITTED]

Type I is the most stable alliance because the regime of property rights of the new knowledge is tight, while the new knowledge is symmetrically redeployable between the firms. Under such circumstances the owner of the intellectual property rights clearly knows to what areas the new knowledge can be applied by its partner; therefore the property rights regarding the new knowledge can be tightly protected by a welldrafted contract. This type involves very limited transaction costs, especially because ex post transaction costs are largely avoided.

In Type II, although the regime of property rights of the new knowledge is loose, the redeployability of the new knowledge is symmetric between the partners. While neither partner can make valid claims for the new knowledge, it can be evenly used by both partners in similar areas and generate similar value. Under such circumstances, the alliance will be stable, while a moderate level of transaction costs may occur because the firms need to monitor their partners' behavior to make sure that balance of bargaining power between them is well maintained.

Type III is a combination of two unfavorable features. While the redeployability of the new knowledge is asymmetric between the partners, the regime of property rights regarding the new knowledge is loose. This type of alliances is unstable and involves high transaction costs, because no one can make valid claims for the property rights of the new knowledge. Moreover, one firm can take more advantage of the new knowledge than the other.

Type IV is also a stable alliance because the tight regime of property rights largely prevents the new knowledge from being unfairly appropriated by one firm. However, because the redeployability of the new knowledge is asymmetric between the partners, the knowledge owner has to negotiate contract terms and set up enforcement mechanisms to ensure that its partner does not apply the new knowledge to unintended areas and create extra value for which the owner has no residual claim. This will entail a moderate level of transaction costs.

4. CONCLUDING REMARKS

In this paper, we present a knowledge-based view of strategic alliances, we focus on the knowledgedriven alliances because they display different patterns of motives and stability than other types of strategic alliances. For the firms participating in knowledge-driven strategic alliances, life is a balance between exploitation and self-protection. While firms try to extract maximum value from the knowledge acquired from their partners, they also need to protect themselves from being exploited by their partners in knowledge transfer and creation. It is systematically demonstrated that the knowledge-driven strategic alliances are jointly motivated by the strategic value of external knowledge to the focal firm and partner's appropriability of the focal firm's knowledge.

It is further demonstrated that the stability of the knowledge-driven strategic alliances is a joint function of two variables--the endogenous characteristics of knowledge and the strength of exogenous contractual protective mechanisms. If transfer of existing knowledge between partners is the primary concern, then the stability of strategic alliances is determined by the leakage potential of knowledge and the strength of contractual protective mechanisms. If the property rights of knowledge generated during the alliances are the central issue, then the stability of alliances is a joint function of relative redeployability of the new knowledge between the firms and the regime of property rights regarding the new knowledge.

Because appropriability constitutes the most serious threat to the motives and stability of the knowledge-driven strategic alliances, firms have to make various efforts to estimate potential appropriability problems, negotiate protective terms in the contracts, monitor their partners' behavior, and set up enforcement mechanisms. All of these entail transaction costs. In this paper we discuss relative transaction costs in each situation when analyzing the motives and stability of different types of knowledge-driven alliances.

The work on knowledge-driven strategic alliances is far from complete. Although we have taken every effort to clarify the key concepts, some are still vague, such as leakage potential and redeployability. Moreover, the article has been largely operating at an abstract and theoretical level; therefore empirical support is badly needed. A large sample statistical analysis or at least some stylized cases will help to understand the motives and stability of different types of strategic alliances and the transaction costs involved in each type. There is still a long way to go to better understand the knowledge-driven strategic alliances.

ACKNOWLEDGEMENTS

I would like to thank the College of Business Administration, California State University, Sacramento, for providing financial support for this study.

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Author Profile

Dr. Yongliang "Stanley" Han earned his Ph.D. at University of Southern California in 2002. Currently he is an assistant professor of strategic management at California State University, Sacramento.