Network Effects in the Governance of Strategic Alliances

We argue that the stock of prior alliances between participants in the biotechnology sector forms a network that serves as a governance mechanism in interfirm transactions. To test how this network substitutes for other governance mechanisms, we examine how equity participation and pledged funding in strategic alliances vary with two features of the way alliance participants are positioned in the network of past deals: proximity, or how close two firms are to one another in the network; and centrality, or how deeply a firm is embedded in the network. As centrality and proximity increase, equity participation (measured by size and propensity) diminishes, whereas pledged funding increases.