When Friends are Located Near Enemies: Knowledge Protection Concerns in R&D Alliances

The previous literature on R&D alliances between incumbent firms and technology ventures has typically focused on knowledge misappropriation by the incumbent firm of the knowledge possessed by the technology venture. As an extension, we join the alliance literature with the agglomeration literature to argue that the incumbent firm is also prone to the risk of knowledge loss when the technology venture is co-located with major rivals of the incumbent firm. Co-location between the technology venture and the major rivals of the incumbent firm (“rivalry in partner location”) increases the risk of rivals’ gaining access to incumbent firm knowledge via misappropriation by or spillovers from the technology venture. Therefore, higher levels of rivalry in partner location makes the incumbent firm more likely to employ defense mechanisms such as (1) inclusion of equity arrangements to provide greater incentive alignment, controls, and monitoring and (2) reduction of task interdependence to limit required knowledge sharing. We further claim that these effects of rivalry in partner location strengthen with the nearby rivals’ absorptive capacity. Our arguments were largely supported in our analyses of 1,242 R&D alliances formed between technology ventures and incumbent firms in the biopharmaceutical industry.