Since the seminal article by Ronald Coase (1937) on “The Nature of the Firm,” scholars have been asking what constitutes the organizational boundaries of a company -- in a world where most larger firms are now part of a global network of alliances and outsourcing partners who perform functions that the focal firm itself does not wish to do in-house. Past ESNIE lectures (on subjects such as Transaction Costs) have sufficiently covered criteria used by companies to decide what activities to undertake internally and which may be externalized, or undertaken in cooperation with alliance partners.

While alluding to the broader context of the theory of the firm, in my lecture I propose to focus on two specific questions in alliance negotiations and management, “How tight or loose a relationship do we wish to have with our partner? ” and “What kind of governance structure is best?” The study is based on a sample of 95 technology transfer alliances. Alliance relationships can have loose, contractual links such as licensing agreements. Or they may be much closer in equity joint venture alliances where the managers and engineers of the two firms rub shoulders on a daily basis. Interaction with one’s partner is necessary in order to coordinate operations, to effectively transfer tacit knowledge, to monitor for opportunism, to maximize joint synergistic value, and to make sure that an appropriate share of the net benefit created by the alliance is appropriated by the technology developer who provides the technology to their ally. However, too high a degree of interaction between the allies can increase coordination costs, and increases the chances of unintended technology leakage. The study suggests answers to the question, “What type of alliance is best?” or “What is the optimum level of inter-partner interaction?”using explanatory variables such as (1) Characteristics of the technology and future technology policy, (2) Coordination costs and risks, (3) Agreement provisions, and (4) Firm and Sector Characteristics.