姝 Academy of Management Review

2008, Vol. 33, No. 2, 473–491.

Baruch College, City University of New York

University of Illinois at Chicago

Mergers and acquisitions (M&As) and alliances are potential alternative choices for
managers. We propose that three dimensions of industry conditions are likely to be
influential in such choices: (1) industry demands on firms to make significant com-
mitment, (2) the environmental pressures for flexibility, and (3) the limitations on firm
choices stemming from industry concentration and institutional conditions. We de-
velop propositions about how differences across these three dimensions influence the
choices that firms make between M&As and alliances.

When a firm decides to expand its operations consider a form of alliance. We examine alli-
or develop new capabilities, its managers have ances that refer to a group of interfirm linkages
choices about how to proceed. Growth can be ranging from joint ventures to a variety of con-
internal or can involve joint actions with other tractual agreements. Alliances are to be distin-
firms. Important cooperative efforts with other guished from M&As, which involve the combina-
firms will involve risky investments and tend to tion of all of the assets of participating firms
be organized as contracts. Joint ventures and under common ownership. This can refer to the
strategic alliances (hereafter called “alliances”) merging of two more or less equal firms, as well
are examples. Sometimes cooperative efforts as acquisitions where one firm obtains majority
may be sufficiently complex and risky that par- ownership over another firm (Hagedoorn &
ticipants combine under common ownership in Duysters, 2002).
a merger or acquisition. While firms can also M&As and alliances have only infrequently
grow through internal development, they do not been compared as substitutes. While there are
tend to do so through making the particular con- many differences in practice between M&As and
tractual decisions to associate or acquire that alliances on such dimensions as size, industry,
characterize alliances or mergers and acquisi- relatedness, riskiness, length of time, degree of
tions (M&As). This makes it more difficult to integration, scope of overlap (whole versus part
compare internal development programs with of the organization), and structural possibilities,
M&As and alliances. Instead, in this paper we the only fundamental difference concerns own-
focus on interorganizational collaboration and ership, since a merger or acquisition implies a
attempt to clarify the basis for a choice between controlling ownership interest whereas an alli-
M&As and alliances. ance or joint venture does not. There are large
We refer to an alliance as an agreement be- alliances and small acquisitions. There are re-
tween two or more firms to jointly manage as- lated alliances and diversifying M&As. Some-
sets and achieve strategic objectives. Some al- times, M&As can become alliances (and vice
liances involve the creation of a separate jointly versa) through small changes in ownership.
owned entity. This is a joint venture, which we This suggests that the two types of deals can
substitute for each other over some range of
activity (Dyer, Kale, & Singh, 2004; Sawler, 2005).
We greatly appreciate the helpful comments of former Our concern is how industry-level factors in-
associate editor Anand Swaminathan and the anonymous fluence the choice of whether to merge or ally.
reviewers. In developing this research, we benefited from
discussions with Don Palmer. We presented an earlier ver-
There have been relatively few studies on the
sion of this paper at the annual meeting of the Academy of effects of the industry environment on M&As
Management in Seattle, 2003. and alliances. The few studies at the industry
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474 Academy of Management Review April

level of analysis have examined the effects of LITERATURE REVIEW
resource dependence (Pfeffer, 1972), industry
Numerous explanations have been offered for
concentration (Pfeffer & Salancik, 1978), market
M&As and alliances, including scale/scope
power (Burt, 1980; Galbraith & Stiles, 1984), in-
economies, resource dependence, transaction
dustry profitability (Christensen & Montgomery,
costs, institutional pressures, network effects,
1981; Park, 2003), and industry constraints and organizational learning (Gulati, 1998;
(Palmer, Barber, Zhou, & Soysal, 1995) on merger Palmer & Barber, 2001; Salter & Weinhold, 1978).
behaviors (Finkelstein, 1997). Such factors as en- To address whether combinations are best orga-
vironmental uncertainty (Dickson & Weaver, nized as M&As or alliances, researchers have
1997), technological complexity and volatility used resource dependence theory, transaction
(Hagedoorn, 1993), industry growth (Devlin & cost economics, industrial organizational (IO)
Bleackley, 1988; Dickson & Weaver, 1997), and theory, and institutional theory.
demands for internationalization (Dickson &
Weaver, 1997) have been identified as correlates
of alliances. Resource Dependence and Transaction Costs
We propose that industry environment signif-
icantly shapes how these decisions are made. Resource dependence theory (Pfeffer & Salan-
Industry focuses the attention of managers on cik, 1978) and transaction cost economics (Wil-
enduring patterns of behaviors across firms. In- liamson, 1985) address why firms might choose
dustry effects are persistent, relative to business M&As or alliances rather than open market
or corporate-parent effects (McGahan & Porter, transactions. Resource dependence theorists ar-
gue that firms manage interdependence with
1997). Persistent interindustry relationships also
other actors by reducing their dependence on
help predict M&A activity (Finkelstein, 1997;
others while increasing others’ dependence on
Pfeffer, 1972). In addition, there is evidence that
them (Oliver, 1991; Pfeffer & Salancik, 1978). The
firms are constrained by the competitive dynam-
choice of a governance arrangement (M&A or
ics (Aldrich, 1979; Scherer, 1980) and cultural
alliance) depends on how much control is
norms of their industries (Hirsch, 1985; Shear-
needed. M&A will be more likely the more con-
man & Burrell, 1987).
trol over a partner is needed, such as control
Industry conditions shape decision content
over critical suppliers or buyers (Finkelstein,
as well. M&A and alliance decisions are com-
1997; Pfeffer, 1972). Transaction cost theorists ar-
plex and unusual (Peteraf & Shanley, 1997), with gue that the choice of M&As versus alliances
an informational context characterized by in- results from a need to decrease the effects of
complete information, agency problems, rapid environmental uncertainty on a transaction, es-
change, and time pressures (Duhaime & pecially effects stemming from the opportunism
Schwenk, 1985). This suggests that the presence of partners due to market imperfections. In rel-
of standard industry practices, common regula- atively efficient markets and absent asset spec-
tory burdens, and shared values and norms ificity, neither M&As nor alliances are needed.
work to reduce uncertainty and shape the con- When market imperfections raise the costs of
tent of firms’ decisions (North, 2005). The features transactions, alternatives to market transac-
of a firm’s strategy often depend on industry/ tions must be considered, including M&As and
market characteristics, such as scale, scope, or alliances (Williamson, 1985).
differentiated demand (Shamsie, 2003). These theories have similar implications.
We are interested in the effects of industry Firms become vulnerable as they engage in
environment on the choice of M&As and alli- asymmetric exchanges and come to depend on
ances. We examine three dimensions of industry partners for resources and services. This places
environment. The first concerns industry re- them at risk of renegotiation or holdup by part-
quirements for commitment. The second con- ners, who thus gain power. Factor market imper-
cerns the environmental pressures for flexibil- fections give some firms power over others. To
ity. The third dimension concerns the extent to reduce their vulnerabilities, firms engage in
which firms’ choices are constrained by industry nonmarket linkages ranging from long-term
concentration, regulatory, and other institu- contracts to M&As (Joskow & Schmalensee, 1988;
tional forces. Pfeffer, 1972; Williamson, 1975). These are often
2008 Yin and Shanley 475

coupled with efforts to achieve scale or scope transaction cost economics is useful as a start-
economies (Williamson, 1985). These arguments ing point for understanding firm choices regard-
have received consistent research support at the ing M&As or alliances.
industry level regarding M&As (Burt, 1980; The choice of M&As versus alliances involves
Finkelstein, 1997; Palmer & Barber, 2001; Pfeffer, a cost-benefit analysis of the relative trade-offs
1972; Pfeffer & Salancik, 1978). of commitment and flexibility. Commitment
Resource dependence and transaction cost ex- brings great benefits to firms (Ghemawat, 1991),
planations have also been applied to alliances but it does so at a cost, in terms of both the
(Hagedoorn, 1993; Pfeffer & Nowak, 1976). Alli- investment itself and the potential for loss of
ances help firms reduce dependencies. Alli- foregone opportunities due to inflexibility. The
ances have greater flexibility and the options to same comparison can be made regarding flexi-
scale up or scale down the investment, depend- bility, in that more flexible arrangements allow
ing on the initial results of the collaboration. firms to take advantage of changed circum-
However, they provide less control over joint stances, but at the cost of less capability to in-
resources than do M&As. This creates gover- tensively exploit an opportunity. M&A possibil-
nance problems, since partners must cooperate ities in a situation can be compared with
to obtain performance benefits. These problems alliance possibilities to see if the net gain for
increase with alliance size and complexity, es- one, in terms of benefits net of costs, is larger
pecially when new governance structures are than the net gain for the other. M&As involve
needed for joint entities (Nooteboom, 1999). greater commitment but less flexibility than al-
Resource dependence and transaction cost liances. Alliances might be preferred in indus-
theories are applicable at the industry level as tries that do not require large investments or
well (Davis & Powell, 1992; Finkelstein, 1997). that undergo such unpredictable periods of
This assumes that “the exchange patterns of the changes that large investments are too risky. In
merging firms are reflected in the average of all the first situation, interfirm cooperation can be
firms” (Pfeffer & Salancik, 1978: 116). We argue achieved without the costs of M&As. In the sec-
that most firms in a given industry will be sub- ond, M&A-related investments risk premature
ject to similar technological requirements and obsolescence because of rapid industry change,
market dynamics. While these theories are firm making alliances relatively more desirable.
level, it is not implausible to expect that firms
will look to firms in similar situations for guid-
The Role of Industry Constraints:
ance on complex decisions. Cross-industry
Concentration and Institutional Influences
merger waves have proven difficult to explain
with firm-specific theories (Peteraf & Shanley, The discussion so far has concerned decisions
1997), since firms in one industry may have trou- made by firms regarding their critical invest-
ble learning from the experiences of firms fac- ments in linking with other firms. Also of inter-
ing very different problems in unrelated indus- est are the industry constraints that firms are
tries. However, firms within the same industry subject to when making their decisions. In most
can relate to common problems and situations, cases, firm choices are understandable in terms
and industry proclivities toward homogenous of the common situations faced by industry par-
strategic changes are more understandable (Ar- ticipants. Firms will choose based on the indus-
mour & Teece, 1978). try requirements for commitment or flexibility,
There may, of course, be situations where the and firms in the same industry will tend to
industry in question is heterogeneous in the de- choose similarly. In some industry contexts,
mands placed on firms. This would occur, for however, firms may not have a full array of
example, in industries with highly articulated choices open to them. For example, M&As are
niche structures or where there are significant more likely where there are relatively large
strategic groups (Dranove, Peteraf, & Shanley, numbers of firms competing and, thus, numer-
1998). In such settings, it might be added, there ous potential partners. Where there are only a
could be considerable disagreement regarding few large incumbents, there will be fewer poten-
the most appropriate industry definition. None- tial partners, and coming to a deal may be more
theless, we believe that an industry-level ap- difficult. This aspect of industry constraints,
proach to resource dependence theory and concerning the number, size, and distribution of
476 Academy of Management Review April

competitors, has been covered in studies of in- operates, norms and rules that define the legit-
dustry concentration. imate forms of corporate behavior and sanctions
There is more to industry constraints than con- for their violations, and common values regard-
centration. Sociologists consider constraints by ing important and appropriate behaviors and
focusing on rules and regulations governing an outcomes (Scott, 2001).
industry, informal behavioral norms among Conformity with institutional values, rules,
competitors, and other factors that establish and and norms provides benefits to firms. Institu-
maintain order, such as status, imitation, and tional frameworks simplify decision making by
reputation. avoiding disputes or limiting the set of choices
Industry structure. The IO literature suggests that are appropriate in a situation. Conformity
that industry structure determines firm conduct with institutional constraints also limits the
(Bain, 1968; Scherer, 1980). Many studies have stress of risky decisions by legitimating them.
examined the effects of structure on conduct and When there is substantial ambiguity regarding
performance. Concentration, for example, is one technological opportunities, industry change, or
of the most important market structure variables other factors, group-level learning processes
(Bain, 1951; Schmalensee, 1989). Industry concen- will be important influences on actors. For ex-
tration is the “combined market share of the ample, firms facing risky decisions without a
’leading firms’” (Shepherd, 1979: 180). With high clear basis for choosing between alternatives
levels of concentration, the expectation is that may resolve their uncertainty by considering
leading firms will be able to coordinate their what other firms in their industry have done
activities, especially pricing and output. With (Peteraf & Shanley, 1997).
lower levels of concentration, the expectation is Industry provides a natural basis for social
that the industry will be characterized by rela- comparisons among managers and is likely to
tively autonomous and competitive firm behav- be a focus for regulatory agencies (Fligstein,
ior, leaving interfirm coordination of pricing and 1990; Fligstein & Brantley, 1992; Haunschild,
output sporadic and weak (Shepherd, 1979: 63– 1993; Haunschild & Beckman, 1998; Hirsch, 1986).
64). Firms will tend to be influenced by the shared
Mergers, alliances, and concentration are experiences of others in the industry (Hambrick,
most commonly linked in the IO literature in 1982; Huff, 1982), leading them to develop norms
terms of the potential for collusion. When there regarding appropriate behaviors (Spender,
are fewer firms in an industry, it becomes easier 1987).
for incumbents to coordinate their pricing activ- Institutional influences work to simplify the
ity to limit rivalry. Weiss (1989) reviewed twenty industry environment and render it more regular
industry studies and found that prices tended to and predictable (DiMaggio & Powell, 1983).
be higher in more concentrated markets. This While their ultimate effect may be to reduce
sort of collusion is often illegal, and, thus, merg- industry uncertainty, the direct effect of institu-
ers prompting greatly increased concentration tional influences may well be to make the envi-
will receive greater antitrust scrutiny for their ronment more complex and constraining, espe-
potential anticompetitive issues. In more con- cially in times of change (North, 2005: 13–19). For
centrated industries, M&As are more difficult example, if the added costs of regulatory com-
and costly to implement, and firms are more pliance associated with a merger are too high, a
likely to pursue alliances. firm may choose not to pursue the merger, even
Overall, the IO literature shows the linkage if the business case for the combination was
between industry concentration and the inci- promising.
dence of mergers. Its particular lines of research How will incorporating economic and socio-
concerning collusion and antitrust show how logical perspectives on industry constraints af-
the constraining influence of concentration may fect our understanding of the choice between
affect firms’ decisions to merge versus ally. M&As and alliances? Institutional influences
Institutional influences. Institutional theorists may be broadly linked to the underlying techno-
argue that firms operate in a socially organized logical and economic conditions in an industry
environment. The factors that help to organize (Scott, 1994). For example, it is likely that the
the industry include collectively held frame- level of industry concentration will be associ-
works of beliefs about how an industry or sector ated with the institutional influences. The pat-
2008 Yin and Shanley 477

terns of norms and behaviors that develop may begin with multiple partners who discover,
among a few large competitors will be different through experience, that centralized control and
from those that develop among a larger number unified ownership are required for the combina-
of smaller competitors with more limited market tion to be successful. Once enough partners
power. Given the market power of larger com- have exited, the alliance has become a merged
petitors, it is also likely that regulatory regimes firm. The reverse might also occur, as a firm
will differ depending on the level of concentra- created out of M&A breaks into separate but
tion. These two aspects of industry constraint cooperating units. There have been few studies
will thus have a similar influence on the choice to date assessing these transactions as substi-
of M&A versus alliance. As the industry context tutes (Dyer et al., 2004; Hagedoorn & Duysters,
becomes more constrained, either through con- 2002; Hennart, 1988; Robinson, in press; Sawler
centration or through the proliferation of institu- 2005; Villalonga & McGahan, 2005; Wang &
tional forces, firms will be more likely to choose Zajac, 2007).
alliances over M&As. We develop these ideas Hennart (1988) used transaction cost argu-
further in the remainder of the paper. ments to explain the choice between joint ven-
tures and acquisitions. He argued that joint ven-
tures are used to reduce management costs and
should be chosen over acquisitions if the de-
The choice that a firm makes between M&A sired assets each party needs are firm specific
and alliance involves balancing requirements and only a subset of those held by its partner.
for commitment with requirements for flexibil- The cost of acquisitions would be particularly
ity. This balancing of commitment and flexibil- high in these circumstances and would be
ity is subject to the further constraints of the higher for large or extremely diverse targets. In
industry structure and institutional forces. We these situations, purchasing the whole firm
present a framework based on these three di- would commit the acquirer to enter unrelated
mensions that provides the basis for a set of fields or to suddenly expand in size, posing
research propositions. management challenges for the acquirer inde-
M&As differ fundamentally from alliances pendent of the immediate logic of the combina-
only in degree of ownership, in that a merger or tion. Joint ventures permit managers to avoid
acquisition implies a majority or controlling in- these problems. In such circumstances, firms
terest whereas an alliance does not. While there will prefer the lower costs of sharing power in
may be other factors that correlate more with an alliance to the higher costs of ownership
M&As than with alliances, it is this difference through M&A. The relative size of the assets
that is fundamental. This suggests that M&As desired by each party is critical here. Firms will
will be preferred where unified ownership and have more at risk in collaborating with other
control rights permit more thorough exploitation firms when the assets involved are a substantial
of combined organizational resources than portion of those held by each partner. Under
would be possible otherwise. This exploitation, such circumstances, if there is substantial
however, comes at the cost of greater invest- causal ambiguity (Rumelt, 1984) about the core
ments— of physical, human, and intangible re- resources, M&As will be preferable to alliances.
sources—and increased governance costs. Alli- Hagedoorn and Duysters (2002) studied how
ances generally do not permit as intensive environmental conditions and firm-specific con-
exploitation of joint assets as do M&As, but they ditions (i.e., appropriability and routines) influ-
are easier to exit if necessary. Alliances also ence preferences for M&As or alliances. In high-
will be preferred where continuing cooperation tech environments requiring learning and
among partners is beneficial and where central- flexibility, alliances are preferred as vehicles
ized control could harm cooperation and destroy for acquiring innovative capabilities. In low-
a combination’s value. tech sectors with less technological change,
For many transactions, it may not be clear M&As are preferred for acquiring innovative ca-
whether the centralized control of M&A is pref- pabilities. These results suggest that firms need
erable to the flexibility and decentralized con- to maintain flexibility in uncertain industry en-
trol of an alliance, and the two could be viewed vironments with the more flexible organization-
as substitutes. For example, a large alliance al arrangements provided by alliances.
478 Academy of Management Review April

Robinson (in press) sees an alliance as the limit their exposure while maintaining the op-
choice to alleviate agency problems brought on tion to acquire if collaboration yields favorable
when target businesses are significantly riskier results.
than those of the acquirer. In such conditions,
parent firm managers can underinvest in under-
An Industry Framework for M&A versus
dog projects in the target to ensure their individ-
Alliance Choice
ual performance results. This leads to agency
problems, since managerial imperatives to How does a firm’s industry environment facil-
achieve budget objectives override the strategic itate the choice of M&A versus alliance? We
objectives behind a deal. Governance by M&As believe that three dimensions are influential.
in such a setting may actually promote dysfunc- The first concerns the degree to which the indus-
tional decision making in the combined firm try context places demands on firms to make
because of perverse incentives. Alliances force commitments to a given strategic position. The
parent firm managers to commit investment and second concerns the degree of environmental
other support to the venture. The contractual uncertainty firms face regarding likely paths of
nature of alliances is a sounder way to ensure industry evolution, the riskiness of investments,
postcombination compliance than a bureau- technological uncertainty, and other factors. The
cratic regime in which premerger promises may third dimension concerns the degree of con-
not be fulfilled. Robinson’s results suggest that straint placed on industry participants by such
alliances are preferred in high-growth, risky, factors as industry structure, regulatory re-
and research-intensive industries. gimes, and other institutional forces.
Villalonga and McGahan (2005) studied the Requirements for commitment. Industry re-
choices among acquisitions, alliances, and di- quirements for strategic commitments are the
vestures made by eighty-six Fortune 100 firms exogenous demands for investment that most
between 1990 and 2000. They studied the impact firms in an industry need to meet in order to
of firm attributes, target/partner attributes, and succeed— common requirements for success.
transaction attributes on the choice of different These requirements may concern the scale and
governance forms. The authors found support for scope of operations, expressed in such ideas as
resource explanations—namely, that the target “minimum efficient scale” (MES). They also can
or partner’s technological resources are associ- refer to the general levels of investment and the
ated with the focal firm’s choice of acquisitions types of “asset specificity” (Williamson, 1985)
over alliances. Study results also suggest the common in the industry, including investments
importance of organizational learning explana- in specialized human assets or in intangible
tions. A focal firm’s acquisition experience is assets, such as reputation and brand equity.
associated with the choice of acquisitions. The These requirements also include investments in
number of prior alliances between the focal firm governance mechanisms, such as dual sourcing
and the target also is positively associated with and other risk-sharing arrangements that are
the choice of alliances. made to reduce transaction cost risks.
Dyer et al. (2004) developed a framework to Identifying a single dimension of industry
help executives decide whether they should ally commitment is complex. Commitment involves
with or acquire potential partners. Their frame- two industry characteristics that imperfectly
work suggests that executives must analyze parallel each other: scale/scope requirements
three sets of factors before choosing between and asset specificity. Commitment certainly in-
M&As and alliances: the resources and syner- volves scale and scope requirements common in
gies they desire, the marketplace they compete an industry. Highly capital-intensive indus-
in, and their competencies at collaborating. It tries—for example, steel and autos—would cer-
suggests that acquisitions are preferable to al- tainly qualify as high-commitment industries,
liances when firms intend to combine tangible since large amounts of productive assets must
resources, such as manufacturing plants. If com- be deployed as a basis for competing. Commit-
panies plan to generate synergies by combining ment requirements, however, also concern asset
human and intangible resources, then alliances specificity, by which we mean the degree that
are preferable to M&As. When market uncer- assets can be efficiently redeployed if their ini-
tainty is high, firms should choose alliances to tial uses prove infeasible (Teece, 1980, 1982). In-
2008 Yin and Shanley 479

dustries characterized by high asset specificity there are considerable scale economies associ-
impose commitment requirements on incum- ated with the operation of commercial airliners
bents, since once these assets have been de- at full capacity. However, airliners can be easily
ployed, they are costly to redeploy. redeployed from unprofitable local routes to
Scale/scope requirements and asset specific- profitable ones and can even be shifted from
ity are related, in that one refers to the volume of commercial to private or charter use. The fungi-
assets committed and the other to the sunkness ble nature of airliners would not by itself argue
(Sutton, 1991) or “stickiness” (Ghemawat, 1991) of for extensive merger activity. The evolution of
those assets. We expect that large-scale assets the U.S. airline industry, however, was depen-
will often involve considerable sunkness and dent on investments besides those in airliners,
that small-scale assets will be more fungible. and many of these investments involved large
However, the association between these two as- specialized assets. Examples of these include
pects of commitment is not a perfect one. Some investments in central hub facilities, specialized
assets, such as commercial airplanes, have baggage handling equipment, computerized
characteristics conducive to scale and scope reservation services, local advertising, and
economies but can be easily redeployed or even high-volume maintenance facilities (Peteraf,
sold if their initial use, such as in new market 1995; Peteraf & Reed, 1994). As the industry
entry, proves unsuccessful. This is at the heart of evolved in a “hub and spoke model” after dereg-
the “contestable market” hypothesis developed ulation in 1978, it was these latter sets of sunk
by Baumol, Panzar, and Willig (1982). Other as- investments that arguably drove the extensive
sets, such as specialized human assets in M&A activity witnessed in the industry.
knowledge-intensive industries, may have high A second exception concerns the role of spe-
levels of asset specificity and yet not be associ- cialized human assets in knowledge-intensive
ated with scale and scope requirements, since industries. While investments in generalized
firms are not able to own and exploit human human resources can be associated with signif-
assets as they can their physical capital. Thus, icant scale commitments, specialized human re-
while we are generally associating scale/scope source investments, while often substantial, do
and asset specificity, there are also midrange not involve the same commitments. Specialized
industry situations where the analysis of com- human resources—for example, expert re-
mitment is more complex. searchers— can often move freely from firm to
The greater the requirements for commitment, firm and across industries. M&A transactions
the more likely it is that firms will pursue inter- whose value is predicated on combining spe-
firm collaborations through M&As. Firms in cialized human resources are especially vulner-
these industries generally will produce at high able to the exit of key staff during integration.
volumes and use significant specific assets. The biotechnology industry is characterized
This means that the firms will have more to gain by smaller firms and relatively fewer M&As
by scaling up their production and distribution than alliances. This is due, in part, to the impor-
via mergers. They will have more at risk in col- tance of the specialized expertise of particular
laborating with other firms, especially where researchers or research groups, coupled with
significant relationship-specific assets are in- the difficulties of integrating such individuals or
volved. This leads to an interest in greater con- groups into larger firms. Where specialized ex-
trol, which is consistent with the predictions of pertise is a key objective, an acquirer will have
resource dependence and transaction cost theo- difficulties accessing the expertise of key indi-
ries and suggests a preference for M&As over viduals and will risk their exit if those individ-
alliances. In industries with high commitment uals become dissatisfied, thus placing the value
requirements, firms will wish to exercise control of the merger in peril. This suggests alliances as
through M&As. more appropriate vehicles (Dyer et al., 2004).
How do the exceptions mentioned above re- Requirements for flexibility. Environmental
late to this general logic? The exception regard- uncertainty refers to the clarity and predictabil-
ing fungible assets with scale/scope potential ity of the premises of industry incumbents. It has
argues against our logic, provided there are no been viewed as the most relevant environmen-
other bases for required sunk investments in an tal characteristic affecting firms’ strategic deci-
industry. For example, in the airline industry sion making (Dess & Beard, 1984; Emery & Trist,
480 Academy of Management Review April

1965; Lawrence & Lorsch, 1967). This uncertainty firm choices that stem from industry concentra-
is multidimensional: technologies and products tion or institutional forces. For example, in more
may change, market acceptance of a product concentrated industries, acquisition options are
line may be unclear, and new products may scarcer and more costly. Moreover, competitors
have an impact on future industry operations. can clearly observe an interfirm collaboration
While any industry will be associated with and respond to it such that the value of the
some uncertainty, high uncertainty implies the collaboration must account not only for its direct
possibility that the environment of an interfirm costs and benefits but also for the indirect costs
collaboration may change enough that the fun- of competitor responses.
damental assumptions of that collaboration are By “institutional constraints,” we mean the
challenged or rendered obsolete. Such a change implicit and explicit social and regulatory or-
would place the value of the entire collaboration ders governing industry participants. These
in jeopardy. constraints come from the activities of govern-
Uncertainty has been linked to increased co- mental agencies, professional and industry as-
operation between firms (Daft & Lewin, 1993; sociations, and the broader social networks in
Devlin & Bleackley, 1988; Dickson & Weaver, which firms are embedded (Scott, 2001). Institu-
1997). When environmental forces create greater tional constraints are not just regulatory de-
turbulence, there is a greater need for interor- mands and coercive pressures, however; they
ganizational connections (Daft & Lewin, 1993). can also involve more general demands on
Industry participants, when choosing among firms to imitate industry leaders or other domi-
different modes of interfirm linkages, will at- nant firms. Firms care about their reputations
tempt to maintain their flexibility and avoid and their identities as well (Albert & Whetton,
commitments that would be put at risk by un- 1985; Dutton & Dukerich, 1991; Fombrun & Shan-
foreseen changes. Dickson and Weaver (1997) ley, 1990). They can gain reputation and status
found that managerial perceptions of general by an extensive program of M&As (Peteraf &
uncertainty, technological demands and volatil- Shanley, 1997). Firms that are acquired or
ity, and demands for internationalization all in- merged often end up losing their identities alto-
creased the likelihood that firms would choose gether, as happened to Compaq, Amoco, and
alliances. They found that perceived reductions Bank One. Industry demands for legitimacy, sta-
in uncertainty were associated with decreased tus, reputation, and identity can influence firm
interest in alliances. Other studies suggest that decisions in directions different from those sug-
high uncertainty is associated with alliances gested by requirements for commitment and
among high-technology firms (Li & Atuahene- flexibility.
Gima, 2002; Shan, 1990). Certain institutional forces, such as the work
Structural and institutional constraints. The of regulatory agencies enforcing rules backed
implication of our first two dimensions is that by strong sanctions, may have a very distinct
firms will choose between M&As and alliances influence on firms’ choices of M&As versus alli-
based primarily on requirements for commit- ances. Specifically, as regulatory scrutiny in-
ment or flexibility. Firms often must also con- creases, firms tend to choose alliances because
sider the reactions of their competitors, govern- of the increased costs of regulatory compliance
ment regulators, and other stakeholders to their associated with mergers. Other institutional
choices. In addition, firms tend to seek legiti- forces, such as the pressure to imitate high-
macy for their actions and, thus, tend to comply status firms and the need to maintain legiti-
with implicit and explicit norms of industry be- macy and reputation, however, do not imply a
havior, which might lead them to one choice specific preference for M&As or alliances. In-
over another. This requirement to consider in- stead, pressures for imitation and legitimacy
dustry constraints is different from firms’ need to imply a limitation on firm choices such that in-
consider commitment or flexibility require- dustries characterized by M&As or alliances in
ments. It is a more general moderating condition the past are likely to be similarly characterized
that indirectly influences the merge versus ally in the future.
decision by affecting the choices open to firms. We focus on the regulatory regimes and gov-
Our third dimension—structural and institu- ernment mandates for an industry when study-
tional constraints— concerns the limitations on ing the constraining role of institutional forces
2008 Yin and Shanley 481

in firms’ decisions to merge or ally. The level of ambiguity regarding the merge versus ally de-
regulatory scrutiny is broadly linked to the de- cision.
gree of industry concentration. We expect struc-
tural and institutional constraints to influence
firm decisions when they are pronounced, such Conceptual Framework
as when an industry is significantly concen- These three dimensions are represented in
trated, when it is subject to extensive regulatory Figure 1, using a simple low/high distinction for
scrutiny, or both. Under high levels of structural each dimension. The resulting 2 ⫻ 2 ⫻ 2 matrix
and institutional constraints, firms will be more suggests eight situations in which the relative
likely to choose alliances rather than M&As. For desirability of M&A versus alliance may be as-
medium or low levels of structural and institu- sessed. Figure 1 provides the bases for the spe-
tional constraints, we are not expecting a dis- cific propositions presented in the remainder of
tinct influence for this dimension. Instead, the the paper.
decisions of firms regarding M&As versus alli- Cell 1 represents a situation characterized by
ances would be the same as those predicted by low needs for flexibility, low requirements for
requirements for commitment and flexibility commitment, and low structural and institu-
without reference to industry constraints. tional constraints. This condition is akin to that
An exception to our general predictions re- of a competitive market. The economic concept
garding industry constraints is when there is no of a “perfectly competitive market” is an ex-
dominant influence of either commitment or treme example (Besanko, Dranove, Shanley, &
flexibility requirements. In such a situation, we Schaefer, 2003). In this context firms are unable
expect that firms will decide between M&As and to gain a sustainable competitive advantage
alliances based on the choices of other elite and and generally display “price-taking” behaviors.
high-status firms in the industry. Uncertainty Firms in these industries will not possess sig-
encourages imitation (DiMaggio & Powell, 1983), nificant strategic assets as a basis for competi-
and firms will tend to model themselves on tion. The cell represents a context in which nei-
other organizations when there is significant ther M&As nor alliances are likely to create

Typology of Industry Contexts
482 Academy of Management Review April

significant and sustainable advantage because mented. Interfirm collaborations will be smaller,
of the fragmentation of the market and the fact more exploratory, and more cooperative in na-
that industry participants are not called on to ture. Flexibility will be desirable to accommo-
make strategic commitments or to adapt to un- date unexpected industry developments. We
certainties in the environment as a condition for would expect more alliances than M&As in such
success. While both M&As and alliances can a setting.
occur in such situations, neither is preferable to Research-intensive, knowledge-based indus-
market transactions, which are less expensive. tries, such as biotechnology, provide examples
Cell 2 represents similar conditions to Cell 1 for this cell. In the biotechnology industry there
in terms of low needs for flexibility and low are numerous firms, most of them small. Al-
requirements for commitment, with the excep- though biotech firms make commitments in as-
tion of a high degree of structural and institu- sembling and equipping their research teams,
tional constraints. Such a condition might arise these commitments are small relative to those in
out of first mover advantages, status or prestige other research-driven industries, such as semi-
differences among firms, location advantages, conductors and pharmaceuticals. The state of
and restrictive entry regulation. In this situation knowledge in biotechnology changes rapidly,
M&As would not create significant advantage. and biotech firms need to be flexible. Efforts to
Alliances, however, may be a preferred mode of exploit scale and scope economies in biotech-
collaboration to access reputation, location ad- nology have not been as successful as they have
vantage, or any other advantage to be obtained been in related industries, such as pharmaceu-
from the structural and institutional context of ticals (Dyer et al., 2004). Not surprisingly, alli-
the industry. Examples of industries in this cell ances have been more common than M&As.
include localized professional services busi- Cell 4 represents conditions similar to those in
nesses, such as real estate brokers, booksellers, cell 3, with the exception of a high level of struc-
and dry cleaners, where product and service tural and institutional constraints. This situa-
quality, personal attention, and reputation are tion might result from a heavy emphasis on in-
valuable and customers are less willing to shop novation and adaptation by industry members,
around for additional providers once an accept- with industry structure determined by the pres-
able seller has been identified. tige or status of established firms or their track
For these sorts of businesses, industry con- records at innovating. Firms in these industries
straints may be important, even in the absence need to invest to gain a favorable market posi-
of large scale or scope. Among these firms, per- tion, but the investments are likely to be smaller
sistent cooperative relationships, sometimes of in scale and more adaptable than traditional
a systematic nature, are common. Real estate investments in scale- and scope-related capa-
brokers make agreements to share listings and bilities. Examples include investments in spe-
split fees. Local bookstores often cooperate in cialized human assets or in dynamic capabili-
sponsoring special events to attract customers. ties (Teece, Pisano, & Shuen, 1997).
Dry cleaners develop arrangements for sharing We would expect more alliances than M&As
capacity in busy times. These are similar to in these industries to maintain flexibility when
what Phillips (1960) calls “linked oligopolies.” facing industry changes. High industry uncer-
Cell 3 represents an industry setting charac- tainty focuses the attention of firms on the need
terized by high needs for flexibility, low require- for redeployable assets and the avoidance of
ments for commitment, and low structural and significant commitments. It also focuses the at-
institutional constraints. This is a situation tention of firms on those practices and products
where value is obtained from investments in the that have succeeded in the past. This implies
industry, although the best ways to exploit that status based on past performance is an
value creation opportunities are unclear, and asset in selecting partners for future alliances.
investments, while entailing some risk, are not Status and reputation become vehicles to better
too substantial. In such situations interfirm col- inform potential partners about a firm’s capabil-
laborations to manage industry uncertainties ities and mitigate the risks and uncertainties
may prove valuable, even though participating involved in an association.
firms are not called on to make significant stra- The venture capital industry provides an ex-
tegic commitments and the industry is frag- ample for this cell. There are large numbers of
2008 Yin and Shanley 483

firms participating. These firms are generally advantage. We expect M&As to be more preva-
small, and there is high turnover of industry lent here than alliances because of the impor-
participants. While the industry is not highly tance of scale and scope.
concentrated, there is evidence of clear status Cell 6 represents similar conditions to those in
ordering among firms in the industry, based on cell 5, with the exception of a high level of struc-
their track records of backing successful ven- tural and institutional constraints. This implies
tures. At the threshold of innovation, venture that there may be limitations on the ability of
capital firms face extraordinary uncertainty and firms to link with other firms via M&As. The
need to constantly adjust to technological and higher the level of structural and institutional
economic changes. Venture capital firms often constraints, the more likely that scale and scope
collaborate to share risks and enhance prestige economies in the industry are present but al-
through association with higher-status peers. ready being exploited. Furthermore, powerful
Cell 5 represents an industry context charac- industry leaders could possibly increase the
terized by low needs for flexibility, high require- costs of M&As by tacit collusion or other cooper-
ments for commitment, and low structural and ative interactions. In an industry that is highly
institutional constraints. While any industry un- concentrated and regulated, the potential anti-
dergoes change, low uncertainty here implies competitive effects of further concentration may
that the basic premises of the industry, in terms prompt regulators to increase their scrutiny and
of its products, technology, distribution, and cus- raise the costs of M&As over what they would be
tomers, are relatively stable. Firms in these set- in more competitive and less constrained mar-
tings can assume sufficient industry continuity kets. We expect alliances to be more likely than
to permit substantial commitments. There may M&As in these conditions because of the in-
even be opportunities for scale and scope econ- creased costs associated with M&As.
omies that have not been exploited by industry Examples for this cell would include tradi-
incumbents. tional, mature manufacturing industries, such
High commitment requirements here mean as steel and heavy metals, automobiles, and
that firms must make significant investments tobacco. These industries are highly concen-
that are costly to reverse as a condition of com- trated and regulated. Most scale and scope op-
peting. This suggests that firms in these settings portunities are already exploited by incumbent
will attempt to exploit scale and scope econo- firms. The gains from industry consolidation
mies. Flexibility and fluidity will not be as nec- that motivate M&A activity are less likely to
essary in such situations. The assumed low occur in these industries. As a result, alliances
level of structural and institutional constraints are more prevalent.
suggests that firms will tend not to be deterred Cell 7 represents an industry context of high
from making necessary commitments on the ba- needs for flexibility, high demands for strategic
sis of market power considerations or institu- commitments, and a low degree of structural
tional restrictions. In such a situation, we would and institutional constraints. This could happen
expect more M&As relative to alliances. in an established capital-intensive industry in
This situation is relevant for industries with which innovation and new product development
commodity-type products, such as agricultural are important and where the industry is under-
wholesalers and marketers. Firms such as going an external shock because of deregula-
Cargill and ADM are examples. These indus- tion or significant foreign entry. A newly dereg-
tries are characterized by fairly stable market ulated or expanded market would allow scale
demand and predictable technological ad- and scope economies to be exploited. Firms par-
vancement. While there are many smaller firms ticipating in such a context will need flexibility
in these businesses, there is also potential for but will also need to make significant invest-
considerable scale and scope economies, espe- ments to exploit scale and scope opportunities.
cially among industry leaders. Most of these This context places conflicting demands on
industries are sufficiently large and global in firms, leading to the expectation that both M&As
scope that there are few problems with exces- and alliances could be employed in such a set-
sive concentration or with antitrust regulation. ting. We expect that when firms face conflicting
Price competition is significant, and cost advan- demands between the needs for commitment
tages are important for achieving competitive and the needs for flexibility, they will look to
484 Academy of Management Review April

other firms as a basis for making a decision. ments in scale-intensive capabilities, as well as
Industry-wide practices and institutional rules needs for significant flexibility given the impor-
will therefore be relevant here. We expect that tance of research and development. The indus-
firms will tend to follow institutional cues re- try is also extensively regulated and concen-
garding the choice of M&As and alliances by trated. While there have been some large
watching what other firms do, especially highly mergers in the industry in recent years (e.g.,
visible ones, and imitating their choices. Pfizer acquired Pharmacia in 2003, and Sanofi
Examples for this cell include such industries acquired Aventis in 2004), the extent of alliance
as entertainment and motion pictures. In the set activity in the industry is much larger. This is
of industries generally related to entertain- due to such factors as regulatory scrutiny, needs
ment, there has been very substantial change, for partnering across geographic markets, and
including deregulation, technological innova- needs for securing distribution capabilities.
tion, and diversification across traditional in-
dustry boundaries (Fombrun & Astley, 1982). The
effect of these changes has been to create a
large entertainment sector that has a strong po- To develop the intuitions behind the concep-
tential for scale and scope economies, is subject tual framework, it is necessary to further specify
to almost continuous change, and lacks both different industry conditions characterized by
significant economic concentration and a uni- the three dimensions of the typology in terms
fied institutional framework. There have been that can, in principle, be measured and tested.
significant mergers among these firms, with In this section we present eight sets of proposi-
TimeWarner being an example of a large enter- tions (eleven in total). The first five concern dif-
tainment conglomerate. There are possibly even ferent types of industry characteristics, includ-
more alliances in this domain, however, as ing capital intensiveness, specialized human
projects and deals come and go. The clearest asset intensiveness, combined capital and spe-
example of the importance of alliances is in the cialized human asset intensiveness, the impor-
increasing dominance of small movie produc- tance of tacit knowledge, and the level of tech-
tion companies that form and reform new asso- nological uncertainty. The next six propositions
ciations with dozens of partners on each major concern aspects of the structural and institu-
film project. tional constraints.
Cell 8 represents conditions similar to those in
cell 7, with the exception of a high level of struc-
Requirements for Commitment: Main Effects
tural and institutional constraints. The coupling
of high commitment needs, high flexibility Capital intensiveness. Capital intensity refers
needs, and a high level of structural and insti- to the amount of physical capital used to pro-
tutional constraints will raise the costs for firms duce a unit of output. Firms in capital-intensive
to commit significant assets via mergers. Given industries will have higher fixed costs and re-
our expectations for the equal likelihood of quire greater economies of scale and scope to
M&As and alliances for Cell 7, the increase in succeed (Chandler, 1977, 1990). Interfirm collab-
costs associated with M&As because of the con- orations in these industries will require unified
strained industry environment will shift the bal- control over the combined firm, especially in
ance of options to alliances and away from larger transactions with expectations for econo-
M&As. mies of scale and scope. This will increase the
Examples for this cell include the semicon- desirability of M&As relative to alliances. These
ductor and pharmaceutical industries. The considerations suggest the following proposi-
semiconductor industry is heavily concentrated. tion.
Even though it is highly innovative, it also
Proposition 1: M&As will be more
places significant demands on participants for
likely than alliances in capital-inten-
investments in scale-intensive facilities. Alli-
sive industries.
ances to set up dedicated generic manufactur-
ing facilities, or “fabs,” are common in the in- Specialized human asset intensiveness. Not
dustry. The pharmaceutical industry is also all value-creating investments are amenable to
characterized by needs for significant commit- control through ownership. Investments in spe-
2008 Yin and Shanley 485

cialized human assets are an example, since it economies can be exploited. Specialized human
is difficult to control critical employees as one asset intensiveness will be associated with a
would control fixed assets, intellectual proper- greater likelihood of alliances because of the
ties, or patents. Employees are free to leave a needs for cooperation and flexibility. In indus-
firm, and firms must secure their cooperation if tries with significant capital and specialized hu-
their specialized human assets are to be put to man asset requirements, we expect that manag-
work. This makes specialized human assets a ers will be tempted to pursue both M&As and
different situation from traditional settings of alliances to improve their asset productivity.
labor intensiveness and traditional human re- Trying to fashion cooperation that balances the
sources, which suggests that firms in industries requirements of capital and specialized human
high in specialized human assets will be more assets intensiveness may prove difficult. The
likely to use alliances than M&As. uniform control needed to exploit scale and
This intuition is true for specialized human scope opportunities may work against the flex-
assets, even if there is substantial causal ambi- ibility, cooperation, and skill sharing required
guity (Rumelt, 1984) of the core resources of po- for joint R&D or new product development (Paut-
tential partners. Causal ambiguity exists when ler, 2003). These considerations suggest the fol-
the precise reasons for success or failure cannot lowing proposition.
be determined and it is impossible to produce
Proposition 3: M&As and alliances will
an unambiguous list of the factors of production
be equally likely in industries charac-
(Rumelt, 1984). When there is causal ambiguity,
terized by high levels of capital inten-
firms may prefer ownership through mergers
siveness and specialized human asset
over alliances in order to have more control of
the combined resources. However, firms cannot
own or control specialized human assets as they Tacit knowledge. Tacit knowledge is knowl-
can control fixed assets. Value from cooperation edge that is difficult to articulate and communi-
based on specialized human assets requires cate and that often requires face-to-face contact
more investment in people, more retention of for effective transfer (Teece, 2000: 13). Tacit
trained people, and more cooperation between knowledge is also associated with ideas of
firms over new resources. causal ambiguity (Rumelt, 1984). The presence of
Interfirm collaborations through alliances extensive tacit knowledge in an interfirm asso-
based on specialized human assets will be more ciation suggests a higher cost of transferring
flexible and less susceptible to exploitation knowledge and a higher cost of contracting. This
than linkages controlled through hierarchy, as will raise the cost of alliances, which depend on
in M&As. Meanwhile, it has long been recog- contracts, relative to M&As. This may make
nized that M&As tend to create cultural clashes M&As preferable to alliances. As already sug-
when they are implemented (Haspeslagh & gested, this implies that the assets involved in
Jemison, 1991; Zollo & Reuer, 2003), which, cou- collaboration are sufficiently large relative to
pled with the difficulties of exploiting special- those held by each partner to justify ownership
ized human assets through hierarchical con- investments.
trols, might increase the turnover of valuable
Proposition 4: M&As will be more
employees from the acquired firms.
likely than alliances in industries
Proposition 2: Alliances will be more characterized by high levels of tacit
likely than M&As in industries charac- knowledge.
terized by a high level of specialized
human asset intensiveness.
Requirements for Flexibility: Main
Capital and specialized human asset inten-
Effect—Technological Uncertainty
siveness. What about industries with high lev-
els of both capital intensiveness and special- As the state of knowledge regarding an indus-
ized human asset intensiveness? Firms in such try’s technology changes, firms will feel pres-
industries will face conflicting influences. Cap- sure to adjust. Technological change will stim-
ital intensiveness will promote M&As, in which ulate firms to adapt, but the variability and
major investments can be controlled and scale predictability of technological change will influ-
486 Academy of Management Review April

ence which adaptations are selected (Bourgeois with increased concentration, and incumbents
& Eisenhardt, 1988). If technological change is will be better able to collude without bearing
predictable, firms can forge new, long-lasting the costs of merging. Antitrust authorities also
relationships with other firms through M&As. A will be more aware of potential market power
predictable trajectory of change will make stra- gains from M&As among market leaders and,
tegic commitments for adaptation more defensi- thus, will scrutinize high-concentration indus-
ble. When the extent and uncertainty of techno- tries more intensively.
logical change are high and its trajectory is not These points are also consistent with the eco-
predictable, however, M&As will become less logical model of resource partitioning (Carroll,
desirable because of the concern that the re- 1985) that, as concentration rises, generalists
quired investments will be negated by subse- will tend to compete vigorously for the center of
quent unforeseen changes. This will make alli- the market, which will create opportunities for
ances more desirable, since they are easier to specialists to thrive on the periphery. A study of
arrange and reverse. the U.S. wine industry over the period of 1941 to
Technological change may be fairly continu- 1980 showed that a mature industry with a high
ous in some industries but discontinuous and degree of concentration is subject to resource
less predictable in others. Research suggests partitioning, with the emergence of distinct gen-
that technological uncertainty contributes to al- eralist and specialist segments (Swaminathan,
liance formation (Dickson & Weaver, 1997; Hage- 2001). In another study of the American brewing
doorn, 1993). Dickson and Weaver (1997) found industry, Carroll and Swaminathan (2000) sug-
that high technological demands and volatility gested that alliances are one way in which firms
increased the odds of alliance use among Nor- from these two segments can grow. For instance,
wegian manufacturing firms. Other studies sup- Anheuser-Busch, a generalist, has equity stakes
port these expectations (e.g., Eisenhardt & in a few microbrewing firms and distributes
Schoonhoven, 1996; Hagedoorn & Duysters, their products. Previous empirical studies also
2002). These considerations suggest the follow- showed that acquisitions are less likely in
ing proposition. highly concentrated industries (Hennart & Park,
Proposition 5: Alliances will be more 1993; Yip, 1982).
likely than M&As in industries where Proposition 6a: M&As will be more
technological uncertainty is high. likely than alliances in industries with
moderate levels of concentration.

Structural and Institutional Constraints: Proposition 6b: Alliances will be more
Moderating Effects likely than M&As in industries with
high levels of concentration.
Industry concentration. Industry concentration
concerns the number of industry participants Regulatory environment and coercive pres-
and the distribution of their market shares. It is sures. Firms are not only constrained by indus-
associated with the relative advantage accruing try concentration but also by the institutional
to large firms owing to both scale and scope forces of their industry. Institutional pressures
advantages and to the greater ability of larger tend to reduce the variation in firm behaviors
firms to restrict competition and benefit from and to encourage conformity (DiMaggio & Pow-
tacit collusion. Thus, we expect a positive asso- ell, 1983). We expect the degree to which firms
ciation between industry concentration and the pursue M&As or alliances to generally conform
likelihood of mergers in the industry. Specifi- to the overall patterns and norms of their insti-
cally, a moderate level of industry concentration tutional environments (DiMaggio & Powell, 1983;
will be associated with scale and scope econo- Fligstein, 1990; Haunschild, 1993).
mies and will signal potential benefits from One type of institutional force is the coercive
M&As. pressure stemming from political influences
At high levels of concentration, however, alli- and the problem of legitimacy in the larger en-
ances may be more desirable. There may be vironment (DiMaggio & Powell, 1983). Coercive
limits to the gains from M&As. The number of pressures include force, persuasion, and impo-
potential merger partners will also be reduced sition of organizational models on dependent
2008 Yin and Shanley 487

firms. These pressures are often linked with be- (2001), for instance, found that a rising number of
havior norms. One area where firms face these acquisitions completed in the previous three
challenges is regulatory change, or government years by other firms in a corporation’s primary
mandate, which affects many aspects of an or- industry increased the likelihood of an acquisi-
ganization’s decisions and behaviors (DiMaggio tion by a focal firm. Haunschild (1993) found that
& Powell, 1983). In this case, firms’ decisions firms tend to imitate the acquisition activity of
regarding M&As versus alliances should also firms with which they share board interlocks.
conform to the prescriptions of the common le- Joint ventures and alliances can similarly be
gal environment. Where there is significant an- explained in terms of imitation processes, since
titrust scrutiny, for instance, M&As will be more firms model themselves on their peers when fac-
difficult and costly to complete, so alliances will ing high environmental uncertainty (Kogut,
be more prevalent among firms in the industry. 1988). In making their decisions about M&As ver-
Firms are also subject to coercive pressures sus alliances, firms will be particularly influ-
outside the governmental arena, including the enced by the high-status firms in the industry.
imposition of organizational models on depen- Status or reputation signals the quality of the
dent firms (DiMaggio & Powell, 1983). When firms, which inclines industry followers to pay
firms in a given industry are highly dependent attention to their strategic moves (Larson, 1992;
on other organizations for funding or other re- Podolny, 1994).
sources, we expect that their choices regarding These considerations suggest that firms
M&As versus alliances will conform to the re- choose M&As or alliances based on the choices
quirements of funding sources and other re- of other firms in the same industry, with a def-
source providers. For example, in start-up high- erence toward elite and high-status firms.
technology industries, it is common for influential Proposition 8a: Alliances will be more
venture capitalists (VCs) to support new firms on likely in industries where alliances
the condition that the recipient firms will even- have been the dominant mode of col-
tually be acquired. This helps the VCs recoup laboration. M&As will be more likely
their investments, even though M&As may not in industries where M&As have been
be the optimal choice for new ventures to pur- the dominant mode of collaboration.
sue. As Robinson (in press) suggests, joint ven-
tures, rather than M&As, may be the best choice Proposition 8b: Alliances will be more
for small, risky ventures. These considerations likely in industries where high-status
lead to the following two propositions. firms predominantly choose alliances.
M&As will be more likely in industries
Proposition 7a: Alliances will be more where high-status firms predomi-
likely in industries where there has nantly choose M&As.
been recent regulatory activity, espe-
cially antitrust activity. M&As will be
more likely in industries where recent CONCLUSION
regulatory activity, especially anti- While the choice of M&A versus alliance is a
trust activity, has been low. decision for a firm’s managers, practice sug-
Proposition 7b: Where funding and gests that the choice is complex and that the
other resource requirements dictate context in which firms find themselves looms
the choice of M&As versus alliance, large as an influence. The aggregate behavior
of firms making M&A versus alliance decisions
firm behaviors will conform to those
suggests the importance of industry-level forces.
In this paper we have attempted to bring indus-
Other institutional factors. Institutional forces try back into consideration as a theoretical focus
are not just regulatory or coercive. Firms’ by examining how firms’ decisions regarding
choices will be influenced by other institutional M&A versus alliance may differ across indus-
forces, such as industry history and the general tries. We have presented a conceptual frame-
demands to imitate high-status firms. Previous work based on commitment, flexibility, and
studies on the antecedents of M&As support structural/institutional constraints that provides
these institutional ideas. Palmer and Barber the basis for research propositions.
488 Academy of Management Review April

We have examined how industry-level factors also little consensus among researchers regard-
influence firms’ choice of M&A versus alliance, ing alliance types, which is apparent in the
but we also recognize that the dichotomy be- wide array of typologies proposed in research
tween M&A and alliance is perhaps simplistic. on alliances and joint ventures (e.g., Borys &
There are different types of alliances, ranging Jemison, 1989; Das & Teng, 1998, 2000; Gulati &
from technical agreements to R&D alliances to Singh, 1998).
long-term contractual agreements, including In this paper we emphasize the fundamental
supply agreements and joint ventures. The pur- difference between M&As and alliances, in that
pose and intentions of different alliances vary. M&As have ownership control that alliances
What’s more, the variety and complexity of alli- lack. With creative contracting, it is no doubt
ances might differ according to specific industry possible to craft a contract that allows an alli-
contexts. ance or joint venture to mimic an acquisition in
For example, joint ventures would be more the degree of control provided. However, the
likely than alliances in industries with high very industries where such joint ventures would
commitment requirements (Casciaro, 2003). Cell be observed, such as the automobile industry,
6 of the conceptual framework, as in Figure 1, are also the ones where further acquisition pos-
represents an industry setting characterized by sibilities would be limited because of industry
high requirements for commitment, low require- concentration and antitrust scrutiny. Although
ments for flexibility, and high structural and this appears to be an exception to our logic, it is
institutional constraints. Examples for this cell actually a reaffirmation of it, and, absent indus-
include mature manufacturing industries, such try constraints, an acquisition well may have
as steel and automobile. In such circumstances, occurred rather than a joint venture.
it is possible that long-term supply agreements
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Xiaoli Yin (Xiaoli_Yin@baruch.cuny.edu) is an assistant professor of strategic man-
agement at the Zicklin School of Business, Baruch College, City University of New
York. She received her Ph.D. from the Kellogg Graduate School of Management at
Northwestern University. Her research interests include strategic alliances, mergers
and acquisitions, governance structures, and franchising.

Mark Shanley (mshanley@uic.edu) is a professor of management and head of the
Managerial Studies Department at the University of Illinois at Chicago. He received
his Ph.D. from the University of Pennsylvania. His current research interests include
mergers and acquisitions, alliances, and strategic decision processes.
Special Topic Forum
on Influencing Politics and Political Systems

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