The effect of uncertainty and asset co‐specialization on governance in biotechnology alliances

We explore transaction cost economics (TCE) and real option (RO) rationales for alliance governance and find the predictive power of each depends upon the type of uncertainty confronted. Our review of alliance activity from 1995 through 2000 for 642 alliances confirms that governance is influenced directly by partner, task, and technological uncertainty and by interactions among asset co‐specialization, partner uncertainty, and task uncertainty. Consistent with TCE, co‐specialized assets increased the likelihood of hierarchical governance. Partner and task uncertainty increased this effect. Consistent with RO, we find technological uncertainty decreased the likelihood of hierarchical governance.