Marshallian Forces and Governance Externalities: Location Effects on Contractual Safeguards in Research and Development Alliances

Abstract

We examine the impact of geographic location of alliance activities on the design of safeguards in contracts governing research and development (R&D) partnerships. Joining research on agglomeration and alliance governance, we argue that the Marshallian agglomerative forces at work in a given location produce governance-related externalities that extend beyond productivity-related externalities considered in previous research. We investigate how location characteristics linked to Marshallian forces, such as local knowledge spillovers, R&D rivalry, dense industry employment, and the strength of professional organizations, have an impact on the specification of formal governance mechanisms. In particular, these Marshallian forces have a bearing on formal governance mechanisms that safeguard the execution of the R&D partnership, such as joint administrative interfaces and termination provisions. We analyze R&D partnerships between biotechnology and pharmaceutical firms and find that misappropriation hazards arising from greater knowledge spillovers and R&D competition in the region where R&D activities are located promote the use of these formal governance mechanisms in R&D partnerships. We also find that factors supporting thick interpersonal networks, such as the intensity of sectoral employment and the strength of professional bodies, reduce the use of formal governance mechanisms in R&D partnerships.