The choice between Alliances and Corporate Venture Capital investment



The business environment has altered over the past few decades. Currently, companies need to cope with globalization, which leads to a high competitive environment and rapidly changing industries (Morris et al., 2008). In order to survive and become successful in the long run, corporate entrepreneurship is seen as critical in this high competitive and rapidly changing environment (Keil, 2005). "What we need is an entrepreneurial society in which innovation and entrepreneurship are normal, steady and continuous" (Drucker, 2010). For this reason, companies modify their business model by using corporate entrepreneurship as a framework of their strategy (Morris et al., 2008). Corporate Entrepreneurship (CE) is a multifaceted and complex construct, (Phan, 2009) which does not provide a uniform definition. In literature the term CE is used to refer to the development and implementation of new ideas in organizations (Hornsby et al., 2002). To provide a clarified answer, the following definition is given; corporate entrepreneurship is the sum of strategic renewal (alterations in strategy or structure of organization), innovation, and corporate venturing (Zahra, 1995).

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Corporate venturing is close related to the other two dimensions (innovation and strategic renewal) of CE, but differs because it primarily focuses on the creation or establishment of new business for an organization (Chrisman, 1999; Zahra, 1995). This approach of CE will be elaborated on in this article. Zooming into corporate venturing, the importance of external corporate venturing, which is explorative oriented, is addressed in the literature. It supports companies to enter new markets, build new capabilities, induce learning by knowledge exchange, and to become more innovative. This in turn, has proved to enhance the overall performance of a company (Keil, 2005). External corporate venturing includes alliances, joint venturing, acquisitions, and corporate venture capital, where "corporate venture capital (CVC) and strategic alliances represent two prominent and distinct types of inter-firm relationships" (Dushnisky & Lavie, 2010).

In prior studies, these both phenomena show a proliferation to understand their role in today's economy (Dushnisky & Lavie, 2010; Gulati, 1998). Due to the fact that both are types of external corporate venturing, similarities are recognized regarding external sourcing in previous literature. Engaging in either CVC investments or alliances will provide the 'parent company' a window to (new) emerging markets (Dushnisky & Lavie, 2010), an increase of social capital, and provides access to new or complementary knowledge, skills and resources to share and exchange (Zahra et al., 2009; Gulati, 1998).

Though, other studies have recognized dissimilarities when it comes down to the objectives of both phenomena and what it expects from the 'partner company'. Alliances, unlike CVC, are mainly formed for co-development, where the alliance expect joint gains from that relationship in terms of e.g. joint R&D projects (Baden-Fuller, & Grant, 2004; Dushnitsky & Lavie, 2010). CVC, in contrast, gives the new venture the possibility to survive as well as the possibility to develop new products by funding, but expects return on its investment (Dushnitsky & Lavie, 2010). In addition, also a mutual interaction between these phenomena is addressed in prior literature. Dushnitsky and Lavie (2010) for example mentioned this interdependency, by saying that a firm's formation of alliance can reinforce but also attenuate CVC investments. Or, when looking from another perspective, CVC is used to identify potential future alliances (Dushnitsky & Lenox, 2006).

However literature streams about alliances and CVC have kept these phenomena separate. Therefore, little is known about the firm's choice to engage in one of the two inter-firm relationships of external corporate venturing. Hence, the gap can be defined, as the choice that a company can make between CVC investments and alliances as types of external corporate venturing.

This article will fill this gap by studying what influences the choice between CVC investments and alliances. Three theoretical pillars are addressed. First, looking at the technological industry, this industry is characterized with a rapidly increasing speed of technological changes. Here internal venturing is not sufficient to any further extent and external venturing is needed for new business development. Traditionally this industry pursued both, alliances and CVC but each has evolved independently (Dushnitsky & Lavie, 2010). Second, the emphasis is put on intellectual property regime, due to the fact that external corporate venturing does not automatically transfer intellectual property and is seen as important for innovation (Miles & Covin, 2002). The degree in which the intellectual property is protected, determines the level in which the parent firm has access to new technology of the venture (Cohen, 2001).This study will examine which of the two governance mode to use when the intellectual property protection is strong. The last theoretical pillar is geographical distance. Businesses increasingly entering into partnerships with foreign companies, as global market become more attractive and domestic markets remain stagnant. This globalization leads to market expansion opportunities, where companies have recognized the need to collaborate in order to compete abroad (Cavusgil, 1998). Therefore, the choice between CVC and alliance in relation to geographical distance will be researched in this study. Hence, the following question will serve as a basis for this study: how do intellectual property, geographical distance, and technological distance affect the choice between alliances and corporate venture capital investments?

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This paper contributes to the growing literatures on external sourcing in two ways. First, we zoom in on two types of external sourcing that are close related to each other in the literature and foster companies their innovativeness. This study will provide deep insight information in how specifically these two (Alliance and CVC) distinguishes and how they outcompete each other in terms of access to external sources. Second, a lot of research is done on financial aspects of CVC or the strategic benefits of venturing activities, but less have researched the difficulties of knowledge exchange in high geographical distance and patenting in relation to the choice between CVC investments or Alliances.

This study is structured as follows. After this introduction, first a short theoretical background including the definitions of CVC and Alliance will be given. Second, information will be provided, for each hypothesis in order to get to the main point of this study: the choice of CVC or Alliance. The paper will conclude with a research method.

Literature review

Companies have become aware of external corporate venturing, to find relevant external sources and to stimulate innovation (van de Vrande et al., 2006). The access to new knowledge and resources and how to share and exchange this knowledge, requires learning processes within venturing relationships. This will enable a firm to create new business and build up the capabilities they already possess (Wadhwa & Kotha, 2006). Furthermore also the provided 'window' into new emerging markets contributes to external corporate venturing. It gives the parent company the ability to identify new technologies or resources that can either threaten or complement their core business (Dushnitsky &Lenox, 2005) and stimulate innovation. But CVC and alliance each in his way is also playing a role in the area of external corporate venturing.

Corporate venture capital has found to play a central role in facilitating high growth entrepreneurship (Reynolds et al., 2000). Firms such as Google, Intel, Microsoft, but also Starbucks may not have existed, or at a minimum would not have grown to the level they have, without corporate venture capital (Bruton et al., 2005). Regarding to the literature, corporate venture capital (CVC) is identified as minority equity investments by an established firm in an entrepreneurial company to support her operations and to gain access to knowledge / technology (Dushnitsky & Lavie, 2010). The financial returns of these investments become higher when the investor is able to provide value added services, complementary capabilities, and resources to the venture, which enhance the value and success of the venture (Sykes, 1986). Furthermore, when an established firm provides larger equity investment in new ventures, the greater the stock of entrepreneurial knowledge they have access to. This in turn led to a higher innovation rate of the established firm, due to combination or expansion of the new knowledge (Dushnitsky & Lenox 2005).

The formation of alliances takes place when firms are in emergent or highly competitive industries or because they are using pioneering technical strategies (Eisenhardt & Schoonhoven, 2010). In these cases a firm's alliance partner is valuable, as it is the most important source for information and new ideas that result in innovations or in performance-enhancing technologies (Dyer & Singh, 1998). The term 'alliance' covers several distinguished types of alliances, in terms of hierarchy and level of equity sharing (e.g. joint venture, licensing contracting) (Gulati and Singh, 1998. R. Gulati and H. Singh , The architecture of cooperation: Managing coordination costs and Appropriation Concerns in Strategic Alliances. Administrative Science Quarterly 43 4 (1998), pp. 781-814. Full Text via CrossRef | View Record in Scopus | Cited By in Scopus (372)Gulati & Singh, 1998). In this study there is no distinction made in types of alliances. Therefore alliances in general are seen as inter-organizational collaborative relationship, involving voluntary agreements, that share and exchange resources and knowledge to create and maximize joint value (Dushnitsky & Lavie, 2010). This creation of joint value and sharing of knowledge is what distinguishes alliances from CVC. Alliances are seen as an optimal way to serve as a channel for the flow and integration of new complementary knowledge to create new businesses, whereas learning from CVC investments has weak efficiency (Wadhwa & Kotha, 2006).

Intellectual property regimes

The ability to identify and partner with an entrepreneur diminishes, due to the fact that some entrepreneurs chose not to reveal its invention or new knowledge / technology. The reason is, that it gives the parent firm the ability to imitate the invention and exploit the information and thus can leave the entrepreneur empty handed (Dushnitsky & Shaver, 2009). In addition to the prevention of copying, which can be one of the reasons for patenting; other reasons for patenting are the use of it in negotiations and the avoidance that competitors protect their invented substitutes (Cohen, 2001). So, secrecy and protection now appears to be much more heavily employed across most industries than previously (Cohen, 2001). This prevents mutual profitable investment. Hence, a right type of inter-firm relationship need to be chosen, in order to get access to this knowledge given the intellectual property regime.

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The return of an investment through CVC, depends on the (in-) ability of a venture to protect their intellectual property (Anand and Galetovic, 2000 B. Anand and A. Galetovic, Weak property right and holdup in R&D, Journal of Economics Management and Strategy 9 (2000) (4), pp. 615-642. Full Text via CrossRef | View Record in Scopus | Cited By in Scopus (19) Gans and Stern, 2003). When an entrepreneur is incapable to protect their invention from imitation, through legal mechanisms such as patents, the intellectual property (IP) regime is characterized as weak. Here the benefits of CVC investment become greater due to the fact that ventures, in weak regimes, may not have the financial resources to buy a patent or to prohibit the investor from appropriating its knowledge (Dushnitsky & Lenox, 2005). Furthermore, the level of commitment, executed by CVC's participation in board meetings and applying due diligence, is only accepted in weak IP regimes. Consequently, this will give the parent company the opportunity to "pierce the veil of secrecy and provide an effective vehicle to learn about the venture's closely held technologies" (Dushnitsky & Lenox, 2005).

Regarding to alliances the opposite is proven to be true, whereas strong IP protection fosters alliance formation. "Greater and more consistent application of IP laws favors the propensity to form alliances" (Contractor et al., 2002). Alliances have the preferences in strong IP regimes, due to the fact that it encloses different types. Here non-equity mode and licensing has the favor, because of the short duration and small commitment from the relationship between the parent company and the venture (Oxley, 1999). Another reason to prefer Alliances, in strong IP regimes, is because of trust. When there is trust in a certain invention and the solidity of a patent, a firm more tend to ally with such a company, due to the fact that the uniqueness is recognized (Contractor et al., 2002). Furthermore, from the other perspective weak IP regimes have negative effect on the cross national pattern of alliances, due to limit transactions in a weak protection environment (Oxley, 1999) Therefore hypothesis one is formulated

H1: There is a positive relation between strong intellectual property regimes and the choice to prefer alliance over CVC investment.

Geographical distance

In the literature a lot of interpretations can be found for distance, cognitive, social, cultural, and institutional distance (Knoben & Oerlemans, 2006). In this article the focus is on the geographical distance in terms of international, national or local. Literatures suggest that "firms move across geographic boundaries for resource and knowledge acquisition as well as capability enhancement" (Bartlett & Ghoshal, 1998). In this area of research it is known that small geographical distances support close interaction between organizations that encloses a high level of information richness and will also facilitate the exchange of knowledge, tacit as well as explicit knowledge (Torre & Gilly, 2000). When the distance becomes larger between the two actors, it is more difficult to transfer this tacit form of knowledge. But is one of the two governance modes able to break down the barrier of high geographical distance concerning knowledge transfer?

Corporate venture capital investments are analyzed at two moments in time; pre-investment and post-investment. The pre-investment process encloses the selection of finding a partner and funding a venture, where high commitment of the management is required of the invested company. In this stage the investing company will conduct due diligence by, reviewing the products and technology, directly observe companies in an early stage, and determine business and market risks. This provides the venture capitalist an opportunity to learn about entrepreneurial inventions and to understand of the success factors (Dushnitsky & Lenox, 2005). After investment (post-investment) corporate investors often secure board seats, or at least board observation rights, for monitoring activities, which give them access to the knowledge of ventures' key activities, knowledge, and technologies (Dushnitsky & Lenox, 2005). This requires small distance, due to the high commitment of management. Furthermore, also due to "regionally based critical mass of financial institutions, including regional stock exchanges, and agents spatial proximity will increase." (Wright, 2006).

Regarding alliances, organizational proximity is taken into account which can overcome geographical distance (Knoben & Oerlemans, 2006). Organizational proximity refers to a level in which members of different organizations operates together (employee proximity) and combine or transfer knowledge (Schamp, 2004; Wilkof et al., 1995). In the literature it is proven that alliances can overcome and lighten the distance that often exists between parent organizations and their partner (Inkpen, 1998). In contrast with CVC, here sharing of new knowledge occur on an individual and group level. This knowledge sharing on a lower level, provide a basis for transforming individual knowledge to organizational knowledge and is known as a knowledge spiral moving upward in the organization (Inkpen, 1998). Therefore, personnel transfer is seen as the most effective management process of gaining access to and integrate new knowledge. The reason is that these individuals are knowledge workers and work in inter-personal groups (e.g. project teams) where knowledge processes are likely to take place (Soekijad & Andriessen, 2003). This implies a high level of organizational proximity due to the high integration of people of both organizations in alliances. Daft & Lengel (1986) confirmed, in de study of Dushnitsky & Lenox (2005), by the recognition that "successful learning is contingent upon close interaction between firms' personnel that accommodates rich media and information flows". Due to this lower level of knowledge sharing and high organizational proximity alliances can overcome high distances. So, the following hypothesis is formulated:

H2: There is a positive relation between high geographical distance and the choice to prefer alliance over CVC investment

Technological distance

Technological distance reflects the level of complementarities or overlaps of technological knowledge, due to different experience, technologies, markets, and organizational histories (cognitive distance) between firms (Nooteboom, 2004). The distance facilitates the possibility of firms to explore novel combination of their technological elements. When the distance become larger it is more likely to get access to more complementary information, resources and knowledge which in turn will result in more exploration (Vanhaverbeke et al., 2009).

Prior research is showing that when the technological distance is large, less integrated governance modes and a low level of corporate involvement are preferred (Roberts & Berry, 1985). These are characteristics of CVC (hypothesis 2) but will also increase the learning effects (van de Vrande et al., 2006). In addition, large distance also requires companies to chase agreements that are focused on the market-transaction in order to remain flexible (Vanhaverbeke et al., 2002). So, the need for administrative control and integration is less important than the learning and flexibility that need to me remained. Therefore, CVC has the preference when the technological distance is large.

From another perspective, the most valuable and effectively cooperative alliances are formed where the technological distance is small (Stuart, 1998). Small technology distance is interpreted as technology that is close related to the core business of the invested firm (van de Vrande et al., 2006). Here, it is important for the invested firm to have the capability to understand the developed information of the venture and to diffuse it across the organization internally and implement it in various operational activities (Vanhaverbeke et al., 2009). To maximize the use of new knowledge, a high level of integration and commitment, which referred to alliances, is needed (van de Vrande et al., 2006). Furthermore, alliances have also the capacity to overcome the difficulties associated with knowledge transfer across dissimilar contexts (large technological distance), because some firms treat their alliance partner as an extension of their internal organization (Rosenkopf & Almeida, 2003). Therefore the following hypothesis can be formulated:

H3: There is a positive relation between a small technological distance and the choice to prefer alliance over CVC investment

Research Method

This paper will help to understand the affect of intellectual property, geographical distance, and technological distance on the choice between CVC and Alliances.

Theme new business creation

Strong intellectual property regimes

* +


CVC / Alliances

High geographical distance


Small technological distance

* + means alliances preferred over CVC

The sample and methods that will be used to achieve this goal are described below.

According to Bryman & Bell (2007), a deductive theory is the most applicable for this study. Based on what is known in the literature, in relation to this specific domain, hypotheses will be derived and subjected to empirical examination. This deductive approach primarily emphasizes the use of quantitative data. Here, the employment of quantifiable measurements is required, in order to test the relationship between the depended and independent variables.

Research setting and sample

This study will test the hypotheses with a pooled time-series dataset of firms in the (high-) technology and bio-technology industry from 2000 to 2007. The sample encloses 500 publicly traded technology firms who have an inter-firm relationship in terms of an alliance or CVC investment and had at least two years of Compustat records. This industry offers a suitable research setting for two reasons. First of all, technological distance is incorporated in the conceptual framework, due to the fact that "alliance formation and CVC investment have become pervasive" in the technology industry (Dushnitsky & Lavie, 2010). Second, the technological industry contains characteristics, such as rapidly changing industry and increasing technological complexity, which indicate the need for new business development through external corporate venturing (van de Vrande et al., 2006). In addition also IP regimes are proved to play in important role in the technological industry, as it relies on IP regimes (Javorcik, 2004). Furthermore, this technological industry is also related to geographical distance, due to the impact that technology has on globalization (James, 2002). Hence, this will enhance the meaningfulness and reliability of the variables incorporated in this research.

Data collection and measurement

The sample used in this study contains data from Standard and Poor's 500 Cumpustat database and contains information on firms' venturing activities that can be used for statistical analyses. The main benefits for using secondary data is the offering of new interpretations and more focus can be given on data analysis due to time savings on data collection.

By answering the posed question, using empirical research, this article can contribute to the validity of these theories. "The outcome must contribute to the theory and body of knowledge generated in the science of management" (Buckley, Ferris, & Bernardin, 1998). Based on empirical research, this goal is primarily reached by making the variables measurable for statistical analysis. The proposition of this research consists out of four variables: three independent variables and one dependent variable.

Dependent variable: The effect of independent variables on the dependent variable needs to be interpreted as follows; when an independent variable has positive influence on the dependent variable, than alliance is preferred over CVC investments. To make this interpretation quantifiable, a dyad level of analysis is used. This means that this study looks at the firm and its inter-firm relationship as a pair. Due to the fact that a company can engage in an alliance or a CVC, this variable is a dichotomous variable denoting the presence (one) or absence (zero) of an alliance in an inter-firm relationship. (bron)

Independent variables: There are three independent variables; 'Intellectual Property Regimes', 'geographical distance', and 'technological distance'.

First the variable 'Intellectual Property Regime' will be made quantifiable, by looking to the effectiveness and number of patents. The number of patents is based on the number of copyright, trademarks, and trade secrets within a company (Seyoum 1996). The effectiveness of patents will be measured, based on the survey of Carnegie Mellon Survey (Cohen et al., 2001). Here "respondents were asked to assess the effectiveness of means of protecting innovation for their industry" (Laursen & Salter, 2005; Dushnitsky & Shaver, 2009). The data of this survey is published in the office of National Statistics register data. If respondents identify patents as effective, than the intellectual property regime is identified as strong and weak when respondents identify patents as limited effective (Dushnitsky & Shaver, 2009).

The second independent variable, geographical distance, will become quantifiable by calculating the number of miles between the parent firm's main office and the location of the target company. This manner to measure geographical distance is based on the study of (Sorenson & Stuart, 2001). Here they assign the longitude and latitude at the center of the zip code of where both companies are established. "Using spherical geometry, we calculate the distance between the two points, i and j, as

where latitude (lat) and longitude (long) are measured in radians and C represents a constant based on the radius of the sphere that converts the result into linear units of measure". In order to convert the result to miles on the surface of the Earth, C =3,437, will be added to the formula.

Third variable is technological distance. This variable will be measured based on the study of Jaffe (1986). Here the technological proximity between two firms (i and j) "is computed as the uncentered correlation between their respective vectors of technological capital (measured as the cumulative patent applications in technology class k over the five years prior to the investment), Pik and Pjk respectively:" The outcome illustrate the technological proximity or common technological interests (Tij) and takes a value between 0-1. In order to calculate the technological distance, the technological proximity will be transformed in 1-Tij which is equal to technological distance.


In the development of this study several limitations have come across. First regarding the governances modes, our analysis has primarily focused on CVC and alliance, while for example acquisitions also belong to it. Moreover, this study provides an optimistic view of alliances and CVC. We recognized that CVC cannot observe private information of a venture that might lead to an unfavorable partner selection and failure. Also moderators are not taken into account that might facilitate or reinforce a relationship and therefore change a relationship. At last some limitations are recognized regarding the use of secondary data. It lacks the control and familiarity of data by the researcher and the present complexity of the data (different level of analysis).

Time schedule

In the beginning of January a lot of attention can be given to the thesis, due to the late start of the electives (end January). No changes in the topic or the question will be made. So a good foundation is established, which will ensure a good starting point in order to finish the literature review within two months (till the beginning of March). From that moment relevant data need to be collected and tested. Here, a lot of attention is needed and will be time consuming. A lot of trials need to be done for a decent conclusion and a full coverage of possibilities. Two and a half months is reserved in order to get a well funded data analysis as result. These results will be written down in text, to present the meaning / interpretation of it. Finally the conclusion will be written together with the discussion. This has an overlap with finalizing the draft and will be finished in the end of June.

The results might show contradictory findings with the literature which will lead to a revision of the 'current' literature at that moment. Therefore another two months are needed to make the results of the data analysis consistent with the literature review. The time schedule can be found in attachment 1.

Attachment 1: Time schedule