Marshallian forces and governance externalities : location effects on contractual safeguards in R&D alliances

We examine the impact of geographic location of alliance activities on the design of safeguards in contracts governing 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 biotech 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