Ally with Incumbent Firms: An Investigation of Entrepreneurial Firms' Alliance Strategy in China

How can entrepreneurial firms benefit from strategic alliances with incumbent firms? Most of the prior research on strategic alliances has taken the perspective of large established firms, while paying scant attention to the alliances in entrepreneurial settings (Alvarez, Ireland, and Reuer, 2006). Research has suggested that alliances can significantly enhance the survival rate of entrepreneurial firms in early years and contribute to their long-term viability (Baum, Calabrese, and Silverman, 2000). In the mean time, however, entrepreneurial firms may suffer from alliances with large firms because large firms tend to outlearn entrepreneurial firms and take away a lion’s share of the value created in alliances (Alvarez and Barney, 2001). Thus, entrepreneurial firms are often at a dilemma in their decisions for forming alliances with large firms.This study attempts to investigate how entrepreneurial firms can effectively address this dilemma in a transition economy like China. It builds upon the co-opetition framework where firms cooperate and compete simultaneously in alliances. Specifically, we investigate two forms of alliance activities that entrepreneurial firms can form with incumbent firms: exploration vs. exploitation alliances. We contend that these two types of alliances exhibit different adaptation attributes (current vs. future viability) and have different demands for entrepreneurial firms in alliance governance, resource commitment and knowledge protection. It is likely that entrepreneurial firms will have varying returns from these different alliance strategies. We argue that in general entrepreneurial firms may have larger financial gains from exploitation alliances with incumbent firms than from exploration alliances. We further investigate the contingency factors such as alliance governance and bargaining power that may strengthen or weaken the financial gains from these alliance strategies. The research is thus of great importance to understand how entrepreneurial firms can successfully grow by allying with incumbent firms.