How risk influences the choice of governance mode in biopharmaceutical inter-firm relationships

This paper proposes a new theoretical framework for assessing the influence of risk in shaping the governance form in biopharmaceutical inter-firm relationships. In particular, we propose a multidimensional operationalization of relational and performance risk and, by following Transaction Cost Economics (TCE) and Real Options (RO) theory constructs, we hypothesize a relation between the aforementioned risk components and the choice of governance form. Specifically, following TCE reasoning, we hypothesize that a high level of relational risk leads towards more hierarchical governance forms, while, following RO theory, we hypothesize that a high level of performance risk leads toward market-oriented governance forms; finally, we hypothesize a moderating effect of each risk component on the other. We empirically test our framework through the analysis of 353 inter-firm relationships signed worldwide between pharmaceutical and biotech companies from 2007 to 2010. The results show substantive support for our theoretical framework. Furthermore, we find a significant moderating effect of the performance risk on the TCE relation between relational risk and governance forms.

► No empirical studies analyse how relational and performance risk shape governance forms in inter-firm agreements.
► We provide an understanding on how the two risk components, and their interaction, shape governance forms.
► We empirically test our framework through 353 inter-firm relationships signed worldwide in the biopharmaceutical industry.
► We find that high levels of relational and performance risk push towards opposite governance forms and moderate each other.
► Our work contributes to stress the importance of risk evaluation for making governance form decisions.