A framework of economic analysis for tapered technology-manufacturing alliances

Globalization of production has altered the configuration of supply chains in many industries. Besides outsourcing, joint ventures and strategic alliances are increasingly established to create competitive production organizations. This paper addresses a case of tapered technology-manufacturing alliance between a process technology firm with captive manufacturing capability and an efficient manufacturing firm in an asset-heavy industry. A framework of economic analysis is first developed for fusing the factors of technology licensing, manufacturing efficiency, risk sharing, and demand uncertainty. Analysis methods of capacity economics are next described for participation analysis, capacity allocation, and contract term tradeoffs. Finally, we demonstrate the utility of the methods by numerical examples with stylized industry data and by an analysis of alliance stability when facing potential new entrants.