How Does the Positioning of Information Technology Firms in Strategic Alliances Influence Returns to R&D Investments?

Abstract

Because software is fungible, has low marginal replication costs, and requires relatively high levels of initial investment to develop, understanding how IT-producing firms protect and leverage value from their research and development (R&D) investments is important. We examine how the positioning of IT-producing firms within their networks of strategic alliances moderates profits from R&D investments. We posit that alliances with IT-consuming firms generate relation-specific rents that, in turn, protect the value of R&D investments by making software innovations difficult for rivals to appropriate. Among IT-producing firms, we make a distinction between software consulting and services firms and software package-product firms. Our analyses of 464 IT-producing firms for the 14-year period 1996-2009 suggest that IT-producing firms’ returns on R&D investments increase with alliance ties to IT-consuming firms. We also find that alliances with IT-consuming firms have a more beneficial effect on R&D investment returns for software consulting and services firms than for software package-product firms. Our findings yield nuanced insights into how IT-producing firms should position themselves within a network of alliances with IT-consuming firms. We discuss implications for research and practice.