Agglomeration and the choice between acquisitions and alliances: An information economics perspective

Research summary: This research extends agglomeration theory by joining it with information economics research to better understand the determinants of firms' organizational governance choices. We argue that co-location in a common geographic cluster fosters lower levels of information asymmetry between exchange partners and thus leads firms to employ acquisitions rather than alliances for their external corporate development activities. We further extend agglomeration theory by arguing that the impact of sharing a cluster location on acquisitions versus alliances strengthens with the level and dissimilarity of the exchange partners' knowledge-based resources as well as with the intra-cluster geographic proximity of the partners. Evidence from a sample of over 1,100 alliance and acquisition transactions in the U.S. semiconductor industry provides support for our hypotheses. Managerial summary: This paper investigates the role of geographical clustering for firms' external corporate development activities in acquisitions and alliances. We explain how better information is likely to be available among firms co-located in the same cluster. This suggests that managers should have less need to use alliances over acquisitions as a means of reducing the risk of adverse selection (e.g., overpaying for acquisitions). Our investigation of over 1,100 transactions in the U.S. semiconductor industry shows that common cluster co-location increases the probability of acquisition relative to alliance. Our arguments and evidence also indicate that the information-related benefits of cluster co-location are even more impactful when the parties have more divergent technology bases, possess larger stocks of knowledge-based resources, or are located in closer geographic proximity. Copyright © 2015 John Wiley & Sons, Ltd.