Opening Up but Staying Local: Insights from Partnership Formations between Established and Startup Firms

In environments characterized by rapid technological change, established firms are increasingly turning to partnerships with startups to gain access to emerging and potentially disruptive technological solutions. At the same time, however, those firms may face challenges in recognizing the value of external solutions with novel elements of knowledge.

By examining potential and realized partnerships between established and startup firms in the bio-pharmaceutical industry, I find that established firms tend to partner for external solutions that do not substantially differ from what the firms already know (i.e. local search). However, experiencing failure in their own product development and experimenting internally with new ways of solving problems provide conditions under which established firms are more likely to recognize the value of partnering opportunities with novel elements of knowledge. I also demonstrate that local search tendencies in partnership formations are less severe once a partnering opportunity is more mature and has overcome substantial development hurdles.