Interorganizational endorsements and the performance of entrepreneurial ventures

Citation: Toby E. Stuart, Ha Hoang, Ralph C. Hybels (1999) Interorganizational endorsements and the performance of entrepreneurial ventures. Administrative Science Quarterly (RSS)
Internet Archive Scholar (search for fulltext): Interorganizational endorsements and the performance of entrepreneurial ventures
Tagged: Sociology (RSS) Networks (RSS), Entrepreneurship (RSS), Status (RSS), Organization Theory (RSS)

Summary

Stuart, Hoang, and Hybels use data from biotechnology IPOs to argue that young firms use alliances (i.e., interorganizational endorsements) as a form of status to signal quality in markets in which the actual quality is very uncertain.

Building on Joel Podolny's work on status and markets, the authors argue that status signals are particularly important in situations where t or the player is very uncertain. The authors argue that IPOs, and IPOs of biotechnology firms in particular who due to high capital requirements will often go public before they have any product or even any patents. Building on the literature that shows that alliances can be used a way of creating status links, they build on literature that has shown that (1) firms attempt to avoid status leakage, (2) that links are quality endorsements and (3) that links are statements about reliability.

The hypotheses are, given the framing, the obvious ones:

• New companies with more prominent strategic partners will do better.
• The larger the stake the prominent strategic partners acquire in the new venture, the better they will perform.
• The more prominent the investment back handling the new venture's IPO, t he better the venture will perform.
• The more uncertainty there is around the new companies, the more impact the prominence of the partners will have.

The hypotheses were tested using data on 301 biotechnology firms specializing in human diagnostics and therapeutics. The two DVs were (1) the time the firm takes to reach IPO (through an event history) and (2) the valuation at the time of the IPO for the 121 firms that went public. Joint ventures, R&D alliances, and licensing deals were all coded as forms of alliances.

The authors measures several kinds of prominence. They measure through a network-based measure (normalized degree score) and used a patent based measure for technical prominence and a tombstone based method for commercial prominence of equity based partners.

The results show most of the action in the interaction terms between prominence and uncertainty. In other word, the paper presents strong evidence that prominent affiliates lead to higher performance, but this effect is very contingent on uncertainty.

Theoretical and Practical Relevance

The paper has been cited almost 1000 times since it was published 11 years ago. It has been highly cited in the literature on networks and entrepreneurship, and in the core literature on networks and organizations in particular. It has also played an important role in the literature on entrepreneurship.