AN EXAMINATION OF DYNAMIC CAPABILITIES

Is Evolutionary Theory Underdetermined?

ROBERTO S. VASSOLO AND JAIDEEP ANAND
ABSTRACT: Firms frequently need to update their capabilities in changing environments but face significant barriers
to accomplish this goal due to the stickiness of their routines, local search constraints, bounded rationality, uncertain
imitability, and causal ambiguity. Under high levels of uncertainty, dynamic capabilities are often externally oriented,
involving acquisitions and alliances. However, nonunique but competitive predictions about the behavior of these capabilities arise from the evolutionary theory. We test these competitive hypotheses analyzing portfolios of acquisitions and
alliances made by pharmaceutical firms in search of portfolios of biotech capabilities. The analysis of portfolios enables us
to better identify common practices in the pharmaceutical industry than using a transactional-level focus. We develop
implications for the evolutionary theory and for managerial practice.
RESUMEN: Las empresas frecuentemente necesitan actualizar sus capacidades frente a un ambiente cambiante pero a su vez
presentan importantes barreras para cumplir este objetivo debido a rigideces en sus rutinas, restricciones en la bsqueda,
racionalidad limitada, y ambigedad causal. Frente a altos niveles de incertidumbre, las capacidades dinmicas se orientan
normalmente al exterior, incluyendo adquisiciones y alianzas. Sin embargo, de la teora evolutiva emergen predicciones
mltiples y contradictorias respecto del comportamiento de esas capacidades. Aqu testeamos estas hiptesis competitivas
analizando portafolios de adquisiciones y alianzas hechas por empresas de la industria farmacutica en su bsqueda de
portafolios de capacidades en biotecnologa. El anlisis de portafolios nos permiten identificar prcticas comunes en la
industria farmacutica mejor que si analizsemos transacciones individuales. De all desarrollamos implicancias para la
teora evolutiva y para la prctica de los negocios.

How do firms adapt to changing conditions and learn new

capabilities? This question has always been at the heart of
strategy. Research has established that firms frequently need to
update their capabilities but face significant barriers to accomplish this goal. The evolutionary view of the firm emphasizes
the stickiness of routines, local search constraints, bounded
rationality, uncertain imitability, and causal ambiguity as
some of the barriers to the identification and development
of requisite capabilities. Consequently, the more drastic the
change the more difficult the adaptation (Siggelkow, 2001). In
this sense, evolutionary theory has been critical in identifying
constraints to adaptation.
Evolutionary theory has also been useful in identifying and
suggesting remedies for such constraints. Acknowledging such
Roberto S. Vassolo is an associate professor in the Business Policy
Department at the IAE Business School, Universidad Austral. He
received his Ph.D. from Purdue University. His primary research
interests are in uncertainty, emerging economies, and adaptation.
Jaideep Anand is an associate professor of strategy and international
business at the Fisher College of Business, Ohio State University.
He has previously worked at Michigan, Ivey, and Wharton Schools
of Business. He has a Ph.D. from Wharton School, University of
Pennsylvania. His research is in the area of mergers and acquisitions
and strategic alliances.

constraints, researchers have termed the routines required for

adaptation as dynamic capabilities. Dynamic capabilities are the
mechanisms underpinning the creation, update, and renewal
of competences over time (Helfat et al., 2007; Teece, Pisano,
& Shuen, 1997). Dynamic capabilities are the antecedent organizational and strategic routines by which managers alter their
source base to generate new value-creating strategies (Eisenhardt & Martin, 2000; Helfat et al., 2007). More specifically,
dynamic capabilities are embedded in routine organizational
processes that guide the evolution of a firms resource configuration and operational routines (Helfat & Raubitschek, 2000:
975; Nelson & Winter, 1982; Zollo & Winter, 2002).
One generally accepted aspect of these capabilities is that
they are externally focused activities (e.g., Ahuja & Katila,
2001; Karim & Mitchell, 2000). This external orientation
helps firms to break out of their routines and escape their path
dependency. Due to transactional hazards and market failures
associated with the trading in embedded resources (Capron,
Dussauge, & Mitchell, 1998; Dierickx & Cool, 1989), such
external exchanges often involve acquisitions and alliances
both of these activities act as dynamic capabilities.
The theoretical assessment that dynamic capabilities allow
organizations to shape the often blind trajectory of adaptation
is not trivial. In particular, from an evolutionary perspective,
alliances and acquisitions are dynamic capabilities that lead
Management Research, vol. 6, no. 1 (Winter 20078), pp. 4762.
2008 M.E.Sharpe, Inc. All rights reserved.
ISSN 1536-5433 / 2008 $9.50 + 0.00.
DOI 10.2753/JMR1536-5433060103

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Management Research

FIguRE 1
Sets of Routines of Dynamic Capabilities
Search for new
capabilities

Procurement of
capabilities

to nonunique paths of adaptation. The recommendations that

emerge from the evolutionary perspective in this matter are
often contradictory. For example, on one hand, this perspective
emphasizes the need for external and independent sources of capabilities so as to bring in new routines beyond the firms local
search constraints. On the other hand, the firm also emphasizes
the constraints on the absorption and assimilation of externally
developed capabilities (Cohen & Levinthal, 1990).
This tension surrounding adaptation has been recently
analyzed as the tension between the evolutionary and the
positioning schools (Gavetti & Rivkin, 2007). We follow a
different and complementary approach and explore adaptation
within the evolutionary theory by making use of the concept of
dynamic capabilities. In this paper, we articulate some predictions that oppose those presented by the evolutionary theory.
This articulation, per se, is enough to illustrate the underdetermination of evolutionary theory. However, in order to shed
light on the nature of dynamic capabilities, we test the opposite
predictions using data from a sample of pharmaceutical firms
and their development of biotech capabilities over the course
of a decade. This empirical setting is particularly appropriate
for analyzing adaptations under drastic change conditions.
The paper also presents a contribution from an empirical
perspective. In order to understand the capabilities of firms,
one needs to analyze the routines and patterns of firms exploratory activities. Previous research has mostly focused on
transactions as a unit of analysis. In this paper, we analyze the
portfolios of firms alliances and acquisitions, and examine the
dynamic relationships among firms, their existing portfolios,
and their new activities. This analysis enables us to theoretically examine and empirically observe the realm of dynamic
capabilities.
THEORY
Dynamic Capabilities
We define dynamic capabilities as the capacity of an organization to purposefully create, extend, or modify its resource
base (Helfat et al., 2007: 4). That is, dynamic capabilities are
routines that modify routines, altering the path of evolution.
Throughout the paper, we understand routines and evolutionary theory in the spirit of Nelson and Winter (1982). With
this framework in mind, it is appropriate to think of dynamic

Integration of
capabilities

capabilities as consisting of three embedded sets of routines.

These are represented in Figure 1.
The first set of routines is that of search for new capabilities.
Firms, often unaware of the market and technological potential
of new capabilities, are challenged to maximize information.
Second, having identified specific capabilities, they proceed
with procurement. At this point, firms decide to acquire or ally
with other firms. Last, there is the issue of integration of these
capabilities that have been procured. Some capabilities will
be successfully integrated, whereas others will be rejected
that is, divested. These three sets of routines may not be as
distinct as implied, and they are not necessarily in the order
represented, but it may be appropriate to represent them in
their logical order for analysis sake.
The outcome from the first set of routines is which capabilities will be pursued. The second set should decide the mode
of pursuing these capabilitiesthat is, through acquisition,
alliances, or internal development. But because firms are often
constrained in internal development of unfamiliar capabilities,
the external modes are generally more likely. The integration
routines are either successful, in which case the capabilities
become part of the firm, or if the firm rejects the capabilities,
they may be divested. Within each set of routines, there is
some influence from the internal firm factors and some from
the external exogenous factors such as attractiveness of these
capabilities.
Search Routines
To identify and shape opportunities, firms must scan, search,
and explore across technologies and markets (Nelson & Winter, 1982). Suppose a firm begins the process of entry into a
new capability space. The new capabilities are unfamiliar at
first, and the firm may proceed with some experimentation.
Consequently, in the early stages of this process, the process
may appear to be haphazard or random. The firm engages in
opportunistic behavior by testing several kinds of new capabilities. Some of these turn out to be more successful than others,
in terms of their technological or market potential or in terms
of their compatibility with the firm. The firm then becomes
more restricted in its search and again refines its search based
on the outcome of the previous search. Consequently, over time,
the search process becomes increasingly sophisticated and less
random or opportunistic. It also becomes constrained over a

An Examination of Dynamic Capabilities

smaller and smaller part of the capabilities space, as more of

the domain is rejected as being unsuitable for further investment. Over time, therefore, firms become more specialized in
their search process. We propose that
Hypothesis 1a: As firms gain in experience with new capabilities, they become more focused in their further search for new
capabilities.
It is also plausible to argue that there will be a significant
degree of path dependency in this search. The search can get
constrained to the capabilities that represent earlier successes
by the firm. Previous literature in evolutionary theory has
emphasized the role of local search constraints. In contrast
to the broad-to-narrow evolutionary process described above,
previous research has often emphasized the narrow-to-broad
evolution in firms strategies. For example, it has been argued
that firms begin their search process with the most proximal
part of the capability space, and then consequently expand after
having achieved some success. For example, models of international expansion emphasize that firms begin the international
ventures in the most familiar domain and then expand to new
avenues (Chang, 1995). Similarly, in technology space, firms
branch out into new domains after establishing presence in
the more familiar spaces (Kim & Kogut, 1996). Kogut (1991)
refers to this principle as platform technologies.
This narrow-to-broad evolution yields the following
hypothesis:
Hypothesis 1b: Firms begin their search strategy in a new capability space from the most proximal part of the space, and then
subsequently expand the search into other parts of the space.
H1a and H1b are both based on some aspects of the evolutionary theory and the capabilities-based perspective, but
offer distinct predictions: Do firms follow a broad-to-narrow
or a narrow-to-broad evolution?
Procurement RoutinesMode
On identification of new capabilities, firms proceed with their
procurement, a task that always requires investments in development and commercialization activities (Teece, 2007). Firms
have several choices, but they are constrained by their internal
inertia as well as by transactional hazards. The latter set of factors constrains the firms to the use of internal development,
alliances, and acquisitions. Other means such as licensing are
less likely to be used due to potential opportunistic behavior
by the supplier or buyer of capabilities. Internal inertia in
the firm also constrains the choices further: firms are often
unable to generate new unfamiliar capabilities due to path
dependencies and bounded rationality. Therefore, the external
mechanisms of alliances and acquisitions become the most
promising candidates as mechanisms of procurement.

49

Several forces shape the choice between alliances and acquisitions. These include the potential for capabilities distinct
from those possessed by the firm, and the potential for successful integration.
Radical changes in the environment can imply a set of new
required capabilities. Evolutionary theory suggests that the
farther the required routines and capabilities are from the firm,
the lesser is the ability of the firm to pursue those capabilities
internally. The stickiness of routines constrains the range of
capabilities that a firm can pursue with solely internal mechanisms. This encourages the use of external means of procuring
new capabilitiesthat is, alliances and acquisitions.
Acquisitions have been seen as a mechanism to gather new
capabilities that are beyond the reach of the routinized capabilities of the firm (Ahuja & Katila, 2001; Anand & Singh,
1997; Karim & Mitchell, 2000). It has been argued that such
acquisitions can provide an infusion of required capabilities
that are neither possible to develop internally due to lack of
proximity to the present routines nor obtainable by exchanges
in discrete resources in the market (Dierickx & Cool, 1989).
Distance from the current stock of capabilities and routines
implies that firms find it difficult to overcome inertia, path
dependence, and stickiness (Nelson & Winter, 1982). Further,
managers in firms are constrained by bounded rationality to
perceive meaningful applications of new capabilities (Cohen
& Levinthal, 1990). Similarly, causal ambiguity and uncertain
imitability restrict the value of undertaking a commitment
to pursue distant or radical capabilities (Lippman & Rumelt,
1982). For some of the reasons mentioned above, as well as
the problems of embeddedness and opportunism, the market
does not suffice as an exchange mechanism for discrete capabilities (Capron et al., 1998; Dierickx & Cool, 1989). Therefore,
acquisitions of existing firms containing bundled capabilities
can help the firm overcome these constraints and leverage the
acquired capabilities to entry into the (attractive) product
markets. Such acquisitions provide access to an existing and
working bundle of resources, which helps in overcoming the
above-stated problems.
Alliances and joint ventures can also serve as a mechanism
to accomplish a similar goal (Grant & Baden-Fuller, 2004;
Mitchell & Singh, 1996; Mowery, Oxley, & Silverman, 1996).
Alliances with other firms can provide a forum to exchange
capabilities through organizational boundaries (Hamel, 1991).
Because new routines can be created by the combination
of routines from the two partner firms, this can be a useful
strategy for obtaining resources or capabilities that can be
complemented with internal existing capabilities to generate
positive outcomes.
Dynamic capabilities involving external sources can be of
several types. We consider two critical kinds of dynamic capabilities: (1) the capability to select and nurture investment
opportunities for the development of new capabilities and (2) the

50

Management Research

integration and assimilation of new capabilities already developed into the routines of the firm. The distinction between
these capabilities is important because it highlights the differences between the alliance and acquisition modes. The alliance
mode involves the selection of and partnering with other firms.
Consequently, the development capability is much more of
consequence. In the acquisition mode, assimilation capability
is of greater importance because the acquired firm has already
developed the capability, but it has to be integrated. Popular
press accounts have often distinguished between some firms
that excel at one rather than the other. For example, Cisco Systems became famous in the late 1990s as a firm that acquires
technology through the acquisition of small firms, and excels
by using its unique routines for integration of these firms into
its main organization. Academic literature has also taken note
of the distinction between acquisition capability (Zollo, 1997)
and alliance capability (Kale, Dyer, & Singh, 2002).
Alliances involve a combination of both external and internal capabilities; they may not be as radical in nature (Hennart
& Reddy, 1997). The existing internal capabilities of the firm
affect the evolution of new capabilities because control and
management are shared between the allied firms. Consequently,
capabilities that are distant or radically different from the
firms core may not be best accessible through such a medium.
Therefore, according to this perspective, alliances may not be
as suitable as acquisitions to access new and distant routines
and capabilities. That is,
Hypothesis 2a: A firm is more likely to use acquisitions relative to alliances in pursuing capabilities farther away from
the core of the firm.
A second perspective emerges from the issue of successful
deployment of new capabilities in existing firms. According
to this view, the capabilities at greater distance from the core
of the firm are also more risky in terms of their assimilation,
absorption, and productive deployment. Some of the same
reasons that inhibit internal development of new capabilities
also make it difficult for the firm to utilize the new capabilities
when they sourced from external sources. These reasons include
bounded rationality, lack of absorptive capacity, asymmetric
information, and causal ambiguity. It becomes more difficult
to integrate, assimilate, redeploy, and recombine radically different capabilities with those possessed by the firm. There is
also greater uncertainty with respect to the outcome of such
attempts due to the difficulty of gauging the potential for successful outcomes ex ante. One way to limit the risk due to this
uncertainty is to invest incrementally (Kogut & Kulatilaka,
2001). Consequently, firms not only confront the challenge
of overcoming their routines but also that of handling the
uncertainty over which capabilities to invest in.
There is some empirical evidence that acquisitions seeking
distant resources are risky. Prior research informs us that ac-

quisitions that seek distant capabilities are more likely to lead

to poor financial and operating results (Anand & Singh, 1997)
and are more likely to be divested early (Karim & Mitchell,
2000; Porter, 1987). According to this latter perspective,
alliances may be a more appropriate process to seek new and
distant capabilities than acquisitions. Therefore,
Hypothesis 2b: A firm is less likely to use acquisitions relative
to alliances in pursuing capabilities farther away from the
core of the firm.
To sum, we identified an empirical question regarding the
relationship between alliance and acquisitions strategies, but
the theory does not entirely support one position: Are firms
more or less likely to use alliances relative to acquisitions in
pursuing capabilities farther away from the core of the firm?
Procurement RoutinesStrategic Intent
Related to the above question is the issue of whether acquisitions and alliances are parts of the same exploration strategy
or if they represent distinct strategies. According to the latter
perspective, we will expect the firms to use alliances and acquisitions to pursue distinct domains of capability space, whereas
in the former, they will be used along a continuum.
Conceptually, one way to separate these two perspectives is
to ask if familiarity in one kind of experience leads to increased
propensity to engage in the other. If a firm engages in alliances
within a capability space, then with this increased familiarity
in this space, is the firm more likely to pursue more acquisitions? Acquisitions will be more likely to take place within
this space if the increased exposure through previous alliances
has led to reduced uncertainty with respect to the capability
and its scope for deployment. Therefore,
Hypothesis 3a: The closer target capabilities are to the existing
portfolio of alliances of the firm, the higher is the propensity for
its acquisition relative to formation of alliance.
On the other hand, if acquisitions and alliances represent
distinct strategies, then increased exposure to a set of capabilities through alliances will not lead to increased propensity
for acquisitions. For example, under this scenario, alliances
may be oriented toward exploration, whereas acquisitions
may be undertaken in proximal areas to gain scale and scope
economies, consolidation (Anand & Singh, 1997), or other
resource-deepening activities (Karim & Mitchell, 2000). In
this case, the closer a target firm is to the existing portfolio
of alliances, the higher is the propensity for further alliances
relative to acquisitions.
It is reasonable to expect firms to delineate the domains for
their exploration, search, and learning (March, 1991). There
may be benefits to specialization in this search process. A clear
direction and strategy in exploration may help achieve optimal

An Examination of Dynamic Capabilities

utilization of the firms learning resources (Cohen & Levinthal,

1990; Cyert & March, 1963). Similarly, the experience gained
by the firm from its acquisition or alliance strategies is easier
to leverage as acquisition/alliance capability if it is within
a restricted domain (Kale & Singh, 1999; Zollo, 1997). But
such benefits of delineating a capability domain for exploration may not extend from one mode to the otherthat is,
experience in alliances in this domain may not extend to
acquisitions. Therefore,
Hypothesis 3b: The closer the target capabilities are to the existing portfolio of alliances of the firm, the higher is the propensity
for formation of alliance relative to acquisition.
H3a and H3b are both based on some aspects of evolutionary
theory and the capability-based perspective and offer distinct
predictions: Are alliances and acquisitions used as parts of the
same strategy or as distinct strategies by firms seeking new
capabilities?
Integration Routines
The outcome of the integration routines may be positive or
negative. If it is positive, and the capabilities are found to be
both attractive in terms of their potential as well as compatible
with the firm, integration is completed. For example, an alliance may be converted into an acquisition. If the capabilities
are found unsatisfactory either in terms of their potential or in
terms of their compatibility, the firm may let them gothat
is, divest the alliance or acquisition.
But what determines the compatibility of the new capabilities and the firm? Previous literature again offers some
conflicting arguments. More proximal capabilities are more
easily absorbed by the firm. Bounded rationality and absorptive
capacity literature suggest that closer capabilities offer fewer
hurdles in assimilation.
Hypothesis 4a: If the capabilities represented within an alliance or acquisition are proximal to those existing in the firm,
divestiture is less likely.
On the other hand, there are more likely to be redundancies
between the new capabilities and the firms existing stock.
Moreover, the use of external transactions (acquisitions or alliances) is contingent on the novelty of these capabilities for
the firm. Hence, the greater the proximity or overlap between
the new capabilities and the firm, the greater the likelihood
of divestiture.
Hypothesis 4b: If the capabilities represented within an alliance or acquisition are proximal to those existing in the firm,
divestiture is more likely.
Again, H4a and H4b are both based on some aspects of the
evolutionary theory and the capabilities-based perspective, but

51

offer distinct predictions. When the capabilities presented

within an alliance or acquisition are proximal to those existing
in the firm, is divestiture more or less likely?
In order to shed light on these four pairs of competing
hypotheses, we proceed to empirically examine these issues.
EMPIRICAL ANALYSIS
The Biotech Industry Context
An appropriate context for this study is one that requires incumbents to pursue a portfolio of external exploratory investments in order to acquire technological expertise. In addition,
these investments would need to be with the focal firm. The
pharmaceutical industry offers such a context because large incumbents pursue portfolios of external exploratory investments
in order to overcome the technological uncertainty imposed
by the evolution of biotechnology. The onset of biotechnology
circumvented many of the capabilities found in existing pharmaceutical firms because the firms that did the initial stages of
applied research and commercial developments in biotechnology were small start-up companies rather than the large pharmaceutical firms. As a strategic response to the biotechnology
threat, pharmaceutical firms started to develop alliances with
biotechnology labs. The larger companies exchanged financial
support and established organizational capabilities in clinical
research, regulatory affairs, manufacturing, and marketing
for the biotech start-ups expertise and patents (Galambos &
Sturchio, 1998). In this dyadic relationship, pharmaceutical
firms are heavily developing learning capabilities.
In addition, pharmaceutical firms often established some
strategic alliances or acquired labs that were investigating
in their same technological domains, a fact that shows that
focal firms pursue further external exploratory investments
in areas related to their current domains. This overlapping
of capabilities also makes an excellent setting for testing the
hypotheses.
Data
We test the above hypotheses using data on biotech investments made by pharmaceutical firms. The main source of
information about technological distances and overlapping,
equity agreements, and acquisitions is BioScan. Other sources
that complement the information regarding equity agreement
and acquisitions are the database from Recombinant Capital,
North Carolina Biotechnology Industry databases, Ernst &
Young Biotechnology Industry Reports, Predicast F&S Index
of Corporate Change, LexisNexus, Dow Jones News Service,
Securities and Exchange Commission (SEC) Schedule 13D
filings, and pharmaceutical firms annual reports. All of these
sources not only give information regarding the existence of

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Management Research

a transaction but also provide the amount of capital invested,

the nature of the company (public or private), the sales of the
incumbent, the origin of the target (United States or foreign),
and other control variables. For uncertainty (stocks or industry
volatility), the main source of information is the Center for
Research in Security Prices (CRSP).
Data collected include all the equity agreements and
outright acquisitions made by the largest 34 pharmaceutical
companies in the world, excluding Japan (hereafter, firms),
with biotech labs between 1989 and 1999. These 34 firms
come from several different countries, including the United
States, England, France, Germany, and Switzerland. However,
due to intense mergers and acquisitions activity in the industry,
our sample size decreased significantly to 19 firms in 1999.
This industry consolidation is accounted for by modeling the
firms separately until the merger or acquisition took place. Although firms have different national origins, they sell products
worldwide. At the beginning of the sample period, around 50
percent of the companies were from the United States and 50
percent were from Europe.
We identified equity agreements and acquisitions related
only with R&D projects. The final sample includes 386 events
of equity transactions: 364 minority equity investments in
biotechnology labs (hereafter, alliance partner), and 22 outright
acquisitions with biotechnology labs (hereafter, acquisition
target). We refer to potential targets of alliance formation or
acquisition as target firms or targets.
Dependent Variables
Our study deals with three types of dependent variables. First,
the study analyzes what type of capability the firm develops.
Here, the dependent variables are the searching space, defined
as different types of technological overlapping. Second, it is
concerned with determinants of entry mode. Therefore, the
dependent variable is the governance choice k. This variable
indicates whether the firm enters into an equity agreement
with the alliance partner (code as 0, as this occurs with greater
frequency) or whether it acquires the target (coded as 1). Finally, the paper assesses the determinants of termination. In
this case, the dependent variable is defined as the timing of
the exercise eventthat is, divestiture. The dependent variable examines the exercise decision (termination) surrounding
existing equity alliances. Divestitures was coded 1 if the focal
firm divests the target and 0 otherwise.
Independent Variables
Two independent variables are at the core of the empirical test:
the technological overlapping between the incumbents and its targets
(either alliance partner or acquisition target), and the technological overlapping between the firms target and remaining alliance

targets of the firm. The technological overlapping is the inverse

of technological distance, which conceptually corresponds to
the concept of distance in our hypotheses. The technological
overlapping between the firm and the target is measured as the ratio
of common technological domain overlapping of the firm and
the target divided by the number of the total technological domains of each of the firms. Examples of technological domains
that appear in BioScan are AIDS therapeutics, DNA probes,
and vaccines. This identification scheme is also considered
in previous research (e.g., Lerner, 1997; Rothaermel, 2001;
Vassolo, Anand, & Folta, 2004). The technological overlapping
between the firms target and remaining alliance targets of the firm is
measured as the average of the ratios of technological overlaps
between the partner and the other partners of the firm.
The variable of technological distance is similar to the one
used by Stuart and Podolny (1996). However, whereas Stuart
and Podolny generate measures of similarity based on patent
citations, the current study compares technological domains
(i.e., BioScans specific subjects). Patent citation has been
widely used in the field for analyzing technological overlapping
(e.g., Mowery, Oxley, & Silverman, 1998; Stuart & Podolny,
1996). Patent citations use information on research that was
conducted many years before the company decided to start a
new external exploration activity. The distance between a technological discovery and a patent in this field is at least ten years.
In this sense, it does not really capture future technological
expertise. Strictly speaking, patents are only the result of past
capabilities. Differently, the technological domains show what
sort of research the firm is carrying out at any given time. The
sort of research that firms are carrying out is forward looking,
because it identifies the potential products that can arise from
this activity. Given that the value of a company is determined
by its expected cash flows, this measure is more accurate in
determining companies future value than patents.
Control Variables
Control variables for the partnership. The first indicator
variable that approximates the degree of appropriability of the
partnership is foreign transaction. Foreign transaction is coded
as 1 if the pharmaceutical firm and the target belong to different countries and 0 otherwise. Firms entering into alliances
with companies that belong to other countries should take
into consideration institutional differences and institutional
governance factors (Bishop, 1994), among others. Depending
on the country, monitoring devices change. This difference
makes it more difficult to control investments and, therefore,
increases the risk of opportunistic behavior. In this sense, foreign transaction captures the presence of behavioral uncertainty
that cannot be incorporated within a contract.
Two other indicator variables approximate the degree of
appropriability of the partnershiplicense and option. The

An Examination of Dynamic Capabilities

presence of a license or an option clause guarantees to the

pharmaceutical firm the appropriability over the discovery. The
purpose of these clauses is to provide an ex post deterrent to
opportunism (Deeds & Hill, 1998). In other ways, the presence
of a complete contract controls for behavioral uncertainty (Williamson, 1991). License is equal to 1 when the equity agreement includes a clause that gives to the pharmaceutical firm
the right to commercially exploit a discovery. Option is coded
1 when the equity agreement either explicitly or implicitly
indicates an option clause. It is explicit when the contract gives
to the pharmaceutical firm the right but not the obligation to
exploit a discovery (explicit call option). It is implicit when
different payments are tied to the accomplishment of certain
milestones by the biotechnology firm (implicit call option).
Even though the biotechnology lab may fail in achieving the
milestone, the presence of this clause signals both potential
option gains and the right to exercise a compound option. This
information was gathered directly from press releases when
available. Otherwise, it was taken from BioScan and ReCap.
Control variables for the incumbent. This study uses a
measure of organization size for control for the financial resource positiontotal pharmaceutical annual sales in millions of
U.S. dollars. Organizational size is a previously used predictor
of alliance formation (Burgers, Hill, & Kim, 1993; Gulati,
1995), because larger firms may be more able to establish an
equity agreement. The values for these variables were taken
from Compustat, LexisNexis, Global Access, and the annual
reports of the firms. For most of the cases, the information was
available under U.S. standards, ensuring the compatibility
of the measure across countries. Different sources were used
for early observations. In particular, substantial work was
needed to get early observations for non-U.S. companies. In
some cases, English versions of the annual reports were not
available, so it was necessary to consult the originals in French
and German.
We control for organizational innovation using the number
of technological domains in which the incumbent is investigating, because broader research scope seems to indicate a higher
commitment to innovation.
Control variable for the target. Three indicator variables
approximate target value: industry returns, industry volatility,
and total number of targets technological domains. Because almost
50 percent of the biotechnology companies are not public, the
variable that measures technological value is industry returns,
which is based on the biotechnology industry index adjusted
by the risk-free interest rate (interest).1 This index includes
ten public biotechnology companies that existed during all
of the period, and it tries to keep a balance in the number of
companies within each particular major subject grouping. The
index is capitally weighted, Standard & Poors uses the cap-

53

weighted methodology. The index was also adjusted each time

any of the companies launched new stocks to the market. This
adjustment is necessary to avoid spurious upside gains.
It has been argued that equity alliances are like real options
(e.g., Kogut, 1991). Under this view, higher levels of uncertainty increase the option value of the alliance. Here, industry
volatility approximates technological uncertainty. It is the
monthly standard deviation of the returns of the index.
Even though our measures of the industry index return and
volatility may accurately measure the value of the field, they
do not assess the value of a particular target firm. This may
introduce a bias in governance decisions because incumbents
are more willing to buy out targets with higher value. In order
to cope with these potential biases, this study proposes a count
variable that measures the total number of a targets technological
domains (Rothaermel, 2001). This count variable is a proxy
of the knowledge endowment of the lab and, therefore, of its
value. It has been argued that firms active in more technological domains have larger growth options associated with them
(Folta & Miller, 2002).
Descriptive Statistics
Table 1 contains descriptive statistics. It can be seen from this
table that the technological distance between the pharmaceutical incumbent and the biotechnological target is much bigger
than that between the biotechnological target and the remaining targets of the portfolio. In other words, pharmaceutical
firms explore in distant technological domains, but they do
that within a fairly tight portfolio.
Table 2 shows the Pearson correlation coefficients. Note
the low correlation between the two measures of technological distance (0.02). This information provides strong evidence
for concluding that the two measures represent two different
constructs (i.e., correlation and fungibility).
Econometric Model
For the analysis of the search routines, we use an exploratory
approach based on descriptive statistics. In particular, we plot
the evolution of the two types of technological overlapping
along the period under study. For ease of exposition and to
increase the inference power of Figures 2 and 3, only three
companies were plottedthose with observations in almost
every year. The information regards only the establishment of
equity agreements.
We use two models for addressing the effect on the dependent variable entry mode. First, we use a logit regression. Second,
we constructed a panel data set, and used a time-series crosssection regression for testing the hypotheses. In particular, we
use the fixed-effects logit model, controlling for the presence
of unbalanced data. An important advantage of panel models

54

Management Research
Table 1
Descriptive Statistics for Termination Sample

Variable

Mean

Standard
deviation

Minimum

Maximum

Technological distance pharmaceutical lab

Technological distance lab portfolio
Interest
Industry returns
Industry volatility
Foreign transaction
License
Option
Log pharmaceutical sales
Number of pharmaceutical technologies
Number of pharmaceutical alliances (total)
Number of lab technologies

0.10
0.07
0.05
0.01
0.001
0.45
0.56
0.36
8.87
23.26
9.38
6.61

0.08
0.06
0.01
0.03
0.001
0.50
0.50
0.47
0.74
11.12
7.91
5.05

0
0
0.03
0.07
0.000
0
0
0
6.62
3
1
1

0.75
0.45
0.09
0.12
0.006
1
1
1
10.59
42
36
30

is that they incorporate cross-sectional as well as time-varying

variables. Thus, panel models provide a better understanding of
the dynamics of capability evolution over some other discrete
choice models. The panel regression is more appropriate for
this type of data, but it leads to a loss of several observations.
Having both kinds of regressions is useful in understanding
the results better. We use a set of ten dummy variables to
control for unobserved fixed effects of each time period. Such
time effects can include economywide factors, such as recession or growth periods, wars, and so onthat is, factors that
may influence the overall balance of supply and demand, and
consequently affect the results of our study. Time effects are
not reported in the Tables 3 to 6 for ease of exposition.
For the dependent variable divestiture, this study uses a
hazard rate model. The most important advantage of hazard
rate models is that it allows incorporating in the sample rightcensored variables. Our analysis models the dependent variable
as the hazard rate of terminating an equity partnership. Even
though H4a and H4b refer only to divestiture, we decided to
analyze two different types of termination eventsdivestiture
and acquisition (i.e., buyout)and modeled their hazard rates
separately. By modeling buyouts, we obtain a much stronger
hypothesis against the alternative of divestiture.
In this line, the first set of models defines the dependent
variable as the hazard rate of divesting an equity alliance. The second set of models defines the dependent variable as the hazard
rate of acquiring a majority stake of the biotechnology partner.
In both sets of models, the rate was specified as a Gompertz
function of the independent variables, Xt, and a vector of
parameters capturing the effects of the variables on the rate
of subsequent equity investment. The Gompertz distribution
was selected among several possible parameterizations based
on the Akaike information criterion.
All of the econometric models presented in our study use
the maximum likelihood estimation technique. The use of

maximum likelihood estimation requires the assumption that

events are uncorrelated across observations. Given that each
pharmaceutical firm has multiple investments, this assumption
is highly questionable in our data. To adjust for this problem,
the two types of regressions were done using the robust and
the cluster options in Stata. The robust option specifies
that the Huber/White/sandwich estimator of variance is to
be used in place of the traditional calculation. The robust
option, when combined with the cluster option, allows for
the presence of observations that are not independent within
clusters (i.e., same pharmaceutical firm). However, observations should be independent across clusters (i.e., between
pharmaceutical firms), which seems to be a reasonable assumption for the sample.
RESuLTS
H1a and H1b were indirectly addressed plotting the evolution
of the two types of technological overlapping along the period
under study. Figure 2 includes the evolution of the technological distances between the incumbent and the target; Figure 3
includes the evolution of the technological distances between
the target and the other targets of the incumbents portfolio.
The plot does not allow us to support H1a and H1b. The
searching pattern seems to have a random or at least a highly
idiosyncratic behavior.
Table 3 shows the results of the logit regression. The independent variable that measures the technological overlapping
between the firm and the target is positively related with the
dependent variable (p < 0.01). That is, the logit model results
support H2b: a firm is less likely to use acquisitions relative to
alliances in pursuing capabilities farther away from the core of
the firm. The logit regression also shows that the explanatory
variable technological overlapping among the alliance partners has a
significant negative coefficient (p < 0.10). That is, the findings

11. Number of lab technologies

10. Number of pharmaceutical alliances (total)

9. Number of pharmaceutical technologies

8. Log pharmaceutical sales

7. Foreign transaction

6. Industry volatility

5. Industry returns

4. Interest

3. Technological distance lab portfolio

1. Entry mode
2. Technological distance pharmaceutical lab

Variable
1.00
0.14
(0.01)
0.08
(>0.10)
0.05
(>0.10)
0.11
(0.05)
0.29
(0.001)
0.09
(0.10)
0.02
(>0.10)
0.05
(0.001)
0.04
(0.001)
0.09
(0.10)

0.24
(0.001)
0.00
(>0.10)
0.02
(>0.10)
0.01
(>0.10)
0.08
(>0.10)
0.02
(>0.10)
0.03
(>0.10)
0.04
(>0.10)
0.49
(0.001)

1.00

0.08
(0.10)
0.08
(0.10)
0.02
(>0.10)
0.02
(>0.10)
0.08
(>0.10)
0.17
(0.001)
0.02
(>0.10)
0.19
(0.001)

1.00

0.31
(0.001)
0.15
(0.01)
0.04
(>0.10)
0.18
(0.001)
0.23
(0.001)
0.18
(0.001)
0.01
(>0.10)

1.00

0.18
(0.001)
0.03
(>0.10)
0.15
(0.01)
0.02
(>0.10)
0.10
(0.01)
0.04
(>0.10)

1.00

1.00

0.04
(>0.10)
0.12
(0.01)
0.02
(>0.10)
0.19
(0.001)
0.06
(>0.10)

Table 2
Pearson Correlation Coefficients for entry Mode

0.05
(>0.10)
0.04
(>0.10)
0.10
(0.01)
0.02
(>0.10)

1.00

0.32
(0.01)
0.30
(0.01)
0.09
(0.10)

1.00

0.00
(>0.10)
0.04
(>0.10)

1.00

0.02
(>0.10)

1.00

10

An Examination of Dynamic Capabilities

55

56

Management Research

FIguRE 2
Pattern of Technological Overlapping Pharmaceutical
Lab for Equity Agreements

FIguRE 3
Pattern of Technological Overlapping Lab Portfolio
for Equity Agreements

support H3b: the closer the target capabilities, the higher is the
propensity for formation of alliance relative to acquisition.
Table 4 shows the results of the fixed-effects panel logit. The
independent variable that measures the technological overlapping between the firm and the target is positively related with the
dependent variable (p < 0.05). That is, the panel logit model

results support H2b. However, the panel logit model fails to

support H3b. The coefficient that measures the effect of the
explanatory variable technological overlapping among the alliance
partners is equal to zero.
In summary, we found strong support for H2b and partial
support for H3b.

An Examination of Dynamic Capabilities

57

Table 3
The logit Maximum-likelihood Regression
Dependent variable: entry mode N = 386
Variable
Constant
Interest
Industry returns
Industry volatility
Foreign transaction
Log pharmaceutical sales
Number of pharmaceutical technologies
Number of pharmaceutical alliances (total)
Number of lab technologies

1
4.35
(2.94)
9.40
(23.74)
7.56
(5.88)
863.95****
(210.09)
0.96*
(0.55)
0.19
(0.30)
0.03
(0.03)
0.09**
(0.05)
0.05
(0.04)

Technological distance pharmaceutical lab

2
5.94*
(3.27)
15.19
(25.86)
7.51
(5.95)
857.29****
(207.22)
0.89
(0.57)
0.28
(0.34)
0.03
(0.03)
0.08*
(0.05)
0.02
(0.04)
4.41**
(2.23)

Technological distance lab portfolio

Technological distance pharmaceutical
lab * minimum technological distance
lab portfolio
Pseudo R-square
Log likelihood
Log-likelihood ratio test

18.55
69.21

20.53
67.52
3.37*

4.26
(2.83)
10.27
(22.05)
7.82
(6.32)
872.62****
(210.31)
0.94*
(0.57)
0.21
(0.28)
0.03
(0.03)
0.09*
(0.05)
0.06*
(0.04)

9.67
(6.55)

6.05
(3.19)
17.28
(23.53)
7.51
(6.53)
880.16****
(212.37)
0.88
(0.60)
0.30
(0.34)
0.02
(0.03)
0.08
(0.05)
0.02
(0.04)
6.88****
(1.98)
13.00**
(6.02)

20.71
67.37
3.68*

24.12
64.47
6.09***

5
6.07
(3.28)
17.81
(23.84)
7.42
(6.45)
880.75****
(211.80)
0.89
(0.60)
0.29
(0.35)
0.02
(0.03)
0.08
(0.05)
0.01
(0.05)
8.16***
(3.07)
11.23*
(6.95)
102.87
(86.48)
24.45
64.19
0.57

Notes: Standard errors are shown in parentheses. * p < 0.10; ** p < 0.05; *** p < 0.01; **** p < 0.001.

The results from the hazard rate models are exhibited in

Tables 5 and 6. Table 5 presents results pertaining to factors
that influence the rate of divestiture. Model 1 is the base
model. To test our conjecture about the importance of capability experience on alliance termination, model 4 introduces a
measure of technological overlap between the pharmaceutical
firm and the alliance partner. This variable did not significantly
contribute to model fit, failing to support H4a and H4b: we
cannot reject that, if the capabilities represented within an
alliance or acquisition are proximal to those existing in the
firm, divestiture is less or more likely.
Table 6 considers an identical set of models as Table 5 while
examining the rate of partnership acquisition. The small number of buyout events makes the identification of determinants
problematic. Model 4 tests our competitive hypotheses about
the effect of pharmaceutical lab technological proximity on
propensity of acquisition. A likelihood ratio test indicates
that model 4 provides a significant (p < 0.05) improvement

over model 1. The individual coefficient is positive (p < 0.05),

supporting H4a: if the capabilities represented within an alliance or acquisition are proximal to those existing in the firm,
divestiture is less likely. Once again, these results hold up on
the full model presented in model 5.
All of the control variables with a significant coefficient
show expected relationships.
DISCuSSION
Is evolutionary theory underdetermined? The fact that evolutionary theory offers competitive hypotheses for similar
strategic situationssearch, procurement, and integration of
new capabilitiesseems to indicate that this theory is not fully
determined for certain business situations. It is worth noting
that the presence of competitive hypotheses under the same
system does not invalidate the theory. We are not claiming
that evolutionary theory is internally inconsistent. Instead,

58

Management Research
Table 4
The Conditional Fixed-effects logit Maximum-likelihood Regression

Dependent variable: entry mode N = 198a

Variable
Interest
Industry returns
Industry volatility
Foreign transaction
Log pharmaceutical sales
Number of pharmaceutical technologies
Number of pharmaceutical alliances (total)
Number of lab technologies

1
34.25
(31.95)
4.34
(10.72)
763.39****
(227.78)
1.91**
(0.99)
0.96
(0.95)
0.05
(0.06)
0.07
(0.07)
0.10*
(0.06)

Technological distance pharmaceutical lab

2
19.24
(35.15)
3.45
(11.44)
721.52****
(225.27)
1.99*
(1.08)
0.49
(0.96)
0.06
(0.06)
0.03
(0.07)
0.01
(0.07)
12.51**
(5.27)

Technological distance lab portfolio

Technological distance pharmaceutical
lab * minimum technological distance
lab portfolio
Log likelihood
Log-likelihood ratio test

3
41.53
(32.81)
5.39
(11.03)
800.38****
(229.10)
2.03**
(0.99)
1.09
(0.96)
0.05
(0.06)
0.07
(0.07)
0.12**
(0.06)

7.44
(5.86)

36.42

32.94
6.95***

35.35
2.14

27.35
(35.31)
4.56
(11.78)
758.25****
(227.19)
2.18**
(1.11)
0.57
(0.99)
0.06
(0.06)
0.02
(0.07)
0.02
(0.07)
12.40**
(5.21)
7.69
(6.10)

23.52
(38.83)
4.63
(12.86)
780.30****
(240.15)
2.29**
(1.12)
1.01
(1.08)
0.09
(0.07)
0.00
(0.09)
0.04
(0.08)
8.93
(5.63)
21.21**
(9.22)
3,873.08**
(1,654.40)

31.86
6.978**

28.94
5.86**

Notes: a 13 groups (198 observations) were dropped due to all positive or all negative outcomes. Standard errors are shown in parentheses. * p < 0.10;
** p < 0.05; *** p < 0.01; **** p < 0.001.

we are highlighting the need for a more integrated approach

of evolutionary theory in order to understand the nature of
dynamic capabilities.
The results are intriguing. First, we focus on the set of
technological capabilities. Here we fail to support any of the
two competitive hypotheses about searching routines (H1a and
H1b). Pharmaceutical firms seem to follow a random searching process and not a broad-to-narrow or a narrow-to-broad
path. We have to acknowledge that our empirical approach
was mainly descriptive; therefore, it was insufficient to reject
or support any of the two hypotheses related to searching routines (H1a and H1b). However, results are surprising enough
to encourage further exploration in this direction.
The remaining hypotheses refer to the dynamic capability
alliancing. Different from our results with searching routines,
here we find it significant that procurement capabilities and
entry mode shed light on the nature of dynamic capabilities.
The logit and the fixed-effect panel logit regression support
the evolutionary argument that when the capabilities are at a
greater distance from the core of the firm, they are also more
risky in terms of their assimilation, absorption, and produc-

tive deployment. These findings are also consistent with the

real options approach to strategic alliances: higher levels of
uncertainty favor alliances over acquisitions.
Findings regarding the procurement routines and strategic
intent were also rich. We found support to the hypothesis of
orthogonality of the procurement routines, at least in the logit
regression. The procurement of biotechnological capabilities
in the pharmaceutical industry is a highly uncertain process.
When pharmaceutical companies build their portfolios of
exploration activities (i.e., equity alliances), they do it in a
coherent way: the portfolio is far from the incumbent technological domain but in a circumscriptive space. That is, strategic
alliances cover a close set of capabilities, even though these capabilities are far from the incumbents capability endowment.
The capability endowments of acquired companies are also
far from that of the alliance portfolios. This seems to indicate
that the strategic intent of entering into an equity alliance is
different than that of making an outright acquisitionthat
is, the two strategies are orthogonal.
Results for the hypotheses related to the integration routines
were ambiguous. Only by analyzing buyouts were we able to

An Examination of Dynamic Capabilities

59

Table 5
The Hazard Rate Maximum-likelihood Regression
Dependent variable: alliance divestiture N = 435, failures = 61
Variable
Interest
License
Option
Foreign transaction
Log pharmaceutical sales
Number of pharmaceutical technologies
Number of lab technologies
Industry returns

6.53e+43**
(2.82e+45)
0.83
(0.25)
0.53*
(0.18)
0.70
(0.19)
0.54***
(0.11)
0.99
(0.012)
0.98
(0.02)
1.37e-08***
(8.33e-08)

1.41e+49**
(7.64e+50)
0.78
(0.23)
0.53**
(0.17)
0.85
(0.23)
0.52****
(0.10)
0.99
(0.01)
0.98
(0.02)
5.28e-07***
(2.95e-06)
5.08e-221*
(1.42e-218)

9.28e+43**
(4.10e+45)
0.78
(0.23)
0.55*
(0.18)
0.71
(0.98)
0.52****
(0.10)
0.99
(0.01)
0.98
(0.02)
6.70e-09***
(4.23e-08)

1.32e+44**
(5.68e+45)
0.84
(0.26)
0.53**
(0.17)
0.70
(0.19)
0.53****
(0.11)
0.99
(0.01)
0.99
(0.03)
9.86e-09***
(5.97e-08)

5.41e+48**
(2.94e+50)
0.75
(0.23)
0.55*
(0.18)
0.85
(0.23)
0.51****
(0.10)
0.99
(0.01)
0.99
(0.03)
2.57e-07***
(1.54e-06)
2.2e-204*
(6.0e-202)
3.78*
(3.07)
0.46
(0.93)
45.74
11.79***

Industry volatility
Minimum technological distance lab
portfolio
Technological distance pharmaceutical lab
Log likelihood
Log-likelihood ratio test

4.75**
(3.53)

51.64

46.99
9.31***

49.84
3.61*

0.25
(0.58)
51.43
0.43

Notes: Standard errors are shown in parentheses. * p < 0.10; ** p < 0.05; *** p < 0.01; **** p < 0.001.

support the hypothesis that more proximal targets capabilities

are more easily absorbed by the firm, diminishing alliances, or
acquisitions failure. These results have two important limitations. First, we fail with the direct test that relates distance
with divest. Instead, we could only support the hypothesis
regarding distance and buyout (the opposite to divest). Second,
due to methodological problems, we were not able to include
acquisitions in the analysis. Therefore, divest only represents
the space of termination of equity alliances.
CONCLuSIONS
We started our study highlighting the prediction from evolutionary theory: as external conditions change, updating capabilities is difficult, and the process is not univocally determined
by evolutionary theory. We identified four sets of competing
hypotheses regarding firms externally oriented routines. Our
study sheds light on this issue by providing empirical evidence
of the existence of specific routines that firms develop to deal
with changing environments.
These externally focused routines are of two types. One type
involves incremental investment commitments to distant domains, which we observe as alliances. The other type of routine

involves larger commitment but within proximity to the firm,

which we observe as related acquisitions. An interesting finding is that in the face of technological discontinuities, firms
develop these two orthogonal or distinct types of routines.
These routines are distinct from one another, but each seems
to reflect a coherent strategy. The preference for these kinds
of transactions arises from the firms relative strengths in
development and assimilation capabilities. At the same time,
while interpreting these results, it is important to note that the
choice between alliances and acquisitions should be seen in the
broader context of the choice between internal development
and external modes. Further, a key difference between alliances
and other modes is the ownership of assets. Internal development and acquisitions involve complete or major ownership
of assets, but in alliances, the ownership is retained by the
collaborating firms. Our results on the use of related acquisitions can also be interpreted on the basis of single or dominant
ownership by the firm in the case of acquisitions.
It is also interesting to note that on the surface, one of our
results regarding the relative use of alliances and acquisitions
is parallel to one obtained from the real options perspective
(e.g., Kogut, 1991). The real options perspective predicts that
firms opt for lesser commitment when uncertainty is high, and

60

Management Research
Table 6
The Hazard Rate Maximum-likelihood Regression

Dependent variable: alliance buyout N = 435, failures = 14

Variable
Interest
License
Option
Foreign transaction
Log pharmaceutical sales
Number of pharmaceutical technologies
Number of lab technologies
Industry returns

1
1,998.12
(108,414.6)
1.05
(0.62)
0.12*
(0.14)
0.91
(0.48)
0.61
(0.30)
0.99
(0.03)
1.06
(0.06)
1.80e-07
(2.09e-06)

Industry volatility
Minimum technological distance lab
portfolio
Technological distance pharmaceutical lab
Log likelihood
Log-likelihood ratio test

215.38
1,874.00
(12,197.89)
(9,714,901)
1.05
1.11
(0.62)
(0.63)
0.12*
0.11**
(0.14)
(0.12)
0.93
0.87
(0.49)
(0.47)
0.61
0.64
(0.30)
(0.27)
0.99
0.99
(0.03)
(0.03)
1.06
1.07
(0.06)
(0.06)
3.22e-07
2.04e-07
(3.88e-06)
(2.33e-06)
1.58e-35
(4.70e-33)
0.01
(0.02)

47.39

47.36
0.06

45.40
3.97**

4
31.81
(1,712.00)
0.96
(0.53)
0.13*
(0.15)
0.97
(0.56)
0.61
(0.31)
0.99
(0.03)
1.01
(0.06)
4.59e-07
(5.35e-06)

1,734.35**
(6,222.75)
45.35
4.08**

5
1.91
(104.95)
0.97
(0.56)
0.12**
(0.13)
0.99
(0.57)
0.61
(0.28)
0.99
(0.03)
1.02
(0.06)
1.68e-06
(0.000)
1.4e-115
(4.5e-113)
0.01
(0.02)
2,735.55**
(10,030.70)
42.93
8.92**

Notes: Standard errors are shown in parentheses. * p < 0.10; ** p < 0.05; *** p < 0.01; **** p < 0.001.

higher commitment when uncertainty is low. In some sense,

alliances reflect lower commitment under uncertainty, whereas
outright acquisitions reflect greater commitment. However,
a key difference is that whereas real options models consider
the uncertainty to be exogenous (Adner & Levinthal, 2004),
we postulate the source of uncertainty to be specific and endogenous to the combination of firm and new capability being
sought. Further, the real options perspective does not shed
light on the relationship between the two orthogonal kinds
of routines mentioned above. In this sense, our study may also
shed new light on the topic of investments under uncertainty,
though that is not our primary motivation.
Finally, the paper has important managerial implications
toward understanding best practices, because alliances and
acquisitions are two important means for learning and growth.
By explaining how pharmaceutical firms utilize these two
externally focused routines (alliances and acquisitions) when
competing in a disruptive environment, this study may be a
source of inspiration for any manager facing a technological
discontinuity.
In our study, the dependent variables mainly relate to firms
behavior; for identifying best practices, we need to analyze
performance. Future research should investigate both the

antecedents and the effects of the practices adopted by firms.

For example, what types of firms adopt specific practices, and
under what conditions? And under what conditions does the
adoption of these practices lead to competitive advantages?
What are the contingencies in the relationship between these
practices and performance? The task of examining the causes
and performance effect of these common practices is in our
future research agenda.
NOTE
1. A better alternative would be to use the stock market of each
of the biotech companies. Unfortunately, this information was
not available for all of the cases.

REFERENCES
Adner, R., & Levinthal, D. 2004. What is not a real option:
Considering boundaries for the application of real options
to business strategy. Academy of Management Review, 29 (1):
7485.
Ahuja, G., & Katila, R. 2001. Technological acquisitions and the
innovation performance of acquiring firms: A longitudinal
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