The Joint Effect of Technological Distance and Market Distance on Strategic Alliances

The literature on strategic alliances has deepened our understanding of the mechanisms behind their formation. This literature has given a central role to complementarities between firms, whereby complementarities are usually measured by technological overlap. An established result tells us that, there is an inverted-u relationship between technological distance and learning by firms. In this paper, we argue that technological distance is only one aspect of complementarities. Equally important is the market distance, which we define as the extent to which the value generated by the alliance depends on the synergies between firms’ products. These synergies may occur because of the complementarities between products, or the possibilities to apply similar knowledge fields in different product domains. Through an agent based simulation study, we show that when firms consider both distances jointly, an alliance strategy which favours being close in at least one dimension yields the highest payoff, rather than being at the intermediate distance in both dimensions.