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The financing of alliance entrepreneurship

Jieying Hong

Journal of Business Venturing, 2020, vol. 35, issue 1

Abstract: It is popular nowadays for entrepreneurial firms to advance their entrepreneurship outside their boundaries through alliances. This paper studies how the financing of entrepreneurship changes in strategic alliances. We model a financially constrained entrepreneur and a deep-pocket incumbent developing an innovative product through a strategic alliance, which generates externalities on the incumbent. We find that i) in contrast to traditional theories, the entrepreneur's financial constraint can be tightened by an increase in his endowment; ii) an outside investor is introduced as a third party to deal with the free-riding agency problem; and iii) the externalities have a significant effect on the design of financial claims in the alliance contract, and the incentive-compatible financial instruments are consistent with empirical observations.

Keywords: Alliance entrepreneurship; Financial contracting; Externality; Security design (search for similar items in EconPapers)
JEL-codes: D82 D86 G32 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jbusvent.2018.12.002

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