Discriminating Alignment in the Innovation Sphere

Contracts play an important role in innovation. As a result, some. scholars have proposed theories highlighting contract provisions as devices that can serve to informally enforce agreements and build trust between parties. Others emphasize the hierarchical provisions between firms to promote efficiency. Yet another group views these agreements as a mechanism to institutionalize learning and protect property interests. This Article offers a new theory. To understand a firm’s contractual choices and governance, we must look at how the same provisions in different contracts may have distinct meanings or operate differently in different contexts. So, scholars must give context to these contracts by evaluating how specific industries utilize these provisions in different ways. Separate industries may use the same provisions––like information sharing, for example––within their contracts, but they will pair these provisions with different clauses or private strategies, resulting in different governance choices. This Article looks at two areas––the manufacturing and biopharma industries­­––because these fields use collaborative agreements with similar provisions and suggests that the same provisions actually work in very different ways. The theory of discriminating alignment suggests that parties within these two industries use contractual and other strategy choices differently in order to meet their separate goals in a cost minimizing way. This Article reaches this conclusion based on qualitative interviews to learn about how participants in the biopharma industry use provisions and understand them. It draws on prior empirical work and scholarship to analyze how the same provisions operate differently within the manufacturing industry. It concludes that the same contract provisions operate differently in manufacturing and biopharma, leading to a divergence in governance choices. In manufacturing, where relational sanctions are possible, parties can combine informal enforcement with formal provisions to achieve their goals. This is consistent with a “braiding theory” of formal and informal enforcement. By contrast, biopharma parties have a joint interest in collaborating early on to achieve profits and success, which renders informal enforcement unhelpful. Biopharma uses formal provisions––including information transfer provisions––because they are the best means of facilitating a successful complex project. However, when the interests of parties within biopharma diverge, property provisions take over. This Article echoes Professor Macaulay’s view that to to understand governance within a specific industry, the industry must be analyzed using qualitative interviews.