Mccann 2015

AGGLOMERATION AND THE CHOICE BETWEEN ACQUISITIONS
AND ALLIANCES:
AN INFORMATION ECONOMICS PERSPECTIVE
BRIAN T. MCCANN*
Owen Graduate School of Management
Vanderbilt University
401 21st Avenue South
Nashville, TN 37203
Tel: (615) 343-7702
Fax: (615) 343-7177
E-mail: brian.mccann@owen.vanderbilt.edu
JEFFREY J. REUER
Krannert School of Management
Purdue University
403 West State Street
West Lafayette, IN 47907-2056
Tel: (765) 496-6695
Fax: (765) 494-9658
E-mail: jreuer@purdue.edu
NANDINI LAHIRI
Fox School of Business
Temple University
1801 Liacouras Walk
Philadelphia, PA 19122
Tel: (215) 204-3090
E-mail: nlahiri@temple.edu
Keywords: Agglomeration theory, information economics, geographic clusters, acquisitions,

alliances
* Corresponding author
This article has been accepted for publication and undergone full peer review but has not
been through the copyediting, typesetting, pagination and proofreading process, which
may lead to differences between this version and the Version of Record. Please cite this
article as doi: 10.1002/smj.2387
This article is protected by copyright. All rights reserved

ABSTRACT
Research summary: This research extends agglomeration theory by joining it with information economics research to better
understand the determinants of firms’ organizational governance choices. We argue that co-location in a common geographic
cluster fosters lower levels of information asymmetry between exchange partners and thus leads firms to employ acquisitions
rather than alliances for their external corporate development activities. We further extend agglomeration theory by arguing
that the impact of sharing a cluster location on acquisitions versus alliances strengthens with the level and dissimilarity of the
exchange partners’ knowledge-based resources as well as with the intra-cluster geographic proximity of the partners.
Evidence from a sample of over 1,100 alliance and acquisition transactions in the US semiconductor industry provides
support for our hypotheses.
Managerial summary: Geographic clusters of firms, such as Silicon Valley, are a common phenomenon that can influence
many different firm behaviors and outcomes. This paper investigates the role of clustering for firms’ external corporate
development activities in acquisitions and alliances. We explain how better information is likely to be available among firms
co-located in the same cluster. This suggests that managers should have less need to use alliances over acquisitions as a means
of reducing the risk of adverse selection (e.g., overpaying for acquisitions). Our investigation of over 1,100 transactions in the
US semiconductor industry shows that common cluster co-location indeed increases the probability of acquisition relative to
alliance. Our arguments and evidence also indicate that the information-related benefits of cluster co-location are even more
impactful when the parties have more divergent technology bases, possess larger stocks of knowledge-based resources, or are
located in closer geographic proximity. Our findings broadly suggest that firms carrying out deals within clusters are able to
avoid turning to other coping strategies to deal with uncertainty concerning potential exchange partners’ resources and
prospects when transacting with them.
INTRODUCTION
A substantial body of research attempts to understand the implications of the geographic co-location of
similar firms, often known as “agglomeration” or “clustering.” Research demonstrates, for example,
that firms located within clusters tend to enjoy performance benefits relative to their geographically-
isolated counterparts (e.g., Baptista and Swann, 1998; Folta, Cooper, and Baik, 2006). More recently,
scholars have begun to devote increased attention to understanding how agglomeration might influence
firms’ external corporate development activities that can shape the resources firms are able to utilize as
well as the firms’ competitiveness. For example, studies have shown that if a particular firm is located
in a cluster, the firm is more likely to participate in acquisitions (e.g., Almazan, De Motta, Titman, and
Uysal, 2010) as well as alliances (e.g., Narula and Santangelo, 2009; Rothaermel, 2002).
Our aim is to extend the agglomeration literature and this nascent research stream in several
important respects. First, a significant amount of research on alliances, acquisitions, and other

organizational forms indicates they are alternative governance structures and as such must be
investigated in comparative terms, so we wish to join recent agglomeration studies to the large literature
on comparative organizational governance. Scholars have argued that the choice between an alliance
and acquisition is among the most important decisions a firm makes concerning its corporate
development (e.g., Dyer, Kale, and Singh, 2004); as such, the choice has been an important focus of
recent theoretical and empirical research on organizational governance (Vanhaverbeke, Duysters, and
Noorderhaven, 2002; Villalonga and McGahan, 2005, Wang and Zajac, 2007; Yin and Shanley, 2008).
This literature recognizes that “the two types of deals can substitute for each other” (Yin and Shanley,
2008: 473) and for high-tech firms, the choices represent “two alternative forms of external sourcing of
technology” (Vanhaverbeke et al., 2002: 715). Thus, it is important to understand whether
agglomeration has an impact on acquisitions versus alliances. Moreover, we will argue that extending
agglomeration theory into this new domain is natural because agglomeration externalities in the form of
knowledge spillovers are closely related to the causal mechanisms identified in recent organizational
governance research, which emphasizes the role of information in firms’ acquisition versus alliance
decisions (e.g., Reuer and Ragozzino, 2012; Reuer, Tong, Tyler, and Ariño, 2013). The second
important extension we offer is to move beyond the firm level and the role of a single firm’s location in
a cluster to focus on the dyad level and consider the potential role of shared cluster location for firms
engaging in transactions such as acquisitions and alliances.
In this paper, we therefore seek to join agglomeration theory with information economics to
explain the ways that common, shared cluster location can have an impact on the choice between an
acquisition and alliance. Prior research in information economics suggests that this choice is influenced
by asymmetric information across the exchange partners. For instance, potential acquirers face the risk
of adverse selection, or the risk of overpayment, when the target has information on its resources and
prospects that the acquirer lacks and cannot efficiently obtain; one way of reducing this risk is to
employ an alliance rather than an acquisition (Balakrishnan and Koza, 1993; Vanhaverbeke et al. 2002;
Villalonga and McGahan, 2005). An alliance requires a smaller sunk investment and allows the firm to

learn about the resources in question. This governance choice is therefore closely tied to the level of
information asymmetry between exchange partners, and we suggest that, all else equal, the cluster-wide
interactions, shared understandings, and social relationships of firms who share a cluster location
reduce information asymmetry and hence lower the need to employ an alliance over an acquisition.
After considering the direct effects of firms sharing a cluster location on organizational
governance, we investigate several conditions under which the governance-related effects of
agglomeration will be more or less pronounced. First, we expect that the information-related benefits
of common cluster location will be most consequential when there would otherwise be more significant
asymmetric information between the exchange partners. Specifically, we use information economics to
argue that the governance-related impact of sharing a cluster location will increase with the dissimilarity
and depth of the exchange partners’ knowledge bases, as information asymmetries tend to be more
substantial under these conditions. In contrast, co-location in a cluster will be less consequential for
firms’ governance choices when exchange partners have more similar or fewer knowledge resources
because information asymmetries will be lower and shared location provides relatively fewer benefits.
Second, our theoretical framework also suggests that the benefits of common cluster location will be
stronger for firms located in closer proximity because the information spillovers produced within
clusters will be most noticeable and most readily absorbed for nearby firms.
We study transactions occurring in the semiconductor industry, not only because of the
importance of clustering in this context, but because this setting allows us to investigate the
technological knowledge stocks of the exchange partners and how they have an impact on the effects
of agglomeration on organizational governance. Our empirical analyses of over 1,100 transactions in
the US semiconductor industry indicate that sharing a geographic agglomeration does make firms more
likely to choose an acquisition over an alliance at the margin (or equivalently, less likely to choose an
alliance over an acquisition), and this relationship is strengthened when the technological knowledge
bases of the firms are more dissimilar and deeper. Finally, our evidence indicates that the governance
effects of sharing a cluster are strongest for the most closely co-located firms within the cluster.

Our research offers several contributions to the literature on agglomeration. First, we extend
agglomeration theory to a new domain, specifically firms’ organizational governance choices involving
acquisitions and alliances. We utilize agglomeration theory as well as information economics as the basis
for bridging these two literatures and formulating individual hypotheses on the effects of shared cluster
location. Specifically, we draw on knowledge spillovers as a form of agglomeration externality and
information considerations that shape organizational governance choices in order to integrate these two
literatures, which have largely developed separately to date. Our arguments and findings suggest that
firms’ organizational governance choices reflect knowledge sharing mechanisms associated with the
overall cluster, beyond just the mere geographic proximity of the exchange partners themselves. Our
work also extends prior research demonstrating how a single firm’s location in a cluster has an impact
on the firm’s propensity to engage in horizontal (e.g., Almazan et al., 2010; Folta et al., 2006) and vertical
(Cainelli and Iacobucci, 2009; Diez-Vial and Alvarez-Suescun, 2011; Enright, 1995) transactions by
linking shared cluster location to the acquisition versus alliance choice.
We also further extend agglomeration theory by identifying a number of important
contingencies shaping the relationship between shared cluster location and firms’ acquisition versus
alliance choices. We show that the governance-related agglomeration effects we study depend on both
the level and dissimilarity of exchange partners’ knowledge resources. Our examination of the
influence of intra-cluster geographic distance and our evidence that the impact of agglomeration on
such decisions is greater when firms are located closer together within clusters also contributes to
agglomeration research on sources of intra-cluster heterogeneity (e.g., McCann and Folta, 2011; Shaver
and Flyer, 2000) and on the attenuation of agglomeration externalities (e.g., Henderson, 2003;
Rosenthal and Strange, 2003).
THEORETICAL BACKGROUND
Agglomeration theory
Agglomeration generally refers to a geographic concentration of economic activity. The spatial
concentration of similar firms is theorized to generate localization externalities (e.g., Porter, 1998a,

1998b; Pouder and St. John, 1996; Saxenian, 1994), including access to specialized labor, specialized
inputs, and knowledge spillovers (Marshall, 1920).1 Such agglomerations are often described as
“clusters,” following the work of Porter (1998a), who defines a cluster as a geographically proximate
group of interconnected and complementary companies and associated institutions in a particular field.
Clusters have been studied in manufacturing industries generally (Shaver and Flyer, 2000), but they are
more often studied in high-tech industries, such as semiconductors (Almeida and Kogut, 1999; Martin,
Salomon, and Wu, 2010; Rosenkopf and Almeida, 2003) and biotechnology (DeCarolis and Deeds,
1999; McCann and Folta, 2011).
Geographic proximity and interconnections among many organizations create agglomeration
externalities such that the net benefits to co-locating with similar firms increase as the number of firms
within the region grows. We only briefly summarize these benefits here as extensive reviews are
available elsewhere (e.g., McCann and Folta, 2008; Storper, 1997). To begin with, clusters create a
pooled market for specialized workers (Krugman, 1991), leading to deeper labor markets as skilled
workers are attracted to concentrated opportunities. Thus, firms within agglomerations have better
access to a pool of specialized labor with lower search costs for qualified employees. Geographic
concentration also draws more numerous specialized input providers, similarly creating lower-cost
access to important sources of supply (Krugman, 1991).
Clusters also foster spillovers of knowledge and technology, most famously reflected in
Marshall’s (1920: 270) observation that “the mysteries of the trade become no mysteries; but are as it
were in the air.” Knowledge spillovers within clusters can occur through more formal means (e.g.,
interorganizational relationships, interfirm mobility of workers) as well as through informal channels
(e.g., social gatherings, trade events). Geographic proximity of many firms is particularly useful for the
transfer of tacit information within the cluster, as it increases the likelihood of face-to-face contact.
Such interaction is the richest form of communication because of its ability to incorporate nonverbal
1
We exclude from our purview spatial concentrations of diverse firms that benefit from urbanization (Jacobs)
externalities, firms that co-locate due to the presence of some exogenous benefit source such as a natural resource, and
co-located firms in similar industries that benefit from demand-related externalities (see McCann and Folta, 2008).

cues and multiple channels and its capacity for immediate feedback, thereby fostering the
communication of complex, subjective messages (Daft and Lengel, 1986).
Clusters have been shown to have an impact on an individual firm’s location choice (e.g.,
Shaver and Flyer, 2000; Zucker, Darby, and Brewer, 1998) and performance (e.g., Baptista and Swann,
1998; McCann and Folta, 2011). Some research has also considered whether a single firm’s location in a
cluster affects its propensity to engage in any transactions, whether acquisitions or alliances, with other
organizations. For example, Almazan et al. (2010) indicate that firms in clusters tend to be more
acquisitive than those located outside clusters. Similarly, Rothaermel (2002) links location in a cluster to
a firm’s number of alliances. We wish to extend studies like these in two important respects. First, in
contrast to examining a single firm’s location in a cluster, we investigate the role of two firms’ sharing a
common cluster. Second, we move beyond the question of whether a transaction occurs to investigate
the comparative governance choice of how to organize a given transaction, such as when to employ an
alliance versus acquisition for a deal. The alliance versus acquisition governance choice is an important
decision for firms making external corporate development choices (e.g., Villalonga and McGahan,
2005; Wang and Zajac, 2007; Yin and Shanley, 2008), particularly in high tech industries in which
external procurement of knowledge features prominently (Liebeskind, Oliver, Zucker, and Brewer,
1996; Vanhaverbeke et al., 2002).
Addressing the organizational governance implications of sharing a common cluster is also
important in light of prior organizational economics research that ties governance choice to the
presence of information asymmetry and risk of adverse selection, which we argue will be associated
with the geographic characteristics, interactions, and social relationships inherent to clusters. To
theorize on the impact of shared cluster location on the choice of acquisition versus alliance, we
therefore draw from information economics, which we briefly review below. We then integrate this
perspective with agglomeration theory in developing research hypotheses.
Information economics
Information economics emphasizes ex ante hazards that arise between exchange partners due to

information asymmetries that surround a transaction. For instance, when a buyer cannot efficiently
ascertain the quality of assets to be purchased prior to completing a transaction, various markets (e.g.,
labor, durable goods, etc.) can break down in the absence of appropriate remedies because the buyer
faces a risk of overpayment, or adverse selection (see Stiglitz, 2002 for a review).
In recent years, this theory has been extended to the M&A market in particular, and alliances
have been presented as a way for firms to address inefficiencies surrounding acquisitions. Although
acquisitions offer certain advantages that accrue with ownership and control of the assets in question,
acquirers can experience information asymmetries and the risk of adverse selection when they pursue
targets that have significant intangible assets, are privately-held, or operate in another line of business
(e.g., Capron and Shen, 2007; Higgins and Rodriguez, 2006; Montgomery and Hariharan, 1991; Porrini,
2004). In these cases, the target’s resources can be costly to evaluate prior to completing a transaction,
partly because the seller wishes to present its business in a favorable light and may even withhold
information on negative aspects of its resources and prospects in order to obtain a higher sales price.
Analogous to the idea of ‘discriminating alignment’ within transaction cost theory (e.g., Williamson,
1991), or the enhanced efficiency that comes from matching governance structures with attributes of
transactions, information economics has a similar principle: when faced with the risk of adverse
selection, a buyer can utilize various remedies to reduce this risk and enhance efficiency, including
devising a contingent contract (e.g., Datar, Frankel, and Wolfson, 2001), or prioritizing targets with
more familiar resources and capabilities (e.g., Capron and Shen, 2007). Coff (1999) similarly describes
how acquiring firms faced with higher levels of information asymmetry are more likely to offer lower
bid premiums, utilize stock as a performance-contingent type of consideration, or engage in lengthier
negotiation periods.
Alternatively, a firm might lessen its risk of adverse selection by opting for a joint venture over
an acquisition (e.g., Balakrishnan and Koza, 1993). The former involves a smaller sunk investment, the
firm can learn about the assets, and certain characteristics of joint ventures promote knowledge
transfers to reduce information asymmetries (e.g., a separate business entity containing the pooled

resources, a joint board to facilitate control, and the mutual hostages provided by shared equity and
threat of termination). As a result, such collaborations “will be efficient when the market for
acquisitions fails due to the asymmetry between the seller’s and buyer’s information about the target’s
assets” (Balakrishnan and Koza, 1993: 115). Other types of inter-firm collaborations such as non-equity
alliances and minority equity partnerships can also reduce the risk of overpayment that an acquisition
would entail, so they are often used in deals involving partners with different resources who lack prior
dealings with one another (e.g., Vanhaverbeke et al., 2002). While high levels of information asymmetry
negatively affect the attractiveness of any transaction (whether it be an acquisition or alliance) for an
exchange partner (Reuer et al., 2013), “an alliance may be more preferable than an acquisition when the
information asymmetry problem is great” (Wang and Zajac, 2007: 1295) given the greater adverse
selection risk presented by acquisitions due to their greater sunk investments.
In developing research hypotheses below, we join agglomeration theory with information
economics to describe how agglomeration potentially affects firms’ governance choices for their
external corporate development activities. We begin by comparing transactions between partners who
share a cluster location to transactions between partners who do not share a cluster location and are
therefore not able to tap into the cluster-wide interactions, shared understandings, and social
relationships that can reduce information asymmetry. Next, we describe how this shared cluster
location effect depends on the level and dissimilarity of the transaction partners’ knowledge-based
resources. Finally, we discuss variance in information spillovers within clusters and suggest that the
impact of shared cluster location strengthens with firms’ geographic proximity within an agglomeration.
HYPOTHESIS DEVELOPMENT
Shared cluster location
Below we explain how the nature of transactions that occur between firms located within an
agglomeration, or shared cluster transactions, have important implications for the determinants of
governance choices highlighted by information economics. Specifically, the increased co-location of
many firms within geographic clusters serves to reduce information asymmetries within the cluster and

the risk of adverse selection in shared cluster transactions. Of particular interest is the important role
played by other firms in the agglomeration, which therefore expands the logic of much of the prior
organizational governance literature with its emphasis on firm-level or dyad-level factors that might
shape the potential for adverse selection and affect the alliance versus acquisition decisions firms make.
More specifically, we emphasize that the importance of being in a shared cluster extends beyond the
mere fact of increased proximity between any two particular individual firms considering an acquisition
or alliance with one another. Prior literature provides ample evidence consistent with the information
advantages of geographic proximity between two parties (e.g., Coval and Moskowitz, 2001; Grote and
Umber, 2006; Malloy, 2005; Ragozzino and Reuer, 2011). Our arguments here, however, are not
related to the dyadic distance between the two specific transaction partners but rather to the fact that
the transaction partners are both located within a larger group of other firms that are similar.
As mentioned in our brief review of agglomeration theory, one of the key theorized benefits of
clustering is that knowledge generated by cluster members spills over to other members of the cluster.
Keeble and Wilkinson (1999) note that knowledge spillovers occur in three ways. These include (1)
employee mobility between firms in the cluster; (2) interactions among firms, customers, and suppliers;
and (3) new organizations emerging from existing firms, research laboratories, and universities. These
spillovers are the result of the co-location of a group of firms in a cluster, wherein a critical mass of
related organizations leads to the generation of knowledge spillovers.
While prior literature has generally been concerned with spillovers of technological knowledge
(Audretsch and Feldman, 1996; Jaffe, Trajtenberg, and Henderson, 1993; Rosenthal and Strange, 2001),
the geographical co-location of a large number of firms also fosters sharing of knowledge related to
other types of resources and companies’ prospects in general, thereby reducing information
asymmetries about potential exchange partners. As Decarolis and Deeds (1999: 956) describe, “social
interactions, both formally and informally, stimulate information exchange about such topics as a
competitor’s plans [and] developments in production technology.” Pouder and St. John (1996: 1203)
also suggest that the localized mental models fostered by clustering make managers “more attuned to

the strategies and capabilities” of firms within the cluster. Overall, the group of interconnected
companies and associated supporting institutions provide a rich source of information on potential
exchange partners.
A final distinctive aspect of clusters is the development of shared understandings among the
firms, or cluster-level architectural knowledge in the terminology of Tallman, Jenkins, Henry, and Pinch
(2004). Storper (1995) similarly describes a key aspect of clusters to be the development of a common
language and understanding of rules for how to develop, communicate, and interpret knowledge (what
he terms untraded interdependencies). A by-product of these cluster-specific understandings is that
firms have better information on the value of potential transactions with firms sharing a cluster
location. They are better able to assess these exchange partners compared to others outside the cluster
and more clearly understand what resources can be productively shared to realize synergies.
In summary, we expect that in shared cluster transactions, parties will enjoy unique benefits
such as cluster-wide interactions, shared understandings, and social relationships due to the presence of
many other related firms in the cluster. As a consequence of the reduced information asymmetry and
risk of adverse selection in shared cluster transactions, firms are more likely to structure deals as
acquisitions than alliances, holding everything else constant. Thus, we posit:
Hypothesis 1: Shared cluster location is positively associated with the choice of acquisition over alliance.
Shared cluster location and knowledge resources
The foregoing theoretical arguments hold that shared cluster location affects organizational governance
due to the lesser risk of adverse selection for transactions occurring within clusters compared to other
geographic locales. This logic naturally extends to a prediction that this overall effect will be magnified
when it is otherwise more difficult to judge an exchange partner’s resources and prospects, so having a
shared cluster location will be more consequential for transactions subject to higher levels of adverse
selection risk. In contrast, if information asymmetry is otherwise less significant, shared cluster location
will be less meaningful in affecting firms’ decisions to use alliances versus acquisitions.
We argue below that the level of information asymmetry, and therefore the strength of the

shared cluster effect, for a given transaction will depend on the differences between the partners’
knowledge portfolios in addition to their stocks of knowledge resources. Our consideration of the role
of knowledge-related resources reflects the fact that accessing external knowledge is often a key
motivation for firms’ external corporate development activities, particularly in high tech domains
(Vanhaverbeke et al., 2002). Building upon the significant research on agglomeration and knowledge
sharing within geographic clusters (Almeida and Kogut, 1999; Appleyard, 1996; Saxenian, 1994), we
focus on the technological resources of partner firms.
Technological distance. We first expect that the degree to which the exchange partners’ knowledge
resources are similar or dissimilar will have a bearing on the level of information asymmetry and risk of
adverse selection for a transaction and will therefore moderate the impact of having a shared cluster
location. Prior organizational governance research establishes that the relatedness of exchange partners
is a key source of information asymmetry between exchange partners (e.g., Villalonga and McGahan,
2005; Wang and Zajac, 2007). When the firms’ resources are similar, each partner has a greater ability to
evaluate the resources of the other and to do so efficiently. As Coff (1999: 144) summarizes, “[r]elated
buyers are probably better able to assess targets since they are steeped in the knowledge base.” Even
when partner firms operate in the same product market, their knowledge and ability to evaluate each
other’s prospects will be lower when the technological resources are dissimilar. Therefore, the similarity
or dissimilarity of technological resources is an important determination of information asymmetry and
adverse selection risk. For instance, possessing similar technological knowledge obviates the need for
costly investments to understand an exchange partner’s technologies (Stuart, 1998) as well as enables a
firm to better evaluate a prospective exchange partner’s resources and the claims this firm makes about
their prospects (e.g., Cohen and Levinthal, 1990). When a firm lacks such absorptive capacity, it can be
difficult and costly to comprehend such resources and the potential opportunities they present
(Rosenkopf and Nerkar, 2001). Gilsing et al. (2008) similarly argue that the increased cognitive distance
that accompanies differences in technologies can preclude understanding.
While these observations can apply to different types of knowledge, in high-tech industries

technological resources are critical knowledge assets determining the level of asymmetric information
and risk of adverse selection. We therefore expect that the governance related effects of
agglomerations (expressed in H1) will be more pronounced when the technological resources of
exchange partners are dissimilar and the risk of adverse selection is greater.
Hypothesis 2: The greater the dissimilarity in the exchange partners’ technological resources, the more positive the
relationship between shared cluster location and the choice of acquisitions over alliances.
Knowledge stocks. In addition to the technological distance between the firms’ resources, we also
investigate their combined knowledge stocks, consistent with Wang and Zajac’s (2007) advice to
consider the governance choice implications of the total resources and capabilities of both exchange
partners (“paired-firm characteristics”) rather than simply focusing on one of the partners. Holding
constant the distance between the partners’ technological resource portfolios, we anticipate that
information asymmetry and the risk of adverse selection increase when the transaction involves the
exchange of more knowledge-based intangible assets. For instance, Dushnitsky and Klueter (2011:19)
emphasize how “information asymmetries are commonplace in the markets for knowledge and give
rise to the adverse selection problem.” Knowledge-based transactions present a particular challenge: the
seller of knowledge resources must be able to reveal sufficient information to the buyer to justify the
attractiveness of its potential as a transaction partner. However, if the seller fully discloses all
information related to the technological resources to foster the buyer’s ability to evaluate the resources
in question, this disclosure reduces the buyer’s incentive to pay for such resources (Arrow, 1962).
Problems also arise because knowledge-based assets are difficult to observe, and a significant portion of
their value may be firm-specific, meaning such assets are harder to assess and value than tangible assets
(Chi, 1994), even if the technological resources are described via disclosure methods such as patents
(Heeley, Matusik, and Jain, 2007).
As the exchange partners’ combined knowledge stocks increase, levels of information
asymmetry and the associated risk of adverse selection grow. At its most basic level, information
asymmetry is the “fact that different people know different things” (Stiglitz, 2002: 469), and it reflects

the total amount of unique information held by two potential transaction partners. Information
asymmetry is therefore represented by the pool of non-intersecting information of the parties (i.e., the
knowledge stock of the first partner plus the knowledge stock of the second less the overlapping
knowledge). As the overall pool of information grows in size, the non-intersecting portion representing
the total unique information held by each party grows correspondingly larger as well. Thus, expansions
in the knowledge stock of either or both parties increase information asymmetry and the potential costs
associated with adverse selection.
This concern has been echoed in a number of prior studies. In studying acquisitions in
knowledge-intensive industries, Coff (1999) argues that increasing amounts of knowledge resources
lead to greater uncertainty about the quality of partner assets. As a second illustration, Barth, Kasznick,
and McNichols (2001) find increased analyst coverage of firms with more intangible assets, a
relationship they tie to the value of gathering private information under conditions of higher
information asymmetry. In a study of the underpricing of initial public offerings, Heeley et al. (2007)
maintain that higher knowledge stocks are associated with increased innovation-based information
asymmetries in opaque industries characterized by complex product technologies.
We have argued that shared cluster location can be valuable in reducing information
asymmetries, obviating the need to use an alliance rather than an acquisition. Given the heightened
information asymmetry and risk of adverse selection associated with greater knowledge stocks, this
ability to evaluate a partner’s knowledge becomes even more critical , so we expect that the governance
related effects of shared cluster location will be more pronounced when exchange partners have greater
knowledge stocks.
Hypothesis 3: The greater the exchange partners’ technical knowledge stocks, the more positive the relationship
between shared cluster location and the choice of acquisitions over alliances.
Shared cluster location and local geographic overlap
The forgoing arguments related to the influence of shared cluster location on information asymmetries
and hence firms’ organizational governance choices have not accommodated the potential for location

heterogeneity of the transacting parties within a cluster. That is, even though the above hypotheses
have considered contingencies that shape the impact of shared cluster location, they have also implicitly
assumed that the information-related benefits of agglomerations are uniform within clusters. We argue
below, however, that these benefits will be stronger for firms located in closer proximity to each other.
The interactions and social relationships among a mass of cluster co-located firms generates a
pool of information about the potential value of potential transaction partners throughout the cluster.
However, it is also likely that firms will not draw upon or absorb information about others in a cluster
in a uniform fashion. In particular, information related to nearby firms will be most conspicuous and
readily absorbed within the pool of information spillovers. We therefore expect that the governance-
related effects of shared cluster location will be enhanced when firms are located closer together.
First, the information benefits generated by the cluster will be strongest for nearby firms
because intra-cluster proximity enhances the salience of information (Pouder and St. John, 1996).
Information salience refers to the prominence or notability of information and describes how likely it is
that the firm will notice and attend to the information produced in a cluster. Although a firm shares
interconnections across the cluster and is thereby exposed to information related to potential
transaction partners in various locations throughout the cluster, information about firms located nearer
the focal firm will tend to be the most salient. Second, the greater exposure to and knowledge of more
closely co-located firms enhances the ability to interpret information about those firms gathered from
other sources throughout the cluster. That is, geographic proximity within the cluster contributes to
higher levels of absorptive capacity (Cohen and Levinthal, 1990). As the focal firm is exposed to
information via its formal and informal interactions with other firms and associated institutions in the
cluster, its ability to recognize and interpret that information will be highest for the information about
geographically proximate firms.
The above arguments suggest that knowledge spillovers in clusters that affect firms’
organizational governance choices are strongest for closely located partners and attenuate with distance
within a cluster. These arguments are consistent with prior research on potential attenuation of

agglomeration externalities. While a number of studies have examined the geographical limits of
agglomeration externalities generally, we focus here on prior research related to the attenuation of
knowledge spillovers in particular because this externality source is most closely related to information
asymmetries and the risk of adverse selection. Prior research in this stream indeed indicates that
knowledge spillovers are subject to geographic attenuation. For example, consistent with the argument
that knowledge spillovers can be accessed over smaller distances than specialized labor and inputs,
Rosenthal and Strange (2001) found that while proxies for labor market pooling and reliance on
manufactured inputs positively influenced agglomeration up to the state-wide level, knowledge spillover
benefits were constrained to the more circumscribed zip code level. Similarly, Orlando’s (2004) study
contended that firms experience challenges in benefiting from spillovers at greater distances, and his
analysis indicated that knowledge spillovers within the same three-digit SIC extended only to a 50 mile
radius. As tacit, technological knowledge spillovers intensify with proximity, we similarly expect that
information available within a cluster related to an exchange partners’ resources and prospects will also
be enhanced when firms are located closer together. Thus, we expect the shared cluster effect to be
strongest for tightly co-located firms.
Hypothesis 4: The greater the geographic proximity of the exchange partners, the more positive the relationship
between shared cluster location and the choice of acquisitions over alliances.
METHODS
Sample
We study the influence of agglomeration on the choice of acquisition versus alliance in the US
semiconductor industry. This industry is a common setting for investigating the consequences of
agglomeration (Almeida and Kogut, 1999; Jaffe et al., 1993; Martin et al., 2010; Rosenkopf and Almeida,
2003), and it has also served as a setting for examining the determinants and effects of alliances as well
as acquisitions (e.g., Eisenhardt and Schoonhoven, 1996; Kapoor and Lim, 2007; Rosenkopf and
Almeida, 2003; Stuart, 1998). Firms in the semiconductor industry engage in external corporate
development activities like alliances and acquisitions for a variety of reasons, including accessing

additional resources in emergent stage markets (Eisenhardt and Schoonhoven, 1996), forming
relationships with prominent partners to facilitate growth (Stuart, 1998), and sourcing external
technology (Vanhaverbeke et al., 2002).
To construct our sample of alliances and acquisitions, we drew from Thompson Reuters’
Security Data Corporation (SDC) database. We first identified all alliances announced during the period
of 1989-2005 for which at least one of the transaction parties was a semiconductor firm (i.e., primary
SIC=3674) (see Schilling, 2009 for an extensive discussion of the use of SDC alliance data). We
augmented this list with all acquisitions over the same period in which either firm was a semiconductor
firm. We focused on transactions between US firms to reduce unobserved heterogeneity in the sample,
and we also focus on acquisitions in which the bidder acquired complete ownership of the target firm
(Coff, 1999). The primary results do not include cases classified as acquisitions of assets or acquisitions
of certain assets, although our substantive results are unchanged if we include these additional
transactions (results available upon request for this robustness check and others). As our theoretical
arguments are most germane to transactions that include some potential for knowledge sharing, we
included research and development and manufacturing alliances and did not consider other forms of
collaboration such as supply agreements, licensing transactions, and marketing agreements.2
Measures
Dependent variable. Our dependent variable specifies whether the particular transaction was structured as
an acquisition (coded “1”) or an alliance (coded “0”). For cases in which there were more than two
parties to an alliance, we included all possible two-way combinations of the transaction partners. A
number of the firms appear multiple times in the data, such that our sample includes 1,179 unique firms
out of a total possible 2,372 unique firms if no firm repeated on either side of transaction, and these
firms engaged in 471 acquisitions and 715 alliances for 1,186 transactions in total. To address possible
correlation in the errors within firms, our models include robust standard errors using clustered
2
All of our results with the exception of the interaction of shared cluster location and technological distance were robust
to the inclusion of these additional types of collaborative agreements.

residuals.3 In supplemental analyses reported below, we also separated non-equity alliances and equity
alliances as unique forms of collaborative agreements.
Our primary dependent variable is the choice of an acquisition versus alliance, provided a
transaction occurs. We elected not to hypothesize upon the effects of shared cluster location on the
occurrence of any transaction (either acquisition or alliance) because the prior literature already supports
a relationship of geographic proximity / clustering to whether any transaction occurs. In supplemental
analyses, however, we compare the choice of alliance and acquisition relative to no transaction. To
create a sample of “non-deals” for these analyses, we considered the fact that in each year the firms
making up the transacting dyads in our sample could have also transacted with other firms in our
sample, so we expanded our data set to include all combinations of these possible non-deals. To utilize
a sample for estimation purposes that was not heavily skewed toward the non-deals, we followed a
sampling approach described in Robinson and Stuart (2007). Specifically, in each year, we randomly
selected five non-deals for each actual deal, and in robustness checks we varied the number of non-
deals selected from 1 to 25.
Independent variables. Our primary independent variable of Shared Cluster Location utilizes location
information for both parties in a transaction. The SDC data provide city, state, and zip code
information for both exchange partners based on the locations of the firms’ headquarters. Based on
this information, we determined whether the exchange partners belonged to the same geographic
cluster of semiconductor firms. 4 In determining which areas in the United States to define as clusters,
we first relied on the work of Almeida and Kogut (1999), who identified 12 regional semiconductor
clusters using 1990 plant location data. We augmented this analysis by examining the location of
3
As described below, we labeled the firms as the first and second firm in the dyad for variable construction purposes.
We estimated robust standard errors using clustered residuals for the first firm in the dyad, and our results were
unaffected by alternatively clustering based on the other firm or by clustering based on repeated dyads (1,097 of the
1,186 dyads are unique).
4
Defining shared cluster location based on headquarters location results in a conservative approach to defining
overlap, as there may be cases of multi-establishment firms who share cluster locations based on non-
headquarters locations. We examine this issue in greater detail in robustness checks discussed after the
primary results.

semiconductor firms as reported in the 1997 Economic Census. Drawing from both of these resources,
we identified ten regional clusters as detailed in Table 1. These ten regional areas accounted for just
under 69 percent of all semiconductor firms in the 1997 Economic Census, and 923 of the 1,179
unique firms in our sample (approximately 78 percent) are located in one of these ten clusters. We
included fewer clusters than Almeida and Kogut (1999) because we did not include the states of Florida
and Vermont given the relatively small number of semiconductor firms in these locations in the
Economic Census data.5 The Shared Cluster Location variable is coded 1 for dyads in which both parties
are located in the same cluster, and 0 otherwise. 307 of the 1,186 transactions were between parties
sharing a cluster (26 percent).
----------------- Insert Table 1 about Here -----------------
We calculated the Tech Distance between the two parties based on their patent portfolios over
the most recent five year period. This measure was calculated as the Euclidean distance between the
firms’ portfolios of three digit technology classes, weighted by the number of patents in each of the
technology classes (e.g., Rosenkopf and Almeida, 2003; Song and Shin, 2008). To measure the amount
of firms’ knowledge-based resources, we calculated a logged sum of the parties’ citation-weighted
patents over the most recent five years (Total Patents).6 As Heeley et al. (2007) note, patents provide a
good proxy for levels of information asymmetry in opaque industries such as the semiconductor
industry. We utilized firm zip codes, our finest level of geographic detail, to calculate the geographic
distance (logged) between the firms. To have this measure represent Geographic Proximity rather than
distance, we simply multiplied the distance measure by negative one.7 The inclusion of this variable also
ensures that our shared cluster location variable is not just capturing a proximity effect between the
specific exchange partners alone.
5
Our results are unchanged if we also define Florida and Vermont to be clusters.
6
Our results are similar if we treat the firms’ patent stocks separately and create interactions between the shared cluster
location dummy and both the first and second firms’ patent stocks.
7
It is possible to have firms located in close proximity without sharing a cluster if the location is not part of a designated
cluster. As just one example, our data set includes a transaction between two firms located in St. Louis, MO. Because we
do not define this area as a cluster, the two firms are not defined as sharing a cluster.

Control variables. We controlled for a number of additional factors that may influence the
decision to structure a particular transaction as an alliance or acquisition. We counted the number of
Prior Ties between the transacting parties, represented by the number of prior alliances in the last five
years. Prior ties may affect governance choice in several ways. To the extent that the partners enjoy
prior relationships, information asymmetry should be lower (e.g., Higgins and Rodriguez, 2006),
implying that acquisitions will be more likely in such transactions;8 however, prior ties may also indicate
that the exchange partners have had the opportunity to build trust, and the reduced threat of
opportunism would foster the choice of the less hierarchical alliance governance form (Gulati, 1995).
To accommodate the fact that our sample of transactions includes firms from a variety of industries, we
included an Inter-Industry Transaction dummy to indicate transactions in which the primary SIC codes of
the parties were different.9
Given that firms may have general preferences for alliances or acquisitions, we controlled for
the prior governance choices of both parties. Specifically, we measured the proportion of transactions
in the five years prior to the focal deal that were structured as acquisitions rather than alliances (Firm 1
Acquisition Preference and Firm 2 Acquisition Preference).10 Finally, because some firms in the sample have
not patented in the last five years, we include two dummies to indicate whether only one of the dyad
had patented within the last five years or whether neither firm had patented in the last five years, with
the excluded category being the case where both firms had patented in the last five years.
We included a number of fixed effects to capture other sources of heterogeneity. First, we
added a series of dummy variables to indicate whether each firm had any patenting activity in each of
the twenty most prevalent 3-digit USPTO technology classes. These technology class dummies control
for the likelihood of unobserved technology class specific factors that drive the choice between alliances
and acquisitions. Early and pioneering work using patents to study flow of information between firms
8
As firms may elect to take a sequential governance approach in which they engage in alliances as options on
future acquisitions, we ensured that our results were robust to the exclusion of sixteen acquisition transactions
that had been preceded by an alliance between the two transaction partners.
9
Our results are robust if we limit our sample to the within-industry deals in the semiconductor industry.
10
Our results are similar if we use raw counts of alliances and acquisitions for both of the parties.

(Jaffe et al., 1993; Trajtenberg et al., 1992) has argued that the degree of information flow between firms
varies depending on the technology domains in which they operate. All regressions also included year
dummies to capture unobserved time-related factors that may influence the propensity of firms to form
acquisitions versus alliances. In addition, we also included cluster dummies to allow for the possibility
that unobserved location characteristics may drive the acquisition versus alliance decision. Specifically,
we added dummy variables to indicate whether each firm was located in one of the ten identified
clusters.11
RESULTS
We first note that descriptive data from our expanded sample, which includes transactions that could
have occurred but did not, supports the importance of shared cluster location in promoting any
transaction regardless of form. The probability of a transaction (either acquisition or alliance) given
shared cluster location is 0.26 versus 0.15 for the probability of a transaction otherwise (difference
significant at p<0.01). These results apply to both alliances and acquisitions because p(alliance | shared
cluster location) is 0.13 versus 0.09 otherwise (p<0.01), and p(acquisition | shared cluster location) is
0.13 versus 0.06 otherwise (p<0.01). Thus, shared cluster locations appear to facilitate external
corporate development activities regardless of form and below we investigate the ways in which firms
organize these activities.
Table 2 provides descriptive statistics and a correlation matrix for the variables used in the
analyses of firms’ alliance versus acquisition choices. The proportion of acquisitions relative to alliances
is 0.40, and univariate statistics provide support for our hypothesis that this proportion will vary
depending on whether the transaction occurs between parties who share a cluster location. The
11
The construction of a number of our controls required that we classify the firms in the dyad. In the case of acquisitions,
the identity of the acquirer (Firm 1) and target (Firm 2) is clear from the SDC data, providing a natural grouping
variable; however, as Wang and Zajac (2007: 1304) note “there is no obvious `correct’ way to order the two firms in
a dyad” for alliances. To determine which firm we would designate as Firm 2 in an alliance, we used the following
approach. We first designated the semiconductor firm as Firm 2 in all cases of cross-industry alliances. For the
within-semiconductor-industry alliances, if one of the parties was a design firm, it was designated as Firm 2.
Finally, we randomly assigned Firm 2 status for the remaining alliances that were between two semiconductor
design firms. Our results are robust to dropping the observations where we relied on random assignment. We also
confirmed that our results were robust to assigning Firm 1 and Firm 2 status entirely at random for all alliances.

proportion of acquisitions for shared cluster transactions is 0.48 versus a proportion of 0.37 for other
transactions (p<0.01), suggesting that shared cluster locations promote the choice of acquisition relative
to alliance.
----------------- Insert Table 2 about Here -----------------
Prior to discussing the results for shared cluster locations from regression models, we note that
the decision of each firm to locate in a particular location is not randomly assigned, raising possible
endogeneity concerns. We believe the potential for endogeneity problems is reduced here for several
reasons. First, we included a robust set of control variables in our models, including year dummies,
technology class dummies, and dummies for cluster fixed effects. Second, although some studies have
found that multinational firms are more likely to locate foreign greenfield investments in clusters (e.g.,
Shaver and Flyer, 2000), the weight of the empirical evidence indicates that domestic firms do not
choose initial locations or re-locate for primarily strategic reasons (e.g., Cooper and Dunkelberg, 1987;
Klier, 2006; Zhang and Patel, 2005). Third, even if location choice were selected strategically, it seems
unlikely that firms’ choices to locate in a cluster are motivated by the potential governance implications
related to potential future transactions with partners who also may or may not choose to locate in the
same clusters.12
Table 3 presents the results of our logistic regression models. Model 1 is a baseline specification
including only control variables, and Model 2 introduces the shared cluster dummy variable to test our
first hypothesis. The significant positive coefficient on Shared Cluster Location (b=1.16, p<0.01) supports
Hypothesis 1 and indicates that sharing a cluster location increases the likelihood that a particular
transaction will be structured as an acquisition. To calculate the marginal effect, we follow the standard
12
We have empirically investigated the potential effects of firms’ self-selection into shared cluster locations, following
the approach of Azoulay, Ding, and Stuart (2009) in using Inverse Probability of Treatment Weights (IPTW)
estimation. Under this approach, the suspected endogenous explanatory variable (in our case, shared cluster
location) is estimated in a first-stage regression; we utilized a variety of firm characteristics as explanatory variables
(including patent stocks, total number of tech classes covered by patents, past alliance/acquisition activity, and a
design firm indicator variable) as well as annual fixed effects (first stage model LR chi-squared = 112.74, p<0.01).
The results of the first stage estimation are used to derive the IPTWs. The IPTWs are then used in second-stage,
weighted regression models predicting the acquisition versus alliance decision. The results of the IPTW estimation
indicated that shared cluster location was still positively related (p<0.01) to the choice of acquisition.

practice of setting all other independent variables at their mean (Long and Freese, 2006). This
calculation indicates that sharing a cluster location increases the probability of acquisition (and thus
reduces the probability of alliance) by 9.1 percent.
Models 3-5 in Table 3 provide tests of the interaction hypotheses. Model 3 provides support
for the prediction of Hypothesis 2 that the effect of shared cluster location is strengthened as the tech
distance between the parties grows (b=3.50, p<0.01). Given the non-linear nature of the logit model,
assessment of the marginal effect of an interaction requires additional investigation, and we graphically
present these effects in Figure 1 (Greene, 2010; Hoetker, 2007; Huang and Shields, 2000). Panel A of
Figure 1 shows that the probability of acquisition is increased over twice as much for high versus low
levels of tech distance.13 The positive and significant coefficient of 0.17 (p<0.01) on Shared Cluster *
Total Patents in Model 4 supports the prediction of Hypothesis 3 that the effect of sharing a cluster
location strengthens when the total knowledge stock of the transaction partners is higher. Panel B of
Figure 1 shows that sharing a cluster location increases the probability of acquisition across all levels of
knowledge stocks; however, the effect becomes progressively stronger as the size of the exchange
partners’ patent portfolios increase. Our final hypothesis related to geographic proximity of firms
within a shared cluster location is supported by the positive Shared Cluster * Geog. Proximity coefficient of
0.41 (p<0.05) in Model 5. Again, while sharing a cluster location increases the probability of acquisition
regardless of geographic proximity, the shared cluster effect is significantly stronger when firms are
located closer together (see Panel C of Figure 1). Model 6 contains the full model in which all
interactions are tested at once, and this specification yields similar interpretations.
----------------- Insert Table 3 and Figure 1 about Here -----------------
Robustness analyses
In addition to the supplemental analyses already discussed, we performed a number of additional
13
To calculate the predicted values in all panels of Figure 1, we set the continuous independent variables at their mean
values, and the dichotomous independent variables were set at their modal values. Unless otherwise stated, “low”
values in the figures represent the mean less one standard deviation while “high” values are one standard deviation
above the mean.

analyses to assess the robustness of the results. First, because a number of the alliances in our sample
(76 of 715) are structured as equity alliances (i.e., joint ventures and other transactions that involve
sharing of equity), which represent an intermediate form of commitment between non-equity alliances
and acquisitions, we performed supplementary analyses using an alternate, ordered form of the
dependent variable (non-equity alliance=“1,” equity alliance=“2,” and acquisition=“3”). We initially
estimated an ordered logit model; however, the proportional odds assumption required by the ordered
logit model was rejected in our data (approximate likelihood-ratio test of proportionality of odds across
response categories: chi-squared=261.17, p<0.01). Following Long and Freese (2006), we elected to
use a stereotype logistic model (SLM). The SLM still takes into account the ordered nature of the
dependent variable, but the SLM does not rely upon an assumption of proportional odds. Table S1
(included in the online appendix) provides the results of our SLM analysis, and the conclusions
from this analysis parallel those from the binary logit analysis.
Second, we undertook additional analysis to investigate the robustness of our primary results
that assign location based on firms’ headquarters. Although we do not have data on all of the locations
of each establishment for the firms, we do have an indication of where firms are conducting research
because patents indicate the US state in which the knowledge was created. We utilized this information
to augment our shared cluster location measure in several ways. In a first robustness check, we also
defined firms located in different states to share a location if they had patenting activity in the same
state that includes a cluster. As shown in the first two columns of the Table S2 (Augmented Definition
1), all of our results are robust to this augmented definition of the shared cluster location variable (see
the online appendix for Table S2). For each alternative definition, the table presents a main effects
model and a full model with all three interactions, and the number of transactions defined as shared
cluster location based on the alternative definitions is also noted. We next considered a second patent-
based indicator of shared cluster location. Under this augmented definition, we also considered firms
with headquarters in different states to share a location if there was overlap between HQ locations and
patenting locations. As shown in Models 3 and 4 (Augmented Definition 2), all of our results are

qualitatively similar. A final modification of the shared cluster location definition draws upon our focus
on the semiconductor industry. We determined whether firms had separate locations for fabrication
plant facilities and further augmented our shared cluster location definition to include cases of HQ-
plant or plant-plant overlap within clusters. Our data on fabrication facilities is drawn from the
semiconductor industry trade association Semiconductor and Equipment Materials International. As
shown in Models 5 and 6 of Table S2 (Augmented Definition 3), all of our results are also robust to this
augmented definition. We also considered specifications that included these three additional overlap
measures as control variables rather than using them to define the shared cluster location variable itself.
This approach enables us to determine if controls for other potential locational overlaps changes the
interpretations for our original measure. As shown in the final two columns, all of the results are robust
to this alternative approach. As a final empirical step to investigate this issue, we replicated our analyses
using a sub-sample of firms that would be considerably less likely to include firms with multiple
establishments across different geographic locations. Specifically, we excluded from the analysis any
firms patenting in multiple states. The results from this analysis again indicated that our hypothesized
relationships continue to hold.
We conducted several other sets of robustness analyses. To ensure that we were capturing the
effect of two firms sharing a cluster location rather than just an effect of locating in clusters in general,
we split the location classification into three categories (shared cluster location, at least one firm in a
cluster, and neither firm in a cluster) and added an additional dummy variable representing the category
of neither firm in a cluster. With this dummy in the model, the shared cluster location dummy variable
represents the effect of shared cluster location relative to the effect of one firm locating in a cluster. All
of our results and conclusions were robust to this approach as well.
We also examined the implications of no transaction occurring between the exchange partners,
and we did so in two ways. First, we ran a multinomial choice model in which the dependent variable
included three categories of no deal, alliance, and acquisition. Results of this analysis were consistent
with prior literature and indicated that sharing a cluster location increases the probability of both

alliance and of acquisition occurring relative to no deal. Second, we wanted to ensure that our
conclusions were not affected by selection bias (Heckman, 1979), in the event that unobserved factors
shaping whether or not a deal occurs affect the nature of the transaction as an alliance versus
acquisition. To investigate this possibility, we conducted a two-stage analysis in which we modeled the
deal-no deal decision in the first stage and the acquisition versus alliance decision in the second stage.14
The results of the two-stage models indicate that all results related to hypothesis testing are robust to
modeling simultaneously the first-stage deal versus no-deal choice. This analysis supported the
conclusion from the descriptive statistics presented earlier that shared cluster location promotes
external corporate development activities in general (p<0.01), and the null hypothesis of no sample
selection effects cannot be rejected (chi-squared=0.38, p=0.54).
DISCUSSION
Contributions and implications
At a broad level, our study contributes by joining research on agglomeration theory with organizational
economics research on governance choice, two research streams that have developed independently
from one another. In particular, we focus on information economics to advance understanding of the
impact of agglomeration economies on firms’ governance decisions to employ acquisitions and
alliances. Previous information economics research emphasizes the adverse effects of asymmetric
information on acquisitions (e.g., Coff, 1999; Datar et al., 2001; Vanhaverbeke et al., 2002; Villalonga and
McGahan, 2005). We develop the theoretical argument that shared cluster location can mitigate
information asymmetry and adverse selection due to the interactions, shared understandings, and social
14
The first stage model included all of the second stage variables listed above along with three variables excluded from
the second stage model. These variables were (i) a dummy variable indicating whether the first firm was located in
California, (ii) a dummy variable indicating whether the second firm was located in California, and (iii) an
interaction between the first two variables. Firms located in California may be better known, have ready access to
capital and other resources, and potentially be more likely to attract transaction partners (Gompers and Lerner,
2001); however, we did not expect location in California to influence the form of the transaction after considering
the other determinants of acquisition versus alliance. We note that these variables are jointly significant (chi-
square=16.67, p<0.01) in the first stage models for the occurrence of deals but they are uncorrelated with the
acquisition versus alliance decision. Correlations with the acquisition versus alliance dummy are 0.022 (p=0.465),
0.016 (p=0.585), and -0.042 (p=0.1237), respectively.

relationships among many firms in a cluster, thereby reducing the need to resort to alliances rather than
acquisitions.
By identifying shared cluster location as an important antecedent of governance choice, our
work also extends agglomeration theory in several specific ways. First, our work sheds light on a new
and important outcome of agglomeration economies. Much of the research on agglomeration theory
has focused on the benefits accruing to firms via knowledge spillovers (Jaffe et al., 1993) and improved
access to specialized assets (Krugman, 1991; Porter, 1998b; Saxenian, 1994). To the extent that
agglomeration can reduce adverse selection in acquisitions, our arguments and findings point to an
unexamined benefit of co-location within a cluster. We therefore add evidence that agglomeration not
only has important implications for competitive strategy, as prior research has emphasized, but also
corporate strategy and specifically firms’ external corporate development activities in alliances and
acquisitions.
More recent research in the domain of agglomeration theory has emphasized the potential for
heterogeneity in agglomeration benefits (e.g., Almeida and Kogut, 1999; McCann and Folta, 2011;
Shaver and Flyer, 2000). Our work further extends this perspective and provides evidence that the
organizational governance implications of agglomeration vary based on dyad-level characteristics.
Drawing from the resource-based view of the firm and building upon the suggestion of Wang and
Zajac (2007) to consider resources available at the dyad level, our work demonstrates that the effect of
shared cluster location depends on the depth and dissimilarity of the transaction partners’ knowledge
bases. In addition, we also establish that the governance choice implications of agglomeration are
enhanced when firms are located closer together within clusters. This further extends recent
agglomeration research on sources of intra-cluster heterogeneity (e.g., McCann and Folta, 2011; Shaver
and Flyer, 2000) and the attenuation of agglomeration externalities (e.g., Henderson, 2003; Rosenthal
and Strange, 2003).
Our paper suggests that information economics provides a strong theoretical basis for
integrating the literatures on agglomeration and organizational governance, given the attention

these separate research streams have given to the implications of knowledge spillovers and
information asymmetries, respectively. It is also interesting to note that the literature on
governance choice has over the years relied extensively on transaction cost economics (TCE)
explanations. The juxtaposition of information economics and TCE perspectives in our research
context provides some new and important insights. To begin with, both perspectives emphasize
opportunism, but the opportunism takes different forms: at the contracting stage in the case of
information economics (e.g., asset representations) and during contract implementation in the
case of TCE (e.g., knowledge misappropriation). They also both emphasize market failures, but
of different types: TCE offers theory on how hybrid governance fails and can necessitate
acquisition due to ex post exchange hazards, while information economics offers theory on how
acquisition markets fail due to ex ante hazards, which can make alliances more efficient.
Moreover, agglomeration presents an interesting phenomenon for which the two theories
suggest certain opposing influences. On the one hand, our arguments rooted in information
economics emphasized how shared cluster location promotes the choice of acquisition. In
contrast, to the extent that the shared relationships of common cluster location also reduce
concern over ex post opportunism due to reputation considerations and reduced behavioral
uncertainty, TCE arguments would suggest that firms might not require the administrative
controls afforded by hierarchy (i.e., acquisition) and alliances might suffice.
In developing our theoretical arguments, we elected to focus on the information
economics arguments given the prominence of the knowledge and information spillovers
benefits of geographic co-location in the prior agglomeration literature. In comparison, the
potential opportunism mitigation benefits have received relatively less attention, excepting work
such as Harrison, Kelley, and Gant (1996) and Wood and Parr (2005). Overall, our empirical
analysis of the influence of shared cluster location supports the prediction derived from
information economics. We do not conclude, however, that this means that the effects
anticipated by TCE are not present in these transactions, only that the effects emphasized by

information economics outweigh those highlighted by TCE in our empirical context. Future
work in agglomeration theory should investigate how these perspectives might be more fully
reconciled and the opposing influences explicitly identified. More broadly, it would be
interesting for future research to more fully investigate how the two theories yield opposing
predictions, complement each other, or have differential effects for various corporate investment
decisions.
It is important to note that our study does not directly examine the efficiency implications of
firms’ external corporate development choices. It would therefore be valuable for future research to
directly test how firms’ choices to use acquisitions versus alliances affect their performance. In
addition, it would be interesting to investigate outcome measures that are tailored to alternative theories
of organizational governance. For instance, if co-location within a cluster reduces adverse selection
risk, such benefits might be observed in the abnormal returns that acquirers experience as well as in the
value captured by targets (i.e., bid premiums). Identifying the consequences of agglomeration for
different governance arrangements such as alliances and acquisitions will therefore be important in
further bringing together agglomeration theory with the literature on organizational governance.
Limitations and future research directions
Our study also has several limitations that present interesting avenues for future research that can
further join agglomeration theory and the literature on organizational governance and firms’ external
corporate development activities. To begin with, extensions that examine the generalizability of our
results to different industries would be worthwhile. We focused on domestic alliances and acquisitions
in the US semiconductor industry, and this focus partly reflects the many prior studies of agglomeration
and its consequences in this industry (Almeida and Kogut, 1999; Martin et al., 2010; Rosenkopf and
Almeida, 2003; Saxenian, 1994), in addition to the exchange hazards that accompany transactions in this
setting (e.g., Almeida et al., 2002; Vanhaverbeke et al., 2002). While we would expect our interpretations
to generalize to other high-tech industries, firms’ reliance on alternative ways to reduce adverse
selection might also vary across industries and therefore shape the importance of agglomeration effects

and geographic proximity. For instance, startups in the biotechnology industry often associate with
venture capitalists (VCs), presenting signals to other companies that can facilitate future deals (Hsu,
2006), and the VCs can also take an active role in brokering collaborations between companies in their
portfolios (Lindsey, 2008). It is less likely that our findings would extend to non-high-tech industries,
however, especially where agglomerations that exist are often due to demand-side drivers (e.g., clusters
of hotels, car dealers, etc.) (McCann and Folta, 2009). In these types of agglomerations, externalities are
associated with reduced search costs fostered by co-location. They are much less likely to exhibit the
types of close interconnections and knowledge spillovers that serve as the foundation of our theoretical
explanations. Given our focus on domestic transactions, it would also be interesting to examine
governance choices involving non-US firms and investigate the implications of clusters and the
institutional environments in which they are embedded (e.g., Tallman and Phene, 2007; Yiu and
Makino, 2002).
We also acknowledge that a limitation of our analysis is that we do not have information on the
locations of all of the establishments of multi-establishment firms, which led us to assign location based
on the firm headquarters. Although this is consistent with many prior studies in the agglomeration
literature (e.g., Almazan et al., 2010; Baptista and Swann, 1998; Folta et al., 2006), multi-establishment
firms might share locations for their individual establishments. We believe this limitation is likely to be
less of a concern in our specific analysis given that the decision we study (whether to structure a
particular transaction as an acquisition or alliance) is a choice most often made at the headquarters level
(Green and Cromley, 1984; Chakrabarti and Mitchell, 2013). Moreover, the use of headquarters
location provides a more conservative test of our hypotheses. To the extent that our data include firms
with other overlapping locations yet classified as not sharing a cluster location based on their
headquarters, it would make it more difficult to support our hypotheses since information asymmetry
and the risk of adverse selection would be lower for these transactions. Moreover, the series of
robustness checks around this issue further reduces concerns about this limitation.
Future research could also usefully investigate how agglomeration facilitates post-merger

integration, which might also influence alliance and acquisition decisions. For example, if acquirers
expect that proximity fosters integration of acquisitions, this expectation could result in a higher
proportion of shared cluster transactions being structured as acquisitions. This raises a concern that
such an effect might underlie the relationships we observe in our study. Although we do not have
access to data related to expected post-integration costs that would allow us to totally rule out this
alternative explanation, we believe several of the specific interaction findings are counter to this
explanation. As an example, tech distance is a proxy for higher information asymmetry but it may also
serve as an inverse proxy for post-acquisition integration intensity as noted in several prior studies. For
example Coff (1999) describes that integration requirements may be lower for less related transaction
partners (i.e., unrelated buyers are less likely to integrate assets). If shared cluster location is related to
the probability of acquisition due to lower post-acquisition integration concerns, we would expect this
effect to weaken when tech distance is high. Instead we find that the effect is enhanced with increased
tech distance, a result in line with the information asymmetry explanation. Nevertheless, we believe that
disentangling the effects of anticipated integration costs and information asymmetry concerns is an
interesting area for future research.
Our study has focused on the impact of shared cluster location on firms’ decisions to enter into
acquisitions versus alliances; however, alliance and acquisition are just two options to pursue inter-firm
collaboration that are available to managers. Future research should consider the influence of cluster
co-location on these other alternatives (e.g., informal affiliations, teaming relationships, licensing
agreements, or other forms of longer-term contractual relationships). In addition, there are many other
governance decisions involving other organizational forms that might be studied. For example, future
research might consider how shared cluster location has an impact on other strategic decisions, such as
internal resource accumulation (e.g., Garrette, Castaner, and Dussauge, 2009), concurrent sourcing (e.g.,
Parmigiani, 2007), or staging investments (e.g., Zaheer, Hernandez, and Banerjee, 2010). For other
types of governance arrangements, it might be that the impact of information costs is different than
what we have observed.

Given that the secondary data we use on firms’ alliances and acquisitions do not allow us to
examine firms’ decision-making, it would also be valuable to use other methods such as surveys to
permit finer analysis of how agglomeration effects matter for organizational governance. As one
illustration, in testing the impact of shared cluster location on firms’ acquisition versus alliance
decisions, we are not able to observe the actual perceived level of information asymmetry and concerns
over adverse selection. Survey research could investigate, for instance, where firms obtain information,
which types of interactions and relationships are most effective in facilitating information and reducing
concerns of adverse selection, and how exactly these relate to the decision to engage in acquisitions and
alliances (e.g., Ariño and Ring, 2010; Ring, Doz, and Olk, 2005; Tallman et al., 2004). Extensions such
as these indicate the many research opportunities that exist to integrate the agglomeration literature with
other streams of strategy research on alliances and acquisitions.
Acknowledgements: We are grateful for the advice and suggestions received from SMJ Co-
Editor Connie Helfat and two anonymous SMJ reviewers. We appreciate helpful feedback and
discussion on earlier drafts from Javier Gimeno, Anne Parmigiani, and Govert Vroom, and we
thank Global Semiconductor Alliance for data support.

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Table 1. Identified semicondu
uctor clusters and constiituent metro
opolitan staatistical areaas
Notes:
Number ini parentheses following
f namee of cluster indiccates number off firms within ouur sample thatt are located in particular
p
cluster.
CBSA= =core based statiistical area, whhich is a collectivve term for bothh metro and miccro statistical arreas. A Metroo
Statisticall Area (SA) coontains a core urban
u area withh a population of at least 50,0000; a Micro Statistical
S Areaa contains
an urban core with a poppulation betweeen 10,000 andd 50,000.
This artticle is proteected by coppyright. Alll rights reserved

Table 22. Descriptivve statistics
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Table 33. Logistic reegression an
nalysis
Depend
dent variable
le: Choice of acquisition ”)
n (“1”) vs. alliance (“0”)
Pan
nel A: Shareed Cluster * Tech Distaance
Paanel B: Share
red Cluster * Total Pateents
Panel C:
C Shared Cluster
C * Geoographic Prroximity
Note: the “low

w” proximity vaalue of 150 milles represents thhe lowest
proximity
p for which
w the shareed cluster =1 vaalue is meaningf gful (appears inn
the sample)
Figure 1: Interactio
on plots

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AGGLOMERATION AND THE CHOICE BETWEEN ACQUISITIONS

Keywords: Agglomeration theory, information economics, geographic clusters, acquisitions,

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technology” (Vanhaverbeke et al., 2002: 715). Thus, it is important to understand whether

engaging in transactions such as acquisitions and alliances.

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governance, we investigate several conditions under which the governance-related effects of

of agglomeration on organizational governance. Our empirical analyses of over 1,100 transactions in

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location. Specifically, we draw on knowledge spillovers as a form of agglomeration externality and

linking shared cluster location to the acquisition versus alliance choice.

We also further extend agglomeration theory by identifying a number of important

Rosenthal and Strange, 2003).

Agglomeration generally refers to a geographic concentration of economic activity. The spatial

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1999; McCann and Folta, 2011).

Geographic proximity and interconnections among many organizations create agglomeration

access to important sources of supply (Krugman, 1991).

interorganizational relationships, interfirm mobility of workers) as well as through informal channels

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communication of complex, subjective messages (Daft and Lengel, 1986).

1996; Vanhaverbeke et al., 2002).

Addressing the organizational governance implications of sharing a common cluster is also

perspective with agglomeration theory in developing research hypotheses.

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bid premiums, utilize stock as a performance-contingent type of consideration, or engage in lengthier

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selection risk presented by acquisitions due to their greater sunk investments.

In developing research hypotheses below, we join agglomeration theory with information

Shared cluster location

governance choices highlighted by information economics. Specifically, the increased co-location of

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related organizations leads to the generation of knowledge spillovers.

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he terms untraded interdependencies). A by-product of these cluster-specific understandings is that

acquisitions than alliances, holding everything else constant. Thus, we posit:

Shared cluster location and knowledge resources

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focus on the technological resources of partner firms.

or dissimilarity of technological resources is an important determination of information asymmetry and

that accompanies differences in technologies can preclude understanding.

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(Heeley, Matusik, and Jain, 2007).

As the exchange partners’ combined knowledge stocks increase, levels of information

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associated with adverse selection.

asymmetries in opaque industries characterized by complex product technologies.

Shared cluster location and local geographic overlap

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geographically proximate firms.

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strongest for tightly co-located firms.

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technology (Vanhaverbeke et al., 2002).

collaboration such as supply agreements, licensing transactions, and marketing agreements.2

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alliances as unique forms of collaborative agreements.

a relationship of geographic proximity / clustering to whether any transaction occurs. In supplemental

deals selected from 1 to 25.

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sharing a cluster (26 percent).

----------------- Insert Table 1 about Here -----------------

of firms’ knowledge-based resources, we calculated a logged sum of the parties’ citation-weighted