Growing Beyond Firm Boundaries Through Strategic Alliances : Role of Labor Market Frictions

We find that labor market frictions affect a firm’s choice of growth strategy. Using the passage of the good faith exception as an exogenous shock to the cost of dismissing employees, firms significantly increase their strategic alliance activities, replacing internal investments and acquisitions. These effects are particularly large for high-growth and innovative firms. Affected firms shift their longshot innovative projects with high failure rates outside the firm’s boundaries by entering into exploratory alliances with risky firms with low technological overlap. The results highlight how affected firms can use alliances to mitigate the negative growth impacts of labor market friction