The strategy literature has widely acknowledged the negative impact of cultural diversity between the partners of an alliance on their innovation performance. We argue that innovation is more challenging in alliances involving subsidiaries of multinational companies (MNCs), as they embody a dual background that encompasses the cultures of their host and home country. We also propose that the effect of cultural diversity is contingent on the content of the alliance, being positive in explorative and negative in exploitative alliances. Our findings, obtained from an analysis of 161 strategic alliances established by 31 MNC subsidiaries in the biotech industry from 1987 to 2010, confirm that subsidiaries are generally less innovative in alliances involving partners from other cultures. However, the impact of such cultural diversity becomes positive when those alliances focus on exploration activities, as the challenges of cultural diversity are offset by the benefits of exposure to novel cognitive schemes.

Introduction

The extant literature on alliances demonstrates that partners’ characteristics and their diversity play crucial roles in alliance success (e.g., Capaldo & Messeni Petruzzelli, 2014; Hoffman & Schlosser, 2001; Reuer & Lahiri, 2014). The selection of suitable partners is crucial, as it ensures access to complementary knowledge and resources (Kogut & Zander, 1992). This is particularly true in high-technology industries in which firms face competition in terms of time and costs, rapid technological development, short product life cycles, and increasing capital expenditures (e.g., Rothaermel & Deeds, 2004). In recent decades, cross-border alliances have assumed a prominent strategic role on the global stage (Berry, 2014). Previous studies have revealed that alliance-related processes and outcomes are significantly influenced by the cultural differences between the partners’ home countries (Steensma, Marino, Weaver, & Dickson, 2000). These differences affect how firms interact and learn from each other, as well as their exchange of knowledge, resources, and competencies.