Prior research on alliances extols the merits of alliances such as pooling expertise and resources to sharing risks and costs. Yet, firms still shun on forming alliances. We develop theory that combines the new institutional economics (NIE) and transaction cost economics (TCE) to overcome barriers toward alliances. Our theory argues that institutional deregulation can help mitigate the perceived risks of forming alliances, but that its effectiveness is limited mainly to small firms. This is because small firms are more eager for complementary resources and other benefits that come from partnering with other organizations and adapting to the regulatory change. To test these hypotheses, we look at a quasi-natural experiment in China (i.e., MAH system) where regulatory barriers to alliance formation were eased in pilot provinces but not in others. The results suggest that easing these barriers facilitated alliance formation and small firms benefited from it more. The study contributes to the literature on alliance formation, including offering insight into why firms may be hesitant to engage in interorganizational collaborations and unearths the role of organizational frictions above and beyond institutional barriers. It also highlights the potential for regulatory interventions to facilitate alliance formation.
