Why might a firm prefer to enter into an equity alliance rather than a short- or long-term contract?

• A. To ensure complete independence from the partner firm's decisions
• B. To gain shared ownership and align incentives with the partner firm
• C. To avoid any financial investment in the partner firm
• D. Because equity alliances typically require less commitment than contracts

Answer: (B)

Verified step by step guidance

1. Understand the nature of an equity alliance: it involves shared ownership between firms, meaning both parties invest resources and have a stake in the joint venture or project.
2. Compare this with short- or long-term contracts, which are typically agreements to provide goods or services without sharing ownership or control.
3. Recognize that shared ownership in an equity alliance helps align incentives because both firms benefit directly from the success of the collaboration, reducing potential conflicts of interest.
4. Note that contracts, while legally binding, may not fully align incentives since each firm operates independently and may have different objectives or priorities.
5. Conclude that a firm might prefer an equity alliance to foster cooperation, share risks and rewards, and ensure that both parties are committed to the partnership's success.