Papers and Slides
Governing Investment in Inter-Firm Collaborations: the Role of Contracts
Giorgio Zanarone with Desmond Lo and Mrinal Ghosh
Abstract: Dedicated investments are a key driver of value creation in interfirm collaborative relationships. At the same time, dedicated investments are potentially vulnerable to holdup, and might also be used opportunistically, to appropriate a partner’s pre-existing resources. Two prominent theoretical frameworks – transaction cost economics and formal incomplete contracting theory – have investigated how contracts and governance mechanisms can be used to elicit optimal levels of dedicated investment in the face of these hazards. Yet, the relative empirical relevance of these frameworks has been rarely assessed. Our paper makes important progress on this agenda, both theoretically and empirically. Theoretically, we develop a model of the relationship between an OEM and a supplier that nests the TCE and ICT approaches, and shows that they lead to fundamentally different predictions on how different contractual price formats affect the supplier’s dedicated investment. Empirically, we test our framework on a dataset of component procurement contracts and find that consistent with a “resource protection” version of the ICT model, and in contrast with the TCE model, OEMs use fixed, or “closed” price formats in their contracts with suppliers when their pre-existing resources are more valuable, despite the fact that closed price formats reduce both the supplier’s dedicated investment and its value-add to the OEM’s end product. This evidence suggests that parties, cognizant of the “dark side” of entering inter-firm collaborations, strategically balance the conflicting goals of safeguarding pre-existing resources and creating value.
Make or Buy Decisions and Investments in New Process Technology
Abstract: This paper examines a firm’s investment in new production technology in the context of vertical integration decisions. The basic premise is that decisions to invest in a new process are based first on a production cost comparison between in-house production and market supply, but also that supplier asset specialization can stimulate a buyer to invest in a new process to avoid transaction costs. The results show that asset specialization does predict buyer process innovation and that such an innovation gives the buyer a production cost advantage over the supplier’s market price. The effect of transaction costs on vertical integration is therefore indirect through their influence on buyer process innovation which lowers the buyer’s production costs compared to the supplier’s price and justifies internalizing the activity. The implications for research on the relative importance of transaction costs and organizational capabilities are discussed.
Contraction for The Sake of Expansion – An Oxymoron?
Niron Hashai with Netanel Drori and Christian Asmussen
Abstract: International and business diversification are two common strategies of firms. We present novel theoretical arguments and empirical evidence suggesting that contracting a given diversification path (be it in the international or business dimension), does not only allow firms to expand the other path in the short term, but also to again diversify the initially contracted path, thereby expanding both diversification paths in the long term. We argue and show that when firms contract a given diversification path, they spark two subsequent processes: They free up non-scale free resources from the contracted diversification path to invest in the other diversification path, which allows them to expand this path. In turn, this expansion creates new scale free resources that also facilitate renewed diversification along the initially contracted path.
Value Creation and Capture in Platform Business Models: An Information-Theoretic Perspective
Richard Makadok with Anparasan Mahalingam
Abstract: Platform-based business models create and capture economic value largely by lubricating longstanding frictions in markets. Our theoretical model considers three classic information economics frictions – namely, coordination costs, search costs and transaction costs – and examines how demand-side synergies among the capabilities for solving these three problems can help platform businesses create competitive advantage over rival platforms or non-platform substitutes. As an extension, we consider how privacy concerns of users can reduce or even reverse these synergies.
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