Why Firms Make Unilateral Investments Specific to Other Firms
Why firms make unilateral investments specific to other firms: The case of OEM suppliers Kang, Mahoney, and Tan (2009) Presented by: Hyeonsuh Lee 1 Overview Unilateral relationship-specific investment
Transaction Cost Economics Economic hold-up hazards Negative NPV Myopia, mismanagement Extended Transaction Cost Economics Consider real options value Beyond the individual resource exchange
Positive spillover effects With the same exchange partner From other third parties 2 Unilateral relationship-specific investment in TCE TCE focuses on the individual transaction Failed to consider the possibility of interdependent transa ctions and existence of spillover effects (learning and capa bility development) Might cause economic holdup hazards negative NPV Safeguards are necessary Forms of economic safeguards:
Signing a formal contract Entering into an equity alliance jointly Mutual sunk-cost commitment (mutual hostage model, Williams on 1996) 3 Extending Transaction Cost Economics Transactions may be interdependent (real options value) Two positive spillover effects: Inter-project spillovers with the same transaction partner Lower search and communication costs Develop multiple projects and economic bonding relationships Fundamental transformation from an ex ante asymmetric bargaini
ng relationship into a ex post bilateral exchange relationship. Inter-project spillovers with other transaction partner Facilitate knowledge transfer from the transaction partner Increase bargaining power capability improvement, reputation e nhancement 4 Case of Taiwanese OEM suppliers Even knowing that their clients may behave opportunistically, som e OEM suppliers in Taiwan are still willing to make client-specific i nvestments without economic safeguards. OEM suppliers place much of the value of their strategic move on t
he positive spillovers these current transactions may yield from fu ture transactions with the same OEM buyers or form other transac tion parties. 5 Why Play Such An Unfair Game? Knowledge Spillovers: Knowledge and information transfer and s haring between buyers and suppliers(customized service, product designs, and business processes) secure more future projects from existing buyers and enable the suppliers to gain business from oth er buyers. Reputation Spillovers: Being classified as a top-tier supplier led
to strategic advantage in dealing with other buyers under the valu e-maximizing strategy. 6 Hypothesis 1 Knowledge spillovers and economic bonding relationships Accumulate partner-specific knowledge and develop inter-organiz ational routines. Improved exchange efficiency and enhance tran saction value. Increase the economic incentive of their clients to transfer knowle dge and information by reducing buyers concerns about leakage. Increase the likelihood of winning new and more valuable projects
from the same partner. H1. The greater the economic value of inter-project knowledge spill over effects with a particular client, the more likely OEM suppliers will make unilateral relationship-specific investments. 7 Hypothesis 2 Knowledge spillovers and capability leveraging Enables the supplier to develop dynamic capabilities that over tim e enable OEM supplier to gain profitable business from other buye rs. Tacit knowledge & positive reputation leverage these in dealing
with third parties. Asymmetric flow of knowledge between OEM buyers and supplier s improvements in the suppliers resource profiles, capabilities a nd absorptive capacity. H2. The greater the economic value of inter-project knowledge s pillover effects with other clients, the more likely OEM suppliers will make unilateral relationship-specific investments. 8 Hypothesis 3 Reputation spillovers and endorsement effect Being classified as a top-tier supplier led to strategic advantage in
dealing with other buyers. Being endorsed by a major OEM buyer reduces the market uncerta inty of other buyers concerning the suppliers capabilities. H3. The greater the economic value of reputation spillover effec ts with other clients, the more likely OEM suppliers will make un ilateral relationship-specific investments. 9 Method Survey of 82 suppliers in IT industry (response rate 17.5%) On-site Interviews of 41 suppliers in bicycle industry (41/45)
Dependent variable: relationship-specific investment 7 indicators using Likert seven-point scale, in which 4 for tangible investment and 3 for intangible investment Independent variables: Knowledge spillovers: multiple projects, integrated services, capability upgrading Reputation spillovers Control variables: industry, length of association, firm size&relative
scales, reciprocal investments 10 Results H1 H2 H3 Discussion and Implication It responds to the call that organization should incorporate learning a nd capability development into governance choice and investment de
cisions. It examines the strategic issue regarding whether or not to invest wit h empirical findings indicating firms are more likely to invest in speci fic investments when they expect their investments to have more posi tive spillovers. It incorporates real options logic into TCE, considering unilateral rela tionship-specific investment as an option in gaining favorable acces s to future opportunities. 13 Discussion From the clients perspective, is this spillover effect de
sirable? (Martinze-Noya, Garcia-Canal and Guillen, Journal of Manageme nt Studies, 2013) The effect of suppliers relationship-specific investment on r elationship performance can differ based on the clients vie w: The clients need to transfer proprietary core knowledge to the supplier The clients perception of the suppliers opportunities for exploiting the acq uired knowledge outside the scope of the agreement. 14
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