Trading in Strategic Resources: Necessary Conditions, Transaction Cost Problems, and Choice of Exchange Structure Tailan Chi Strategic Management Journal (1994) by Eunkwang Seo Session 2: Transaction Costs Theory
Trading in Strategic Resources: Necessary Conditions, Transaction Cost Problems,
and Choice of Exchange Structure
Tailan Chi
Strategic Management Journal (1994)
by Eunkwang Seo
Session 2: Transaction Costs Theory
AGENDA
Research Questions
1) Under what conditions can strategic resources
be gainfully traded across firms?
2) What are the main difficulties of trading the
resources?
3) What mechanisms can be used to manage the
difficulties?
4) How does the adoption of the mechanisms
affect the features of
transaction modes?
1. TRADING IN STRATEGIC RESOURCES
Characteristics of Strategic Resources (1)
1) Imperfect Imitability Because of causal ambiguity – uncertainty about the causal
connection between managerial actions and economic results – strategic
resources cannot be perfectly imitable to other firms.
2) Imperfect Mobility Because of specificity – the conditions that a resource is specialized
to firm-specific needs so that it has less value to other firms than to its present
employer – strategic resources cannot be perfectly mobile to
other firms.
1. TRADING IN STRATEGIC RESOURCES
Characteristics of Strategic Resources (2)
3) Imperfect mobility ≠ Non-tradability Even strategic resources that cannot get away from its
present employer can be traded by purchasing its service
or transferring its skills and routines.
The concept of tradability is broader than the concept
of mobility in that it concerns the potential that a
possibly temporary use of the resource in conjunction
with resources that are not put under the control of the
firm can yield a higher return. However, potentially tradable resources will not
necessarily be traded.
Then, what are impediments to trading in strategic resources?
2. IMPEDIMENTS TO THE TRADE
Four Major Impediments (1) : Measurement
Problem
1) Causal ambiguity and adverse selection
Casual ambiguity involves information asymmetry
between the employing firm and potential acquirers
about the content and quality of the resource in question.
Such information asymmetry gives rise to the problem of
adverse selection, possibly causing market exchanges in
the resource to break down (Akerloff, 1970).
2) Tacitness and moral hazard Tacit knowledge is difficult to articulate and cannot be
fully coded in technical manuals. The extent of shirking is likely to rise as performance
measurement becomes more imperfect (Chi, 1991).
2. IMPEDIMENTS TO THE TRADE
Four Major Impediments (2) : Coordination
Failure
3) Resource interdependency and cheating
Uncoordinated use of the resource will reduce the total
amount of benefit derived from it.
Under imperfect price and behavioral constraints, there
are gains from cheating in contracting ex ante.
4) Resource interdependency and Holdup Coordination in ex ante non-contractible aspects requires
frequent joint decision making through negotiations
between the two parties. Under incomplete information about the other’s
negotiation strategies, contingencies, or preferences,
each firm has a strong incentive to do opportunistic
behaviors at the expense of the other.
Then, how do we manage the impediments?
3. MANAGING THE IMPEDIMENTS
Structural Remedies for Transaction Cost
Problems
4. MODE OF TRANSACTION
Transaction Costs and Transaction Modes
1) Acquisition The aim of acquisition is to effect the transfer of residual
claimancy and residual control over the resources from
their present employer to the acquirer. However, the acquirer may face difficulty in assessing the
value of the resources in the acquisition process and
encounter a degradation of performance of the acquired
personnel after the acquisition.Acquiring the entire firm Acquiring only part of it
Adverse Selection
Less severe if the equity of the target firm is traded in an efficient stock market.
More severe because a portion of the firm does not have stand-alone market value.
Moral Hazard
More severe as the portion of the target firm that does not exhibit much complementarity.
Less severe because any degradation of performance only affect part of the firm.
4. MODE OF TRANSACTION
Transaction Costs and Transaction Modes
2) Collaborative Venturing The alternative to acquisition is to purchase the service of
the resources from their present employer or replicate
them under its guidance. Although CV is also subject to both measurement
difficulties and coordination failure, it is typically more
efficient in resolving transaction cost problems than the
acquisition, because both firms involved in the exchange
can be apportioned some residual claimancy or residual
control in a CV. Therefore, a necessary condition for CVs to be the
optimal choice of transaction mode is the presence of
high transaction costs in trading the resources (Hennart,
1988, 1991; Shan, 1987, 1990).
4. MODE OF TRANSACTION
Transaction Costs and Transaction Modes
5. DISCUSSION
• Is Residual Claimancy and Effective Way of Minimize
Transaction Costs?
It has been suggested that executive stock option tends to
encourage risk-taking by the executives (Cohen, Hall, &
Viceira, 2000).
In this point of view, I am wondering whether giving some
residual claimancy to business partners is sufficient to control
the potential opportunistic behaviors of them.
Otherwise, how much portion of the residual claimancy
should be given to control the behavior effectively?