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Tsang (2000) "Transaction cost and resource-based explanations of joint ventures: A comparison and synthesis

35 important questions on Tsang (2000) "Transaction cost and resource-based explanations of joint ventures: A comparison and synthesis

What is the purpose of this study?

Explain the formation of joint ventures from the resource based perspective and to compare this perspective with TC theory

How does the TC logic explains joint ventures?

In terms of market failure for intermediate inputs, asset specificity, and high uncertainty over specifying and monitoring performance

How does the resource-based theory regards joint ventures?

As means of exploiting and developing a firm's resources.

What happens when a firm possesses a certain capability which is better than those of rivals?

That capability becomes a competence.

What are two behavioral assumptions of TC theory?

Opportunism
Bounded rationality

What is the different role played by bounded rationality in TC and RB theories?

TC theory: all complex contracts are unavoidable incomplete because of bounded rationality and hence are subject to hazards of opportunism.

RB theory: believes that what a firm can do and will do is mainly determents on its organizational embedded routines.

What is needed according to the TC theory to safeguard transactions against opportunistic behavior?

An appropriate governance structure

What is the main weakness of TC?

The over-emphasize of costs. The RB theory takes both costs and values into consideration but its focus is on the former instead of the latter.

What is the main function of the entrepreneur according to TC?

Coordinate production within the firm by fiat (goedkeuring)

Where is the governance structure chosen mainly determined by (for TC)?

By the extent of asset specificity involved in the transaction concerned

What is asset specificity?

The degree to which an asset can be redeployed to alternative uses and by alternative users without sacrifice or productive value

What is the basic nature of TC?

Allocation of resources through authority relations

What is the basic nature of RB?

A collection of productive resources

What is the objective of TC?

Economizing on transaction costs through choosing an appropriate governance structure

What is the objective of RB?

Maximizing long-run profits through exploiting and developing firm resources

What is the entrepreneurial function of RB?

Identifying and taking advantage of productive possibilities

What are the constraints on strategic options of TC?

Asset specificity and small numbers exchange condition

What is the limit of organization on TC?

Due to top-down control loss and managerial opportunism

What is the limit of organization on RB?

Due to managerial diseconomies

In which two forms can joint ventures be classified?

Equity
Non-equity

Why not acquire the firm with the complementary assets, or develop the assets internally?

The authors state that the answer lies in the costs of divesting or managing unrelated business activities or the higher costs of in-house development

What does a high degree of asset specificity precludes?

Arm's length market transactions

What are the reasons why firms would form a JV under the RB logic?

Exploitation of resources
Development of resources

What makes exploitation of resources a case for a joint venture?

Consider the case of a firm that wants to make further use of its superior technology in the production process of another industry. Licensing is the preferred mode of transfer since it requires few resource commitments on the part of the transferor. However, if the technology to be transferred is newly developed and consists of a substantial tacit element, it is very firm-specific and licensing is not a suitable option. This makes the case for JV.

Why is acquisition more viable but also not without problems?

Usually, a substantial price premium needs to be paid for the acquired firm. So it entails higher financial resources and is less flexible than JV.
In addition, successful integration of the acquiring and the acquired firm into a single firm requires the managerial services of the acquiring firm.

What is also a motive for a joint venture?

The possibility of creating Ricardian rents because of the presence of scarce resources. It is possible that a combination of resources generates Ricardian rents though each of them separately does not.

What makes development of resources a case for a joint venture?

The objective to manage resources in a relational manner
To acquire resources that are needed and to dispose of those that do not fit into a firm's core competence

What makes more sense regarding capabilities?

To learn the capability from its owner. Strategic alliances provide firms with ‘a window on their partners’ broad capabilities’.

Which two factors affect the success of learning?

The degree of firm specificity of the resource in question
The learner’s absorptive capacity.

What are the complications when firms want to get rid of a business unit (put a business up for sale)?

Price determination. Asymmetric information about the true value of the business causes an ‘adverse selection’ or a ‘lemon’ problem.
Once a ‘for sale’ label is attached to the business, damaging impacts on staff morale, customer loyalty, suppliers’ trust and other relations may occur.
The business may have various linkages with its corporate parent due to, say, the sharing of facilities and personnel.

What is the equation for the net benefit of joint venture?

Net benefit of joint venture = (V_j + TC_M) – (MC_j + PC_j + AC_j)

V_j= When an activity is organized internally, extra value may be created due to reasons pertaining to intrinsic firm capabilities. It also stands for the value that would be destroyed under market arrangements. In some cases V_H is negative when compared with transaction through markets. For example: overstretching of resources.
TC_M= When an activity is organized through markets, transaction cost (TC_M) is incurred.
MC_j= management costs
PC_j= production costs
AC_j= alliance costs

What is an effective protection against opportunistic behavior by joint venture partners?

Tacit knowledge

Why is the issue of trust important?

Because interfirm trust can alleviate the hazards of opportunism associated with future transactions of the firms concerned

Why is trust a core behavioral assumption?

Inter-firm trust is an organizational resource and the personal base of that trust belongs to the human resources of the firm. It is built up gradually as firms repeatedly interact

What do the authors expect when two firms enter into multiple JV?

ACj to fall and Vj to rise over time.

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