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 firmAcquiring 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?