1. Is My Firm-Specific Investment Protected
Is My Firm-Specific Investment Protected? Overcoming the Stakeholder Investment Dilemma in the Resource-Based View
Hoskisson, Gambeta, Green, and Li, 2018
Academy of Management Review, 43:
Jinah Ryu
Fall 2018

2. Summary of Research
[Research Agenda] How to incentivize stakeholders to make firm-specific investments?
Why is it important? Resource-Based View(RBV; Barney,1991): Stakeholder FSIs create the firm’s unique resources and enable the firm to have sustainable competitive advantage
Problem FSI dilemma for stakeholders can disincentivize stakeholders from committing their FSI
What is their dilemma? By making FSIs, stakeholders can enjoy economic rents (due to the firm’s value created by inimitable FSI) & be a holdup to the firm (due to inability to transfer the value to outside the firm)
[Suggestion] Develop protection devices based on Property Rights theory and other complementary devices
What is underlying mechanism? Protection devices reduce behavioral uncertainty and environmental uncertainty, and therefore, reduce the stakeholders’ reluctance of making FSIs
[Contribution] Provide a unified framework about stakeholder protection devices, which have been dispersed in multiple theories without any theoretical connections to each other

3. Theoretical Gap in Previous Literature
Research Agenda: How to incentivize stakeholders to make FSIs?
Solutions suggested by multiple theoretical perspectives
Agency theory (Jensen & Meckling, 1976)
: Incentivize (ownership, residual claim rights) all stakeholders with complete ex-ante contracts for eliminating ex post holdups
[Limitations] None of contracts are ex ante complete
Incomplete Contract theory (Grossman & Hart, 1986; Hart & Moore, 1990)
: Assign property rights & authority to one party to solve ex-post conflict
[Limitations] RBV: Decision rights can not be efficiently allocated ex ante, because none of actors may know ex ante what the value of their contribution may be or how it will evolve
Stakeholder Approach (Blair & Stout, 1999; Blair, 2005; Clark, 1985)
: Assign decision rights to “mediating hierarchy” who has fiduciary duty and legal case to protect stakeholders’ interests and resolve ex post disputes + Develop specific devices for inducing a particular group to make FSIs
[Limitations] Most of such devices are considered in isolation, and designed to resolve the FSI dilemma for specific stakeholders only

4. New Theoretical Perspectives
3.5) Mahoney, 2012: Property Rights Theory + RBV
: Stakeholders’ FSIs may generate a “residual interest that is not ex ante contractually bargained over and it is not ex post perfectly allocated” + Value created from stakeholders’ FSIs affects the overall firm competitiveness (or value)
Emphasis on the value of Property-rights within the RBV
Property Rights-based Stakeholder Approach
: Develop ex ante devices to protect the stakeholders’ property rights and ex ante resource depreciation devices, and complement those devices with other ex post formal and informal governance systems/safeguards

5. Research Model
Research Agenda: How to incentivize stakeholders to make FSIs?
Research Model: Protection devices reduce stakeholders’ diverse uncertainties which expose stakeholders to the holdup risk, and therefore disincentivize them to make FSIs

6. Research Model
Research Agenda: How to incentivize stakeholders to make FSIs?
Research Model: Protection devices reduce stakeholders’ diverse uncertainties which expose stakeholders to the holdup risk, and therefore disincentivize them to make FSIs
Stakeholders: 3 types – Employees / Suppliers / Customers
Uncertainties: 2 types
Behavioral Uncertainty : Stakeholders lack the knowledge on the firm’s opportunistic behavior after they make FSI (ex) The firm can terminate an employee after making an FSI
Environmental Uncertainty : Uncertainty about the value of the investment itself; It is difficult to accurately predict what the eventual value created by the FSI will be (ex) Shifts in the technological and political landscape; Change in market demand
Protection Devices: 4 types
[ex ante] Property rights allocation Devices
[ex ante] Resource depreciation Devices
[ex post] Monitoring devices
[ex post] Relational governance Devices

7. Ex Ante Property Rights Allocation Devices
Research Model 1
Ex Ante Property Rights Allocation Devices
: Provide a “stake; a property right in the firm” to the relevant stakeholder
Proposition1: The provision of property rights allocation devices to employee, supplier, and customer stakeholders decreases the hazard associated with ex ante behavioral uncertainty.
Proposition2: The provision of property rights allocation devices to employee, supplier, and customer stakeholders increases the hazard associated with ex ante environmental uncertainty.
P1 (-)
Conflicting effects
P2 (+)
(M1) The devices provide ex ante reassurance that the firm will not engage opportunistically and reduce behavioral uncertainty (M2) The devices align the risk of the firm’s environmental uncertainty (e.g. market fluctuation) with the future compensations of stakeholders

8. Ex Ante Resource Depreciation Devices
Research Model 2
Ex Ante Resource Depreciation Devices
: Protect the firm itself from environmental uncertainty; More likely to general corporate strategy
Proposition3: The provision of ex ante resource depreciation devices to employee, supplier, and customer stakeholders decreases their exposure to the hazard associated with environmental uncertainty.
Proposition4: The provision of resource depreciation devices to employee, supplier, and customer stakeholders increases the hazard associated with ex ante behavioral uncertainty.
P4 (+)
Conflicting effects
P3 (-)
(M3) The devices prevent the whole firm from environmental uncertainty, and therefore indirectly reduce the stakeholders’ concerns about environments (M4) The devices confer strong bargaining power to the firm / generate information asymmetry (suppliers’ moral hazards) / endow power to managers and enable them to act opportunistically

9. Ex Post Moderating Protection Devices
Research Model 3-1
Ex Post Moderating Protection Devices
Why more Protection Devices? Ex ante protection devices produce conflicting effects between two types of uncertainties  Firm needs more devices to overcome this trap
Monitoring by third parties – who do not make any FSIs (M5): (1) BOD – act as a legal entity who can resolve the problem when ex ante contracts fail (2) Institutional investors – have better information on firm’s stakeholders, and provide a credible ex post device under the conditions of causal ambiguity and BOD’s biased decision
Proposition5: The provision of ex post monitoring devices involving BODs and dedicated institutional investors in support of employee, supplier, and customer stakeholders will negatively moderate the effects of the ex ante devices such that it will reduce the effect of property rights allocation devices on environmental uncertainty.
P1 (-)
Conflicting effects
P5 (-)
P2 (+)

10. Ex Post Moderating Protection Devices
Research Model 3-2
Ex Post Moderating Protection Devices
Relational governance and trust-based relationship devices (M6): Informal self-enforcing safeguards (e.g. reputation as a fair employer) that the firm will not use its higher bargaining power to extract greater quasi-rents
Proposition6: The provision of ex post relational governance and trust-based relationship devices to employee, supplier, and customer stakeholders will negatively moderate the effects of the ex ante devices such that it will reduce the effect of resource depreciation devices on behavioral uncertainty.
P4 (+)
Conflicting effects
P6 (-)
P3 (-)

11. Ex Post Moderating Protection Devices
Research Model 3-2
Ex Post Moderating Protection Devices
Proposition7: The provision of ex post relational governance and trust-based relationship devices to employee, supplier, and customer stakeholders provides feedback reducing the importance of ex ante property rights allocation devices in reducing behavioral uncertainty.
(M7) Repeated transactions lead both parties to trust each other not to expropriate value, and therefore, reduce the emphasis on ex ante property right devices and the possibility of opportunistic behavior
P7 (-)