1. and Mahoney Resource-Based and Property Rights Perspectives on Value Creation: The Case of Oil Field Unitization (Kim and Mahoney 2002) Chih Liu

2. Why realized value creation can be less than potential value creation? Expand the scope of resource-based theory to a business context with frictions in establishing property right (e.g. oil field unitization) Need to incorporate the role of property rights into the analysis of RBV to internalize externalities and to solve prisoners’ dilemma problems of common-pool resources. 2 Objective and Contribution ? ? Potential Value Realized Value

3. Resource-based view Seeks to understand sources of competitive advantages from owning certain resources Assumes resources are secured due to Inherent attributes third-party enforcement Self-enforcing agreement Property Right theory Relaxes the implicit assumptions of RBV Deals with the processes whereby property rights are established 3 RBV versus PRT

4. Overview of Resource-Based Theory VRIN – resources that are valuable, rare, inimitable, and non-substitutable can generate economic rents (Barney, 1991) Peteraf’s four cornerstones framework (1993): Resource heterogeneity Ex post limits to competition (isolating mechanisms) Ex ante limits to competition Imperfect resource mobility

5. An oilfield is an area of rock under the ground that is full of oil or gas or both. Oilfields are typically 10-20 km (6-12 miles) wide. Oil is created in a source rock, along with water and gas. Over millions of years, the oil and gas float upwards above the water along a migration path. Oil and gas often rises all the way to the surface of the earth. In other cases, it collects in a reservoir; a rock that has spaces where oil can collect. Sandstone is a good example, in which oil collects in the spaces (pores) between the sand grains. There must also be a trap - a rock structure that forms a seal above and around the reservoir rock. A seal is impermeable - that is, fluids such as oil cannot flow through it. Clay and shale are impermeable and make good seals. 5 Oil Field Source: http://www.seed.slb.com/qa2/FAQView.cfm?ID=878

6. Inefficiency in contracting for OFU results from the joint condition of Multiple landowners The migratory nature of oil Important variables for efficient extraction The rate of production The location of the wells Individual competitive drilling goes against Finding optimal location Maintaining efficient extraction rate Therefore, OFU is the most complete solution. But why is this solution not realized? 6 Oil Field Unitization (OFU)

7. Many economic aspects of contracting situation Length of contract Once-and-for-all contract, etc. Asymmetric information Leads to diverging valuations of contracting parties’ shares Imperfect information and strategic holdout Competitive drilling → Negative externalities Prisoner’s dilemma 7 Impediments to Contracting

8. Interest-group theory Eggertsson (1990) criticizes the implicit assumption that governments will act to minimize transactions costs. Not true of OFU in the US (e.g. Texas) Number and heterogeneity (Libecap, 1989) The greater the impediments to contracting when The larger the number of bargaining parties The more heterogeneous the bargaining parties 8 Impediments to Contracting

9. RBV in terms of the property right theory Clarifies the definition of “resources” Specific what kind of utilizations are possible with a particular resources Property rights are relational The interdependent nature of resources utilized in a competitive environment 9 RBV in terms of PR

10. “The more valuable the resources, the more incentives there are to make property rights of resources more precise.” “The more precisely delineated the property rights of resources, the more valuable resources become.” 10 Complementarity btw RBV and PR PR RBV

11. Summary and Discussion In an economic world of positive transaction costs, a full RB analysis must consider not only whether resources are VRIN, but must also consider the role property rights in value creation Value creation vs. value distribution, and how they interact Systems of property rights are, in essence, conduits upon which value-creating activities are implemented so that resources can be channeled to higher yield use. Asymmetric information and distributional conflicts may limit resources from being channeled to these higher yield uses.

12. A full resource-based analysis must consider not only whether resources are valuable, rare, inimitable and non-substitutable but must also consider the role of property rights in (realized) value creation. “The property rights theory (along with transaction costs and agency theories) will become increasingly prominent in the next generation of resource-based research in strategic management.” 12 Conclusions