Transaction Cost and Resource-based Explanations of Joint Ventures: A Comparison and Synthesis

Organization Studies, Wntr, 2000 by Eric W.K. Tsang

Abstract

Transaction cost theory has been the dominant theoretical lens used in the study of joint ventures. The purpose of this paper is to explain the formation of joint ventures from the resource-based perspective and to compare this perspective with transaction cost theory. By focusing on the cost aspect of a transaction, the transaction cost logic explains joint ventures in terms of market failure for intermediate inputs, asset specificity, and high uncertainty over specifying and monitoring performance. Putting more emphasis on the benefit side of a transaction, resource-based theory regards joint ventures as a means of exploiting and developing a firm's resources. The transaction cost and resource-based explanations are, to a certain extent, complementary. Taking the stance of theoretical pluralism, an attempt is made to synthesize the two theories into a more comprehensive perspective which takes both costs and benefits into account.

Descriptors: transaction cost economics, resource-based theory, joint venture, theoretical pluralism, synthesized perspective

Introduction

During the past decade or so, there has been a proliferation of joint ventures formed domestically as well as internationally. At the same time, the study of joint ventures has attracted increasing interest from students of organization. In a critical review of the literature on joint ventures, Kogut (1988) compares the transaction cost (TC) and strategic behaviour perspectives in explaining the motivation to joint venture. He also proposes a theory of joint ventures as an instrument of organizational learning. Of the different theoretical perspectives, TC economics has become a dominant one in the study of joint ventures, despite the many weaknesses pointed out by its critics (e.g. Kay 1992; Perrow 1981; Robins 1987).

Inspired by Penrose's (1959) seminal work, The Theory of the Growth of the Firm, a recent development in management research is to analyze and develop a firm's strategy by focusing on its resources instead of the external environment. This more inward-looking approach is known as the resource-based (RB) view. Researchers have also been trying to explain firm behaviour and competitiveness in terms of concepts such as capability (Collis 1996), competence (Sanchez et al. 1996), and knowledge (Choi and Lee 1997). Nevertheless, these perspectives are either based upon, or closely related to, the RB logic. A caveat is that although the RB perspective is said to become the dominant perspective in strategy research (Foss 1998), it is still in its early stage of development and is not without problems. For instance, Porter (1991: 108) challenges that the RB reasoning is circular: 'Successful firms are successful because they have unique resources. They should nurture these resources to be successful.' A similar critic ism is also made by Mosakowski and McKelvey (1997). Nevertheless, as demonstrated in the following discussions, the RB perspective does offer significant insights with respect to explaining joint ventures.

The paper is organized as follows. To provide a backdrop for subsequent discussions, the next section describes the different concepts of the firm as seen through the TC and RB lenses. It is followed by a detailed comparison of the TC and RB explanations of joint ventures. Then an attempt is made to synthesize the two perspectives.

The Different Concepts of the Firm

Before discussing the TC and RB perspectives of joint venturing, it is useful to first examine the very different concepts of the firm portrayed by them. Insights obtained from this exercise would benefit our subsequent discussions. Table 1 highlights the main differences between the TC and RB concepts of the firm. Williamson (1975) assumes, for expositional convenience, that at the beginning, there were markets. The existence of the firm is explained by market failures. The firm is chosen as a governance structure when the costs of carrying out certain exchange transactions in the open market are greater than organizing these transactions within the firm. A key feature of the firm is its allocation of resources through authority relations rather than price mechanism (Coase 1937).

The approach of RB theory is very different. Penrose (1959) conceptualizes the firm as a collection of resources, each of which is a bundle of potential productive services, bounded together in an administrative framework. Barney (1991) groups firm resources into three categories, namely physical resources, human resources and organizational resources. The capability of a firm is defined as its capacity to perform an activity as a result of organizing and coordinating the productive services of a group of resources. Firm capability does not vest in any individual and belongs to a special category of organizational resources. Here the term 'capability' is used in a neutral sense; that is, a capability can be good or bad. If a firm possesses a certain capability which is better than those of its rivals, that capability becomes its competence. It should be noted that there is a considerable amount of terminological ambiguity in the RB literature. Theorists have used concepts such as resources, assets, competenci es, and capabilities in a rather liberal manner and sometimes, different meanings are attached to the same concept by different theorists. This terminological ambiguity partly stems from the fact that the RB view is far from a coherent perspective (Foss 1998).