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

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

Other researchers use the TC logic to analyze joint ventures specifically. Kogut (1988: 320) argues that the 'situational characteristics best suited to a joint venture are high uncertainty over specifying and monitoring performance, in addition to a high degree of asset specificity' (emphasis in original). The high degree of asset specificity precludes arm's length market transactions. The high uncertainty over performance makes even a long-term contract difficult and costly to stipulate ex ante the complex conditions and contingencies for monitoring performance and guarding against opportunism. A joint venture addresses this issue by providing a superior alignment of incentives through the mutual dedication of resources and sharing the residual value of the venture. Hennart (1988) approaches the problem from a slightly different angle. He argues that a necessary condition for joint ventures to emerge is the presence of inefficiencies in markets for intermediate inputs, which include raw materials, component s, knowledge, and so on. There are complications in their pricing and transfer. Sales contracts of these inputs are bound to be incomplete and expose the parties concerned to opportunistic exploitation of the specific investments made. Joint ventures are an efficient means of internalizing these failing intermediate markets.

For joint ventures to remain an efficient option, effective safeguards against the risk of a partner's opportunistic behaviour need to exist. Using the TC paradigm to extend internalization theory, Beamish and Banks (1987) argue that in situations where a joint venture is established in a spirit of mutual trust and commitment to its long-term success, the potential threats posed by opportunism and a small-numbers condition can be reduced. This argument is similar to the theory of cooperation proposed by Buckley and Casson (1988). They discuss the various arrangements of a joint venture which may motivate the partners to practice mutual forbearance and thereby build up trust and reputation.

Kogut's (1988) and Hennart's (1988) explanations are related because it is likely that when the market for an intermediate input fails, monitoring the performance of the parties involved will also be difficult. For instance, when tacit knowledge is transferred from one firm to another, 'it is impossible for either party to know ex ante what the cost and the value of the transfer will be' (Hennart 1988: 366). In such a market failure situation, it is problematic to assess how far the seller has fully performed his duties. Similarly, the buyer may argue that the transfer process is ineffective and ask for more assistance from the seller than what is really needed. However, a question remains: Why not acquire the firm that owns the complementary assets, or develop the assets internally (i.e. the hierarchy alternative)? Both Hennart (1988) and Kogut (1988) reason that the answer lies in the costs of divesting or managing unrelated business activities or the higher costs of in-house development. Ramanathan et al. (1997) comment that TC theory does not systematically address the conditions which prohibit full internalization.