WHY FIRMS MAKE UNILATERAL INVESTMENTS SPECIFIC TO OTHER FIRMSKang, Mahoney and Tan (2009)

Presented by Yifan for BADM549 (FALL 2012)

IntroductionExamines why and under what conditions firms will make unilateral relationship-specific investments to their transaction partners

Goes beyond transaction cost economics (TCE)TCE does not consider the possibility that transactions may interdependent and have positive spillover effects (learning and capability development)

Unilateral relationship-specific investments as value-maximizing strategy (Zajac and Olson, 1993)*

Unilateral relationship-specific investment in TCEContractual hazards arise from unilateral investments specific to transaction parties:Prescription: not to take such investment unless sufficient economic safeguards have been put in place

Safeguard: secure a mutual sunk-cost commitment or mutual hostage

In practice, however, powerless firms are willing to accept the hazards as they have no other available choices (resource-dependency theory by Pfeffer and Salancik, 1978)*

Unilateral relationship-specific investments in OEMFocus of interdependent transactions

Such investments are to capture potential positive economic spillovers generated from previous contracts

2 positive spillovers: inter-project spillovers with the same transaction partner, inter-project spillovers with the other transaction partners

Taiwan OEM suppliers

The worlds largest supplier of manufacturing electronic components, PCs and devices to high-profile firms (Dell, Apple, Sony, etc.)

Place much of the value on the positive spillovers the current transactions may yield from future transactions with the same or other OEM buyers

*

HypothesesH1: The greater the economic value of inter-project knowledge spillover effects with particular client, the more likely OEM supplier will make unilateral relationship-specific investments

H2: the greater the economic value of inter-project knowledge spillover effects with other clients, the more likely OEM suppliers will make unilateral relationship-specific investments

H3: the greater the economic value of reputation spillover effects with other clients, the more likely OEM suppliers will make unilateral relationship-specific investments*

MethodsSurvey of 82 suppliers in IT industry (response rate 17.5%)

Interviews of 41 suppliers in bicycle industry (41/45)

Dependent variable: relationship-specific investment 7 indicators using Likert seven-point scale, in which 4 for tangible investment and 3 for intangible investment

Independent variablesKnowledge spillovers: multiple projects, integrated services, capability upgradingReputation spillovers

*

Methods*

Results*

DiscussionCausalityone-time data setWhich (DV or IVs) comes first?

Internal validity: single source for data on relationship-specific relationships

External validity: only a sample of Taiwan OEM suppliers

Does not examine the economic effect of the spillovers on OEM buyers*

*