Trading in Strategic Resources: Necessary Conditions, Transaction Cost Problems,

and Choice of Exchange Structure

Tailan Chi

Strategic Management Journal (1994)

by Eunkwang Seo

Session 2: Transaction Costs Theory

AGENDA

Research Questions

1) Under what conditions can strategic resources

be gainfully traded across firms?

2) What are the main difficulties of trading the

resources?

3) What mechanisms can be used to manage the

difficulties?

4) How does the adoption of the mechanisms

affect the features of

transaction modes?

1. TRADING IN STRATEGIC RESOURCES

Characteristics of Strategic Resources (1)

1) Imperfect Imitability Because of causal ambiguity – uncertainty about the causal

connection between managerial actions and economic results – strategic

resources cannot be perfectly imitable to other firms.

2) Imperfect Mobility Because of specificity – the conditions that a resource is specialized

to firm-specific needs so that it has less value to other firms than to its present

employer – strategic resources cannot be perfectly mobile to

other firms.

1. TRADING IN STRATEGIC RESOURCES

Characteristics of Strategic Resources (2)

3) Imperfect mobility ≠ Non-tradability Even strategic resources that cannot get away from its

present employer can be traded by purchasing its service

or transferring its skills and routines.

The concept of tradability is broader than the concept

of mobility in that it concerns the potential that a

possibly temporary use of the resource in conjunction

with resources that are not put under the control of the

firm can yield a higher return. However, potentially tradable resources will not

necessarily be traded.

Then, what are impediments to trading in strategic resources?

2. IMPEDIMENTS TO THE TRADE

Four Major Impediments (1) : Measurement

Problem

1) Causal ambiguity and adverse selection

Casual ambiguity involves information asymmetry

between the employing firm and potential acquirers

about the content and quality of the resource in question.

Such information asymmetry gives rise to the problem of

adverse selection, possibly causing market exchanges in

the resource to break down (Akerloff, 1970).

2) Tacitness and moral hazard Tacit knowledge is difficult to articulate and cannot be

fully coded in technical manuals. The extent of shirking is likely to rise as performance

measurement becomes more imperfect (Chi, 1991).

2. IMPEDIMENTS TO THE TRADE

Four Major Impediments (2) : Coordination

Failure

3) Resource interdependency and cheating

Uncoordinated use of the resource will reduce the total

amount of benefit derived from it.

Under imperfect price and behavioral constraints, there

are gains from cheating in contracting ex ante.

4) Resource interdependency and Holdup Coordination in ex ante non-contractible aspects requires

frequent joint decision making through negotiations

between the two parties. Under incomplete information about the other’s

negotiation strategies, contingencies, or preferences,

each firm has a strong incentive to do opportunistic

behaviors at the expense of the other.

Then, how do we manage the impediments?

3. MANAGING THE IMPEDIMENTS

Structural Remedies for Transaction Cost

Problems

4. MODE OF TRANSACTION

Transaction Costs and Transaction Modes

1) Acquisition The aim of acquisition is to effect the transfer of residual

claimancy and residual control over the resources from

their present employer to the acquirer. However, the acquirer may face difficulty in assessing the

value of the resources in the acquisition process and

encounter a degradation of performance of the acquired

personnel after the acquisition.Acquiring the entire firm Acquiring only part of it

Adverse Selection

Less severe if the equity of the target firm is traded in an efficient stock market.

More severe because a portion of the firm does not have stand-alone market value.

Moral Hazard

More severe as the portion of the target firm that does not exhibit much complementarity.

Less severe because any degradation of performance only affect part of the firm.

4. MODE OF TRANSACTION

Transaction Costs and Transaction Modes

2) Collaborative Venturing The alternative to acquisition is to purchase the service of

the resources from their present employer or replicate

them under its guidance. Although CV is also subject to both measurement

difficulties and coordination failure, it is typically more

efficient in resolving transaction cost problems than the

acquisition, because both firms involved in the exchange

can be apportioned some residual claimancy or residual

control in a CV. Therefore, a necessary condition for CVs to be the

optimal choice of transaction mode is the presence of

high transaction costs in trading the resources (Hennart,

1988, 1991; Shan, 1987, 1990).

4. MODE OF TRANSACTION

Transaction Costs and Transaction Modes

5. DISCUSSION

• Is Residual Claimancy and Effective Way of Minimize

Transaction Costs?

It has been suggested that executive stock option tends to

encourage risk-taking by the executives (Cohen, Hall, &

Viceira, 2000).

In this point of view, I am wondering whether giving some

residual claimancy to business partners is sufficient to control

the potential opportunistic behaviors of them.

Otherwise, how much portion of the residual claimancy

should be given to control the behavior effectively?