WHY FIRMS MAKE UNILATERAL INVESTMENTS SPECIFIC TO OTHER

WHY FIRMS MAKE UNILATERAL INVESTMENTS SPECIFIC TO OTHER FIRMS Kang, Mahoney and Tan (2009) Presented by Yifan for BADM 549 (FALL 2012)

2 Introduction • Examines 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)

3 Unilateral relationship-specific investment in TCE • Contractual 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)

4 Unilateral relationship-specific investments in OEM • Focus 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 world’s 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

5 Hypotheses • H 1: 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 • H 2: 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 • H 3: the greater the economic value of reputation spillover effects with other clients, the more likely OEM suppliers will make unilateral relationship-specific investments

6 Methods • Survey 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 variables • Knowledge spillovers: multiple projects, integrated services, capability upgrading • Reputation spillovers

7 Methods

8 Results

9 Discussion • Causality • one-time data set • Which (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