Summary – International Strategic Alliances #1 – Firm resources and Sustained Competitive Advantage Most research on sources of sustained competitive advantage has focused either on isolating a firm’s opportunities and threats, describing its strengths and weaknesses, or analyzing how these are matched to choose strategies, with little emphasis on the idiosyncratic firm attributes on a firm’s competitive position. These models have assumed that firms within an industry are identical in terms of the strategically relevant resources they control and the strategies they pursue and that heterogeneity will be very short lived because those resources are highly mobile. Under those assumptions, no firm can enjoy a sustained competitive advantage, there are no first-mover advantages, and there cannot be any entry/mobility barriers. This paper eliminates those assumptions and assumes heterogeneous firms within an industry and not perfectly mobile resources. Firm resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness. They can be classified into physical capital resources (physical technology, equipment, and access to raw materials), human capital resources (training, experience, etc. of individual workers), and organizational capital resources (formal reporting structure, planning, controlling systems). A firm is said to have a sustained competitive advantage when it is implementing a value strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy. To have the potential of a sustained competitive advantage, a firm resource must be - - Valuable: resources are valuable when they enable a firm to conceive of or implement strategies that improve its efficiency and effectiveness. Rare: resources must be rare among potential and current competitors. Imperfectly imitable: firms that do not possess these resources should not be able to obtain them. Firms resources can be imperfectly imitable based on unique historical conditions, causal ambiguity, or socially complex. Not substitutable: there must be not strategically equivalent valuable resources that are themselves either not rare or imitable, as a competitor may then be able to substitute a similar resources that enables it to conceive of and implement the same strategies. 2# - The Relational View: Cooperative Strategy and Sources of Interorganizational Competitive Advantages. A firm’s critical resources may extend beyond firm boundaries. Productivity gains in the value chain are possible when trading partners are willing to make relation-specific investments and combine resources in unique ways. This indicates that firms who combine resources in unique ways may realize an advantage over competing firms who are unable or unwilling to do so. Thus, idiosyncratic interfirm linkages may be a source of relational rents and competitive advantages. Arm’s length market relationships are incapable of generating relational rents because there is nothing idiosyncratic about the exchange relationship that enables the two parties to generate profits above and beyond what other seller-buyer combinations can generate. Competitive advantages of partnerships fall in the following categories - - - - Interfirm relation-specific assets: A firm may choose to seek advantages by creating assets that are specialized in conjunction with the assets of an alliance partners. Productivity gains in the value chain are possible when firms are willing to make relation/transaction-specific investments. There are three types of asset specificity, being site specificity (successive production stages are located close to one another), physical asset specificity (e.g., customized machinery), and human asset specificity (know-how accumulated by transactors through longstanding relationships. There are two subprocesses that influence the ability of partners to generate relational rents: the length of the governance arrangement designed to safeguard against opportunism, and the ability to substitute special-purpose assets for general purpose-assets, which depends on the total volume and breadth of transactions between the alliance partners.. Interfirm knowledge-sharing routines: alliance partners can generate rents by developing superior interfirm knowledge sharing routines, being regular patterns of interfirm interactions that permit the transfer, recombination, or creation of specialized knowledge (information, explicit & know-how, tacit). The ability to exploit outside resources of knowledge is a function of prior related knowledge or the absorptive capacity of the recipient of knowledge. Absorptive capacity is a function of the extent to which partners have developed overlapping knowledge bases and the extent to which partners have developed interaction routines that maximize the frequency and intensity of sociotechinal interactions. Finally, the greater the alignment of incentives b partners is to encourage transparency and reciprocity and to discourage free riding, the greater the potential will be to generate relational rents through knowledge sharing. Complementary resource endowments: Sometimes, a firm’s ability to generate rents may require that its resources are utilized in conjunction with the complementary resources of another firm. Conditions are that relevant resources must not be available in a secondary markets and are indivisible. The combination can be more valuable, rare, and difficult to imitate than before. A challenge is to find each other and recognize the potential value of combining resources. This depends on prior alliance experiences, internal search and evaluation capabilities, and the ability to acquire information. Effective governance mechanisms: An important objective for transactors is to choose a governance structure that minimizes transaction costs, thereby enhancing efficiency. There are two classes of governance: third-party enforcement of agreemenets (legal contrects) and self-enforcing agreements (formal safeguard (financial and investment hostages) and informal safeguard (goodwill trust and embeddedness)). Effective governance can generate relational rents by lowering transaction costs or providing incentives for value-creating initiatives. Transaction costs are lowever under self-enforincing agreements because contracting costs are avoided, monitoring costs are lower, costs associated with complex adaption are lower, and there are no recontracting costs. Finally, formal safeguards are much easier for competitors to imitate. However, they are subject to two key liabilities: they require substantial time to develop and are subject to the paradox of trust (provide opportunity to abuse other partner). A relational rents is defined as a supernormal profit jointly generated in an exchange relationship that cannot be generated by either firm in isolation and can only be created through the joint idiosyncratic contributions of the specific alliance partners. They are preserved as a result of causal ambiguity and time compression diseconomies, interorganizatonal asset interconnectedness, partner scarcity, resource indivisiliby, and a socially complex institutional environment. #3 – Economic perspectives Within the market-based view, a cooperative strategy may offer a mutually advantageous opportunity for collaborating firms to modify the position that they occupy within their industry and increase market power. Offensive coalitions are intended to develop firms’ competitive advantages and strengthen their position by diminishing other competitors’ market share. Defensive coalitions are intended to construct entry barriers in order to secure and stabilize a firms’ position. The marketbased view does not take trust into account and does not accommodate the way in which evolving relationships can alter the rationalities and strategic visions of policy makers. Porter’s value chain analysis may help a firm in identifying in which area it needs an ally. The perspective on strategic alliances offered by TCE views them as potentially cost-reducing methods of organizing international business transactions. Williamson identified five factors that are relevant for the choice between internalizing the governance of transactions within firms as opposed to market exchanges, being opportunism, bounded rationality, small numbers, uncertainty and complexity, and information impactedness. Under the last three factors, he argues that a firm should internalize the activity. One-off nonspecific, short-term transactions should be done in the market, whereas recurrent, uncertain, transaction with transaction-specific investments should be conducted within organizations (hierarchies). The concept of Agency theory argues that there may be differences between the two parties of a JV or any other cooperational form. Both parties should place a combination of incentives and monitoring techniques to ensure that an agent’s behavior remains consistent with the principal’s objectives. With regards to the RBV, alliances are considered to be critical sources of both strategic assets and of complementary resources for organizations. A firm may want to consider a JV or alliance in order to tap into the partner’s knowledge assets without committing to a single market price or buying the partner in whole or part. The transaction-value theory propose that the real issue is joint value maximization for the collaborative transaction. A cooperative venture should be allowed to bear higher transaction costs if these added expenditures increase revenues to a greater degree by creating a unique asset bundle. TCE would argue that investing in value-enhancing assets increases transaction costs. The transaction-value theory would argue these activities will increase the expected value of the relationship and will reduce the risk of opportunism. The real-options theory looks at the call options on the opportunity to invest in a foreign market. For a small charge, the company can buy the right to acquire part of the equity of a target company, without all too much risks. In equity JVs, the less familiar the acquirer is with the business or market of the target, the greater the uncertainty and the more difficult the job of assigning a meaningful value to the investment A JV, which is why a call option would be appropriate. The theory of increasing returns argues that companies with a high market share might be able to lock in their consumers and dominate the market, resulting in increasing returns on the long run. Forming alliances in order to create critical mass and dominate the market can lead to those increasing returns. #4 - Instabilities of Strategic Alliances; An Internal Tensions Perspective Internal tensions account for the inherent instabilities of strategic alliances. Alliance instabilities refer to major changes or dissolutions of alliances that are unplanned from the perspective of one or more partners. Previous explanations of alliance instabilities derive from TCE (opportunistic behavior), relational contracting theory (trust ensures smooth operations), game theory (payoffs are higher when cheating), the RBV (control and minimize dependence), shifting bargaining power, agency theory (agents pursue own goals and must be monitored), strategic behavior theory (unrealistic goal expectations and overlap of goals). There are three pairs of competing forces: - - - Cooperation vs. competition: Cooperation is the pursuit of mutual interests and common benefits in alliances, whereas competition is defined as pursuing one’s own interest at the expense of others. Both are required form a sustainable and successful alliance, since cooperation ensures a smooth working relationship and competition protects a partner from losing its FSAs through inattention. There must be balance between the two, since too much competition will result in dissolution and too much cooperation will lead to one partner having reached its learning goal and terminates or renegotiates the agreement. Rigidity vs. flexibility: Rigidity refers to the characteristics of mutual dependence and connectedness, whereas flexibility enhances the ability of partners to adapt, unencumbered by rigid arrangements. When flexibility is given too much emphasis, the alliance will tend to evolve into a new system that will require very little control, eventually weakening the bond between partners and making the alliance vulnerable. A system that is dominated by rigidity will restrain the partners from adapting to environmental changes. Short-term vs. long-term: short-term orientation views strategic alliances as transitional in nature, with a demand for quick and tangible results, whereas long- term orientation regards alliances as at least semi-permanent entities, so that more patience and commitment are exercised. Interfirm learning (long-term) tends to balance the needs for short-term orientation and long-term orientation, it stabilizes the alliance. A dominating short-term view will transform the alliance into a gold rush, whereas a dominating long-term view tends to ignore short-term, tangible performance. Cooperation Competition Rigidity Flexibility Short-term Long-term Emphasis on goodwill Opportunistic behavior Collective interest Zero-sum game Relationspecific investment Commitment to relationship Private benefits Adapt to changing conditions Potential to avoid risks (easy exit) Low involvement (limited resources) Exploitation (prompt results) No burden on partners Common benefits Cannot adapt to changing conditions Increasing incentives and commitment Aligning partner interest Learning opportunities (balances) Learning opportunities (balances) Smooth relationship Protects FSAs Deters opportunistic behavior Aligns incentives Shadow of the future effect (discourages opportunistic behavior) Characteristics of competing forces The first tension is behavioral, the second one structural, and the last one psychological. The levels of rigidity and cooperation will be positively related when the partners have a short-term orientation in strategic alliances, whereas at a high level of rigidity, cooperation and rigidity will be negatively related when the partners have a long-term orientation in strategic alliances. Hierarchies will be created when the alliances exhibit high cooperation with low competition (M&A), when rigidity sacrifices strategic flexibility, or when an alliance is dominated by a long-term orientation (neglect of short-term performance, or a change from short-term to long-term orientation). A movement towards the dominance of competition, flexibility, and a short-term orientation is likely to lead to dissolution of the alliance because these forces have a lot in common with market transactions. Competitive Cooperative Short-term Flexible Rigid Arm’s length Joint R&D contracts Joint Marketing Funded research Joint bidding Long-term Flexible Rigid Licensing JVS Joint Production Minor Equity Allia Dealership JVs Shared distribution Product bundling- Joint R&D Joint marketing Franchising Licensing Joint Production Long-term sourcing Minor Equity Allia Wholly own subs. Alliance Structures and Internal Tensions #5 - The Dynamics of learning Alliances: Competition, Cooperation, and Relative Scope. Learning alliances, associations in which the primary objective of the partners is to learn from each other, constitute an important class of interfirm alliances. Private and common benefits are those that accrue to individual firms within the alliance and collectively to all participants in the alliance. Private benefits are those that a firm can earn unilaterally by picking up skills from its partners and applying them to its own operations in areas unrelated to the alliance activities. Common benefits are those that accrue to each partner in an alliance from the collective application of the learning that both firms go through as a consequence of being part of the alliance; these are obtained from operations in areas of the firm that are unrelated to the alliance. The greater the overlap between alliance scope and firm scope, the higher are the common benefits and the lower are the private benefits. A higher ratio of private to common benefits leads to greater departures from cooperative and toward competitive behavior. The concept of the relative scope measures the extent to which activities in markets unrelated to the alliance are in proportion to all activities conducted by the firms. Different firms in the alliance and the same firm in different alliances have different relative scope values. The smaller the relative scope, the greater the ratio of private to common benefits. The extent to which markets are related to the scope of the alliance and the extent to which the firm has the skills to accomplish the transfer of learning together can be summarized in a transferability factor. A firm earns private benefits as soon as it has learned enough to apply this learning to its operations, whereas common benefits will only be available once both partners have learned enough to be able to creatively synthesize their knowledge bases. In alliances with only common benefits, resource allocation decisions are best made jointly and are fairly predictable(no budget -> stage allocation, fixed budget -> split resources). In an alliance with only private benefits, a learning race is expected. The firm that completes the first stage first will increase its allocation, while the rival will lower its allocation. If the lagging firm then finishes the first stage before the leading firm finishes the second stage, both firms alter their resource allocation to equal values. Key factors influencing the differences are the incentives to race, the appearance of asymmetries in incentives, and the additional source of uncertainty in the case of pure private benefits. The presence or absence of equity stakes between partners can alter private and common benefits in a variety of ways. Moreover, some critical amount of learning must transpire before benefits begin to accrue. Several scenarios appear. In case of the three-legged fallacy, the partners fail to recognize that they are in a learning race. In case of the reluctant loser, the lagging partner fails to reduce its allocation, even though the leader partner has increased its allocation and seems likely to secure its private benefits. Finally, the hesitant winner sketches a situation where the leading partner fails to capitalize on its learning advantage, even though the lagging partner has reduced its resource commitments. #6 - The Interorganizational Learning Dilemma: Collective Knowledge Development in Strategic Alliances The interorganizational learning dilemma is that being a good partner invites exploitation by partners attempting to maximize their individual appropriation of the joint learning, and such opportunistic learning strategies undercut the collective knowledge development in strategic alliances. The authors develop a framework for understanding the dilemma through consideration of tradeoffs between how collective learning is developed in alliances and how the joint learning outcomes are divided among the partners. Within the developed matrix, the joint outcome is maximized by two organization with collaborative strategies that enable high mutual transfer as well as high creation of knowledge. Combinations between compromise and collaboration strategies are expected to result in moderate levels of mutual transfer and creation of knowledge. Combinations involving one accommodating or competitive strategy are proposed to lead to asymmetric outcomes consisting of merely one-way transfer and appropriation of new knowledge. There are other factors that are likely to make the interorganizational dilemma a very real one. First, receptivity is constrained by the organization’s availability of organizational slack as well as its absorptive capacity. Moreover, receptivity is also limited by the strength of the intent to learn. Transparency might be more difficult than simply opening up; essential knowledge might be tacit and socially embedded in context-specific relationships. Organizational members are seldom rewarded or culturally motivated to have as much concern about another organization as for their own. Finally, power dynamics are very important, since beating a partner in the learning race if likely to lead to a change in bargaining power and the dimension of time should not be overlooked. Strategies: - Collaboration (highly receptive and highly transparent) Competition (highly receptive and nonstransparent) Compromise (moderately receptive and transparent) Accommodation (nonreceptive and highly transparent) Avoidance (neither transparent nor receptive) #7 – Between trust and control: developing confidence in partner cooperation in alliances Given that it is often impossible to identify who is likely to act opportunistically, the interesting question is what enables alliances partners to garner enough confidence in partner cooperation so that they are not overwhelmed by the potential hazards in alliances. Confidence in partner cooperation is defined as a firm’s perceived level of certainty that its partner firm will pursue mutually compatible interests in the alliances, rather than act opportunistically. This sense of confidence comes from the supplementing factors of trust an control. Partner cooperation is the willingness of a partner firm to pursue mutually compatible interests in the alliance rather than act opportunistically, with opportunism being defined as self-interest seeking with guile. Corporation may include two particular dimensions: veracity (being truthful) and commitment (making efforts). Control is a key source of confidence, as firms tend to be more confident about partner cooperation when they feel they have an adequate level of control over their partners. Whereas control mechanisms are the organizational arrangements designed to determine and influence what organization members will do, level of control is the direct outcome of the controlling process, being the degree to which one believes that proper behavior of the other party is ensured. Firms may want to use control mechanisms to either routinize their activities or to promote nonroutine activities, such as learning, risk taking, and innovation. Finally, partner control in alliances can be seen as a regulatory process by which the partner’s pursuit of mutually compatible interests is made more predictable. Trust is a second source of confidence. Organizations develop close bonds over time and form a positive attitude regarding each other’s reliability. The benefits of interfirm trust in strategic alliances seem wide ranging in character, including lowering transaction costs, inducing desirable behavior, reducing the extent of formal contracts, and facilitating dispute resolution. Trust relates to expectations about the motives of the trustee. Confidence, however, deals with the perceived level of certainty that the partner will behave in a desirable manner. Thus, the key difference s that whereas trust refers to expectations about positive motives, confidence refers to certainty about cooperative behaviors. Second, trust is a contributor to confidence. Trust itself it not a control mechanism, but is a substitute for hierarchical control in organization. A supplementary relationship seems to describe the dynamics realistically. The trust level and the control level jointly and independently contribute to the level of confidence in partner cooperation. Alliance Types Joint Ventures Minorty Eq. Alliances JV and partner Partner Hierarchical control Ownership control and ownership control Manifestation of trust Delegation and JV Using equity share a autonomy distribution over voting mechanism Requisite confidence High Moderate level Dimensions Object of control Type of control Nonequity Alliances Partner Contractual control Contractual flexibility Low Trust, control, and confidence in differen alliance types. Trust level High Low Control level High High confidence Joint ventures Moderate confidence Minority Eq. Alliances Low Moderate confidence Minority Eq. Alliances Low confidence Nonequity alliances Requisite Confidence Levels in Different Alliance Types Formal control and social control are different in that formal control is more of a strict evaluation of performance while social control is about dealing with people. Formal controls may create stress, thereby affecting mutual trust. Social control mechanisms are likely to enhance the level of trust among partners. In strategic alliances the trust level will exert a moderating effect in a manner so that control mechanisms will achieve a greater level of control in high-trust situations than in lowtrust situations. Finally, a high level of trust tends to encourage partners to tolerate short-term inequity or mutual forbearance. #8 - Effective interfirm collaboration: how firms minimize transaction costs and maximize transaction value A central premise of transaction cost theory is that transaction costs increase as transactors make greater asset-specific investments. The standard reasoning is that as asset specificity increases, more complex governance structures are required to eliminate or attenuate costly bargaing over profits from specialized assets. However, studies of dyer indicate that firms can simultaneously achieve the twin benefits of high asset specificity and low transaction costs. Transaction costs can be decomposed into four separate costs related to transacting, being search costs, contracting costs, monitoring costs, and enforcement costs. To protect against the hazards of opportunism, transactors may employ safeguard, being control mechanisms which have the objective of bringing about the perception of fairness or equity among transactors. Allthough contracts are viewed as the primary means for safeguarding transaction, alternative means in the form of self-enforcing agreements/private ordering/trusts are offered. These include informal safeguards (relational or goodwill trust, reputation) and formal safeguards (financial hostages, specialized investment hostages). Different safeguards are likely to have different set-up costs and result in different transaction costs over different time horizons. Even in situations in which the level of asset specificity is identical, the transaction costs may differ. Japanese transactions are characterized by higher asset specificity (in all three forms), but also have lower transaction costs. One can argue that the relationship between asset specificity and transaction costs will only hold if environmental and other factors are held constant. Furthermore, one can argue that Japanese transactors have simply chosen more efficient safeguards than US transactors, and thus minimized transaction costs by more effectively aligning transactions with governance structures. Finally, Japanese automakers have lower transaction costs than their US counterparts due to: - Repeated transaction with a small set of suppliers (increases costs of opportunism for the supplier and provides the opportunity to correct for transaction inequities) Economies of scale and scope in transacting with that small supplier group (high volume of exchange between transactors)(reduces costs of sharing information and bargaining costs) Extensive interfirm information sharing which reduces asymmetric information the use of noncontractual, self-enforcing safeguards which are effective for an indefinite time horizon. Investments in cospecialized assets. #9 – Relation-specific Capabilities and Barriers to Knowledge Transfers: creating advantage through network relationships. Interfirm knowledge-sharing routines are one of four possible sources of relational rents, which are superprofits generated in an exchange relationship that cannot be generated by either firm in isolation. An interfirm knowledge-sharing routine is a regular pattern of interfirm interactions that permits the transfer, recombination, or creation of specialized knowledge. Explicit (codifiable) knowledge is relatively easy to transfer with little cost, while tacit knowledge is more difficult and costly to transfer. A supplier’s newly acquired knowledge assets must be at least somewhat specific to the relationship (network). Major barriers to intra-frm transfer of knowledge include the lack of absorptive capacity on the part of the recipient, lack of credibility on the part of the source of knowledge, lack of motivation of the part of the source or recipient, arduous relationship between the source and recipient, and causal ambiguity. Finally, the context (environment) may also work as a barrier to replication. The difficulties of adopting a complete bundle of routines represent a key piece in the puzzle of why network resources are not easily imitated. This paper tests whether knowledge transfer to a supplier leads to higher productivity and higher quality. Both hypotheses are confirmed. In addition, it was shown that not only are suppliers better performing, the result is also sustainable. It can be concluded that networks are a critical unit of analysis for explaining firm performance, even when networks appear to be similar, firms can achieve competitive advantages by exploiting knowledge assets with a supplier network, and network constraints represent a potential barrier to knowledge transfer within firms, especially within a value chain producing a customized, complex product. #10 – The determinants of trust in supplier-automaker relationships in the U.S., Japan, and Korea Trust in supplier-buyer relations may be an important source of competitive advantage because it lowers transaction costs, facilitates investment in relation-specific assets, and leads to superior information sharing routines. A trustworthy partner is known to reliably make good faith efforts to behave in accordance prior commitments, makes adjustments in ways perceived as fair by the partner, and does not take excessive advantage of an exchange partner even when the opportunity is available. Thus, interfirm trust relies on reliability, fairness, and goodwill. Trust is produced through social relationships and embedded ties (relation-ship based trust (length & intensity)), institutionalized processes or routines for fairly and reliably dealing with a partner organization (process-based trust), or an alignment of economic incentives (hostage-based trust). Duration, intensity of interaction, repeated transactions, the provision of assistance, and ownership of supplier stock, all are argued to have a positive impact on trust. Supplier trust is higher in Japan than in Korea and the US, with also the highest length of relationship and more face-to-face contact (maybe due to proximity differences). There is only a significant relationship between length and trust in Japan. Intensity didn’t seem to matter anywhere. Repeated transactions and the provision of assistance (except for USA) had a significant positive effect on trust, whereas stock ownership was found not to have a significant impact. The different outcomes indicate that the institutional environment is of key importance in estimating the level of trust in a buyer-supplier relationship, even though it may be less important than firmlevel practices in influencing trust, since Japanese companies also build higher levels of trust in the USA. Although Japanese automakers get a return on their investment in the form of more efficient suppliers, they still must incur the expense of maintaining a large staff of qualified individuals to assist suppliers. The cost of maintain continuity includes the opportunity cost of not taking advantage of one’s suppliers and the loss of the opportunity to use lower cost suppliers if they came along. #11 – Determinants of trust in supplier relations: Evidence from the automotive industry in Japan and the US Trust is said to promote suppliers willingness to invest in customer specific and general assets and is defined as an expectation held b an agent that its trading partner will behave in mutually acceptable manners. There are three types of trust, being contractual trust (will the other party carry out its contractual agreements?), competence trust (is the other party capable of doing what is says it will do?) and goodwill trust (will the other party make an open-ended commitment to take initiatives for mutual benefit while refraining from unfair advantage taking? The higher the general level of trust, the less need there is for vertical integration. Trust may complement, rather than substitute for, hierarchy or market governance modes. Cooperation may emerge where no trust exists and cannot be equated with trust. Also, trust is a subjective state of mind and may not have a straightforward linear relationship to cooperation or trust as manifested in behavior. Suppliers’ trust and perception of customer opportunism are not affected by the degree to which they are vertically integrated by their consumer. Long-term contracts may reduce the expectation of opportunistic behavior, but may not necessarily enhance trust. The authors argue that contracts are a partial safeguard against opportunism only and are almost always incomplete due to uncertainty and complexity. Both previous transactions (untrue) and the expectation of future transaction have a positive effect on suppliers’ trust of its consumer. A two-way flow of information is essential for creating and sustaining trust. Information asymmetry resulting from one-way flow of information gives much scope for opportunistic behavior. A deliberate strategy of locking oneself into a relationship, thus raising switching costs, may facilitate the creation and maintenance of trust. (untrue) To the extent that the customer demonstrates knowledge and skills by providing technical assistance, it enhances supplier´s competence trust of the customer. However, technical assistance provides no protection against opportunism. The greater the degree of environmental uncertainty, the greater the benefit from being able to trust a trading partner, because trust facilitates decision making in unanticipated circumstances, though a distinction should be made between behavioural uncertainty, and environmental uncertainty. Environmental uncertainty predisposes agents to behave opportunistically when there are relationspecific investments. Finally, the level of trust is to a certain extent path-dependent, and depends on the institutions within a country. #12 – The governance of Global Value chains Two of the most important new features of the contemporary economy are the globalization of production and trade, which fueled the growth of industrial capabilities in a wide range of developing countries, and the vertical disintegration of transnational corporations, which are redefining their core competencies to focus on innovation and the highest value-added segments. TCE offers various reasons why firms internalize activities; the more customized the good, the more likely it is to involve transaction-specific investments and inter-firm relationships require greater coordination. This does not mean that this is always the case, as network actors in many instances control opportunism through the effects of repeat transactions, reputations, and social norms, which makes inter-firm trade viable. History, institutions, geographic and social contexts, the evolving rules of the game, and path dependence matter and many factors will influence how firms and groups of firms are linked in the global economy with regards to governance systems. Gereffi used the term ‘buyer-driven global commodity chain’ to denote how global buyers used explicit coordination to help create a highly competent supply-base upon which global scale production and distribution systems could be built without direct ownership. However, variety of network forms were not adequately specified. Recent work uncovered three types of supply relationships: the commodity supplier that provides standard products through arm’s length market relationship, the captive supplier that makes non-standard products using machinery dedicated to the buyer’s need, and the turn-key supplier that produces customized products for buyers and uses flexible machinery to pool capacity for different customer. Market-based relationships among firms and vertically integrated firms make up opposite end of a spectrum of explicit coordination and network relationships comprise and intermediate model of value chain governance. Five basic types of value chain governance are identified - Markets: Low switching costs, arm’s length relationships Modular value chains: typically, adjusted products based on turn-key services Relational value chain: mutual dependence and high asset specificity Captive value chains: small suppliers are dependent on large buyers, high switching costs, high degree of monitoring and control of lead firms. Hierarchy: vertical integration. Conditions that will lead to a certain typology concern the complexity of information and knowledge transfer required to sustain a particular transaction, particularly with respect to product and process specifications, the codifiability of information and therefore be transmitted efficiently without transaction-specific investments, and the capability of actual and potential suppliers. Governance type Complexity transactions Market Modular Relational Captive Hierarchy Low High High High High of Ability to codify Capabilities in the Degree of explicit transactions supply-base coordination and power asymmetry High High Low High High Low/Medium Low High Medium High Low Medium/High Low Low High Key determinants of global value chain governance Value chain governance patterns are not static or strictly associated with particular industries . The governance mode based on the three factors may chance as a result of new requirements to the supplier, the tension between codification and innovation, and chancing suppliers’ competences as a result of learning. Moreover, standards that enable the codification of product and process specifications are different across industries and are constantly evolving and the standards can become obsolete as technologies change. Mundane transactions costs are costs involved in coordinating activities along the value chain. #13 – Global sourcing: insights from the global clothing industry- the case of Zara, a fast fashion retailer Until recently, Zara, a major international clothing retailer and pioneer of ‘fast fashion’ principles, kept almost half of its production in Spain and Portugal, earning the reputation of being one of the exceptions to globalization. Since the 1980s, the existence of such exceptions has been fueling an expectation that the production of high-quality fashion garments and tailored suits would remain in the industrialized core. Here, the authors revisit this expectation in the light of the current seminal change in the culture of fashion from ready-to-wear to fast fashion, and report that the increased variety and fashionability associated with fast fashion have tilted the balance of competitive advantage towards, rather than away from, firms in partially industrialized countries. As a number of supplier firms in countries such as Morocco, India and Turkey have gained the competence to manufacture intricately worked high-quality garments with the required flexibility and speeds, Zara has turned to sourcing from these countries. It appears that instead of Zara changing the geography of jobs, the geography of competencies and jobs has changed Zara. #14 – Asymmetrical power relations and upgrading among suppliers of global clothing brands: Hugo Boss in Turkey Business ties between lead clothing firms and their suppliers are characterized by asymmetrical power relationships, which concerns the asymmetrical degree to which one party can influence the conduct of others. In the clothing industry, manufactures are motivated to upgrade within production but face discouragement when it comes to moving to the high end of the value chain (functional upgrading), as it has been viewed as encroaching on the core competence of the lead firms (brand bullies). Due to high entry barriers such as lavish marketing budgets, lead firms can protect their position However, there is an Anglo-American bias in those observations, there is no consensus on the influence of country-of-origin on firms’ behavior, and the emphasis on the buyer-drivenness of the clothing industry simplifies the richness and varying spectrum of intra-sectoral power relationships and interconnections between firms. Finally, asymmetrical power relationships are dynamic and fluid and are constantly constituted, transformed, and reproduced by firms with strategic intent. Relationships may change over time as a result of learning or innovation. Learning involves the accumulation and development of a basic knowledge or competence. A second factors concerns the long-term development of a capability for learning and continuous improvement – learning to learn. Learning is a reciprocal process and creates not only opportunities for upgrading among contract manufacturers as they learn from their lead firms, but also generates prospects for lead firms. A more important variant occurs when the motivation for learning for manufacturers ceases to be the sense of shared purpose with the lead firm and supplier firms start learning for themselves. #15 Managing indirect supplier relations – how firms implement sustainability in the extended supply chain. The extended supply chain refers to both the direct and indirect relations that a buying firm has with its suppliers for a given product.A buying firm should not only strive to implement sustainability practices (the consideration of social and environmental issues) at its direct suppliers, but also manage indirect buyer-supplier relations. This is a challenging task because of the lack of a direct business relationship, the huge amount of possible second tier suppliers, and oftentimes unknown second tier suppliers. An alternative to this direct form of involvement could be a mixed approach where few, core second-tier suppliers for critical parts are managed directly and the remaining ones will be managed indirectly through the first-tier supplier. Another option could be the cascading strategy, in which the buyer delegates and passes ideas and policies downwards to its supplier, who do the same in turn, which may lead to lower transaction costs for the focal firm (full delegation archetype). The second archetype, being the mixed delegation model, is characterized by delegation of sustainability implementation to the first-tier supplier, which is complemented by direct monitoring of second-tier suppliers through the buyer or a third party. Finally, in the zero delegation model, the buying firm takes full responsibility for monitoring sustainability compliance of its indirect tiers, leading to high transaction costs. #16 – A Configural Analysis of International Joint Ventures Both capital and non-capital investments can be made in a company, hereby increasing the dependence of the IJC and hence of the other company on the parent(s) that provide them. Equity share (capital investment) is a stronger predictor of strategic control than is non-capital investments, whereas non-capital investment (as it includes the appointment of key personnel as a control mechanism) is more predictive of control in the operational areas to which it is normally directed. Joint ventures having a dominant control by one partner will be more successful because they approximate to a unitary firm and are easier to manage. Moreover, dominant control offers an ability to determine the most effective use of whatever strategic resources that company shares with an IJV. Finally, the exercise by a parent company of control over some or all of an IJV’s activities helps to protect it from the risk of prematurely exposing its technological or other proprietary assets to other parents and the threat of an IJV partner gaining a future competitive advantage through a superior ability to learn from collaboration also increases the need to control activities and information flows in the IJV. However, a dominant control may damage a partner’s willingness to contribute to what it regards as an unequal partnership and may also limit the dominant partner’s receptivity to advice and information offered by the weaker partner. As such, IJVs with 50-50 ownership achieved superior goal and system performance. A sharing of control with local partners will lead to a greater contribution from them which can assist in coping with circumstances that are unfamiliar to the foreign partner, and therefore result in a higher return on investment. Chinese partners are thought to contribute too little, leading to a conclusion that foreign firms should take control of their IJVs, which is received with greater satisfaction for both parties in a Chinese-foreign alliance. Path analysis suggested that the higher the level of operational control a parent company exercises in the joint venture relative to its partner, the greater the extent to which that parent is perceived to be achieving its objectives. The configuration of ownership investment, control and performance among the IJVs suggest a degree of path dependence based on the three initial condition of degree of partner choice, partner investment capacity, and partner expectations. It was found that the primary configurational variables – equity share, non-capital investment or control – had any relationship to the economic performance of IJVs. However, IJVs with strong foreign ownership and control, a combination of strong resource support with sensitivity to local conditions will assist the achievement of good performance. With majority foreign equity investments, the configuration is denoted as a surrogate subsidiary, since the IJV is managed as if it was a subsidiary. The 50-50 approach is termed a balanced partnership, where the minority equity investment configuration is called a junior partner. It can be concluded that IJV performance derives from the combination of ownership, resourcing and management factors rather than ownership perse and is highly dependent on institutional differences. Finally, trust is found to always be an important requirement for good performance. #17 – Knowledge, Bargaining Power, and the instability of international Joint ventures The primary knowledge contribution of foreign partners generally involves technology, management expertise, and global support, whereas the local partner contributes some local knowledge. Factors causing instability (unplanned equity changes or major reorganizations) are changes in partner’s strategic missions, changes in importance of the JV to the parents, increases in the competitive rivalry between partners, the foreign investment climate of the host country, and the existence of prior relationships between the partners. The authors argue that the main factor contributing to instability, and a factor that can be controlled by firms in IJVs, is a shift in partner bargaining power associated with the acquisition of knowledge and skills that allows a firm to eliminate a partner dependency. A stable JV is one in which the partners believe the benefits to the relationship exceed the costs of termination. The bargaining power perspective states that the possession or control of key resources by one entity may make other organizations dependent on that entity. A firm that has the option to contribute or withhold important resources or inputs can use that option as leverage in bargaining with its partner. The acquisition of knowledge and skills can shift an IJV partner’s bargaining power and may enable the firm to eliminate its dependency on its partner. As the foreign partner’s local knowledge increases, he can covert alliances to subsidiaries or can choose to withdraw from the market. As the local partner’s knowledge increases, the JV may be dissolved since there is no more need to cooperate for at least one party. Valuation of knowledge involves two stages, the first being the research to which information you want to get access, and the second stage occurring when the partner has received the information and has to decide whether access is sufficient or the knowledge should be acquired. When a foreign partner has a strategic objective of acquisition and proprietary control over local knowledge, the speed of knowledge acquisition that is necessary to shift bargaining power will be influenced by two key factors: (a) the foreign partner’s effectiveness in acquiring local knowledge and (b) the initial resource contributions of the partners. The greater the individual or structural attachment between the IJV partners, the lower the likelihood of IJV instability and the lower the effect of shifts in bargaining power on the likelihood of IJV instability (dormant instability).Finally, changes in individual and structural attachment between IJV partners will lead to updating of the foreign partner’s valuation of local knowledge and the greater the number of foreign managers at the IJV, the greater the foreign partner’s access to local knowledge. #18 – After the Ink dries: the interaction of trust and control in US-based international joint ventures The purpose of control in IJVs is to attain predictability through some regulatory means. Such predictability promotes confidence that the other partner will behave in a way that is consistent with mutual benefits. Presuming both partners possess such confidence, they are much more likely to collaborate in governing their joint creation that will in turn improve IJV performance. Formal control mechanisms can be cybernetic (post-hoc mechanisms) or those aimed directly at protecting the assets of the partner firms. In contrast, social control mechanisms are designed to permit the evolution and inculcation of norms and values through structured personal interaction and training. Formal control mechanisms mitigate opportunism especially in younger IJVS, but have a negative impact on older IJVs. Social control mechanisms increase the potential for opportunistic behavior and should be supplemented by affect-based trust (which can be derived from earlier success). As such, the relationship between the use of social control mechanisms and IJV performance will be positive when affect-based trust is high and negative when affect-based trust is low. Both social controls and affect-based trust had a positive influence and formal controls and cultural distance has a negative influence. IJV age moderates the relationship between formal control and parents’ perceptions of IJV performance. #19 – Predicting the performance of international joint ventures: an investigation in china Learning, quality of resourcing, and control are potential ways of addressing the risks presented to IJVs by an emerging economy environment like China. There are two main perspectives on IJV performance. The first takes as its criterion the extent to which the goals expressed in the parent companies objectives for the venture are met. The second perspective takes as its criterion the health of the IJV in respect of its viability as an operation system. This study looks at three different sources of learning. First, learning from experience is a transfer to a new IJV of relevant knowledge acquired by parent company personnel from their previous experience of joint ventures and international business. Second, formation learning, takes places in the process of seeking and negotiating terms with new partners; the more extensive and thorough that process is, the greater the learning opportunity it provides. Third, operational learning, which is learning how to work effectively with one or more partners in the subsequent operation of an IJV. Quality of resourcing, based on the resource-based view, predict that the higher the quality of resources provided by foreign parent companies, the higher will be IJV performance. Moreover, IJVs which transact their inputs and outputs directly with their parent companies are expected to have higher levels of performance. If the quality of resourcing is poor, it seems to be more critical for the foreign partner to compensate for this through exercising a higher level of control. Strong management within an alliance has more benefits than strong management over an alliance. Moreover, foreign partner rights to key managerial appointments in joint ventures were associated with greater satisfaction JV performance among both foreign and Chinese managers. Firm-level variables are consequential for IJV performance and indicate the value of adopting a broad theoretical approach with respect to such variable. They uncover subtleties in the relationship between IJV control and performance and demonstrate the utility of distinguishing between goal and system perspectives on IJV performance. Finally, they suggest qualification to international business theory as applied to developing and transition economy contexts.