STRATEGIC RENTS AND TRANSACTION COSTS
IN THE THEORY OF THE FIRM
Josef Windsperger
Center for Business Studies
University of Vienna
Brünner Str. 72
A-1210 Vienna
Austria
Tel.: 00431-4277-38180
Fax: 00431-4277-38174
E-mail: josef.windsperger@univie.ac.at
Vienna, October 2003
Abstract:
The objective of this paper is first to explain the existence of the firm as knowledgecreating institution by developing a strategic efficiency criterion. Starting from Connor
and Prahalad’s view, we critically comment on the resource-based theory of the firm
and show that a strategic efficiency criterion is missing in the previous literature.
Second, we show that the existence of the firm as a knowledge-creating and knowledgeexploiting governance structure can be only explained by combining transaction cost
and resource-based reasoning because rent-yielding resources and capabilities are
closely intertwined with asset specifity and transaction costs. Finally, we argue that
‘economizing is more fundamental than strategizing’ (Williamson) because the
transaction cost theory of the firm can be established in a zero strategic rent world, but a
strategic theory cannot be formulated in a zero transaction cost world.
Key-words: Transaction Cost, Rents, Strategic Theory, Resource-based Theory.
STRATEGIC RENTS AND TRANSACTION COSTS IN THE THEORY
OF THE FIRM
1. Introduction
During the last decade the theory of the firm has made important progress. On the one
hand, contractual approaches of the firm have reached a new stage of development
through the new property rights theory (Grossmann and Hart 1986, Hart and Moore
1990, Hart 1995). In addition, the application of the transaction cost theory was very
successful in economics, law, organization and marketing (Rindfleisch and Heide 1997,
Anderson 1996, Macher and Boerner 2001). On the other hand, an alternative paradigm
has been evolving since the 1980-ies - the strategic theory of the firm (Wernerfelt 1984,
Rumelt 1984, Connor 1991, Barney 1991, Mahoney and Pandian 1992, Grant 1996,
Kogut and Zander 1996, Teece et al. 1997, Barney et al. 2001, Priem and Butler 2001,
Nickerson and Zenger 2001). Based on Penrose's resource-based theory (Penrose 1959)
and Porter's activity-based approach (Porter 1980, 1985), the strategic theory of the firm
investigates the influence of the market structure and internal resources and capabilities
on the firm strategy and organization. Hence it tries to explain the efficient strategystructure relationship. However, previous literature in the strategic theory of the firm
has not incorporated a strategic efficiency criterion to evaluate the competitive
advantage of organizational modes. Strategic efficiency refers to the realization of
sustainable competitive advantages as strategic rents of the firm. Depending on the
origin of competitive advantage, different strategic rents can be realized. If the
competitive advantage primarily results from monopolistic advantages, as argued by
Porter (1980, 1985), the strategic choice depends on the generation of monopolistic
rents. If the competitive advantage is primarily based on knowledge advantages due to
1
specific resources, capabilities and competencies, Ricardian and Schumpeterian rents
can be realized (Peteraf 1993, Winter 1987).
Starting from Wernerfelt (1984), Winter (1987) and Barney (1991), Kogut and Zander
(1992, 1996) as well as Connor and Prahalad (1996) presented a resource-based view of
the firm. The firm is less a contractual network economising on transaction costs but
more a rent-yielding bundle of resources and capabilities. They differentiate their
approach from the transaction cost theory by emphazising that knowledge-based
advantages do not require the assumption of opportunism to explain the existence of the
firm. As Kogot and Zander formulated, firms exist because of their „higher order
organizing principles“ (1992, p. 384). Under the resource-based view this means that
knowledge-based competitive advantages can be more easily created when specific and
tacit resources are internally combined to build up organizational capabilities and core
competencies (Grant 1991, 1996). This view is also compatible with Nickerson and
Zenger’s knowledge-based theory of governance choice. Nickerson and Zenger (2001)
developed a theory of alignment that predicts under which problem-solving conditions
market supplants hierarchy as knowledge formation mechanism. Their theory can be
summarized by the following proposition: The governance mechanism as knowledge
formation mechanism depends on the complexity and decomposability of problems. The
more complex and non-decomposable the organizational problems, the higher is the
tendency toward hierarchy as consensus-based system. On the other hand, Nickerson
and Zenger’s theory does not include a knowledge-based efficiency criterion for the
governance choice. To summarize the previous literature we may conclude, that the
main difficulty of the existing resource-based theories lies in the missing efficiency
2
criterion to evaluate the governance mode as knowledge creation mechanism. Starting
from this gap in the literature, the primary objective of our paper is to develop a
strategic efficiency criterion and to use this concept to explain the existence of the firm
as knowledge-creating institution. Furthermore, we develop an integrative view of the
firm and show that the existence of the firm as knowledge-creating and knowledge
exploiting mechanism is inseparably intertwined with strategic rents and transaction
costs. This simultaneity issue has not been featured in previous resource-based theories
of the firm, except Madhok’s discussion of the alignment hypothesis (Madhok 2002).
The paper is organized as follows: Section two criticizes Connor and Prahalad's
resource-based view of the firm and develops a resource-based theory of the firm by
incorporating strategic rents as efficiency criterion to evaluate the governance modes. In
section three we show that the transaction cost theory of the firm can be constructed
without assuming that the transactors have heterogeneous resources and capabilities.
Section four presents an integrative approach by combining the transaction cost and
resource-based view. Finally, we argue that a strategic theory of the firm cannot be
formulated without transaction costs, but a transaction cost theory of the firm can be
established in a zero strategic rent world.
2. Resource-based Theory of the Firm
2. 1. Connor and Prahalad's View
Connor and Prahalad’s theory (Connor and Prahalad 1996) is the most sophisticated
version of the resource-based theory developed in the last years. In the following, we
3
summarize and criticize their view. Their resource-based approach of the firm is based
on the knowledge substitution and flexibility effect of the organizational mode:
(a) Knowledge substitution effect: If Y (as supplier) and Z (as final goods
producer) have certain resources and capabilities, both have two possibilities to
influence the other‘s actions: Firm organization and market contracting. The knowledge
substitution effect exists when one party (in Connor and Prahalad’s case Z) directs the
action of the other party (Y). Hence it refers to the hierarchical mode of coordination.
Under this mode, Z can require Y to act according to Z’s judgement. This effect results
in a
competitive advantage if Z has a specific knowledge base that cannot be
internalized by market contracts. In this case, internal organization better enables
knowledge creation without full knowledge absorption. This is compatible with
Demsetz' view that „[d]irection substitutes for education“ (1991, p. 172). The greater
the initial difference in knowledge due to higher skills and capabilities, the larger the
knowledge substitution effect.
(b) Flexibility effect: „The flexibility effect accounts for the relative cost, under
the two organizational modes, of altering the parties’duties and responsibilities on an
ongoing basis, in order to incorporate learning or unexpected opportunities...“ (Connor
and Prahalad, p. 486). Hence it refers to the dynamic capabilities of the firm. The more
dynamic and competitive the environment, the more often changes in skills, duties and
responsibilities are required favouring the firm organization, because under market
contracting it will be difficult to provide for unanticipated acquisition of new
knowledge. However, the flexibility advantage of firm organization only exists if it is
assumed that Z has higher learning or knowledge-upgrading capabilities than Y. This
4
flexibility effect is compatible with Langlois’s concept of dynamic transaction costs as
learning costs (Langlois 1992).
Which resource-based predictions can be derived from Connor and Prahalad's
approach? According to Connor and Prahalad, the firm existence is more likely, the
higher the knowledge substitution and flexibility advantages are. Consequently, the firm
will arise as knowledge-creating institution if the net value of the knowledge
substitution and flexibility is higher than under market contracting. Connor and
Prahalad’s approach can be criticized as follows:
First, the main critics refers to the missing knowledge-based (resource-based)
efficiency criterion: They compare the organizational modes according to the
knowledge substitution and flexibility effects without explicitly incorporating a
strategic efficiency criterion. Oliver Williamson (1999) also criticized this point, but he
does not propose a solution. Hodgson proposes a dynamic efficiency criterion for the
resource- or competence-based theories. Dynamic efficiency refers to „learning and
innovations“ (Hodgson 1998, p. 188). This is an important starting point to distinguish
transaction cost and resource-based approaches. However, Hodgson does not
operationalize this efficiency concept.
Second, as already criticized by Foss (1996), Connor and Prahalad assume that
the knowledge substitution and flexibility effects are primarily realized under firm
organization. This need not be the case. For instance, as shown by Argyres (1996),
market contracting may result in strategic advantages if the supplier has higher
organizational capabilities.
5
Third, Connor and Prahalad present a comparison of the resource-based theory
with the transaction cost approach as the opportunism-dependent approach (Connor and
Prahalad, p. 489). The problem of this comparison is that they do not specify the
conditions under which the predictions are possible. The restriction of the transaction
cost theory to the opportunism-based view as a reference theory cannot be justified,
because transaction cost theory is more than the opportunism-based view. This
comparison neglects the information processing view of the firm as an important
component of transaction cost theory because – as already argued by Coase 1937,
McManus 1972, and Casson 1994 – bounded rationality is sufficient to move from
market to hierarchy due to information cost savings. In a world of bounded
rationality/zero opportunism the firm exists as an information processing mechanism
due to high market coordination costs. The extent of information processing advantage
of the firm depends on the degree of environmental uncertainty. If high environmental
uncertainty exists, frequently new information arises resulting in high search,
bargaining and adjustment costs under market contracting. In this case, the firm
organization may lower the coordination costs by installing a higher information
processing capacity.
2.2. A Resource-based Approach of the Firm
Starting from the Connor and Prahalad’s approach we develop a resource-based theory
of the firm by incorporating strategic rents as efficiency criterion to evaluate the
organization modes. As discussed in section 3.1., Connor and Prahalad developed a
knowledge-based approach for the existence of the firm. They argue that the firm’s
existence can be explained on the basis of the transactor’s knowledge advantages
6
resulting from firm-specific resources and dynamic capabilities. The first refers to the
knowledge substitution effect and the latter to the flexibility effect under changing
environmental conditions. In the following, we argue that knowledge substitution and
flexibility effects are only relevant for a resource based theory of the firm, when they
are closely related to the rent-generating potential of organizational mode.
As argued by Barney (1991), Amit and Schoemaker (1993) and Alvarez and Busenitz
(2001), the firm's resources, capabilities and competencies (as strategic assets) may
generate a sustainable competitive advantage if
rarity, imperfect imitability and
nonsubstitutability exist. Under this resource-based view of the firm, strategic rents
(including Ricardian and Schumpeterian rents) are the efficiency criteria to evaluate the
firm’s competitive advantage. Ricardian rents result from knowledge advantage due to
differences in existing firm-specific resources and "static capabilities" (Fujimoto 1998,
p. 17), and Schumpeterian rents result from knowledge creation due to differences in
dynamic or innovation capabilities (Teece et al. 1997, Penrose 1959, p. 85). This
organizational learning refers to the knowledge-leveraging capabilities to strengthen the
firm’s competitive advantage in the future. This concept of strategic rents is also
compatible with Putterman’s “information rents” (1995, p. 379), but Putterman does not
differentiate between rents due to static and dynamic capabilities.
In the following, we show that the resource-based theory explains the firm as
knowledge-creating institution due to its higher strategic efficiency, compared to market
contracting. We differentiate between two strategic criteria: Ricardian rents (RR) due to
static resource advantages and Schumpeterian rents (SR) due to dynamic capabilities
7
(innovation capabilities) advantages. The results of the comparison of the rentgenerating effect of the firm organization and market contracting are summarized in
figure 1. Based on Connor and Prahalad’s analysis, we use Y as supplier and Z as buyer
(final goods producer) and investigate the strategic efficiency of the organizational
modes from Z’s point of view. We differentiate four cases:
Insert Figure 1
(1) The firm organization results from Z’s static resource advantages and Z's
more efficient organizational learning due to its higher innovation capabilities.
Thus Z can realize both higher Ricardian and Schumpeterian rents by internal
bundling of resources and capabilities.
(2) In this situation, the firm organization arises if Z's Schumpeterian rents due
to its higher innovation capabilities are not compensated by Z's static resource
disadvantage.
(3) The firm organization will arise if Z's Ricardian rents due to its static
resource advantages exceed the lower Schumpeterian rents (higher learning
costs) due to Z's lower innovation or dynamic capabilities compared to Y.
(4) Market contracting is more efficient from Z’s strategic point of view,
because Z can leverage its
resources and capabilities by acquiring and
exploiting Y’s static resource and innovation capabilities advantage.
Consequently, the firm will arise as a knowledge-creating institution (Nonaka et al.
2000), if the sum of Ricardian and Schumpeterian rents from internal bundling of
resources and capabilities are higher than under market contracting. Therefore, a
8
resource-based explanation of the existence of the firm is only possible if the rentyielding potential of resources under internal organization is higher than under market
contracting. The resource-based theory can be summarized by the following
proposition:
The firm organization (F) as a knowledge creating institution is more efficient
than market contracting (M), if the knowledge-based rents (Ricardian and
Schumpeterian rents) under internal organization exceed the rents under market
contracting (RF – RM > 0).
3. A Transaction Cost View of the Firm
Compared with the resource-based theory, the transaction costs approach does not
require heterogeneous resources and capabilities of the transactors to explain the firm’s
existence and organization (Barney and Hesterley 1996). Under given transactionspecifity and frequency, environmental uncertainty and opportunism influence the
organizational mode (Williamson 1975, 1985). Transaction costs, due to environmental
uncertainty, are coordination costs consisting of search, information processing and
adjustment costs, and transaction costs, due to opportunism (behavioral uncertainty), are
motivation costs resulting from adverse selection, moral hazard and hold-up. Based on
transaction costs as coordination efficiency criterion, we show that transaction costs
differences can explain the firm as knowledge-exploiting institution, due to its
information processing and incentive effects, without recourse to heterogeneous
resources and capabilities.
9
We differentiate between two transaction cost criteria: Coordination and motivation
costs According to the transaction cost theory (Williamson 1975), coordination cost
savings of the firm organization are higher, the higher the uncertainty is. The results of
the comparision are summarized in figure 2.
Insert Figure 2
(1) Under low environmental uncertainty, market contracting results in low transaction
costs because Z already has the relevant knowledge to conclude a relatively
complete contract.
(2) Under high environmental uncertainty, high market coordination costs as search,
information processing and adjustment costs arise because market contracts must be
frequently adjusted to new information. On the other hand, Y does not behave
opportunistically and is willing to adjust its plans to new relevant knowledge.
Consequently, under internal organization Z can realize coordination cost
advantages, if the savings of market transaction cost exceed the higher setup-costs
of internal organization structure.
(3) Under low environmental uncertainty and opportunism, market contracting results
in relatively low coordination and motivation costs. Although Z behaves
opportunistically, moral hazard, adverse selection and hold-up behavior can be
easily detected in this situation. Thus Z may realize coordination and motivation
cost advantages under market contracting.
(4) Under high environmental uncertainty and opportunism, the firm organization will
arise as a knowledge-exploiting institution. High uncertainty results in information
asymmetry between Y and Z, hence in high market transaction costs. In addition,
10
high environmental uncertainty increases Y‘s tendency toward opportunistic
behavior and hence Z‘s motivation costs, because information selection and
manipulation cannot be easily detected.
Consequently, in a world of bounded rationality and opportunism the firm existence can
be explained by transaction cost differences without recourse to heterogenous resources
and capabilities of the transactors. The transaction cost view of the existence of the firm
can be summarized by the following proposition:
The firm organization as a coordination mechanism (knowledge-exploiting
institution) is more efficient than market contracting, if the transaction costs
under market contracting exceeds the transaction costs under internal
organization.
4. An Integrative View
Finally, we show that the existence of the firm as institutional entity requires an
integrative view of the firm by combining the resource-based and the transaction cost
theory, because transaction costs incurred in the exchange of resources are not
independent of the rent-generating effects of resources and capabilities (Madhok and
Talmann 1998, p. 327). Hence the question to ask is, which relationship exists between
transaction costs and strategic rents?
4.1. Asset Specifity, Transaction Costs and Rents
The mediating factor between transaction costs and rents is asset specifity. Asset
specifity is an important theoretical concept both in the resource-based and in the
transaction cost theory. But many authors do not differentiate between firm specifity, on
11
the one hand, and transaction specifity, on the other hand. In order to be able to explain
the relationship between transaction costs and strategic rents, we have to distinguish the
two forms of asset specifity:
(I) Transaction-specifity: The concept of transaction-specifity is based on the
transaction cost theory developed by Klein et al. (1978) and Williamson (1979). An
asset is transaction-specific when it realizes a quasi rent (QR), which refers to the higher
value of the transaction compared to the best alternative. Two cases can be
distinguished (Anderson and Weitz 1992, Buvik and John 2000, Wathne and Heide
2000): (a) Asymmetric specific investments: If the transaction-specific investments of
the supplier are high and of the buyer are low, the opportunism risk is high because the
buyer may appropriate the supplier's quasi-rents under unilateral dependency. (b)
Symmetric specific investments: When both partners invest into relationship-specific
assets, bilateral dependency mitigates the opportunism risk because both can realize
high quasi-rents. Consequently, the following propositions between transactionspecifity and transaction costs can be derived: If asymmetric specific investments exist,
the quasi-rents of the more dependent party are exposed to the hold-up risk by the less
dependent party, hence transaction costs rise with transaction-specifity (e.g., Anderson
1988). If symmetric specific investments exist, both parties can realize high quasi rents
under the current relationship, hence transaction costs decline with transaction-specifity
due to the incentive effect of bilateral dependency (e.g., Dyer 1997).
(II) Firm-specifity: The concept of firm-specifity is based on the resource-based
view of the firm (Wernerfelt 1984, Barney 1991, Connor 1991, Amit and Schoemaker
1993). Strategic assets as resources, capabilities and competencies are firm-specific
because they are difficult to transfer and imitate due to high transaction costs.
12
Consequently, sustainability of competitive advantage is closely intertwined with high
transaction costs.
Now we can answer the question regarding the relationship between asset specifity,
transaction costs and strategic rents. Two cases can be distinguished:
If the assets of one party (buyer) are firm-specific and generate strategic rents (R) but do
not require transaction-specific investments of the other party (supplier), high
transaction costs may arise due to the hold-up behavior of the less dependent party. On
the other hand, if the buyer‘s assets are firm-specific and require transaction-specific
investments of the supplier, high relationship-specific rents arise under "idiosyncratic
investments" (Jap 1999, p. 471, Bensaou, Anderson 1999). In this case, the buyer
realizes high strategic rents (R) due to its firm-specific resources and capabilities, and
the supplier realizes high quasi-rents (QR) due to the transaction-specifity of its
investments. For instance, as argued by Asanuma 1989, Dyer and Singh 1998, Kalwani
and Narayandas 1995, Nishiguchi and Brookfield 1995 and Helper and Sako 1995, the
close relationship between Japanese automobile suppliers and producers is characterized
by high relationship-specific assets that result from the dynamics of firm-specific and
transaction-specific investments. The change of assets specifity during the relationship
life-cycle can be explained as follows (Asanuma 1989, Jap and Ganesan 2000, Dyer et
al. 1998) (see figure 3): We assume that the producer (buyer) realizes a competitive
advantage (strategic rents) due to its capabilities in the design and production of
automobiles. These firm-specific assets require transaction-specific investments by the
supplier (1). Over time these transaction-specific investments trigger a capabilityupgrading and knowledge leverage effect for the supplier (2). Conversely, the high firm-
13
specifity of the supplier's resources and capabilities results in transaction-specific
investments by the producer (3) which may lead to a knowledge leverage effect for the
producer (4) and hence to an increase in strategic rents (as Schumpeterian rents).
Insert Figure 3
Consequently, strategic rents and transaction costs are closely intertwined with asset
specifity. In order to explain the existence of the firm as knowledge creating and
knowledge exploiting institution the transaction cost and resource-based theory have to
be combined. The results of the theory development are depicted in figure 4; thereby we
assume a medium degree of environmental uncertainty. We differentiate four cases:
Insert Figure 4
(1) The buyer’s (Z’s) high rent-yielding resources and innovation capabilities show a
high degree of firm-specifity. In addition, the probability of opportunistic behavior
is high if the supplier (Y) has not to undertake transaction-specific investments
resulting in high hold-up risks for Z. Therefore, both resource-based and transaction
cost predictions lead to internal organization by Z.
(2) Z has no competitive advantage in resources and capabilities implying a low degree
of firm-specifity. On the other hand, transaction costs are high under a high
probability of opportunistic behavior. This can be only the case, if one agent (Z or
Y) has to undertake high transaction-specific investments resulting in high hold-up
risks under unilateral dependency. Firm organization is more efficient than market
14
contracting, because it can more easily process the relevant information and it may
mitigate the opportunism risk by creating incentive and control devices.
(3) Z‘s rent yielding knowledge-based advantages are high due to the firm-specific
resources and capabilities. On the other hand, market transaction costs are low under
a low probability of opportunistic behavior. This can be the case if a high degree of
bilateral dependency exists, due to high transaction-specific investments by Y.
Hence Z’s firm-specific assets are complemented by Y‘s transaction-specific
investments. Under this bilateral dependency, market contracting results in low
transaction costs. Consequently, the resource-based and transaction cost theories
lead to different predictions. The firm organization will arise if the higher rentyielding potential of internal knowledge creation exceeds the transaction cost
savings of market contracting.
(4) The firm organization cannot realize rent-yielding resource and innovation
capabilities advantages. Hence no knowledge leverage effect exists. In addition,
transaction costs under market contracting are low because Z and Y undertake low
transaction-specific investments. Consequently, market contracting is more efficient
than firm organization under the transaction cost view.
As a result, the existence of the firm as a knowledge-creating and knowledge–exploiting
institution can be explained by combining the transaction cost and resource-based
reasoning, because the rent-yielding resources and capabilities are inseparately
intertwined with high transaction costs. Under these conditions, the knowledge- or rentgenerating organizational mode cannot be separated from the transaction cost
15
minimizing organizational mode. The existence of the firm as a knowledge-creating and
knowledge-exploiting institution can be summarized by the following proposition:
The firm organization (F) is more efficient than market contracting (M), if the
rent-yielding potential of internal bundling of resources and capabilities exceeds
the transaction costs disadvantages, or the transaction cost savings of the firm
organization exceed the rent-yielding advantage of market organization (RF –
RM > TCF – TCM or TCM – TCF > RM – RF).
4.2. Existence of the Firm and Primacy of the Transaction Cost Explanation
Finally, we argue that “economizing is more fundamental than strategizing”
(Williamson 1994, p. 362) to explain the existence of the firm as governance
mechanism. Although the resource-based theory does not depend on the existence of
opportunism, the existence of the firm as a knowledge-creating (or rent-generating)
institution requires positive transaction costs. This is compatible with the view of
Mahoney (2001) and Foss (2001, 2002) that market frictions (transaction costs) explain
sustainable firm-level rents, because transaction costs make the transfer and imitation of
resources and capabilities more difficult. A similar view was already presented by
Lippman and Rumelt (1982) and Reed and DeFillippi (1990). They suggest that
uncertainty and ambiguity regarding which factors are responsible for performance
differences between competitors explain the existence of rents. Conversely, if
transaction costs are zero, the firm resources are mobile and easily imitable and do not
generate sustainable strategic rents. On the other hand, a zero strategic rent world is
compatible with a positive transaction cost world. If no strategic rents are generated,
due to homogeneous resources and capabilities, the existence of the firm can be only
16
explained by transaction cost differences. As argued in section 4, transaction cost
differences result from transaction specifity, transaction frequency, as well as
environmental and behavioral uncertainty consequences under firm
and market
organization. Therefore we may conclude: Contrary to Mahoney’s view (2001, p. 655),
market frictions (transaction costs) that explain the existence of the firm as knowledgeexploiting institution (in transaction cost theory) are not always sufficient isolating
mechanisms that explain sustainable strategic rents (in resource-based theory). Only
when market frictions exist due to firm-specific resources and capabilities, the market
frictions are sufficient to explain sustainable strategic rents. From this reasoning we can
derive the primacy of transaction cost explanation: If strategic rents are zero, the firm
only exists as coordination or knowledge-exploiting governance structure. But if
transaction costs are zero, the firm exists neither as knowledge-exploiting nor as
knowledge creating-governance structure.
5. Conclusion
The paper focuses on the role strategic rents and transaction costs in the theory of the
firm. Resources, capabilities and competencies are the building blocks of a strategic
theory of the firm. According to Barney, they generate competitive advantage when
rarity, imperfect imitability, and nonsubstitutability exist. Based on this view, Connor
and Prahalad developed a resource-based theory of the firm by trying to show that the
firm can realize a competitive advantage by internal bundling of resources and
capabilities. Starting from Connor and Prahalad‘ s view, we developed a resource-based
theory by explicitly incorporating a strategic efficiency criterion. Strategic efficiency is
operationalized by the concept of strategic rents, consisting of Ricardian and
Schumpeterian rents. Ricardian rents result from static resource advantages and
17
Schumpeterian rents from innovation or dynamic capability advantages. Only if the
organization of resources and capabilities influence strategic rents, rents can serve as
efficiency criterion in a resource-based theory of the firm. We have shown that the firm
as a knowledge-creating institution may arise, if strategic rents under internal
organization exceed the rents under market contracting. However, to explain the firm as
a knowledge-creating and knowledge-exploiting institution the transaction cost and
resource-based views must be integrated because strategic rents as resource-based
advantages are closely related to transaction costs. Finally we argued that a primacy of
transaction cost explanation exists. A transaction cost theory of the firm can be
formulated in a zero strategic rent world, but a strategic theory of the firm organization
cannot be established in a zero transaction cost world.
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Ricardian Rents (RR)
Resource Advantage
Resource Disadvantage
Innovation Capabilities
Advantage
(2a) FIRM:
(SR + RR > 0)
(2b) MARKET:
(SR + RR < 0)
Innovation Capabilities
Disadvantage
Schumpterian Rents (SR)
(1) FIRM:
(SR + RR > 0)
(3a) FIRM:
(RR + SR > 0)
(3b) MARKET:
(RR + SR < 0)
(4) MARKET:
(RR + SR < 0)
RR > 0/SR > 0: Compared to market contracting, the firm organization can
realize higher Ricardian/Schumpeterian rents due to its resource advantages or
higher innovation or learning capabilities.
SR < 0/RR < 0: Compared to market contracting, the firm organization
realizes lower Ricardian/Schumpeterian rents because the firm has resource or
innovation capability disadvantages.
Figure 1: Resource-based Theory
23
Coordination Costs (CC)
Low Environmental
Uncertainty
Opportunism
Motivation Costs (MC)
No Opportunism
(1) MARKET:
(CC > 0)
(3) MARKET:
(CC + MC > 0)
High Environmental
Uncertainty
(2a) FIRM
(CC < 0)
(2b) MARKET:
(CC > 0)
(4) FIRM:
(CC + MC < 0)
CC > 0/MC >0: Market Contracting results in
coordination/motivation cost savings.
CC < 0/MC < 0: Firm organization results in
coordination/motivation costs savings.
Figure 2: Transaction Cost-View of the Firm
24
Producer’s Capabilities
(Firm-specific Assets)
(1)
(4)
Supplier’s Transaction-specific Investments
(2)
Supplier’s Capability-upgrading (Knowledge-leveraging)
(Firm-specific Investments)
(3)
Producer’s Transaction-specific Investments
Figure 3: The Dynamics of Asset Specifity
25
Strategic Rents (R)
YES
High Probability of Opportunistic
Behavior
Low Probability of
Opportunistic Behavior
Transaction Costs (TC)
(1) RB+: FIRM
(R > 0)
OB: FIRM
(TC < 0)
(3) RB: FIRM:
(R > 0)
OB: MARKET:
(TC > 0)
NO
(2) RB: FIRM or
MARKET
(R = 0)
OB: FIRM
(TC < 0)
(4) RB: FIRM or
MARKET:
(R = 0)
OB: MARKET:
(TC > 0)
+: RB refers to the resource-based view and OB to the transaction cost view.
R > 0: The firm can capture higher strategic rents (Ricardian and/or
Schumpeterian Rents) under internal organization, compared to market
contracting.
TC < (>) 0: The firm organization (market contracting) results in transaction
cost savings.
Figure 4: An Integrative View
26