姝 Academy of Management Review
2006, Vol. 31, No. 3, 738–751.
CONSTRUCTIVE PARTNERSHIPS: WHEN
ALLIANCES BETWEEN PRIVATE FIRMS AND
PUBLIC ACTORS CAN ENABLE CREATIVE
STRATEGIES
SUBRAMANIAN RANGAN
RAMINA SAMII
LUK N. VAN WASSENHOVE
INSEAD
Drawing on transaction cost economics and externalities theory, we argue that privatepublic partnerships will be necessary when economic opportunity realization (1) calls
for industry-specific competencies but entails significant positive externalities (i.e.,
implies specialized private actions with significant public benefits), (2) is shrouded by
high uncertainty for the private actors, and (3) necessitates for private actors high
governance costs for contracting, coordinating, and enforcing. Thus, specialized resources, positive externalities, uncertainty, and governance costs are all jointly implicated in our theory.
other drug companies and employers like Anglo
American and De Beers) and public actors (such
as national governments in Africa and specialized United Nations agencies). “We need to
build up the level of resources through a larger
coalition” (Gilmartin, quoted in Lamont, 2002: 6).
The hope appears to be that a constructive partnership—an alliance between private and public actors—will enable creative and effective responses to tackle the economic and social crisis
being wrought in Africa by AIDS.
While one can understand the CEO of a major
pharmaceutical company speaking about AIDS,
it is less easy to comprehend the call for a larger
coalition, especially one including public actors. After all, drug firms don’t call for such coalitions to sell headache remedies in Africa.
Why this organization? As Williamson (1991) argues, the optimality of organization is often better understood through comparative analysis. In
this illustration the question then is why is
Merck not going it alone, or with a multiparty
alliance among private firms? Alternatively,
why is the Botswana government not going it
alone (as it might in the case of primary health
or child vaccination programs)? Why a privatepublic partnership in this instance?
More generally, under what circumstances—
that is, when—will only such constructive partnerships be effective and efficient? Why, in
those circumstances, won’t conventional ar-
Ronald Coase (1937), in his article “The Nature
of the Firm,” introduced the notion of firm as a
governance mode rather than a production function. Williamson (1975, 1985, 1991), building on
Coase (1937), Stigler (1951), Richardson (1972),
and others, specified the conditions under which
transactions are carried out within markets,
firms, and alliances. Transaction cost theory
and institutional theory (Powell, 1990) have
made important contributions to our understanding of organization. However, the alternatives they contemplate don’t say much about the
contribution of public actors to private economic
activity. Yet there are situations where pockets
of private economic opportunity cannot be realized effectively and efficiently without the operative participation of public actors.
Consider the following illustration of “uncommon associations” being called for to foster “creative strategies.” Speaking in Botswana on the
massive and urgent challenge of HIV/AIDS in
Africa (and, implicitly, on the legitimacy of the
pharmaceutical industry that has, relatedly,
been called into question), Ray Gilmartin,
former CEO of Merck, called for a “constructive
partnership” among private actors (including
We thank Thomas D’Aunno, Antonio Fatas, Javier Gimeno, William Lazonick, Mary O’Sullivan, Peter Ring, Timothy
Van Zandt, guest editor Arvind Parkhe, and the anonymous
reviewers for helpful comments on this research.
738
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Rangan, Samii, and Van Wassenhove
rangements (viz. markets, interfirm alliances, internalization, or nationalization) work as well?
That is, why can’t firms or public actors go it
alone? Last, when, in these cases, can the public
actor be a government, and when does a multilateral organization have to be involved? These
are the questions we address in this paper.
In brief, drawing on transaction cost economics and the theory of externalities, we argue that
when the realization of economic opportunity (1)
calls for industry-specific competencies but entails significant positive externalities (i.e., implies specialized private actions with significant public benefits), (2) is shrouded by high
uncertainty for the private actors, and (3) necessitates for private actors high governance costs
for contracting, coordinating, and enforcing,
then private-public alliances— constructive
partnerships—will be necessary for realizing
the economic potential. Thus, specialized resources, positive externalities, uncertainty, and
governance costs are all jointly implicated in
our proposed theory.
Before proceeding, we should point out that
our arguments are strictly economic in orientation. While we acknowledge that principles of
justice and liberty (as indicated in Bryson &
Ring, 1990) are important, our focus here is on
efficiency and effectiveness. Likewise, politics,
power, and institutionalism—in their own right
important explanations of organization (see
Moe, 1990; Myer & Rowan, 1977; Perrow, 1981)—
are set aside in this initial theorizing. In turn, we
cannot and do not claim to explain all reality,
which, after all, is frequently shaped by politics
and history. Still, in a world in which actors are
becoming less buffered from “selection pressures,” the economic approach can be a powerful starting point.
We organize the remainder of our article as
follows. In the next section, drawing primarily
on transaction cost economics, we review base
concepts and traditional modes of organizational exchange. In the section after that, we widen
the analysis and draw on the theory of externalities to bring in public actors. We delineate the
general circumstances in which private-public
partnerships will be optimal. Subsequently, we
discuss when and why multilateral organizations (rather than just governments) might participate in constructive partnerships. We then
instantiate our theory with real-world illustrations drawn from a variety of settings. We con-
739
clude with a summary and a discussion of implications for future research.
CORE AND COMPLEMENTARY VALUES:
RESOURCES AND GOVERNANCE
Every economic transaction involves a dyad
composed, on the one hand, of resources and, on
the other, of governance. Resources refer to the
core values (viz. investment, know-how, time,
materials, etc.) that are the objects of the exchange, while governance refers to the complementary values (viz. the ex ante searching, negotiating, and contracting and the ex post
coordinating, monitoring, and enforcing) that
are necessary to enable and ensure satisfactory
exchange.
It is generally accepted that markets economize on resource costs, while firms economize
on governance costs (Coase, 1937; Hayek, 1945;
Williamson, 1975). Networks, the focus of this
special topic forum, are viewed as hybrids that
are adopted in circumstances in which markets
or firms alone are unsatisfactory (see Richardson, 1972, for an early treatise on the topic). Because we use this conventional wisdom as a
point of departure, in the paragraphs below we
review its basic form and substance.
Resources—that is, the objects of exchange—
are seldom costless. Unit resource costs tend to
be (1) positive, (2) not constant or bounded, and
(3) varying across actors. Some actors, by virtue
of scale, experience, and expertise, can deliver
given resources at lower unit costs than others
who are not so specialized. We can therefore
expect actor capabilities to affect resource costs.
In particular, if resources required are industry
specific, then industry-specific actors can be expected to have lower resource costs than other
actors. Resource costs can also vary across circumstances. In circumstances where volumes
are sufficiently sizable and stable or growing,
unit resource costs might, by virtue of scale
economies, be expected to be lower. Thus, actor
capabilities, a factor on the supply side, and
volumes, a factor on the demand side, can both
influence unit resource costs.
Governance, the enabler of the exchange, is
typically not costless either. Both ex ante and ex
post governance costs also vary across circumstances and actors (see Parkhe, 1993). In circumstances where resources are made specific (to
exchange partners, industry, or location), gover-
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nance costs are expected to be higher. In circumstances where there is high and uninsurable
uncertainty on volumes (and, hence, prices),
governance costs (especially related to renegotiation) can be expected to be higher. Likewise,
governance costs can be expected to be high
when high and uninsurable uncertainty is perceived in the future behavior of transaction partners (regarding their explicit and implicit obligations in the transaction). A corollary is that as
the number of actors involved rises, governance
costs can be expected to rise as well.
It is also well established that the nature and
identity of actors can influence governance
costs. Actors can vary in their knowledge of and
connectedness to other actors. Thus, actor position and status can influence governance costs.
Certain actors can weaken partners’ legitimacy
or block their access to scarce resources. Such
actors can be expected to face lower governance
costs. Actors can also be from the same or different industries. Governance costs can be expected to be higher if collaborating actors are
from different industries. Last but not least, actors can vary in their authority and credibility.
Lower governance costs, especially in terms of
July
monitoring and enforcing, attach to actors endowed with greater authority and credibility.
TRADITIONAL EXCHANGE MODES
Juxtaposing (1) resource losses to a focal actor
from adopting a “make” option and (2) governance losses to the same focal actor from adopting a “buy” option, we can depict, as in Figure 1,
the three traditional exchange modes that have
been widely discussed in the existing literature
(e.g., Williamson, 1991). To be clear, our purpose
here is not to develop logic but simply to categorize the known exchange modes.
Thus, when the governance losses of buying
are not high but the resource losses of making
exceed the governance losses of buying, then
markets are expected to hold sway. Indeed, the
area in Figure 1 allocated to markets is consistent with the view that they economize on resource costs. Further, when the resource losses
of making are not high but the governance
losses of buying exceed the resource losses of
making, then firms are expected to hold sway.
Thus, the area in Figure 1 allocated to firms is
consistent with the view that they economize on
governance costs. Last, when the resource
FIGURE 1
Relative Resource and Governance Losses to a Focal Actor
and Expected Transaction Governance Mode
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Rangan, Samii, and Van Wassenhove
losses of making and the governance losses of
buying are both perceived to be high, then alliances (hybrids) are expected to hold sway. Thus,
the area in Figure 1 allocated to alliances is
consistent with the view that they are a compromise indicated when the resource losses of making and governance costs of buying are both
high.
PUBLIC ACTORS AND PUBLIC BENEFITS
As important and useful as the traditional organizational apparatus is, it does not help address the issues we raised at the beginning of
the paper. Indeed, there is no mention of public
actors, and, further, there is no mention of nationalization, which, after all, has been and still
remains a widely used organizational arrangement in certain spheres of the economy (e.g.,
general postal services).
To see when nationalization might emerge as
an organizational arrangement, it is necessary
to lift certain assumptions that are implicit in
the preceding analysis. First, although not
stated explicitly, it is assumed that the benefits
generated by transactions in Figure 1 accrue
mainly to the parties bearing the resource and
governance costs in the transaction. This, of
course, is not always the case. Certain private
transactions bring benefits to third parties that
are not directly (or immediately) part of the
transaction. These transactions, in economic terminology, have positive externalities—that is, the
potential to create significant “public benefits.”1
When this is the case, a wedge can exist between
the amount of private benefit that accrues to the
cost-bearing actors and the public (or total social)
benefits that accrue to all actors affected.
Now it is well known that because of individual rationality (oriented toward maximum private benefits at minimum private costs) and the
nontrivial governance costs of collective action
(i.e., fair allocation of costs over all potential
beneficiaries and enforcement of sanctions
against free riders), public “goods” tend to be
underprovided (and public “bads” tend to be
overprovided2). After all, private actors will tend
to be reluctant to participate in economic trans-
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actions in which expected public benefits far
exceed expected private benefits, especially if
the latter are not expected to exceed private costs.
Two things now become clear. First, the traditional apparatus focuses on resources and governance costs but does not explicitly discuss
benefits. It is driven, therefore, by a logic of
minimization (an apparent feature of Williamsonian transaction cost theory critiqued in Ghoshal
and Moran [1996]). Second, the traditional apparatus does not address public benefits from private transactions—that is, it does not address
positive externalities. As noted, public benefits
are the benefits accruing to all private actors from
the (costly) actions of some private actors. Taking
these factors into account allows us to consider
wider economic organization.
Accordingly, in Figure 2 we introduce public
actors and public benefits into the analysis. (For
simplicity, we discuss only governments and
multilateral organizations as public actors.) Like
private actors, public actors, too, have limited
resources and varying levels of capability and
credibility. They differ, however, from private
actors in two important ways. First, they differ in
terms of objectives. While private actors strive
to maximize private benefits (indicated, say, as
firm-level economic profits and long-term independent survival), public actors strive to
maximize public benefits (indicated, say, as region-level GDP per capita and sustainable development) for their constituents.
Second, public actors tend to possess greater
authority and legitimacy. Authority inheres in
public actors, especially governments, because
they have a monopoly on rule making, its application, and enforcement (see Moe, 1990, and
Zerbe & McCurdy, 1999). Public actor legitimacy
can be controversial; still, especially for multilateral organizations, it tends to be higher than
that of private actors because objectives are explicitly public spirited rather than private. To be
clear, the pursuit of private benefits (selfinterest) is legitimate, yet, as a generalization,
the pursuit of public benefits (other interest) enjoys prima facie greater legitimacy. This greater
legitimacy translates into greater credibility,
because professed motives are not only well
regarded but are also more accepted as true ones.
1
Coarsely, in utility terms, if U2(A2, A1) is an increasing
function of A1, then A1 has positive externalities.
2
Overproduction of public “bads” imposes negative externalities (recall “the tragedy of the commons”), which, typ-
ically, are the object of regulation—a topic beyond the scope
of this paper.
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FIGURE 2
Expected Actors and Transaction Modes Based on Public Versus Private Benefits, Relative
Resource Costs, and Private Actors’ Uncertainty and Governance Costs
Returning to Figure 2, the vertical axis of the
main framework on the left contrasts public and
private benefits for a given transaction (or set of
transactions). The horizontal axis of the same
framework contrasts public versus private actor
resource costs pertaining to the same transaction (or set of transactions). As we suggest in
that framework, when (1) public actor resource
costs are higher than those for private actors
(i.e., private actors are more efficient), and (2)
public benefits do not much exceed private actor
benefits (i.e., the public-private wedge is small),
then private actors will undertake transactions
they regard as beneficial (and will do so within
one or another of the three traditional modes
sketched in Figure 1). We therefore allocate the
south-southeast area of the main framework in
Figure 2 to private actors (i.e., markets, firms,
and interfirm alliances).
However, when (1) public benefits significantly exceed private benefits (whatever the
reason), and (2) public actor resource costs are
not relatively higher (and perhaps are even
lower) than private actor costs (i.e., public actors
are not less efficient), then public actors will
themselves undertake transactions they regard as
beneficial (and will tend to do so via nationaliza-
tion or its equivalents). We therefore allocate the
west-northwest area of the main framework in
Figure 2 to public actors (and nationalization).
As before, a third area remains in the figure.
When (1) public benefits significantly exceed
private actor benefits (i.e., the public-private
wedge is large), but (2) public actor resource
costs in the activities contemplated are far
higher than private actor costs (i.e., private actors are more efficient), then there is scope for
collaboration between private and public actors. Public actors will want to get involved because of positive externalities (and the large
public benefits), but they will be loath to go it
alone, because the effectiveness and efficiency
implications indicate otherwise. Private actors
will be reluctant, by themselves, to undertake
transactions in this northeast quadrant, because
while they might have resource (i.e., cost) advantages, they do not have the governance advantages required to close the public-private
wedge and reap adequately positive net benefits. They will therefore be hard pressed to justify to their stakeholders the allocation of (presumably scarce) private resources to the
creation of (dubious) benefits that are not fully,
or, worse, sufficiently, privately appropriable.
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Rangan, Samii, and Van Wassenhove
It is in this northeast quadrant of the main
framework in Figure 2 that we can expect to see
constructive partnerships—that is, active alliances between private and public actors. Here,
right away, we must make two important clarifications. First, for the same transaction, the parameter values of public and private benefits
can and do vary across place and time. The
valid calculus depends on the presence,
breadth, and quality of the ambient institutions
of governance—including norms and laws on
private property, courts, enforcement units such
as the police, and, not least, markets—as perceived by the private actors contemplating the
focal transaction. In a place or time where ambient institutions of governance are not well developed, private appropriability will be perceived as low and the public-private wedge will,
in general, be perceived as large. Of course,
even in contexts where ambient institutions of
governance are well developed, there will be
certain transactions for which private appropriability is still perceived as low and the publicprivate wedge as unacceptably large. In sum, to
be explicit, assessments of the parameter values on the vertical axis in Figure 2 depend not
only on the transaction but, importantly, on the
ambient institutions of governance.3 In turn, this
means that the full and meaningful unit of analysis for the question at hand is transaction, as
well as place and time.
The second clarification involves immediately
acknowledging that the private-public collaboration indicated in the northeast area in Figure
2 can and often does take place in “contract”
mode. In this mode, government (the public actor) simply contracts with private actors to undertake, in return for financial consideration,
certain transactions. Today, transactions such
as waste collection, highway construction, and
design and assembly of defense aircraft tend, in
many places, to be undertaken in this mode.
Here, the public actor uses its delegated authority and solves the collective action problem on
the demand side (by, for instance, taxing citizens) and at the transaction level presents the
private actor an acceptably low level of uncertainty regarding private net benefits (see Forster, 1999). Alternatively, if uncertainty still ex-
3
For pointing out this “nested logic,” we thank an anonymous reviewer.
743
ists, it must be the case that private actor
governance costs are sufficiently low to contract, monitor, renegotiate, and enforce obligations according to the circumstances that actually exist. That is, if private actors have efficient
access to effective mechanisms to deal with uncertainty (e.g., access to courts and court enforceable government contracts with, say, satisfactory cancellation clauses), then the contract
mode of private-public collaboration will tend to
prevail, even under uncertainty.
It is when private actors perceive high uncertainty in terms of their expected net benefits and
when they perceive high governance costs of
contracting, coordinating, renegotiating, and
enforcing (to mitigate or react to the uncertainty)
that constructive partnerships will be necessary. Private actors will be willing to contribute
their specialized resources to transactions that
generate positive externalities (i.e., public benefits), but their participation will be conditioned
on the satisfactory externalization of governance. Here, multiple actors on the demand and
supply sides might need to be coordinated, and
contracts might be perceived as impractical and
offering limited relief. (Recall the HIV/AIDS effort in Botswana.)
Public actors come in because they are
uniquely placed to take on the governance (coordination and enforcement) function.4 As reasoned above, public actors are endowed asymmetrically with more authority and legitimacy,
both of which are key currencies for efficient
and effective governance. Accordingly, if suitable public actors exist, and if they are persuaded to step in to supply satisfactory external
governance, then the economic (and social) opportunity can be realized. The satisfactoriness of
external governance will be indicated in the extent to which it lowers private actors’ uncertainty
in terms of expected net benefits accruing to them.
These, then, are the circumstances in which
constructive partnerships will be necessary. We
4
Notice, today, at least in economically developed nations, that public actors don’t tend to have factories (i.e., they
are not much engaged in transforming inputs into outputs);
they are staffed largely with planners, program managers,
and administrators (i.e., bureaucrats and technocrats). A notable exception is governments’ direct involvement in science, especially basic and future science. It would appear
that the fact that science can contribute to public benefit, but
is often not commercially exploitable, has something to do
with this pattern.
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Academy of Management Review
portray this last set of arguments by telescoping
out the northeast quadrant of the main framework in Figure 2 and delineating there the contract and constructive partnership modes.
To recap, public actors enter the transaction
because of significant positive externalities
(public benefits to constituents). They do not go
it alone because of resource cost disadvantages
(which hurt efficiency and effectiveness). Private
actors possessing specialized resources enter
the transaction to reap positive private net benefits (profits and long-term independent survival). They do not go it alone because of uncertainty and governance cost disadvantages
(which cast doubts on value creation and appropriation). Of course, all this holds only where
suitable private and public actors exist. Assuming this, and based on the preceding, we offer
the following.
Proposition 1: When the realization of
economic opportunity (1) calls for industry-specific competencies but entails significant positive externalities
(i.e., implies specialized private actions with significant public benefits),
(2) is shrouded by high uncertainty for
the private actors, and (3) necessitates
for private actors high governance
costs for contracting, coordinating,
and enforcing, then private-public alliances— constructive partnerships—
will be necessary for realizing the economic potential.
GOVERNMENTS AND MULTILATERAL
ORGANIZATIONS
Having specified when private-public alliances— constructive partnerships—will be necessary, we turn now to the question of when the
public actor in the partnership might be a (local
or national) government and when the public
actor might be a multilateral organization.
In general, private-public alliances are likely
to involve governments. Governments are, as
noted above, uniquely endowed with authority.
Moreover, government actors in economically
advanced nations are perceived by private actors as generally capable and credible partners
in private-public alliances. In the United States,
for instance, the National Institutes of Health is
a major sponsor and overseer of basic and “orphan drug” research (both activities with uncer-
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tain private payoffs), often conducted in conjunction with and within private drug companies. In
general, then, constructive partnership involves
private firms and government actors.
Although governments are endowed with exceptional authority, scholars have highlighted
the political nature of their actions (Moe, 1990;
Spiller, 1999). We identify at least two other factors beyond political motives (and unethical diversion of resources) that can undermine the
effectiveness of governments as partners in the
provision of public benefits. First, a government
may not be a viable partner owing to the absence of adequate human, financial, and institutional capability. Second, it may lack credibility because of an unsatisfactory history of
achievements, relationships, and behavior. Lack
of credibility can prevent it from being regarded
as a viable partner, because governance effectiveness of public actors is a function of their
perceived credibility (see Delmas & Heiman, 2001).
When private actors perceive the capability or
credibility of potential public partners as inadequate, they will tend to shy away from the
economic opportunity (see Parkhe, 1993). It is in
these situations that multilateral organizations,
where suitable ones exist, can be optimally involved. A multilateral organization is a not-forprofit economic, judiciary, social, or cultural organization with a specific or broad mandate
that transcends national and firm boundaries,
authority, and interests. Created, governed, and
funded by its member states, it has no legal
claim to ownership of the goods and services it
creates or strengthens. Yet multilateral organizations (such as the United Nations Development Program, the World Health Organization,
and the International Monetary Fund) often possess greater organizational capabilities and
credibility than many governments (especially
in the developing world). Thus, in a recent commentary, Jeffrey Sachs (2002) argued that specialized United Nations agencies have more organizational expertise and hands-on experience
than many organizations worldwide, including
bilateral donor agencies. Importantly, he notes,
they have a wide operational presence that enables them to organize and oversee activities
even in the most difficult settings.
The role of the multilateral organization in a
constructive partnership may be as varied as
the catalyst, coordinator, administrator, and
moral watchdog. As a catalyst, it brings together
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Rangan, Samii, and Van Wassenhove
actors for the achievement of a common goal.
Through a negotiation process, it coordinates
the establishment of a framework for cooperative relations and the initiative (roles and responsibilities of individual economic and political partners, nature of the problem to be
addressed, modalities, etc.). Incurring high sunk
costs, it pulls together all the necessary resources (financial, human, and technical) and
accepts accountability for their utilization. It can
relieve the actors from the administrative and
implementation burden as it takes on responsibility for the delivery of the deliverables. As a moral
watchdog, it acts as an acceptable intermediary
between the market, government, and the corporate world. It tries to ensure the accomplishment of
system goals (through a process of goals and expectations management and harmonization).
Proposition 2: When a constructive
partnership is indicated in the context
of an economic opportunity, but local
or national governments are not perceived by the relevant private actors
to possess adequate capability or
credibility, then the participation of a
suitable multilateral organization will
be necessary for realizing the economic potential.
Before turning to real-world illustrations to
instantiate the theory we have outlined, we
would like to make two further points. First, beyond a very general mention of profits and longterm independent survival, we have offered no
discussion of specific “reasons” for the participation of firms in private-public partnerships. In
particular, some observers have rightly pointed
out that, in some of these cases (as in the Merck
example mentioned earlier), private actors
might be maneuvering for legitimacy. This is
valid, but legitimacy enhances long-term survival, which is the broader end under which we
subsume this specific reason. More important,
reasons (such as legitimacy) are distinct from
“circumstances,” and scrutinizing reasons
rather than circumstances does not help us discriminate among organizational forms. There
are, after all, many organizational forms
through which private actors might obtain legitimacy (see Meyer & Rowan, 1977), but there is a
specific set of circumstances in which privatepublic partnerships are optimal and, hence, can
be expected. This is why we focus on circum-
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stances rather than reasons. (For a useful categorization of reasons that motivate interorganizational relationships, see Oliver [1990]).
Second, we have said little about negative
externalities. Consider the improper disposal of
industrial waste, or the corrupt business practices of some firms. Such actions of some private
actors bring public disbenefits. As a generalization, however, negative externalities tend not be
addressed via private-public partnerships;
rather, like other “bads,” they tend to be the
object of regulation. There is a public disbenefit,
and, hence, a public actor, typically a government, is involved, but specialized resources are
not usually called for, so the matter is handled
largely by public actors. However, consistent
with what we argued above, we would venture
that in the cases where the containment of negative externalities calls for industry-specific
competencies (e.g., optimal regulation of business practices—related to security, privacy, and
content— on the internet [see Baird, 2002]), public
actors will engage with private actors in preregulatory consultation and exchange.
REAL-WORLD EXAMPLES
In the paragraphs below, we briefly discuss
several real-world examples drawn from a variety of settings and position them within the
framework of Figure 2. To be clear, our purpose
here is instantiation, not substantiation.
Consider first the north-northwest (public actors) area of the main framework in Figure 2. We
could position public libraries here. For reference materials, the private cost-benefit analysis
is such that they seldom find their way onto
private book shelves. Still, public benefits of
making such materials widely accessible can
be considerable, and the public costs can
scarcely be greater than private costs—ergo,
public libraries.
Another example we would position here is
the U.S. space exploration program pursued
through NASA. Space exploration can be regarded as an activity with potentially enormous
future benefits. Currently, however, uncertainty
shrouds both scientific discovery and especially
commercially attractive applications in that
realm. This means that the wedge between public and private benefits is perceived as large.
Also, given the exploratory nature of the space
“business,” few private actors possess resource
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advantages (experience and expertise) over
public actors (government and university labs).
Furthermore, given their different time horizons
and “discount rates,” the projected net present
value is higher (less negative?) for public actors
compared to private actors. Therefore, today,
consistent with the logic sketched above, this
set of activities is pursued, for the most part, by
public actors. In the future, in this domain, if the
private supply curve and (private or public) demand curve shift enough so that they intersect,
then space research and exploration could be
privatized in contract mode or even operate altogether privately.
An example we would place in the southsoutheast (private actors) area of Figure 2 is the
(interfirm) alliance formed by America Online,
Microsoft, and Yahoo! to address the email
“spam” problem (estimated to account for 40 percent of all email traffic and “$8 billion to $10
billion in costs to business a year’’ [Krim, 2003:
A6]. At this time, the three firms are estimated to
have more than 200 million email account holders, which, it would appear, gives them sufficient private incentive to move to address the
spam issue. Thus, here, the net private benefits
are strong, the concerned private actors are few
in number, and those actors possess distinct
resource advantages (technical expertise) to address the issue. Hence, as would be indicated by
the proposed framework, this set of activities is
undertaken and organized by private actors.5
Above, in instantiating our theory, we described purely public and purely private actor
transactions. In passing, we also already mentioned contract relations between public and
private actors; recall road construction and procurement of defense aircraft. In the paragraphs
below we turn to examples of constructive partnerships involving private and public actors.
The call by the CEO of Merck for a constructive partnership—among industry peers, government, and specialized multilateral organizations—to address the HIV/AIDS crisis in
Botswana is the first example we noted. The set
of life-saving medicines to fight this disease is,
5
To be sure, consistent with our comment about negative
externalities being addressed via regulation, the U.S. Federal Trade Commission recently held in Washington a threeday forum on spam, and U.S. law makers are tabling several
bills, including one proposing “a bounty” for tracking down
spammers (Krim, 2003: A6).
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today at least, a “specialized resource,” implying that, currently, only industry-specific private
actors (specialist pharmaceutical firms in this
case) possess the expertise to effectively and
efficiently fabricate the indicated drugs. However, the treatment is complex in nature and
must be complemented by an adequate health
infrastructure: trained physicians and nurses,
diagnostic and treatment facilities, community
distribution channels, and so forth. Ability to
pay, moreover, is a critical issue and calls for
serious collective action.
The implementation of such a system implies
high coordination, monitoring, and enforcement
costs. Because government capabilities (and in
some cases credibility) might be inadequate,
specialized multilateral actors (e.g., UNAIDS,
WHO) have been called in. These latter actors
bring legitimacy and expert authority to their
role as project administrators and coordinators.
Thus, they lower coordination and enforcement
costs to the private actors and also mitigate the
fear of misuse and neglect by government (and
other complementary actors).
While the government is keen on the initiative
for obvious public benefit reasons, the multilateral organizations view this as an opportunity to
fulfill their mandate. For their part, the private
actors require such a constructive partnership if
their efforts (in making the drugs available at
subsidized prices) are actually to bear fruit (in
this case, prevent the spread of AIDS). Success
in this endeavor can repair firms’ legitimacy,
which has eroded subsequent to their initial traditional responses. In terms of longer-term private benefits, Merck CEO Gilmartin bluntly
points out:
Corporations must view these issues from the
perspective of a long-term investor. The ability to
maintain and extend markets from the developed
world to emerging markets . . . will be impossible
unless we create the foundation of political and
economic stability that can only come by addressing the economic and social needs of the
world’s poorest nations (2003: 177).
Another example of constructive partnerships
relates to developing country project finance for
power plants, ports, petroleum pipelines, and so
on. Here again, potential economic opportunity
is realized and transactions consummated
through constructive partnerships between private and public actors. High-sunk-cost, longterm, illiquid infrastructure projects in develop-
2006
Rangan, Samii, and Van Wassenhove
ing countries face both high country and project
risk. In these countries the governance mechanisms (contracts, legal infrastructure) to mitigate such uncertainties are often not adequately
developed (see Klein, So, & Shin, 1996). Therefore, although private actors (construction companies and commercial banks) see the opportunity and possess industry-specific knowhow—in infrastructure engineering, capital
allocation, and risk management—they are deterred from going it alone. However, through a
constructive partnership with two sets of public
actors— host governments and multilateral development banks—these private actors may
pursue such infrastructure projects.
As a third example, consider MPEG (the Moving Picture Expert Group)—the body that works
out and establishes technical standards for
compressing digital video and audio information. This is a constructive partnership where
private actors come together under the auspices
of a public actor, the International Organization
for Standardization (ISO). The private actors
(such as Fujitsu, Lucent, Matsushita, Philips,
Scientific Atlanta, and others) have a resource
advantage (e.g., technical expertise), but they
are too numerous and heterogeneous in terms of
the industries they come from. The costs of coordination among these computer, electronics,
and telecommunications firms can be considerable. Still, the public benefits from agreement
on digital information compression standards
are considerable too. (Just think of the public
benefits to all users and merchants from the
standardization of credit card physical sizes and
data formats—an activity that also occurred under the auspices of ISO.)
Thus, in MPEG, private actors want to participate because there is potential private benefit
(viz. current and future profit from sales, patent
royalties, and the right allocation of research
resources). Yet they face not only a coordination
challenge but also uncertainty in terms of net
benefits. If not enough firms join and comply
with the consortium, then there can be costly
factionalization (which has happened in the U.S.
mobile phone arena). With the participation of
one or more credible public actors, this factionalization can be avoided (as in the governmentaided setting of the single GSM telecommunications standard in Europe).
Hence, consistent with the model we have proposed, the MPEG involves public actors (the ISO
747
and the International Electrotechnical Commission [IEC]). The website of the ISO notes that
the technical work of ISO is highly decentralized,
carried out in a hierarchy of some 2,850 technical
committees, subcommittees and working groups.
In these committees, qualified representatives of
industry, research institutes, government authorities, consumer bodies, and international organizations from all over the world come together as
equal partners in the resolution of global standardization problems. Some 30,000 experts participate in meetings each year (ISO, 2003).6
A fourth example is manifested in a problem
we refer to as the infrastructure gap—a challenge in developing countries faced by multinational enterprises (MNEs) that operate in linkage-intensive industries. It is useful to bear in
mind, as background, that despite market potential in developing countries, those nations receive less than a third of world foreign direct
investment (United Nations Conference on
Trade and Development, 2001).
Adaptation for foreign investors in linkageintensive industries consists of the establishment of backward and forward linkages within
the host economy. The financial success of an
MNE’s investment often depends on this. In developed markets (such as Britain and the United
States), market uncertainty is relatively low and
basic infrastructure sound enough that multinationals can make it on their own. But in developing countries, a focal multinational often
faces market uncertainty and the absence of a
precompetitive supply platform. As a result, it
must determine a strategy to overcome this infrastructure gap in the short and long term. The
firm can pursue at least four different strategies:
internalization through vertical integration, reliance on market mechanisms, traditional creation of local on-site capability, or risk diversification and externalization through a
constructive partnership.
Internalization is a high-risk strategy, given
the uncertainties on the demand side and the
6
We should note that in certain technical arenas the
speed of public actors might be perceived as unacceptably
slow, and private actors might view the window of economic
opportunity as fleeting. In such cases, some private actors
might well come together in an attempt to create de facto
standards. In this private coordination the larger public
might lose, which, however, does not automatically imply that
government intervention would have been better. For more on
optimal standard setting, see Farrell and Saloner (1988).
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Academy of Management Review
high sunk costs involved in developing specialized and industry-specific resources ex novo. As
Ohmae has asserted, “You can do everything
yourself—with enough time, money, and luck.
But all three are in short supply” (1989; 197). To
maintain quality levels in supply, firms may
resort to a fast and reliable route: the market
mechanism of imports. While this can be an
effective strategy in the short run, its long-term
competitiveness implications are not enticing
because of changing exchange rates and tariffs
on imports. That is, firms pursuing this strategy
forego the predictability and cost effectiveness
they could realize with a local supply chain.
The decision of an MNE to source locally depends on the local suppliers’ capability and performance (competitive cost structure, quality, reliability, and flexibility). When performance is
below acceptable standards, MNEs engage in
one-to-one company-specific vendor development programs. The objective is to create specialized capability and upgrade key and strategic suppliers capable of absorbing new
technologies and management practices. However, given cost and private appropriation concerns, in an economy characterized by market
size uncertainties and incomplete contracts (i.e.,
costly governance), it is unlikely that individual
firms will singly indulge in the development of a
public benefit—namely, a precompetitive supply platform.
An alternative to the above is the development of the supply platform through a constructive partnership with other industry members
and public actors. Government, multilaterals,
and private actors have an interest in the collective action. In this vein, Samii, Van Wassenhove, and Bhattacharya (2002) document the constructive partnership between the United
Nations Industrial Development Organization
(UNIDO), the multinational firms Fiat and Magnetti Marelli, and the host government of India,
in the development of an automotive industry
supply platform in the western region of the
country. Viewed by all parties as a pilot case,
the project aimed to upgrade industry-specific
capability of the Indian suppliers. While governance was externalized to UNIDO, the private
actors—Fiat and others—provided both funding
and expertise. The government provided funding and authority to the whole initiative, while
the Indian industry associations provided local
resources and knowledge.
July
This constructive partnership was viewed by
all parties, including the Indian automotive
component suppliers, as successful on two
fronts: as a governance mode per se, and as a
creative and effective strategy to address the
infrastructure gap and unlock economic potential. Like those discussed earlier, this case too
illustrates (1) how firms working alone might
fail to capitalize on pockets of private economic
opportunity, (2) how governments working alone
would be unable to close the gaps and advance
the public benefit, and (3) how a constructive
partnership can alleviate the problem.
The examples cited above are consistent with
the model we have proposed. Notwithstanding,
our theorizing should be seen not as positive
(i.e., what is) but rather as normative (i.e., what
should be). By setting aside history and politics,
as we have done, we also set aside claims of
explaining all governance in the real world. Indeed, we already speculated that superior outcomes could have been expected had U.S. mobile
phone standards been determined via a constructive partnership (as opposed to a market melee).
Likewise, we would venture, today, that the
health care systems in the United States, Britain,
and continental Europe seem perplexingly unsatisfactory. We would argue that governance in
this arena is well-suited to a constructive partnership. Yet (for reasons that lie outside our
model) the system is largely marketized in the
United States (with large swaths of the population undercovered and in questionable health)
and nationalized in Europe and the United Kingdom (with apparently inefficient and unsatisfactory outcomes there). We agree that history and
politics probably play a great role in explaining
the current governance arrangements in health
care. Among other malaligned governance arrangements we would add pharmaceutical pricing, and also perhaps the continuation in Western nations of government-supported radio and
television stations (witness the debate on the
forced public sponsorship of the British Broadcasting Corporation).
CONCLUSION
As extensive as the literature on networks and
alliances is (see Contractor & Lorange, 2002), it
has focused largely on private actors—namely,
firms. Little has been said about the role of public actors. Yet, as we argued above, only alli-
2006
Rangan, Samii, and Van Wassenhove
ances between private firms and public actors
can enable creative strategies in certain
spheres of economic activity. We have specified
the circumstances under which such constructive partnerships will be effective and efficient.
We have explained why, in those circumstances,
conventional arrangements (viz. markets, interfirm alliances, internalization, or nationalization)
cannot be expected to work as well. Last, we have
also specified when, in these cases, the public
actor can be a government and when a multilateral organization will have to be involved.
Through this paper we have attempted to
make three contributions. First, we have explicitly and jointly discussed both resource and governance costs. In most of the organization literature (on trust and social networks), resources
are taken as given and governance receives
sole focus, or, alternatively, governance is taken
as given and resources receive sole focus. Second, we have shown that only by joining both of
these latter costs with public benefits and the
concept of positive externalities can we identify
when constructive partnerships will be necessary. While this explicit joining of positive externalities and transaction costs might not be
novel in the worlds of positive political theory
and public policy, it has received little attention
in the management literature. (In most economics the resolution of externalities has been
sought via appropriate pricing mechanisms, but
transaction costs are usually set aside there.)
Third, and most important, we have shed explicit light on the potential role of public actors
in building effective private networks. By highlighting the role of (especially multilateral) public actors, we hope we have shown that alliance
governance can be externalized to a specialized
actor. The alliance literature has implicitly assumed that governance should be endogenous
to the core players. This, as we have shown, can
be severely limiting.
In the confines of one paper we have not been
able to explore the dynamics implied in our
model. What is clear, however, is that boundaries between the state and the firm have
changed over time, especially during the past
two decades. We would submit that several developments jointly explain these shifts. Most important, perhaps, has been the growing budgetary pressures on all actors, but especially public
actors. For a variety of reasons (comparative
growth rates being among them, and also the
749
mobility of technology, capital, and skilled labor), small government ideology and a preference for market ordering have captivated policy
circles and become the conventional wisdom.
Citizens, partly perhaps as a reaction, look more
to the private sector to fill in spaces left open by
government (witness the emergence of corporate social responsibility). Thus, the legitimacy
standards of government have evolved more
along an economic dimension (making public
efficiency and errors of commission more salient), while those of private actors have evolved
more along a social and ethical dimension
(making private actor errors of omission more
salient). Belief and growth in competition, we
speculate, are root causes of both developments.
Alongside these broad developments, market
growth and specialization have shifted the
boundaries of the firm (and made interorganizational relations more salient). In some sectors
(such as civil aviation, which historically was
typically nationalized), there has been a marked
upward shift in demand, which has made marketization feasible and sensible. In other words,
private demand curves have risen to now intersect private supply curves. In other sectors, technologies have advanced (e.g., color TV, internet),
with roughly the same effect. In still other cases,
the ambient institutions of governance have
evolved (e.g., on intellectual property, human
rights) and new actors have emerged (e.g., nongovernmental organizations, such as Médecins
Sans Frontières).
Whatever their origins, these developments
influence and shift the values of the parameters
in our model. They do not, however, negate the
parameters themselves or the logic underlying
them. In this sense, the model we have advanced can accommodate changes not only in
transaction but also in place and time. If shifts
along one or more of those three dimensions
cause sufficient changes in parameter values,
then the model signals changes in governance
arrangements.
We expect that the ideas sketched above will
be of some interest to managers in the private
and public realm. One implication for private
managers is that, in complicated situations of
unlocking economic potential, if they can demonstrate genuinely that their firms’ private actions can bring considerable public benefits,
they might be able to call and count on effective
and efficient governance from authority- and
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Academy of Management Review
credibility-endowed public actors. While this division of labor might not have been pondered by
Adam Smith, it would appear to hold important
promise today (and, for this reason, perhaps
even meet with Smith’s approval). In the words
of another economist,
Governments realize that firms [private actors]
are peculiarly well equipped to be wealth [and,
we would add, health] creators. At the same time,
they acknowledge their responsibility to provide
the . . . institutional . . . framework so that firms
can fulfil this function efficiently and with the
minimum transaction costs (Dunning, 1993: 328).
In terms of future research, it will no doubt be
necessary to refine and deepen the early ideas
we have sketched here. The issues of time horizon, repeat interactions, opportunity costs, and
other ideas from game theoretic approaches to
interorganizational cooperation (as elegantly
treated in Parkhe, 1993) could be promising avenues. We hope the question we have framed
and the theory we have proposed will provoke
this sort of interest. Likewise, it will be important to study how constructive partnerships get
initiated. This is an issue about which we have
said little. Last but not least, it will be instructive to attempt an empirical operationalization
of the framework we have proposed.7
Before concluding, we would be remiss not to
acknowledge a “fig leaf” hypothesis on constructive partnerships. At least some of the illustrations we have sketched (e.g., the one involving Merck in Botswana) raise the specter of firms
posturing for pure private gain: using partnerships to cover up or deflect attention away from
serious inadequacies and defects. Similar motives could be attributed to governments (politicians) and even multilateral organizations. Disturbingly, as has been pointed out to us, the
seeming rationality of economics can hide political choices while legitimating often arbitrary
and purely self-interested arrangements.8 Obvi7
The empirical approaches in Dubin and Navarro (1988),
Ferris and Graddy (1990), and Parkhe (1993) provide helpful
models.
8
We credit a judicious reviewer for helping us confront
and acknowledge this awkward reality. At the same time,
we maintain that testability, not only parsimony and generalizability, is a hallmark of useful theory. On that score the
fig leaf hypothesis is problematic, not to mention it could not
easily explain constructive partnerships in such cases as
the infrastructure projects (the pipeline and auto parts examples we described) or the MPEG.
July
ously, our intentions here are not such, and we
leave to future research the task of grappling with
empirical evidence and apportioning explanatory
power among economic and political factors.
In a world that is increasingly specialized and
interdependent, successful responses to new
goals and challenges will call for more understanding of how to orchestrate complementary
activities. We hope, in responding to this special
issue on unusual partnerships enabling creative strategies, we have made a contribution in
this direction.
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Subramanian Rangan (subramanian.rangan@insead.edu) is associate professor of
strategy and management at INSEAD. He received his Ph.D. in political economy and
government from Harvard University. His current research focuses on competition
among multinational firms in foreign host markets and on cooperation across geographic boundaries within multinational firms.
Ramina Samii (Ramina.samii@insead.edu) holds a laurea degree in economics and
business administration from the University of Rome. She currently works as a private
sector officer at the OPEC Fund for International Development. She holds a visiting
researcher status at INSEAD. Her current research interests revolve around development and disaster management.
Luk N. Van Wassenhove (Luk.van-wassenhove@insead.edu) is the Henry Ford Chaired
Professor of Manufacturing at INSEAD. He received his Ph.D. in industrial management from the Katholieke Universiteit Leuven, Belgium. His current research includes
global supply chain management, risk, and bottom-line performance. He works with
companies and humanitarian organizations to improve disaster response.