Option to Acquire or Divest a Joint Venture

This is the author's final draft. The publisher's official version is available from: http://dx.doi.org/10.1002/(SICI)1097-0266(200006)21:6<665This paper develops a model for assessing options in joint ventures. The model is used specifically to examine the option to acquire or divest a joint venture, both in the case where the acquisition/divestiture price is specified ex ante in the initial contract and in the case where the price is to be negotiated ex post. The results derived from the model show how the value of the option and each partner’s payoff from the venture vary with the structure of the option and how the presence of the option may affect the structuring of the joint venture. The main theoretical insights are stated in twelve potentially testable propositions, and possible ways to operationalize some of the propositions for empirical testing are also explored

Optimal Stopping Rule for a Project with Uncertain Completion Time and Partial Salvageability

This is the author's final draft. The publisher's official version is available from:http://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=552808&userType=instIn this paper, we developed an optimal stopping model for the control of an investment project that takes an uncertain length of time to develop and can still provide a partial payoff even if it is terminated without achieving its original performance objectives. We first investigated the solution of the model under a specific set of assumptions about the forms of the functions that characterize the uncertainty about the project and the buildup of its value. An analytical solution was derived for the special case where the discount rate is zero, and numerical solutions were obtained for the general case where the discount rate is allowed to be positive. Using the insights from the solution under the specific set of assumptions, we then examined the solutions of the model under alternative assumptions about those component functions. Our results suggest that the optimal control policy is quite sensitive to how the terminal payoff evolves in a project’s development process, pointing to the importance of carefully accounting for its impact in determining the control policy for this kind of project. Finally, we also suggested methods for estimating the forms of the component functions that characterize the uncertainty about the project and the buildup of its value

Product Life Cycle, and Market Entry and Exit Decisions Under Uncertainty

This is the author's final draft. The publisher's official version is available from: http://dx.doi.org/10.1023/A:1010901813523A key characteristic of the product life cycle (PLC) is the depletion of the product’s market potential due to technological obsolescence. Based on this concept, we develop a stochastic model for evaluating market entry and exit decisions during the PLC under uncertainty. The model explicates the conditions for the optimality of a two-threshold policy based on the estimated earnings potential of the product, and can be used by manufacturing firms to assess entry and exit decisions under such conditions. To aid the applications of the model in actual decision situations, we also provide the procedures for computing the exact and approximate values of the two thresholds

Rethinking Rouse and Daellenbach's Rethinking: Isolating Versus Testing for Sources of Sustainable Competitve Advantage

This is the author's final draft. The publisher's official version is available from: http://dx.doi.org/10.1002/smj.255In a recent paper, Rouse and Daellenbach (1999) provide a five-step methodological approach which they feel will cure alleged inadequacies in empirical resource-based research. We suggest, however, that their methodology can provide only a useful aid for expanding our understanding of potential sustainable competitive advantages but will not allow researchers to effectively verify those hypothesized advantages. Specifically, we argue that Rouse and Daellenbach’s methodology is plagued by three major shortcomings: 1) it confuses the important distinction between knowing-how and knowing-what; 2) it fails to recognize the importance of observable variables in verifying the sources of sustainable competitive advantage; and 3) it calls for sampling on the dependent variable

An Economic Analysis of Matrix Structure, Using Multinational Corporations as an Illustration

This is the author's final draft. The publisher's official version is available from: http://dx.doi.org/10.1002/(SICI)1099-1468(199805)19:3<141This paper applies a comparative institutional perspective to the organizational design called matrix structure. After discussing the motivations for a multidimensional form of organization, the paper compares the transaction cost characteristics of the matrix (MX-form) structure with those of the well-known multidivisional (M-form) structure. This analysis reveals three advantages and three disadvantages of the matrix structure as well as two conditions affecting the efficacy of a matrix. Examples from multinational corporations are used throughout the paper to illustrate the analysis

The Structuring of Interfirm Exchanges in Business Know-How: Evidence from International Collaborative Ventures

This is the author's final draft. The publisher's official version is available from: http://dx.doi.org/10.1002/(SICI)1099-1468(199706)18:4<279This study investigates the effects of transaction cost considerations on the apportionment of residual bearing and the assignment of managerial control between two firms involved in the exchange of business know-how. Data were collected from contractual agreements between multinational enterprises and indigenous firms that formed collaborative ventures in developing countries. A simultaneous-equation model was employed to test hypotheses that were derived under a theoretical framework based on the new institutional economics. The empirical results are supportive of the hypotheses

Collaborative Ventures and Value of Learning: Integrating the Transaction Cost and Strategic Option Perspectives on the Choice of Market Entry Modes

This is the author's published version. The publisher's official version is available electronically from: http://www.jstor.org/stable/155286This paper employs a simple stochastic model to investigate how transaction cost and strategic option considerations interact to influence a firm’s evaluation of collaborative venturing as a market entry mode. After demonstrating how uncertainty about the market and about the potential partner can add to the value of a collaborative venture, the paper explicates a condition under which the option to acquire or sell out generates a positive economic value for both of the partners. The interaction of transaction cost and strategic option considerations is then examined, and a number of testable hypotheses are proposed based on the theoretical analyses of the paper

Trading in Strategic Resources: Necessary Conditions, Transaction Cost Problems, and Choice of Exchange Structure

This is the author's final draft. The publisher's official version is available from: http://dx.doi.org/10.1002/smj.4250150403The paper develops a theoretical framework for analyzing the exchange structure in the trading of imperfectly imitable and imperfectly mobile firm resources. It first explores the conditions for such resources to be gainfully traded between firms and then investigates the interconnections between barriers to imitation and impediments to trading. A major part of the paper is devoted to developing an integrative and yet parsimonious model for assessing the exchange structure between firms that are involved in the trading of strategic resources in the face of significant transaction cost problems. The model is applied in the last part of the paper to the analysis of the choice between acquisitions and collaborative ventures

Cognitive Limitations and Investment "Myopia"

This is the author's final draft. The publisher's official version is available electronically from: http://dx.doi.org/10.1111/j.1540-5915.1997.tb01301.xOptimization of investment decisions in an uncertain and dynamically evolving environment is difficult due to the limitations of the decision maker’s cognitive capacity. Thus, actual investment decisions may deviate from the dynamically optimal decision rule. This paper investigates how a potential investment rule bias affects the expected payoff from a project that has an uncertain development time and an uncertain completion cost. The result shows that the presence of a potential bias in the adopted decision rule dissipates project value and that the dissipating effect is greater for a longer-term project if the completion cost is an increasing function of the time to completion

Performance Verifiability and Output Sharing in Collaborative Ventures

This paper studies the problem of contracting between two firms when they try to exploit their complementary resources in a collaborative venture (CV), but their performance in the CV cannot be precisely verified by the other party or by a third-party arbiter. Using a mathematical model that treats performance verifiability as a continuous variable, the paper first establishes that a party whose performance cannot be perfectly verified has an incentive to shirk if it is paid only a flat fee and that this shirking problem is more severe as its performance is less verifiable. Then, the paper shows in a general setting that a contract under which each party shares a fraction of the output is superior to a contract under which one of them is paid only a flat fee when performance verifiability is sufficiently low. In addition, with some specific assumptions about the forms of the revenue and cost functions, the paper also shows that a party's share of the venture's residual output in the equilibrium is an increasing function of its productivity and a decreasing function of its opportunity cost. Finally, the numerical examples constructed in the paper suggest that a contract which combines the self-enforcing mechanism of output sharing with the third-party enforcement mechanism of arbitration generally performs better than a contract that utilizes only one of these mechanisms.joint ventures, transaction costs, double moral hazard, contracting, residual claimancy