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How Transaction Cost Economics and Social Network Essay

Introduction With information mobility, borderless business expansion and rapid updates of technologies, increasing competition for technology-based companies is a well accepted phenomenon. In order to cope with this phenomenon, more technology- based companies form alliances or M&As, because they expect positive returns of it. The expected advantages of forming alliances are sharing partners’ strength, dispersing costs and risks, acquiring resources, and learning from partners.

Quite in line with the reasons for forming alliances, reasons for forming M are increasing racket or political power, reaching economies of scope or synergies, and reducing of transaction and information costs. However, some studies reveal there are not only positive effects after forming alliances or M. Hodgepodge and Chickenhearted (1994) have given us some examples : Joint venture activity tends to have a significant negative impact or insignificant effects on profitability (a study of Berg et al. 1982)), and general mergers have shown a decline in profitability (a study of Meek (1977)). Consequentially, companies need careful strategic management that might affect their ex post effects of alliances or M. For the strategic management, literature highlights that understanding motives and selecting suitable partners are crucial for forming alliances or M. There are dominant perspectives on alliances and

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M, which two are, among others, Transaction cost economics (ETC) and Social network analysis (SNAP).

In this essay, I will address briefly what these perspectives are and how these can inform the companies’ strategic management especially in the partner selection process. Furthermore, I will discuss the determinants for the partner selection process by reviewing them from a ETC and SNAP perspective. ETC perspective Transaction costs occur in a companies’ choice between markets, M and alliances, and there are six factors that guide their choice process : opportunism, bounded rationality, monopoly, uncertainty, information impeachments, and asset specificity of firms.

ETC scholars argue these factors cause transaction costs such as searching, contracting and monitoring (potential) partners during the choice making process. Therefore ETC suggests that minimizing the potential transaction costs is important for the partner selection process in alliances or M. SNAP perspective Social network theorists argue that firms are not an atomistic notion but a set of nodes linked by a set of social relationships. Furthermore, they see that the social context in which companies are embedded and the position of companies in social networks affect the companies’ economic actions. Pacifically, not only you as a firm engage alliances or M&As but your partners also Join the network, so when you find yourself in a complex network there are certain implications for you as an individual firm. There are two broad analytical approaches for examining the influence of social How Transaction Cost Economics and Social Network Analysis Can Inform the Partner Selection Process By encountering alliances as possible to get diverse resources. Efficiency means that a firm only looks for certain partners to generate advantage that you really need.

Hence, SNAP suggests that it is important for a firm to take a strategic network position for the partner selection process. Determinants for the Partner Selection Process from ETC and SNAP perspectives Performance After forming alliances or M&As, if the focal firm doesn’t get better performance, needless to say, the firm will more likely consider quitting their relation with the rent partner and will search for a new partner that will potentially bring better performance to the focal firm.

In this progress, transaction costs in searching and contracting will occur, therefore selecting a partner that can bring and keep better performance is the determinant in terms of the ETC perspective. There are a number of studies that have revealed certain characteristics of firms that affect focal firms’ post-alliances or post-M&As performance. First, alliance partners’ size and innovativeness has a positive impact on ego firms performance either directly or indirectly. A Firm’s size and innovativeness reflect their propensity of seeking opportunities and social status of recognition.

Especially the good reputation of the partner is highly advantageous because the focal firm’s reputation can be upgraded by passing due diligence by its prominent partner. However, prominent partner may leverage their bargaining power. Second, the technological relatedness between acquired and acquiring firms has an inverse U shape of graph for the post- M performance, which suggests that some degree of differentiation in technology will enhance acquiring firms performance.

Sings and Montgomery (1987) also propose to managers to consider technological relatedness acquisitions, because relatedness may create higher returns, but it may cause higher competition in their bidding process because the target firm may have popular value to other firms and may increase the bargaining power. Third, the acquired firm’s cultural distance positively affects an acquirer’s performance because it may force the acquirer to rethink its own innovation strategy. Furthermore, the multinational of the acquired firm has a positive impact on the acquirer’s innovative or financial performance by having access to diverse information .

Knowledge Flow With increasing number of alliances and M&As, more companies share their knowledge. Sharing knowledge gives opportunities of learning from each other, but it also threats companies with the risk of opportunism. When a company expects the risk of opportunism from its a partner, transaction costs will occur by drafting detailed contracts and closer monitoring. Therefore, selecting a suitable partner that fits the focal firm’s intellectual property right (PR) regime is the determinant for the partner selection in terms of the ETC perspective.

Different PR regimes in different countries affect companies’ decisions in forming international alliances. Nevertheless, it seems companies partially accept potential opportunism risks and form alliances or M&As because it is a mechanism for sharing knowledge. A contract never can be complete for covering all events in the future. This suggests that, in terms of the ETC perspective, the learning effects by sharing knowledge is the important determinant, because the learning complements the potential opportunism risks that might come from the incomplete contract .

The knowledge sector and geographical scope. Furthermore, distance and cultural differences between firms can be an obstacle to promote the sharing knowledge. On the other hand, some degree of differentiation in knowledge between acquiring and acquired firm enriches the acquiring firm’s knowledge base. But still, the acquirer may find it easier to assess targets when the knowledge base is related with the targets. Trust Companies can build trust with their partners, and trust may reduce transaction costs.

A company that built trust with their partner through their prior relationship s more likely chosen by the partner again and their contract may not be as a complex as the one they had previously. Furthermore, trust facilitates open communication, reduces fear of opportunistic behavior by partners and positively affects the alliance performance. Trust also plays an important role in networks because trust may ease relationships between firms. Firms that are either directly connected or indirectly connected through their partner’s partner already have a certain level of trust within the network.

Therefore trust is the determinant in the ratter selection process in terms of ETC and SNAP perspectives. In line with this thought, scholars have studied what factors affect building trust with partners. Galatia and Scotch (2008)suggest that organizational similarity has a positive impact on deriving trust because the similarity may lead to rapid learning and a positive identification with the partner. In line with this, Hennaed and Reedy (1997) noted that management costs are higher when firms’ industries or nationalities are different.

Central and Efficient Position Taking a central position in a network positively affects innovation output, reputation r likelihood of a future partnership formation of ego firms in terms of the SNAP perspective. A company that has more direct ties is more likely to have better access to diverse and special knowledge although the maintaining costs increase . However, Stuart (2000) gives a different finding that the number of alliances formed proved to be insignificant in terms of alliance performance. Regarding these opposite conclusions, findings of Hodgepodge and Chickenhearted (1994) may explain why.

They found an indirect relationship between a firm’s external linkages and economic performance via the degree of a firms’ R inclination. It suggests that taking a central position in a network is meaningful when it is used for improving corporate performance rather than Just being in the core of the network to enjoy many accesses of resources or information. Having corporative partners with direct connections is not only the mean for taking benefit from the network, but firms can also enjoy benefits by efficient positioning by being connected to well-connected partners in the network.

Joshua (2000) found that indirect connections with a partner’s partners are also beneficial to the focal firm, because there are potential knowledge spillovers’ without additional costs, which means that a firm can grasp knowledge held by its partner’s partner. Furthermore, when a firm facing difficult challenges, it can activate its network to identify direct or indirect partners that are specialist in the focal firms issue. The other sort of efficient positioning, managing structural holes, which means gaps in information flows between firms linked to same ego but not to each other, can affect the ego firm.

Joshua (2000) noted that many structural holes in the network can be beneficial when the focal firm seeks mall number of structural holes can be beneficial if the focal firm seeks abundance information and the minimization of opportunistic behavior. Conclusion It is obvious that ETC and SNAP can inform the partner selection process in forming alliances or M&As in order to gain better ex post effects for technology-based companies. Through looking at the perspectives of ETC and SNAP, and reviewing literature, I have pointed out some considerations that can affect the partner selection process.

First of all, post-alliances or post-M&As performance should be considered in the process in terms of the ETC perspective. The post-alliance performance is positively affected by the partner’s size and innovativeness, especially when the partner has a good reputation. Nevertheless, the bargaining power of your prominent partner may reduce this positive effect. Some degree of technological dissimilarity and cultural distance between an acquired and an acquire firm, and the acquired firm’s multinational can positively affect post-M&A performance.

Second, Knowledge flow should be considered in the process in terms of the ETC perspective. A partner that fits the focal firm’s PR regime is important for avoiding the partner’s attention opportunistic behavior. The knowledge flow is maximized when the partner is similar in technology, industry and geographical scope and minimized when the partner is geographically located far away and has cultural differences. But, some degree of knowledge difference can also enhance acquirers’ knowledge base. Third, trust between firms is one of the determinants for the process in terms of both ETC and SNAP perspectives.

The more the organizations fits, the higher the trust between firms. Finally, central and efficient positioning in the network is important or the partner selection process in terms of the SNAP perspective. Taking a central position can bring better access to resources and information, but firms need to be aware of the redundant direct ties and the potential maintaining costs and they need to keep an efficient position to enjoy knowledge spillovers from your partner’s partners without additional costs.

Managing structural holes depends on the focal firm’s object: few holes for minimizing opportunistic behavior, and many holes for maximizing information. To sum up, firms need to perform detailed analyses for the ratter selection to check whether your partner a) is either large or innovative, b) is similar either in technology, culture or industry, c) fits either PR regime or organization d) has the bargaining power.

Furthermore, firms need to analyze whether e) your partner and your partner’s network affect your position either centrally or efficiently in the complex network and f) maintaining costs outweigh the efficiency of your position . However, these factors’ positive or negative influence will depend on what forms of external collaborations between alliances and M and what motives and objects the focal firm actually seeks.

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