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*Corresponding author. Tel.:#358-5-6212612; fax:#358-
5-621-2699.
E-mail addresses: kirsimarja.blomqvist@lut." (K. Blomqvist),
kalevi.kylaheiko@lut." (K. KylaKheiko), veli-matti.virolainen@
lut." (V.M. Virolainen).
Int. J. Production Economics 79 (2002) 1}14
Filling a gap in traditional transaction cost economics:Towards transaction bene"ts-based analysis
K. Blomqvist, K. KylaKheiko, V.-M. Virolainen*
Telecom Business Research Center, Lappeenranta University of Technology, P.O. Box 20, FIN- 53851 Lappeenranta, Finland
Department of Business Administration, Lappeenranta University of Technology, P.O. Box 20, FIN-53851 Lappeenranta, Finland
Received 12 April 2000; accepted 10 August 2000
Abstract
This paper analyzes dyadic partnership formation between asymmetric buyers and specialized suppliers. In the "rst
part of the paper di!erent economics of organization-based approaches are evaluated. Their basic implications
concerning the rise of partnerships are derived. In the second part a dynamized transaction cost and bene"t model is
introduced to analyze the most critical elements of a typical partnership decision. The "nal part is based on insights from
practice and in-depth interviews among 12 specialized suppliers and their four large incumbent partners in the
Information and Telecommunications Industry. 2002 Elsevier Science B.V. All rights reserved.
Keywords: Transaction costs and bene"ts; Theory of the "rm; Partnership; Supply management; Trust
1. Posing the issue
According to the founders of transaction cost
economics (TCE), Coase [1] and Williamson [2],
markets and vertical integration (or hierarchies) are
the two main governance structures, out of which
a "rm may choose the most e$cient one. Coase
did not even mention the intermediate gover-
nance structure between markets and hierar-chies, called hybrid by Williamson. We call these
hybrid governance structures partnerships and
interpret them as individual contracts between
parties. The aim of the contract is, of course, to
create the joint surplus through cooperation and
share it in a way, which bene"ts both (all) the
parties.
Rapid changes in business environments are
increasingly driving the formation of strategic part-
nerships between companies in the world economy.
Di!erent types of partnerships are a logical and
timely response to intense and rapid changes ineconomic activities, technologies, and globalization
of world markets [3]. Partnerships have gained
much theoretical interest in strategic literature dur-
ing the last 10 years. Despite the fact that Coase
skipped them altogether modern economics of
organization-related approaches have managed
to shed light on some factors behind the rise
of partnership-based governance structures. A
recent stream of resource-based view, the know-
ledge-based view, [4}6] analyzes organizational
0925-5273/02/$- see front matter 2002 Elsevier Science B.V. All rights reserved.
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Table 1
Typology of di!erent explanations of inter-"rm partnerships [14,17]
Focus Temporal dimension
Static Dynamic
Production & Cognition-based-'
Transaction & management benexts
A: Resource-based view based on static capabilities
and given cognitive frames [15,38] added with [18]
innovation-related transaction costs
B: Dynamic capability view based on
learning and changing cognitive frames
[8,5]
Exchange-based-'
Transaction & managements costs
C: Static Coasean [1] & Williamsonian [19]
transaction cost economics
D: Dynamic transaction cost
economics (embryos launched by
[20,9,39]
capabilities and knowledge as a source for competi-
tive advantage. The key organizational issue is
whether to develop the needed competencies, capa-
bilities and knowledge internally or whether it is
rational to exploit and integrate external know-
ledge. Knowledge-based competition leads us to
the classic questions of the modern theories of the
"rm concerning the crucial role of organizational
boundaries. Unfortunately, these explanations are
typically static and focused primarily on cost-based
comparisons. Our contribution to this discussion
will be the explication of the main sources of the
governance bene"ts, which can be obtainedthrough di!erent kinds of inter-"rm contractual
arrangements.
2. On partnership explanations
We start with a survey of some theoretical results
obtained so far in economics-based literature. The
rise of partnerships has been studied at least from
two di!erent angles. The "rst one can be character-
ized as the economics of organization-inspired con-tractual or governance approach, which in its
explanations emphasizes either the Coasean trans-
action costs or the ownership of non-contractible
assets (i.e. the property rights school introduced by
Grossman and Hart [7]). The alternative, more
evolutionarily inspired perspective is based on the
dynamic capability or knowledge-based approach
[8,9], which, in turn, emphasizes the role of
"rm-speci"c, rare, and hard-to-imitate routines,
capabilities, learning and socially embedded tacit
knowledge when creating and sustaining joint
surpluses through partnerships.
For those who want to get acquainted well with
the basic premises and di!erences between these
two approaches there are many quite recent meta-
theoretical comparisons available (cf. [10}12]).
Here we would like to pick up only one important
position which arised from recent discussions,
the integrationistic metatheoretical point of view
strongly propagated by Foss [11] (cf. also [13]).
According to this view, both the seemingly rival
approaches can (should) be interpreted as the
complements but not as substitutes. This view thatwe share has important implications as to the anal-
ysis of inter-"rm arrangements.
Following the integrationist research strategy we
take seriously some parts of the knowledge-based
criticism of the proponents of the dynamic capabil-
ity view (e.g. [14}16]). To put it simply, these critics
maintain that the governance approach at least
partly neglects the production and cognition-related
issues, such as genuinely bounded rationality and
imperfect and disperse knowledge of agents,
collective tacit know-how, radical uncertainty,and overemphasizes the exchange-related issues,
such as market (in)e$ciency and incentives.
We interpret the tone of this critical message
so that the gap between production and ex-
change has to be bridged by launching some
additional explanatory items into the standard
TCE framework.
Table 1 outlines the main di!erences between the
two main approaches mentioned above from the
explanatory point of view. This typology is based on
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the insightful ideas introduced "rst by Winter [14]
and worked out by KylaKheiko and Miettinen [17].
The distinctions used are between (i) staticness and
dynamics on the one hand and (ii) production andcognition-based and exchange-based categories on
the other hand. In terms of these distinctions we
can characterize the seemingly rival but actually
complementary domains of theoretical explananda
(i.e. the set of explained items) of di!erent
approaches.
Our main thesis will be that every comprehensive
explanation of the emergence of various inter-xrm
relationships has to be based on all the aspects repre-
sented in Table 1. The largely neglected theoretical
bridge between the production and the exchange-
based focal points of Table 1 can be built by intro-
ducing relevant concepts such as transaction
benexts or transaction values (cf. [21]).
3. Towards dynamized and extended governance
cost minimizing model
Next, we will introduce some basic concepts of
the dynamic capability view (cell B in Table 1) in
order to make sense of our forthcoming analysis
which can be characterized as an attempt to com-bine all cells A}D and to use them as a common
explanans set. We begin with learning mechanisms,
the hallmarks of the dynamic capability view. They
can best be analyzed in terms ofstatic and dynamic
routines introduced by Nelson and Winter [22].
Static routines replicate existing organizational and
technological competencies. Through partial repli-
cation there is room for adaptational adjustments
by learning. Dynamic routines are routines through
which the "rm can `learn by learninga and di!use
generic scienti"c and engineering knowledge fromother "rms. The dynamic capability concept rests on
dynamic routines and can be de"ned as `the capa-
city of a xrm to renew, augment, and adapt its core
competencies over timea [23].
The dynamic capability view regards the "rm as
an organization, which combines partly tacit and
cumulative know-how (`technoa) with generic in-
formation (`logya). Heterogeneity of capabilities im-
plies that the boundaries of the "rm have to be
interpreted as strategic devices when outlining
a "rm's competitive strategy. To put it brie#y, it is
a question of how to generate more value by using
internally produced/ externally acquired capabili-
ties and resources in the most e$cient way. In ouropinion, this message has to be imported into the
static Coasean framework in order to make it more
comprehensive for coping with the inter-xrm arrange-
ment issues.
Fig. 1 summarizes the basic #ows and determi-
nants in our extended and dynamized governance
framework. The "rm is viewed as a value chain
consisting of many activities. They are all based on
partly tacit and partly generic routines/capabilities.
Some internal and external capabilities already
exist (i.e. they are static), whereas some have to be
developed through learning or knowledge transfer-
ring or created through knowledge integration
(these not yet existing ones are called dynamic).
Some activities can be bought from other "rms (i.e.
outsourced capabilities), whereas some are based
upon internal capabilities. Outsourcing costs are
called transaction costs (relating to search, planning,
negotiating, monitoring, and enforcement) and the
insourcing costs are called management costs (relat-
ing to administration, control and monitoring as
well as the costs of using low-powered bureaucratic
incentives).Following the lead of Coase and Williamson we
conclude that the main issue in our model is to "nd
out such a governance structure, i.e. a combination
of outsourced, networked and insourced transac-
tions which economizes on the sum of production,
transaction and management costs at the same time
when the surplus value obtained through transac-
tion and management bene"ts is maximizedas well.
Next, we will launch the main determinants of
di!erent cost and bene"t categories shown in Fig. 1.
Williamson [2,19] explicated the followingdeterminants that give rise to (static) transaction
costs: (i) bounded rationality, (ii) opportunism,
(iii) information impactedness, (iv) frequency of
transactions, and (v) asset speci"city. His most
paradigmatic case was (and is) the so-called ex post
hold-up problem caused by the dangerous triad of
uncertainty, frequency and asset speci"city. When
the assets are very speci"c it means that their value
is much lower (or even zero), if they cannot be used
in the joint transaction between the partners [10].
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Fig. 1. Dynamic transaction and management costs and bene"ts.
In such a situation there opens up an opportunityfor opportunistic ex post behavior for the non-in-
vesting partner, who may threaten to stop the co-
operation, unless he/she/they cannot have a greater
share of the joint surplus [13]. A paradigmatic
solution for this case is vertical integration.
Later, Teece [18] introduced such concepts
as complementary capabilities and appropriability
regime. The former consists of external capabilities
needed to complete a "rm's internal capabilities.
The complementary external capabilities, which have
to be outsourced, a!ect the bargaining situation themore, the more ine$cient are their markets. This
implies higher transaction costs and, consequently,
more integrated solutions. The appropriability cri-
terion determines how e!ectively a "rm can protect
its strategic knowledge from free rider imitators.
The tightness of this regime depends upon legal
protection and tacitness. The more tacit knowledge
is, the lower are transaction costs and vice versa.
Next, we have to introduce dynamics into the
framework. The dynamic TC problem can be for-
mulated as follows: the "rm has to decide, whetherit is more e$cient (i) to generate new and develop
old internal capabilities through continuous learn-
ing and R&D investments (`a conglomerate strat-
egya) or (ii) to acquire external capabilities from the
market (`a hollow "rm strategya) or (iii) to exploit
economies of scale and scope through networking
(`a partnership strategya).
Henceforward, the costs of transferring capabili-
ties over the "rm's boundaries are called dynamic
governance costs. They can further be divided into
dynamic transaction costs (i.e. persuading, negotiat-ing and teaching with the providers of external
capabilities) and dynamic management costs, which
consist of the costs of persuading, negotiating and
teaching within the "rm of own when trying to
create/develop a capability internally or persuad-
ing, negotiating and teaching external partners
when a "rm-made activity is tried to sell (cf. [20]).
As an example of how to use these dynamic
concepts we can take the "rm operating at the
turbulent emerging phase of a new technological
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trajectory (e.g. telecommunications) where the role
of tacit knowledge is high. This means that the
appropriability regime is tighter than in the case of
well-established mature trajectory (e.g. the paperand pulp industry). Following this logic, one can
predict a tendency towards vertically more integ-
rated inter-"rm arrangements as the technological
trajectory becomes more stabilized because of de-
creased technological uncertainty and increased
standardization.
Now, it is time to go brie#y into the governance
benexts problematics (more about this in Section 5).
A bit paradoxically traditional TCE literature
totally neglects the issue of transaction, management
or partnership benexts. This means that they impli-
citly assume that these bene"ts are somehow inde-
pendent of governance structures. Of course, this
argument is not valid. There are always bene"ts,
which basically depend on the very nature of the
governance structure. Fig. 1 allows us now to intro-
duce our "rst characterizations concerning them.
When the "rm utilizes its own resources and
capabilities it can e!ectively build on cumulative
learning and exploit the economies of scope
through learning. It can also utilize competence-
enhancing innovations or exploit monopoly power
over other "rms. They all are benexts related to thevertical integration strategy. We call them manage-
ment orxrm-internal benexts.
On the other hand, when the "rm uses the mar-
ket option it can exploit high-power incentives
through "erce competition, economies of scale
through specialization, and utilize #exibility and
variation generated through many alternative part-
ners operating in open markets. From the property
rights perspective this originally evolutionary view
can be defended by referring to the fact that the
market-related bene"ts arise basically, since`
mar-kets are identixed with the right to bargain and, when
necessary, to exit with the assets owned. This... pro-
vides entrepreneurial incentivesa [10]. Through the
market a "rm can also better cope with radical
uncertainty and competence-destroying innova-
tions. We call these market-related mechanisms
transaction benexts. The usual distinction between
staticness and dynamics is not necessary here, since
bene"ts typically are generated only through
dynamic processes. Hence, they are called dynamic.
In order to clarify all the transaction and manage-
ment-related categories we extend and modify Die-
trich's [24] approach, which is based on two crucial
distinctions. The "rst one is between static transac-tion costs (Cm) and static management costs (Cf),
where C denotes `costsa and `m, fa denote `marketa
and `"rm's internal organizationa, respectively. The
second one deals with the distinction between dy-
namic transaction benexts (Bm) and dynamic manage-
ment benexts (Bf). Our own extensions dynamic
transaction and management costs can be di!erenti-
ated by using the asterisks (*:s). Our dynamized
governance cost formulations are as follows:
(1) Use pro-market option iw
Bm!Cm!Cm*'Bf!Cf!Cf*or
Bm!Bf'Cm#Cm*!Cf!Cf*
(2) Use pro-integration option iw
Bm!Cm!Cm*(Bf!Cf!Cf*
or
Bm!Bf(Cm#Cm*!Cf!Cf*,
where
Bm* dynamic transaction benexts, which are posit-
ively correlated with the ability to exploit
economies of scale, high-powered incentivesand #exibility. They also allow to generate
more ideas through the market variation and
to cope with competence-destroying innova-
tions.
Cm static transaction costs, which are positively
correlated with opportunism, few partners
available, asset or capability speci"city, in-
ability to cope with parametric uncertainty,
dependence on complementary assets
holders, systemic nature of innovation, low
appropriability, and organizational inertiaagainst newcomers.
Cm* dynamic transaction costs related to persua-
sion and learning costs with the providers of
outsourced external capabilities.
Bf* dynamic management bene"ts, which are pos-
itively correlated with the ability to exploit
monopoly power, asymmetric knowledge,
economies of scope, and cumulative tacit
know-how when facing competence-enhanc-
ing innovations.
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Cf static management costs, which are related to
the costs of monitoring large bureaucracy
and high sunken R&D costs.
Cf* dynamic management costs relate to the costsof persuading, negotiating and teaching with-
in the "rm when a new capability has to be
generated. It also includes the inability to
cope with radical uncertainty.
Now, we are ready to use these implicit equa-
tions (1) and (2) above when explaining the rise of
inter-"rm partnerships in light of our approach-
related explanatory categorization introduced in
Table 1. The cost types Cm and Cf belong no doubt
to the domain of the Coasean}Williamsonian basic
model with some Teecean extras (i.e. cell C#some
elements of A), Cm* and Cf* belong to the domain
of until now relatively ill-developed dynamic trans-
action cost economics (i.e. cell D), whereas, the
dynamic bene"t functions Bm* and Bf* represent
our own contribution i.e. they cover a combination
of cells A and B.
4. Paradigmatic explanations for emergence of
partnerships
In this section we shall put together our explana-
tory categories (A, B, C, D) and our explanation
functions (1 and 2) and introduce in terms of them
some interesting paradigmatic explanations for the
emergence of inter-"rm partnership relationships.
First we will take cell C, which combines the
exchange-based view with static temporal isolation,
i.e. represents the most paradigmatic Coasean}
Williamsonian transaction cost case. In this very
aggregative framework, which is actually built for
the analysis of the basic choice between the marketsand hierarchies, the rise of di!erent governance
options can be interpreted as follows.
Vertical integration is the best option, when
(i) uncertainty, the danger of opportunism and
complexity are high, (ii) asset speci"city is high and
there are only few providers of complementary ca-
pabilities, and (iii) trust between partners is lacking.
The market option is preferred when (i) the de-
grees of uncertainty and complexity are minor and
the danger of opportunistic behavior is small,
(ii) there are many potential partners available, and
(iii) transactions do not need any speci"c investments.
In this static TCE-oriented interpretation the
partnership solutions can best be regarded asstrange hybrids between well-de"ned market and
hierarchies. Intermediate governance structures are
most preferable when there are determinants,
which simultaneously speak both for insourcing
(e.g. uncertainty, danger of opportunism, high asset
speci"city) and for outsourcing (the need for high-
powered incentives). A typical precondition for the
emergence of networks is also the pursuit ofecono-
mies of scale and scope at the same time, even if this
dynamic extension can be imported only as an ad
hoc relaxation into the static framework. These two
important concepts actually belong to the domain
of dynamic transaction/management cost, i.e. to
cell D. In addition, trust and reciprocity among
partners are badly needed to impede opportunism.
The next step is to go to cell A, where Teecean
transaction cost elements can be taken into account
as well. Main additional elements here are the na-
ture of innovation (systemic vs. autonomous), the
role of complementary assets and the tightness of
the appropriability regime. We can conclude that
the partnership agreements will be looser (tighter),
i.e. closer to market (vertical integration) solutions,if (i) innovation launched is autonomous (systemic)
by nature and requires small (large) speci"c invest-
ment, (ii) appropriability of new knowledge is tight
(weak), thus implying no (great) danger of free rider
imitators, and (iii) the markets of complementary
capabilities are e$cient (ine$cient), thus fostering
the pressures towards hold-up problems. Fig. 2
illustrates the basic governance choice problem
in terms of a `governance costa indicator or
pendulum. The higher the management costs and
the lower the transaction costs are, the more prefer-able is the market option and vice versa. Fig. 2 also
shows how the boundaries of the "rm change
subject to governance costs.
Although all the results derived above grasp
some important issues as to the rise of inter-"rm
partnership solutions, they also leave some crucial
elements out of the explanans (i.e. the set of
explainers) and, consequently, out of the explanan-
dum (i.e. the set of explained items) as well. Most of
these omitted explainers can best be dealt with in
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Fig. 2. Dynamic transaction and management cost-based choice illustration.
terms of static and dynamic governance bene"ts
and their underlying mechanisms, i.e. by taking
a step towards the union of cells A&B.
5. On partnership-related bene5ts
In this section we shall analyze how transac-
tion and management bene"ts may give rise to
inter-"rm partnerships. The necessary (but not suf-
"cient) reason for a partnership is that the aggreg-
ate level of quasi-rents derived from the joint
production is higher than would be the sum of
independent investments done by the parties alone.Let us start with a set-up where we have only two
parties, say an incumbent buyer (B) and a small
seller (S). Aggregate quasi-rents (QR) can now be
measured as QR"
expected capitalized value of the jointly controlled
assets obtained in the partnership (i.e. the expected
value of co-operation) and
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(b) This case, which is not that rare in the R&D
context, refers to the issue where the joint sur-
plus can be created only through melting by
complementary skills, routines and capabilitiesof specialized partners (cf. modern biotech-
nological "rms).
(c) In the third case it is possible that the
cooperative use of an asset x may increase the
pay-o!generated through another asset y (the
so-called supermodularity case).
(d) The fourth case is related to the situation where
there are cost advantages to be obtained
through the economies of scope. This fosters the
tendency towards more vertically integrated,
tighter partnerships.
(e) The "fth case is related to the situation where
there are cost advantages to be obtained
through the economies of scale or dynamic learn-
ing-related externalities. They all strengthen the
tendency towards more market-oriented and
specialized partnerships.
(f) The sixth case is related to the situation where
the "rms can signalize through mutual coopera-
tion that they trust each other. Trust decreases
both the static and dynamic transaction costs,
thus generating more market-oriented partner-
ships. Trust-generating mechanisms eliminatethe fear for opportunistic behavior, which is the
factor that compounds all other sources of
transaction cost. In trustworthy conditions the
parties can without the threat of getting held up
to invest in dedicated or relation-speci"c assets.
This, in turn, lowers production costs, raises pro-
ductivity, improves quality, and reduces time to
market. Here we see transaction bene"ts in action.
The rise of trust-generating mechanisms (i.e. the
change from non-cooperative to co-operativegame) can most easily be explained in terms of
a simple game-theoretic exercise. Let us assume
that there are two players who face the following
pay-o! matrix: (i) if both the players trust each
other and ful"ll the contract, they both will have
EUR 5 million pro year, (ii) if only one partner
ful"lls the contract, whereas the other breaks it, the
breaker will have EUR 10 million against EUR
1 million received by the loser during the "rst year,
(iii) if both the players break the contract both will
have EUR 2 million. In a static setting, which is
typical for the TCE approach, there is an incentive
to cheat the partner and hope that he ful"lls his
own part of the contract. If there is no loyalty andtrust between the partners, the equilibrium will be
the non-cooperative prisoners+ dilemma outcome (2,
2) where both will face the worse situation than in
the cooperative equilibrium (5, 5).
If we now put this extremely simple game into
the dynamic framework we will see that trust-based
cooperation is the most rational outcome. Let us
assume that both the players are playing the tit for
tat-strategy and no one knows how long the game
will last. In such a set-up it is easiest to think that
the game will last forever, which means that you
can use a simple perpetual discount rate factor
when calculating the expected net present values of
non-cooperative and cooperative strategies. If the
real rate of interest is assumed to be 4%, the ex-
pected NPV of perpetual non-cooperative strategy
in the `tit for tata-game is as follows:
(i) 10#2(1.04)\#2(1.04)\#2(1,04)\#2
#2(1.04)\L"10#2(0.04)\"EUR 60 million.
In the cooperative strategy alternative the expectedNPV can be counted as follows:
(ii) 5#5(1.04)\#5(1.04)\#2#5(1,04)\L
"5#5(0.04)\"EUR 130 million.
Since EUR 130 million' EUR 60 million we can
conclude that in the dynamic set-up of this particu-
lar model there is a built-in tendency towards
cooperative games, i.e. trustworthy relations. These
results can be generalized when taking into accountthe values of cells and the rate of interest. The
Section 6 will analyze further the role of trust in
asymmetric partnerships typical in telecommunica-
tions sector.
Finally, we can introduce perhaps the most deci-
sive piece of criticism coming from the dynamic
capability camp against the contractual gover-
nance camp. It deals with the inability to treat
properly the genuine coordination problems, which
are due to dispersed knowledge, radical uncertainty,
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Fig. 3. Bene"ts provided with di!erent governance structures.
and bounded rationality. This criticism clearly goes
further beyond the traditional issues of mitigating
the e!ects of incentive con#icts [26].
The common message of both the property rights
and principal agency theories is that in the situ-
ations where the Pareto criterion is too weak to
bring to the cooperative equilibrium, which maxi-
mizes the joint surplus, the partners should organ-
ize the cooperation in a way which gives all the
players incentives (e.g. bribes) enough to get them
to the equilibrium with higher joint surplus. This
simple incentive-alignment game can teach us
much about di!erent ways to organize some sorts
of incentive mitigating problems in the dynamic
set-up, but we can go further. The point of theproponents of dynamic capability view is that this
paradigmatic contractual game does not take into
account the real cognitive limitations of players and
gives therefore quite too naive and simple picture of
real coordination problems faced by the "rms in
real-life partnerships negotiations.
The real issue is that all the players are genuinely
boundedly rational and relevant knowledge about
the structure of the game, payo! functions, poten-
tial economies of scale and scope, etc., is more or
less imperfect, partly non-existent and necessarilydispersed. Hence, genuine knowledge gaps, such as
mistakes, accidents and surprises, cannot be ruled
out ([26]). This again means that one cannot plan
the rules of the game exactly but one has to rely
much more on (i) markets as discovery mecha-
nisms, (ii) alert entrepreneurs as catalysts of new
combinations, and (iii) trust-generating mecha-
nisms as vehicles to mitigate unsolvable (due to
dispersed knowledge and unforeseen contingencies)
interest con#icts.
This radical dynamic capability view with empha-
sis on cognitive limitations has its roots in Austrian
economics, of course. One cannot help thinking
when facing this criticism that the recent trend
towards partnerships may actually be only a reac-
tion against too centralized (integrated) and too
planned hierarchies, which cannot cope with rad-
ical uncertainty when facing turbulent time in not
yet fully developed industries.
One interesting answer to this challenge could be
the evolutionary economics-basedview, which starts
from the idea that in the situations of radical uncer-
tainty it is most advisable to build on backward-
looking routines, which may be changed through
learning and surprises, and to organize the whole"rm structure on the capabilities based on them.
We skip this issue now (cf. [13]). In Fig. 3 we
summarize the list of bene"t-generating factors and
mechanisms.
The partnership enables parties to combine the
bene"ts of economies of scale and scope. At its best
it may yield many bene"ts of markets and hier-
archy. The partnership is however challenging gov-
ernance structure to manage. If parties are able to
generate coordination mechanisms, e.g. trust they
may be able to create a most e$cient solution withmajor joint surplus. It is, of course, quite evident
that all the decisions concerning the choice between
di!erent governance structure options are based on
subjective estimates about the e!ects, which main
transaction and management cost/bene"ts determi-
nants will give rise to in the future. Since the e!ects
are often hard or impossible to quantify (at least
ex ante), the basic decisions have to be based on
qualitative considerations about the relevance of
di!erent determinants.
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6. Role of trust as a mechanism for e7cient solution
in telecommunications
In the telecommunications both technologicaland market uncertainty are high. There is little time
to learn or study the volatile markets or constantly
emerging new technologies. Considerable rewards
may be gained, yet the players face considerable
risks. In such a turbulent business the players are
forced to constant strategizing. Also, partnerships
may have to be decided almost `overnighta. Players
of this challenging game also know, that the
`shadow-of-the-futurea might be surprisingly short,
since the various alliances and consortiums are in
the constant move. Due to the high volatility (un-
certainty) and the involved great risks the role of
trust is crucial. Trust is a necessary element in any
cooperation [27] and an e$cient mechanism to
manage risks.
In high-trust relations "rms are better able to
tolerate the inherent risk. Trust has been identi"ed
among the key factors in technology partnership
establishment and management [28]. Previous
research on trust shows that by nature trust
develops gradually and common future is a strong
motivator for a trusting relationship [29]. In tele-
communications the partnering "rms clearly needtrust, yet they have little chance to commit themsel-
ves gradually to the relationship or experiment the
values and goals of the other.
In telecommunications partnerships between
a resourceful large incumbent player and a special-
ized supplier are common. We call these com-
plementary relationships asymmetric partnerships.
In this context asymmetry could be de"ned as
`di!erence in skills, resources and power as well
as management and culture of actorsa. Role of trust
may be particularly important in asymmetric part-nerships, where the value addition is generated
from specialized complementarities resulting in
dependence and with inherent risks of hold-up and
opportunism. If the relationship is based on
co-specialized complementarities, the power bal-
ance is more equal resulting in mutual dependence,
which may counterbalance the need for trust.
Asymmetry in the relationship sets additional chal-
lenges for the creation of trust due to the dissimilar-
ity and cultural distance of the parties. In this
context trust may be de"ned as `an actor's expecta-
tion of the other party's competence and goodwilla.
Thus, both the competence (technical capabilities,
skills and know-how) and the more abstract good-will which implies moral responsibility and positive
intentions towards the other are included [30].
Trusting parties are able to relax the various
safeguarding measures (hostages, reviewing, in-
formation gathering) and gain increased e$ciency.
Among others Dodgson [31] notes that perhaps
the greatest challenge in collaborative relationship
management is production of trust.
According to Spekman and Wilson [32] the abil-
ity to establish and sustain similarvalues and norms
and to build a set of congruent goals between the
partners sets a base for a trusting relationship.
Open communication, commitment and social/char-
acter similarity are also commonly cited mecha-
nisms for trust building. Personal trust has been
seen as a mechanism for promoting organizational
trustand subsequently enhancing economic perfor-
mance of organizations [33]. Organizations devel-
op routines and processes, which unify the behavior
of their employees and the responses to external
contacts. Individual members of the organization
may set the standard for routines and processes by
their example and by stressing homogeneousorganizational values promoting trust.
Asymmetric partnerships in the telecommunica-
tions are especially challenging for trust building.
Social-psychological processes like trust develop
slowly as a product of cumulative interactions (see
e.g. [34]). In highly volatile telecommunications
there is little time for partnership establishment and
the asymmetry by nature demands open commun-
ication, mutual adaptation and commitment for
trust to emerge.
7. Illustrations of the bene5ts in the
telecommunications sector
Telecommunications is one of the most turbulent
industries in today's economy. Privatization,
liberalization, consolidation and emerging new
technologies re-shape the competitive landscape.
Telecommunications is a good example of an in-
dustry where technological discontinuities give rise
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Fig. 4. The contradictory forces in the development of complex systemic telecommunications software.
to competence-destroying technological change
forcing the incumbent large corporations to rethink
their strategy and underlining assumptions. E.g.
company core competencies need to be seen as
dynamic capabilities, which successful companies
renew and adjust in relation to the environmental
needs. Incumbent large organizations may utilize
and preserve their established competencies in, e.g.
brand, reputation and commercializing services
and products, but start-ups may be relatively better
in innovation demanding completely new compet-
encies (see [37]). In today's telecommunications the
incumbent large players are looking for specialized
suppliers to learn from them and to leverage tech-
nology options provided by technology suppliers.
Emerging new technologies also enable new busi-ness models, which the start-up ventures may be
most agile to test and later experiment with more
resourceful incumbent players.
In the following, we illustrate the main bene"ts
provided by di!erent governance structures in the
telecommunications sector. Insight is based on
in-depth interviews of 12 small and specialized
software suppliers and their 4 large counterparts,
incumbent players in the Information and Com-
munications Technology industry. Interviews have
been carried through as a part of the forthcomingPh.D. study on Trust in Asymmetric Technology
Partnership Formation by one of the authors, Ms.
Blomqvist. Key decision-makers have been identi-
"ed and interviewed in lengthy interviews on their
propensity to establish asymmetric partnerships
and relevant factors (e.g. bene"ts, costs, com-
plementarity, opportunism, risk and trust. In
addition information from expert interviews and
practical working experience has been bene"cial to
our insight of empirical reality.
Market benexts: In the market option the hold-up
risks of speci"c partnerships are avoided. If the
products, technologies and services needed are such
that they can be purchased from the market the
competition keeps the prices down. E.g. programming
capacity may be purchased from the market. How-
ever, it may be di$cult to "nd highly skilled labor
for some of the most recent technologies, e.g. Java
used in Mobile Internet, which may become
a problem. The high boom in the Finnish telecom-
munications sector has resulted in small "rms with
good teams which are acquired also for capacity
reasons. If the company is able to use the market
option employee costs and costs for establishing
and managing partnerships are saved. However,
the demand is usually quite speci"c and theremay be only a small number of suitable suppliers
available, giving rise to potential transaction
costs.
Firm-internal benexts: Coordination, control and
ewective management should be easier to accom-
plish within a hierarchy. In the telecommunications
sector the software is often systemic, i.e. the cus-
tomer is o!ered a systemic product consisting of
di!erent layers and components, often provided by
several specialized suppliers. Development of sys-
temic software in a partnership is complex anddemands close collaboration. The complexity of
systemic development would call for vertical gover-
nance, i.e. hierarchy, yet the need for specialized
know-how of several technologies calls for co-
operation Fig. 4.
Due to the high level of competition and the need
for innovative and spear-edge product o!ering
a partnership seems to be an accepted solution
also in challenging systemic telecommunications
software development.
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In a hierarchy it is possible to build on existing
knowledge and enjoy economies of scale in learn-
ing. Some of the innovations are competence en-
hancing making it possible to enter new businessareas. E.g. combining innovations and knowledge in
mobile technologies, large-scale customer service
and Internet makes it possible to o!er global servi-
ces for M-Commerce (mobile electronic commerce).
On the other hand, some generic innovations, e.g.
platforms may be used in various business areas.
Large organizations may also use their monopoly
power to set standards, e.g. for operating systems or
new concept development, e.g. mobile portals. They
may also try to limit competitor access for certain
business. If the large organization operates e$-
ciently and focuses its e!orts, it may be able to
launch new products faster. A quite common `not-
invented-herea resistance common to technology
partnerships may be avoided in the hierarchy, even
if internal politics also play a role. Higher process
and project quality may be reached without the need
to adjust and educate external partners. Internal
communication in a hierarchy may be e$cient yet
the quality of the communication is dependent on the
level of organizational trust. If the specialized sup-
pliers operate alone, they are most probably faster
to reach and implement decisions. Risk for opportun-istic behavior and unintended disclosure of informa-
tion is less. Internal management costs of vertical
hierarchy (e.g. costs for R & D and personnel devel-
opment, support for the head o$ces, as well as the
time the management uses to manage and control
the internal venture) are ignored in the traditional
transaction cost approach [35,36]. This may result
in overly optimistic evaluation of the internal net
bene"ts.
Benexts from partnering: The partnering "rms are
able to focus on core competencies and reach higherspecialization and ezciency. Leveraging external
complementary competencies they are able to
enjoy the economies of scale and scope at the same
time. Partnerships may increase the yexibility and
lower the riskinherent in new technologies and new
projects by o!ering a technology window to new
technologies. Asymmetric partnerships with com-
plementary and diverse "rms may generate new
innovative practices and processes. Learningis often
cited as a major positive outcome of partnerships.
Established partnerships are used in announce-
ments for signalizing technological and market
power. They also legitimize new entrants and
emerging technologies. Partnerships and alliancesare very important tools when newly established
telecommunication companies try to push their
new technologies towards dominant design and
industry standards.
8. Concluding remarks
Our study points out that partnership types of
arrangements (hybrid organizations) emerge in
businesses characterized by high volatile nature,
high degree of uncertainty and high degree of asset
speci"city. High degree of transaction frequency,
mutual dependency, and a possibility to share risk
and information encourage inter-organizational
cooperation.
It is obvious that a partnership is superior in
certain conditions when compared with vertical
integration or to the use of open markets. Positive
net joint surplus is evident, if there are only a small
number of players able to provide the needed tech-
nologies, products and services. High risks inherent
in technological development and the uncertaindirection of technological development (e.g. which
technologies will become dominant designs and
later industry standards) do not favor autonomous
development. In search of high complementary
value addition the asymmetric partnerships with
specialized or co-specialized resources have gained
popularity. The evolution and management of
asymmetric technology partnerships is however
very challenging. Partnership is an e$cient solu-
tion only if it creates some extra value compared
with markets and hierarchies. It can be concludedthat partnership is not a panacea, which can be
transposed into any conditions. Transaction cost
economics explains why possibly disappointing
outcomes can arise from a partnership agreement.
There may be problems with asymmetric in-
formation and potential opportunism. We believe
that inter-organizational trust may act as a
mechanism providing an e$cient solution. Because
of the extremely high volatility in the converg-
ing telecommunications partnerships seem to have
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become increasingly as temporary arrangements.
This volatility sets great challenges for trust build-
ing. Trust-building mechanisms in this risky and
turbulent business will be left for further research.
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