gap in TCE

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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.

PII: S 0 9 2 5 -5 2 7 3 ( 0 0 ) 0 0 0 9 5 - 5


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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

2 K. Blomqvist et al. /Int. J. Production Economics 79 (2002) 1}14


3/14

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].

K. Blomqvist et al. /Int. J. Production Economics 79 (2002) 1}14 3


4/14

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 (à conglomerate strat-

egya) or (ii) to acquire external capabilities from the

market (à hollow "rm strategya) or (iii) to exploit

economies of scale and scope through networking

(à 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


8/14

(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,



9/14

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.



10/14

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



11/14

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.



12/14

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



13/14

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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