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This paper provides a stakeholder-based rationale for firm risk reduction through diversification. While firm-specific investments from stakeholders are often important sources of firm competitive advantage and economic rents, there is a reduced incentive for stakeholders to make these investments due to the risk associated with firm-specific investments. Since the risk associated with firm-specific investments is often related to the total firm risk level, we argue that stakeholders’ difficulties in diversifying the risks associated with their firm-specific investments create incentives for risk management by firms. We test this argument in a diversification setting. Based on a sample of firms’ first acquisition moves, we find that firms are more likely to engage in risk reduction through diversification when high levels of firm-specific assets are important to the firm's operations. Several proxies for stakeholders’ specific investments are found to be significant in explaining cross-sectional variation in the extent of ex ante risk reduction in acquisitions.

Transaction cost economics (TCE) has received extensive attention from a variety of disciplines, but it holds a particularly central place in strategic management. The focal issues examined by TCE, vertical integration and interfirm governance (including contract design), are important determinants of firm performance – the central issue in the field of strategy. While several extensive reviews of empirical work in TCE have been undertaken, one key issue has received relatively little attention – construct validity in TCE empirical research. The purpose of this chapter is to highlight some of the challenges of operationalizing key transaction cost predictions and provide some ideas for better measuring core constructs such as asset specificity, uncertainty, and frequency.

The world in which companies operate today is volatile, uncertain, complex, and ambiguous, thus subjecting contemporary forms to an array of risks that challenge their viability in an increasingly competitive landscape. Organizations that cling to their traditional ways of operating impede their ability to survive while those able to embrace evolving changes and lever their strategic response capabilities (SRCs) will thrive against the odds. The possession of such capabilities has become a prominent explanation for effective adaptation to the impending changes but is rarely analyzed and tested empirically. Strategic adaptation typically assumes innovation as an important component, but we know little about how the innovative processes interact with the firm’s SRCs. Hence, this study investigates these implied relationships to discern their effects on organizational performance and risk outcomes. It explores the effects of SRCs and the role of innovation as intertwined adaptive mechanisms supporting strategic renewal that can attain superior performance and risk effects. The relationships are analyzed based on a large sample of US manufacturing firms over the decade 2010–2019. The study reveals that firms possessing effective SRCs have the ability to exploit opportunities and deflect risky situations to gain favorable performance and risk outcomes. While innovation indeed plays a role, the precise nature and dynamic effect thereof remain inconclusive.

While organization theories acknowledge the influence of specific assets on dependence and increasingly represent the latter as a structure of mutual dependence (dependence of A on B and dependence of B on A), there is, to the best of our knowledge, no empirical test concerning the impact of specific assets on a structure of dependence. Our chapter aims to fill this gap. It is all the more original in that it considers a case study where dependence changes sides according to the characteristics of the transaction. We examine the dependence between Chilean exporters and European importers when trading fresh produce. Such dependence originates with the need for just-in-time coordination and compliance with a compelling demand in a context of high price uncertainty.

Using a unique dataset from international trade in fresh produce between Chile and the rest of the world, we justify the use of a concentration sales ratio as a proxy for dependence and test the influence of a variety of specific assets on the side of dependence by using both categorical and dimensional approaches. Original findings show that certain transaction attributes have a strong influence on the side of dependence. In particular, the higher the frequency and the level of specific assets such as volume, niche varieties, and joint sales with other products, in the transaction, the greater the likelihood of a higher ratio of dependence for the importer rather than the exporter. Conversely, in the event of low levels of specific assets and less frequent operations, dependence tends to be greater on the side of the exporter.

A model of reputation is developed to show how firms operating in concentrated sectors can use the sponsorship of general human capital investments to specifically trained workers as a device of commitment with prospective employees. Employees of firms that operate in concentrated sectors learn skills that are valuable only for a limited number of alternative employers. This gives monopsonistic power to the training firm over the trained workers. Anticipating it, potential employees will be reluctant to work for the firm unless the employer is able to commit oneself’ must be turned back to ‘herself. I argue that human resource policies including the provision of general human capital to workers reduce employers’ commitment costs. Evidence from two representative samples of workers from Spain and the United Kingdom show that, consistent with the predictions of the model, firms from more concentrated sectors are more likely to sponsor their employees’ education.

Interfirm contracts are a ubiquitous economic institution in market economies. In this study, we examine the determinants of one important aspect of interfirm contracts – contract duration. We begin with Joskow's (1987) study that demonstrated that contract duration is governed by mechanisms that economize transaction costs. Our study extends Joskow's study in several ways: First, while Joskow's study focuses on one particular area of extreme resource dependence, between the coal mine and the power company, we examine patterns of contract duration and their determinants across broader economic sectors, thereby providing a more general test of the key ideas in transaction cost economics. Second, we investigate the role of social institutions as a distinct mechanism underlying the design of contract duration, especially in terms of mitigating risks and transaction costs. Finally, by situating our study in China, we extend the research context beyond industrialized market societies to a transitional economy where interfirm contracts are an emerging economic institution. The empirical study is based on the analyses of information on 877 contracts from 620 firms collected in two Chinese cities, Beijing and Guangzhou, in 2000.

Purpose – This study focuses on the relationship between local governments and public sector joint ventures (JVs). Public sector JVs are separate administrative entities that undertake public service activities on behalf of local governments. The aim of this study is to examine the vertical management control packages that are used by local governments to control the relationship with their public sector JVs.

Design/methodology/approach – Two case studies have been conducted in two public sector JVs, owned jointly by more than 20 local governments. The analysis of the two cases is informed by an integrated conceptual framework describing how transactional and relational factors influence control, trust, and risk in the context of public sector JVs.

Findings – The case studies provide a nuanced understanding of the interplay between the vertical management control packages, trust between the parents and the public sector JVs, and risks as perceived by the local governments. The case findings not only reveal how local governments struggle with adequate outcome control but also highlight how and why they rely on behavioral control. A related finding is that while the probability of poor business performance does not have a significant impact on the design of the vertical control packages, the social impact of failure has the potential to create a sense of urgency with regard to changes in the design of vertical management control packages.

Originality/value – This study adds to the literature on interorganizational relationships by providing insight into the use of vertical management control packages in the specific, but relevant, setting of public sector JVs.

Given the confluence of opportunism, bounded rationality, and asset specificity in a partnership, the participants may attempt to expropriate certain rents. This type of rent is called the quasi-rent, and it is the reason for participating in the relationship in the first place (Alchian & Woodward, 1988). A quasi-rent is the excess above the returns necessary to sustain the current use of resources. It can be the means to recover sunk costs, such as investments in assets in general, and relational assets in our context. A relational quasi-rent is that portion of the quasi-rent generated by a resource that depends on the partner's resources (Hill, 1990). It stems from investment in specialized assets to support a partnership. Also this rent is the amount, which a partner can expropriate without destroying the relationship.