The Cost of ownership in the governance of interfirm collaborations

1 Documents de treball The Cost Of Ownership In The Governance Of Interfirm Collaborations Josep Rialp Criado Vicente Salas Fumás Document de treball nº 2000/1 Departament d'economia de l'empresa 2  Josep Rialp Criado and Vicente Salas Fumás Coordinador documents de treball: Dr. Jordi López Sintas http://selene.uab.es/dep-economia-empresa/document.htm e-mail: [email protected] Telèfon: 93 5812270 Edita: Departament d'economia de l'empresa http://selene.uab.es/dep-economia-empresa/ Universitat Autònoma de Barcelona Facultat de Ciències Econòmiques i Empresarials Edifici B 08193-Bellaterra (Barcelona), Spain Tel. 93 5811209 Fax 93 5812555 3 February, 2000 The Cost Of Ownership In The Governance Of Interfirm Collaborations Josep Rialp Criado Departament d'economia de l'empresa, Universitat Autònoma de Barcelona Vicente Salas Fumás Dpto. de Economía y Dirección de Empresas, Universidad de Zaragoza Document de treball nº 2000/1 A Working Paper in the documents de treball d'economia de l'empresa series is intended as a mean whereby a faculty researcher's thoughts and findings may be communicated to interested readers for their comments. Nevertheless, the ideas put forward are responsibility of the author. Accordingly a Working Paper should not be quoted nor referred to without the written consent of the author(s). Please, direct your comments and suggestions to the author(s). 4 The Cost Of Ownership In The Governance Of Interfirm Collaborations∗ Abstract: This paper investigates the selection of governance forms in interfirm collaborations taking into account the predictions from transaction costs and property rights theories. Transaction costs arguments are often used to justify the introduction of hierarchical controls in collaborations, but the ownership dimension of going from “contracts” to “hierarchies” has been ignored in the past and with it the so called “costs of ownership”. The theoretical results, tested with a sample of collaborations in which participate Spanish firms, indicate that the cost of ownership may offset the benefits of hierarchical controls and therefore limit their diffusion. Evidence is also reported of possible complementarities between reputation effects and forms of ownership that go together with hierarchical controls (i.e. joint ventures), in contrast with the generally assumed substitutability between the two. Key Words: interfirm collaboration, property rights, transaction cost, Spanish firms. Correspondence address: Josep Rialp Criado Dep. Economía de la Empresa Edificio B - Campus U.A.B. 08193 - Bellaterra (Barcelona) Spain Phone 34 - 93 581 2258 Fax 34 - 93 581 2555 e-mail: [email protected]. ∗ The authors want to thank the assistants to the Academy of Management Conference in Chicago, specially professors Gautam Ahuja and Ivan Manev, and also professor Esteban García Canal for their comments in earlier drafts. 5 1. INTRODUCTION What determines the boundaries of the firm is an important question in the theory of economic organization, still under very lively intellectual debate (Holmstrom and Roberts, 1998). The conventional distinction between firms and markets, hierarchies and prices, as the mechanism which solve the coordination and incentive problems resulting from division of labor and exchange, not only is still under the process of academic clarification, but it is challenged by the proliferation of intermediate or hybrid mechanisms of governance (Williamson, 1985, 1991; Imai and Itami, 1984; Powell, 1990). When a firm needs a good or service to carry out its plans, it may buy it in the market, develop it itself, or joint efforts with other agents, firms, in what is often called interfirm cooperation. Now firms do not exchange in an anonymous market, neither they merger into a single entity, so the cooperative action is often viewed as an example of “hybrids” between the market and merger or acquisitions. A closer look at interfirm collaborations1 reveals that they differ in the governance structure chosen to regulate the collective actions: sometimes such structure relies more on market principles (contracts, prices); others it involves principles often found in the internal organization of firms (hierarchy, plans, orders). Therefore, the intellectual challenge is not only to explain why firms or why markets to organize and govern economic transactions, but why firms choose different governance forms for their collaborations. This paper is written with the purpose of contributing to answer the previous question by introducing in the theoretical analysis the propositions derived from the theory of property rights (Grossman and Hart, 1986; Hart and Moore, 1990; Hart, 1995) besides the widely used, so far, theory of transaction costs (Coase, 1937; Williamson, 1975; 1985, 1991). The propositions are tested using data about interfirm collaborations in which participate Spanish firms. The research question of this paper is not new. For example, Pisano (1989), Pisano and others (1988), Osborn and Baugh (1990), Gulati (1995) investigate why firms choose equity exchanges (minority interests, joint ventures) to support collaborations. More recently, Oxley (1997) further distinguishes among bilateral and multilateral contract, within the collaborations which do not involve equity exchanges, while Gulati and Singh (1998) separate collaborations under minority equity interests and collaborations governed under the form of joint ventures. In all these papers, the basic underlying framework is borrowed from Transaction Cost: as any collective action, interfirm collaboration involves coordination and incentives needs. Contracts have limitations when 6 they come to solve these needs, specially if interdependencies are intense (Gulati and Singh, 1998), and payoff are difficult to enumerate ex-ante and verify ex-post creating appropriability hazards (Oxley, 1997). Therefore, in certain cases, it is more efficient (it has lower transaction costs) to substitute or complement contracts with some of the principles and rules proper of the hierarchy (administrative controls, formal coordination units, authority). The property rights theory has pointed out the limitations of transaction costs to explain the boundaries of the firm with the argument that the costs of the firm (hierarchy), have not been properly expelled out (Hart, 1995). In other words, transaction cost economics has emphasized the costs of using the market to govern exchange, but it has not provided a rigorous explanation of the costs of the firm as a governance structure. To our knowledge, the literature on explaining the choice of governance forms for interfirm collaborations has ignored so far the property rights approach and, therefore, we believe, it has ignored some basic costs of introducing hierarchical principles in the governance of collaborations. We spell in more detail which are such costs in section two of the paper, but to motivate the exposition let us consider the case of joint ventures. One of the basic predictions of the property rights model is that joint ownership (each party has veto power on how to allocate the assets) is inefficient when either separate ownership (each party is the owner of some assets) or single ownership (all assets belong to one party) are also feasible. However, a joint venture with two parties, each holding 50 per cent of the shares, is a widely diffused form of joint ownership in interfirm collaborations. To reconcile the empirical evidence with the theoretical prediction is quite important, if we take into account the recognition given by the academic profession to the property rights approach2, and the diffusion of balanced joint venture3. Section two of the paper presents the theoretical model and postulates the hypothesis to be tested. Besides extending transaction cost to properly account for the “costs of ownership”, the paper combines results from the theory of implicit contracts and the consideration of “market power” interests to expand the factors that determine the choice of the governance form. Section three contents the description of the data, the variables, the methodologies used to test the hypothesis (ordered logit and multinomial logit models), and the empirical results. The paper closes with discussion of the results and conclusions. 7 2. THEORETICAL MODELS 2.1. Transaction cost and property rights The basic proposition of transaction costs economics establishes that “transactions which differ in their attributes, are aligned with governance structures which differ in their costs and competencies in a discriminatory way” (Williamson, 1991, p. 277). The application of transaction cost theory to explain the governance form in inter-firms collaborations requires to properly identify the relevant attributes involved in the transaction, the alternative governance forms considered and the costs functions resulting from using a governance form in each transaction. The transaction In this paper, the unit of analysis (transaction) is what we label as “interfirm collaboration”, defined as any non transitory relation among independent companies which involves exchange and/or sharing of resources and capabilities to obtain mutually beneficial outcomes. With this definition, we identify transactions where there are at least two firms and both remain legally independent entities (so the transaction does not take place within a single firm, as would be the case if it was the result of a merger, acquisition or internal development). Also we identify transactions where the relation among the participating firms goes beyond an anonymous spot exchange of goods or service at a market predetermined price (so even that the transaction takes place in the domain of the market it involves long term relations with identifiable parties). In some cases the collaboration involves exchange of an already existing good or service in a long-term non-spot basis. In others, collaborating firms share resources to carry out ex-novo activities either creating at the same time a new entity (firm) or without creating it. The transaction attribute listed as determinants of the cost of governance, differ across the authors. Williamson (1985) selected three: the nature of the involved assets, general or specific; the available information, uncertainty and symmetry; the frequency under which the transaction takes place. Milgrom and Roberts (1992), on the other hand, indicate five potentially relevant attributes: the specificity of investments, frequency and duration between consecutive transactions; complexity and uncertainty about possible actions in the future; difficulty of measuring the performance along the transaction; interrelations among transaction and/or persons involved. In the present paper we shall refer to the level of “transaction complexity”, assumed to be an increasing function of interdependencies among transacting units, level of asset specificity, uncertainty about future contingencies and difficulties of measuring performance. As in others 8 research papers, the attributes considered as sources of complexity are not directly observable, and they will have to be approximate by variables that can be observed. The governance forms Imai and Itami (1984) made the important distinction between where transactions take place, in the market or within firms, and the principles used to govern them, organization principles or market principles. Interfirm collaboration takes place in the domain of the market, as the two or more firms involved remain independent, but sometimes they rely mostly on organization principals, such as hierarchy, administrative control, and formal coordination units. Most of the previous works on the governance of collaborations have made the distinction between governance forms that rely on contracts and forms that rely on hierarchical controls. From an empirical perspective, contracts are further divided in unilateral or bilateral exchange (Oxley, 1997). Within the hierarchy, differences in degree have been attributed to equity (minority) exchange, and to the creation of a new independent firm -joint venture- (Gulati and Singh, 1998). Implicit in the notion of hierarchy there is the idea of authority and fiat (Williamson, 1991). The literature on interfirm collaboration has extensively described how joint ventures, for example, imply the introduction of hierarchical principals, compared with the case of contracts. However, the implications in terms of allocating ownership rights have been ignored. This is why we extend the choice of governance to consider the theory of property rights, introduced in Grossman and Hart (1986) and summarized in detail in Hart (1995). Agents participating in exchange and/or production are often forced to rely on incomplete contracts. This is due to the fact that when the contract is written down it is impossible or extremely costly to anticipate all future contingencies, or such contingencies will be unverifiable by third parties (mainly the courts) when they actually occur. Therefore, incomplete contracts are ambiguous about what will happen in certain circumstances, so a mechanism has to be designed to resolve such ambiguity. Presumably, a new bargaining process will be initiated, but even in this situation it has to be anticipated what will happen in case of disagreement. The property rights theory associates the actual resolution of the incomplete contracts with the allocation of “residual decision rights”. To hold such rights over the non-human assets of the transaction means to have the rights to decide on any non-anticipated contingency. In this regard, to be the “owner” of an asset is to hold the residual decision rights on the asset. Ownership is an institution to allocate residual decision rights. In a world of complete contracts, where everything is predetermined ex-ante, ownership is irrelevant. But when contracts are incomplete and there are 9 specificities in the transaction, the allocation of decision rights (ownership) matters in terms of incentives to invest more or less in the specific assets, before the transaction takes place. In the property rights framework, governance forms differ according to how residual decision rights are allocated. When assets in both sides of the transaction belong to one of the parties we refer to single ownership because the decision rights are concentrated in only one part. This is the situation created when two previously legally independent firms merger into a single one. If each of the two or more transacting parties has veto power on the use of the assets, the governance is known as joint ownership; a 50 – 50 equity joint venture between two firms will be a form of joint ownership. If the residual decision rights are allocated to a third party not directly involved in the transaction, as it would be the case in collaboration where some third party arbitration is contemplated in the contract to resolve disputes, the governance form is known as trilateral governance. Finally, ownership of the assets can be distributed among transacting parties; separated ownership. A typology. Borrowing from transaction costs economics and from the theory of property rights, the governance forms available for exchange and production can be described as follows; see Figure 1 Spot Classical Contracting corresponds to pure market exchange where prices are the main (and sufficient) information to adjust resource allocation decision in an efficient way. Buyers and sellers can substitute each other at no cost and therefore the identity of the transacting parties is irrelevant (anonymity). Finally, the “quid” and the “quo” of the exchange occur at the same time, so exchange only takes place when there is mutual compliance. Long Term Classical Contract is a governance form closer to the pure market governance as it continues to rely on prices to guide adjustments and coordinate decisions. Contracts are fairly standardized and complete but the repeated and long-term perspective of the transaction makes relevant the identity of the parties. To substitute a partner has an important cost (at least you have the search costs, trying to find the best new partner). A time distance will generally exist between the “quid” and the “quo” of the transaction, and therefore the formal and explicit contract plays a more significant role in regulating the transaction. Neoclassical Contracting is a governance form where contracts provide a framework under which production or exchange will take place, and some degree of incompleteness and ambiguity is acknowledged. The ownership of the assets is separated among the transacting parties, as in the previous two cases, but the contract may include safeguards for the transacting parties in the form 16 Figure 2. Relationship between Governance Costs and Transaction Complexity. Governance Costs 1 * X2 * X Government through Government through Long Term Classical Contract Hierarchy Government through Neoclassical Contract Source: Adapted from Williamson (1991). Figure 2, together with the attributes of the Transaction which have been recognized as sources of complexity, allow us to formulate the following hypothesis: H1a: There exist two ordered complexity thresholds in inter-firm collaborations, which determine the respective choice of Long Term Classical contracting, Neoclassical contracting and Hierarchical arrangements. H1b: Complexity is positively associated with coordination needs, as interdependencies increase, and also with incentive problems, information asymmetries, resource specificity and measurement cost. So far, no consideration is made of the costs of ownership, as the substitution of contracts by hierarchy has only considered the introduction of administrative and operational mechanisms for coordination and control. As it has been mentioned above, to go from “contracts” to “firms” implies to change the allocation of ownership rights on non-human assets and this has implications for efficiency. Long-Term Classical Contract Neoclassical Contract Hierarchy Transaction Complexity 17 Moreover, joint ownership is only efficient, compared with all ownership alternatives, under special conditions. So the property H’x < N’x no longer holds in general: separated ownership of physical assets, which is the case in Neoclassical contracting, may be more efficient in terms of exante incentives to invest in assets specific to the transaction, than joint ownership. From the property rights perspective, then, hierarchy may be less attractive than contracts at high levels of complexity (uncertainty and resource specificities), especially when the specific assets are human capital not incorporated into physical capital in the process of the transaction. H2: When there are ex-ante investments in human capital embodied on the persons making the investment, inter-firm collaborations which imply joint ownership of the non human assets are less likely than those which keep ownership of assets separated among the collaborating parties. Consequently, in the case of joint ventures, we may have to weight the potential benefits of introducing administrative systems, which help to solve coordination needs, with the direct costs of these systems AND with the indirect costs due to the choice of an inefficient governance form from the point of view of the allocation of ownership rights. 2.2. Collusion opportunities and implicit contracts as determinants of the firms boundaries Collusion interests Inter-firm collaborations may not only respond to efficiency considerations aimed to lower production and transaction costs, but to facilitate coordination among firms in the product market and alleviate competitive pressures. If firms are rivals in the product market the costs and benefits of collaboration are more difficult to evaluate since now they may interfere with the competitive process. Veugelers and Kesteloot (1996) reach this conclusion for firms collaborating in R&D activities. Reynolds and Snapp (1986), on the other hand, show that firms in the same product market may reduce the intensity of competition and obtain profits closer to the monopoly solution by creating equity linkages among them (cross-shareholding and joint ventures). The search of more market power and the facilitate of collusive practices may then be additional reasons why firms collaborate. 18 H3: For a given level of transaction complexity, inter-firm collaborations with equity linkages are more likely when there are opportunities to attenuate product market competition among collaborating firms. Implicit contracts The economic analysis of inter-firm collaborations as a part of the broader question of explaining the boundaries of the firm (market, integration, hybrids) has considered so far the selection among explicit contracts (more or less complete) to regulate the transactions. However, collaborating parties may also rely on implicit contracts, i.e. contracts that are sustained by mutual promises of good faith, non-opportunistic behavior and priority of collective interest over individual ones. Transacting parties are willing to participate in transactions governed by implicit contracts because there are savings in costs compared with the use of explicit contracts sustained by the courts and legal procedures, and because each one believes that the other parties will comply with the promises of not acting opportunistically. The reduction in costs is obvious if we take into account that contracts do not have to be written down and that no ex-post verification by third part will be implemented (since there is no formal contract, verification is excluded as a possibility). The credibility of promises of “good behavior” will be sustained by the presence of social norms, Coleman (1990), Kandel and Lazear (1992), and by the egoistic interest of preserving a good reputation. If one party abuses of the trust of the other, who accepted to transact under the governance of an implicit contract, it may be broken a social norm which establishes what are considered the desirable patterns of behavior from the point of view of the collectivity. Social pressures in the form of sentiments of “guilt” and/or “shame” make promises credible as parties know that those making the promises will try to avoid such social sanctions. Reputation helps to sustain implicit contracts, as persons build up believes about future behavior of the others based upon observed behavior in the past (Kreps, 1990). If one agent has abused of the trust of the others in the past, it is expected that no one will want to be involved in implicit contracts with such agent in the future. The potential short-term benefit of the abuse may be offset by the future losses, as the abuser will not be able to participate of the advantages of implicit contracts. In fact, some transactions may generate so high transaction costs if they rely on explicit contracts that they can only be viable if implicit contracts are feasible. Therefore, the access to such transactions will be restricted to those whose reputation induces in others believes of good faith in their behavior. 19 In the inter-firm collaboration literature, implicit contracts can be considered substitutes of explicit contract provisions in Neoclassical contracting, and/or substitutes of voice and other safeguard mechanisms against opportunistic behavior when Hierarchies substitute contracts. Therefore, for a given level of transaction complexity it is expected to observe less hierarchical governance structures in collaborations where implicit contracts are feasible than in those where they are not (Gulati, 1995; Gulati and Singh, 1998; Oxley, 1997). H4a: For a given level of transaction complexity, the likelihood of contractual safeguards and hierarchical controls in inter-firm collaboration is lower when collaborations are carried forward under conditions which favor social norms and reputation effects, as sustainable of implicit contracts. Notice, however, that, as indicated above, the property rights theory finds complementarities between implicit contracts and some forms of hierarchical governance structures considered in inter-firm collaborations, such as joint ventures, as a case of joint ownership. Recall that the efficiency of joint ownership as a form of governance is recovered when reputation considerations are introduced into the analysis. The reason is that, with joint ownership, it is possible to lower the parties payoffs in the case of contract abuse and, consequently, increase the future losses which are compared with short-term benefits of defecting; Halonen (1994). H4b: The likelihood of joint ownership in inter-firm collaborations with person-embodied specific human capital increases under conditions that favor reputation effects. 3. EMPIRICAL ANALYSIS The data used in this work come from a detailed study of the inter-firm collaborations announced in Spanish leading economic newspapers and magazines during the three-year period of 1990 till 1992. The condition for an announcement to be included in the database was that at least one of the participating firms had to be from Spain. When possible, the description of the collaboration and of the selected governance structure was completed with information coming from different sources. Finally, a total of 1148 evidences of collaborations were identified and completely described with the variables listed below. Variables Dependent Variable The dependent variable is the governance form of the collaboration. The coding of this variable proceeds as follows: 20 i) Long Term Classical Contract = 0, when the collaboration is an Exchange Agreement ii) Neoclassical Contract = 1, when the collaboration is an Alliance iii) Hierarchy = 2, when the collaboration involve a Cross-Shareholding or a Joint Venture. An interfirm collaboration is identified as an Exchange Agreement when it involves the supply of a product, service or know-how from one firm to the other in a recurrent basis; when firms share a given facility for marketing, distribution or after sale services; technology licensing; subcontracting of manufacture or R&D. For example, since 1995 Freixenet, the Spanish firm leader of the sparkling wine market, is collaborating with the German distributor Eckes. The relation is based on a distribution contract among both firms. The time period that was initially established were three years (at the end of this period both firms could maintain the relation if they were interested in). The contract clauses establish the supply of the product (specifying all their characteristics) and some aspects of the marketing program. For example, Eckes must sell a minimum of bottles. If they could not do it, Freixenet would be able to cancel the contract, compensating Eckes with an amount equivalent to one-year profits8. Collaboration is classified as an Alliance when firms set up a project that implies the production or development of a non-existing product or service. No new legally independent entity is created and the project may have a limited or open time horizon. For example, Telmex, a Mexican firm, and Telefónica developed a project with the purpose of finally creating a digital system operated through a submarine cable of optic fiber. No time limit was established in the contract. The exchange of minority interest, Cross-Shareholdings, and the creation of new entities, Joint ventures, are the collaborations more easy to identify and properly separate from Alliances and Exchange Agreements. For example, Banco de Santander and Royal Bank of Scotland exchanged equity (the former bought 9.9 per cent of shares of the later and Bank of Scotland bought 4.9 per cent of Banco Santander) to do joint investments in Europe and exchange experience and technology. On the other hand, Acerinox, a Spanish company, and Armco, a US firm, jointly created the firm North American Stainless, an example of joint venture. The codification of the variables does not explicitly recognize the different forms of ownership. However notice that Exchange Agreements and Alliances are cases of Separate Ownership as collaborating firms control the residual decisions right, if any, of the physical assets involved in the collaboration. Cross-shareholdings and Joint ventures, on the other hand, are treated initially as 21 forms of Joint Ownership. Ideally, it would be of interest to know in which cases the parties have individual veto power on the assets combined in the collaboration and/or the actual shares hold for each of them in the joint venture, but such information was not available. Notice, however, that Geringer and Herbert (1989) and Killing (1983) report empirical evidence on the fact that, in general, the creation of a joint venture incorporates the right of veto over strategic decisions by the partners. We rely on this evidence to assume that this veto power is present in most of the joint ventures of our sample, although this evidence has not been contrasted. To see the robustness of the results to this assumption some sensitivity analysis will be performed, for example, excluding cross-shareholdings as a form of joint ownership. Explanatory variables In this paper we consider that it is possible to assign a more or less degree of complexity to the observed transaction depending upon the uncertainty, the assets specificity, interdependencies, number of parties, measurement problems, etc. The assumption postulates that more complex transactions present higher values in these underlying attributes. Most often, empirical data do not allow measuring directly the theoretically postulated attributes; therefore, we have to manage with the appropriate proxies. In our particular case, the attributes of the transaction actually observed are: the number of collaborating parties; whether there are multiple activities contemplated in the transaction or only a single one; whether the collaboration involves R&D activities or not; whether the collaboration had to do with the expansion in the same product-market where the firms are already active or, to the contrary, involves diversification into new ones. We now relate these observable variable attributes with the sources of complexity. The number of independent parties involved in the transaction will affect the complexity of such transaction as the number of potential interactions, and therefore interdependencies among them, will increase with such number. So, the number of partners is considered to have positive influences on the coordination needs. The problems of measuring individual contributions to the collective action, which facilitate free riding behavior (Alchian and Demsetz, 1972), will also likely increase. As the number of activities to be performed within the inter-firm collaboration increases, it is likely that the number of interdependencies will also increase. Collaborations with multiple activities (coded with 1) as compared with those with a single activity (0), have more coordination needs. Furthermore, the likely interrelations among them will make more difficult to spell out the 22 contributions and pay-off for each partner and, therefore, it will increase the risks of expropriation, compared with those when only one activity is performed. Therefore it is possible to associate this observed attribute with higher degrees of transaction complexity. The two other attributes affecting the complexity of the transaction are the realization of technology and R&D related activities (1), compared with the absence of such activities (0), and whether the purpose of the collaboration is to diversify into new product-market (1), compared with expansion in the current ones (0). The presence of R&D related activities in the collaboration suggest that the transaction involve production and transfer of knowledge, which is difficult to protect with contracts. In this situation, transaction complexity increases because (Arrow, 1969; Williamson, 1985): i) For fixing a price it is necessary to know the product, but once the knowledge is acquired there is no point in paying the price. ii) The knowledge may be non-codified and often ex-ante uncertain, so the outcomes of the transaction are difficult to enumerate and verify. iii) The generation of knowledge often involves sunk costs and therefore specific resources to the transaction. Finally, it will be assumed that innovation through R&D activities is likely to have more person embodied human capital than other activities. Innovation is highly labor intensive and the costs incurred on it are widely recognized as sunk costs (Stiglitz, 1987). Inter-firm collaborations which imply diversification into new products and markets will be associated with more transaction complexity than those which only expand current productsmarkets of the parties, because it is expected higher uncertainty in the former than in the later. Expansion will allow the transacting parties to draw from previous experiences at the time of enumerating possible contingencies to take place along the transaction. Diversification, on the other hand, implies newness and less potential for anticipating disrupting events and for evaluating their likelihood of occurrence. The conditions that favor social pressure and reputation effects as sustainable of implicit contracts, are proxies by the variables nationality of the collaborating part and location of the activities to be carried out. Social norms are more likely in culturally homogeneous social communities. Moreover, geographical proximity will facilitate the observation of the behavior of the partners and check whether such behavior is consistent or not with the premises. Observation of the behavior, or at 23 least, of the consequences of it, is necessary to apply social sanctions such as shame, and to start the application of economic penalties by excluding the deviating part from future collaborations. The partner nationality variable is divided in five categories: Spanish, European Union, United States, Japan and Other countries. Implicit contracts are expected to be more viable when partners are Spanish or European (cultural proximity). It may also be argued that higher socio-cultural distance among collaborating partners may difficult collaborations that involve strong interpersonal relations. So, instead of introducing more hierarchical controls, firms choose to rely on more standardized contracts such as licensing. So, socio-cultural distance may favor both, long-term contracts and hierarchies. Collusion opportunities are proxied by a variable that refers to the nature of the relations among collaborating firms. A distinction is made between horizontal (1) and vertical (0) relation. In the first case, collaborating firms belong to the same stage of the industry’s value chain and therefore are likely to compete in the same market. Vertical relations occur when firms belong to consecutive stages of the value chain. The search of market power, as a possible objective of some form of equity linkages among firms, can be expected under horizontal relations. Information is also available on the economic sector where the collaboration takes place. Manufacturing, Construction and Service sectors are widely represented. It is acknowledge that patent protection differ across industries (Oxley, 1997; Gulati and Singh, 1998), so the legal system will protect in a different degree the interests of the parts depending upon the economic sector where the collaboration is developed. Furthermore, according to Harrigan (1985) rapidly changing technological development induces the formation of somewhat more informal forms of collaboration such as non-equity agreements. As industries become mature, more formal modes of collaboration such as joint ventures become the preferred ones. So, in choosing particular modes of collaboration, the level of technological sophistication of industries plays an important role (Hagedoorn and Narula, 1996, p. 280). Osborn and Baughn’s (1990) survey suggest that technological stability of industrial sectors is a crucial factor in explaining different patterns of equity and non-equity partnerships. The estimation will control for sector effects including sector dummies as explanatory variables. Finally, two time dummies, one for the year 1990 and other for the year 1991 (so the omitted year is 1992), are included as control variables to account for possible macroeconomic factors common to all collaborating firms in a given year. Table 1 summarizes the explanatory variables used in the analysis and provides basic descriptive statistics for each of them. 24 Insert Table 1. Overall, 26 per cent of the collaborations are Exchange Agreements, 32 per cent Alliances and 41 per cent involve equity interests (Cross-shareholdings and joint ventures). The dominant form of collaboration has the following attributes: it involves activities different from R&D, it is created with the purpose of market expansion, the partner is from outside from Spain, the collaboration takes place in a manufacturing sector and the firms involved have an horizontal relation. Methodology To test the hypotheses we shall use two methodologies: ordered logit and multinomial logit choice models. Let xi be the level of complexity of collaboration i where: Xi = βyi + εi(3) The vector yi includes all the variables (proxies) considered as sources of complexity (together with possible control terms); the vector β includes the weights attached to each source of complexity; and εi is the error term. The theoretical model, synthesized in conditions (1) and (2), assumes that the unobservable variable xi determines the choice of one of the ordered governance forms as it falls in one of the following discrete intervals: i) If xi < µ0, Long Term Contract (=0) is selected ii) If µ0 < xi < µ1, Neoclassical Contract (=1) is selected iii) If µ1< xi, Hierarchy (=2) is selected (4) The ordered logit statistical analysis estimates the vector of parameters β taking into account the observed characteristics of the collaboration yi and the mapping in (4). It assumes that the underlying probability distribution of εi is normal. Acceptance of hypothesis 1 requires that the thresholds levels µ0 and µ1, with µ0 < µ1, are confirmed by the statistical estimation and that the variables considered associated with complexity do in fact have a β coefficient positive and significant. Our model derives the thresholds µ0 and µ1 assuming properties (1) and (2) of the underlying and unobservable cost functions. The multinomial logit choice model provides an statistical 25 methodology which is based upon the comparison of the utilities (negative costs), associated with each of the alternative governance forms, given a vector of transaction’s characteristics. In probabilistic form, the model is expressed as follows: Pij = P(G = j / yi) = e αjyi / Σk eαkyi Where Pij is the probability that collaboration i is governed by structure j, j = 0, 1, 2; αj is a vector of coefficients which determine the impact of the explanatory variables on the probability that each of the governance forms will be selected. The variation of αj across governance forms is consistent with the assumption that the cost functions (utilities) are different for each of them, see Figure 2. To estimate the coefficient αj the utility of one of the alternatives is used as normalization value. In our case, the alternative will be the Long Term Classical contracting. Therefore, the parameters of the other alternatives have to be interpreted in reference to the omitted one. A particular value of one estimated coefficient αlj, indicates the extent to which the attribute l of the transaction contributes to the utility of governance alternative j, beyond the contribution that this attribute would have in determining the utility of the base option, Long Term Classical contracting. The existence of the thresholds of complexity postulated in hypothesis 1 is the result of increasing fixed costs and decreasing marginal costs with respect to complexity as governance forms approximate the hierarchy. If the base option to compare with is the Long Term Classical contracting, then we should expect that the likelihood of choosing other governance forms different from the base option at lower levels of transaction complexity decreases as such governance forms are closer to the hierarchy. At the same time, the likelihood of choosing an alternative governance form compared with that of choosing the base option, as complexity increases should increase more intensively as more hierarchical is the alternative form. Therefore, we expect α1 < α2. The multinomial logit choice model allows for another way to test H1a, and also will be the methodology used to test the other hypotheses as they are formulated in terms of comparisons of likelihood values. 4. RESULTS The first estimation corresponds to the ordered logit model; Table 2. The statistical package LIMDEP 5 used for such estimation, fixes a threshold value of µ0 = 0, and therefore, in Table 2 only the estimated value of µ1, the second threshold, is reported. 32 threshold value of the variable which determines the choice of the governance form. However, such threshold is the cornerstone of the theory, as our Figure 2 makes clear. Moreover, our interpretation of the variable which determines the choice of governance in terms of complexity of the transaction as this complexity falls within certain limits, thresholds values, it is more consistent with the theory that the interpretation given in Oxley (1997, p. 401). Secondly, we establish a detailed link between the coefficients estimated in the multinomial logit model and the ordered logit results. Such link is possible because these coefficients can be related to the differences in fixed costs and in variable costs of governance, across governance forms, as a function of any variable that makes the transaction more or less complex in the terms established in the paper. As it is generally the case in previous literature and hypothesized in the theory section, the paper also finds evidence that the cultural and social proximity of the partners, measured by their geographical origin, may influence the choice of the governance form. Proximity favors in general Neoclassical contracting, i.e. the intermediate form between Classical (Long-Term) contracts and hierarchical controls. Therefore, collaborating firms may perceive Classical contracts and the presence of equity interests as governance forms which provide more protection against ex-post opportunism than Neoclassical contracts, and they will be preferred when partners are more “distant” so implicit contracts are less feasible. This result, together with others, for example, the fact that equity interests are more likely than Classical contracts but less likely than Neoclassical ones when firms are horizontally related, suggests the relevance of disaggregating contracts in two (or more) categories. Comparing a single category of contract with governance forms including equity interests, we would find that equity interests are more likely when collaboration is among horizontally related firms and, according to our hypothesis, conclude that there may be collusion interests behind interfirm collaborations. When Classical and Neoclassical contracts are distinguished, such conclusion does not emerge. Our paper and the results obtained, although encouraging in terms of opening new avenues for empirical work on the boundaries of the firm, have limitations due mainly to the nature of the data. The information about the collaborations is quite limited both in terms of the actual features of the selected governance form and in terms of the attributes which are identified as sources of complexity in the transaction. We would have benefited from a more detailed description of the terms of the contracts to make sure that the coding of the dependent variable was the correct one. This difficulty is often recognized in the literature, Oxley (1997, p. 391), but nevertheless it is important to recall it and introduce some caution in the conclusions. Information was also limited on the type of technological activities and in particular whether they really involved person 33 embodied specific human capital. To have this detailed information, as well as the degree of complementarity between human and non-human assets involved in the collaboration, it will be critical to be able to progress in empirical analysis of the property rights predictions. We hope that the preliminary evidences presented in this paper will encourage future efforts to collect these data and verify the robustness of the results. 34 Table 1. Descriptive Statistics of the Variables. Variable Mean Standard Deviation Minimum Maximum Number of partners (mean) 2.27 0.94 2 16 Cooperation range (%) 0.527 0.5 0 1 1. Multiple activities 0. One activity Kind of activity (%) 0.082 0.27 0 1 1. R+D 0. Other kind Nature (%) 0.609 0.49 0 1 1. Horizontal 0. Vertical Purpose (%) 0.07 0.25 0 1 1. Diversification 0. Other Nacionality (%) 0.652 0.48 0 1 1. International 0. National Sector (%) Manufacturing (dummy) 0.436 0.50 0 1 General services (dummy) 0.265 0.44 0 1 Energy (dummy) 0.112 0.32 0 1 Construction (dummy) 0.069 0.25 0 1 Finance services (dummy) 0.118 0.32 0 1 Partner’s country Europe (dummy) 0.405 0.491 0 1 USA (dummy) 0.103 0.304 0 1 Japan (dummy) 0.034 0.183 0 1 Other (dummy) 0.456 0.498 0 1 Total collaborations 1148 35 Table 2. Ordered Logit Estimation of the Choice of Governance. Model 1 Model 2 Intercept. -0.44775** (0.19514) -0.76107** (0.38380) Nº partners 0.11299 (0.78897E-01) 0.86489E-01 (0.84830E-01) Multiple 3.5044*** (0.16573) 3.5683*** (0.17632) R+D 0.52309** (0.25124) 0.55994** (0.25094) Diversification 2.1279*** (0.46526) 2.3986*** (0.47620) Horizontal 0.41458*** (0.14597) Spanish 0.27627E-01 (0.22904) Europe 0.37750* (0.22256) USA -0.40945 (0.28502) Japan 0.23452 (0.38883) Manufacturing -0.34588 (0.21862) Construction 0.15029E-01 (0.24332) Energy -0.81374*** (0.26971) Gnral. Services -0.77157** (0.30925) Data90 0.52688*** (0.15886) Data91 0.36143** (0.16182) MU(1) 2.5476*** (0.13570) 2.6503*** (0.13970) Log. Likelihood -885.6349 -852.6389 Chi square. 709.5562*** 775.5482*** Percentage correct classification 64.8% 66.63% Standard Error in parenthesis. *Significance < 0.1; ** Significance < 0.05; ***Significance < 0.01. 36 Table 3: Multinomial Logit Estimation of the Choice of Governance. Alliance Joint venture –Cross shareholdings Alliance Joint venture –Cross shareholdings Intercept -2.4017*** (0.63206) -4.2256*** (0.73369) -2.3870*** (0.63723) -4.2234*** (0.73981) Nº partners 0.51583*** (0.19420) 0.51923** (0.20334) 0.54326*** (0.19848) 0.54672*** (0.2075) Multiple 2.5029*** (0.31307) 5.1406*** (0.33287) 2.4637*** (0.31237) 5.1166*** (0.33196) R+D 1.0269*** (0.27512) -1.3540* (0.70703) 0.28192 (0.32978) -2.6932** (1.1236) Diversification 2.1697** (1.0928) 4.3480*** (1.1347) 2.0183* (1.1106) 4.1415*** (1.1422) Horizontal 1.312*** (0.21442) 0.63020** (0.24799) 1.4202*** (0.21995) 0.70958*** (0.25066) Spanish 1.1482*** (0.36132) 0.60872 (0.41303) 0.87867** (0.36733) 0.37770 (0.41682) Europe 0.64788* (0.34792) 1.0296*** (0.39552) 0.65997* (0.34714) 1.0509*** (0.39716) USA 0.47468E-01 (0.42847) 0.17438 (0.50061) 0.85475E-01 (0.42740) 0.19522 (0.50204) Japan 0.12250 (0.63599) 0.77240 (0.68677) 0.24290 (0.62801) 0.87603 (0.68857) Manufacturing -1.6333*** (0.32403) -0.43285 (0.38995) -1.6766*** (0.32684) -0.47242 (0.39295) Construction -0.28044 (0.35296) 0.92721E-01 (0.42069) -0.31080 (0.35632) 0.71995E-01 (0.42405) Energy -0.64690 (0.39997) -1.4997*** (0.49656) -0.55857 (0.40407) -1.4160*** (0.50083) Gnral. Services 1.1349 (0.82259) 0.55134 (0.87064) 1.1882 (0.82892) 0.60150 (0.87738) Data90 0.42867* (0.23815) 0.96341*** (0.28187) 0.39667 (0.24174) 0.94437*** (0.28419) Data91 0.38318 (0.23856) 0.60610** (0.28497) 0.35872 (0.24159) 0.58309** (0.28676) R&D – Spanish 2.4489*** (0.67906) 3.5564** (1.4725) Log. Likelihood -753.9903 -745.4062 Chi square 972.8455*** 990.0137*** Percentage correct classification 71.95% 71.95% Standard error in parenthesis. *Significance < 0.1; ** Significance < 0.05; ***Significance < 0.01. 37 NOTES: 1 In this paper the word “collaboration” is preferred to “cooperation” because the later suggests the convergence of objectives among firms participating in the exchange or production and therefore the absence of conflicts of interests. The fact that firms collaborate does not imply that each one changes its proper objectives and interests and assume collective ones. The term “alliance” also widely used to refer to any form of collaboration, as in Gulati and Singh (1998, p. 781), is used in this paper to identify a subset of collaboration forms. 2 See for example the issue of the Journal of Economics Studies, January (1999). 3 There have been several papers discussing the advantages and disadvantages of balanced joint ventures versus nonbalanced one’s (see Kogut (1988) for a good classification). But no references have been made to the costs and benefits of ownership as considered in the property right approach. 4 A detailed comparison between Classical and Neoclassical contracting is found in Mcneil (1974, 1978). See also Williamson (1991, p. 271-273; 1985, p. 70-72). 5 To ignore two of the possible alternatives, spot contracting and merger or internal development, when explaining the choice of governance forms in collaboration, may in fact bias the results. In any case, the literature on the determinants of “vertical integration” is very large. 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