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Article

Vertical Integration and the Theory of the Firm  

Jongwook Kim

How do firms organize economic transactions? This question can be thought of as a question of firm boundaries or as a decision about a firm’s scope, encompassing the choice along a continuum of governance structures, including spot markets, short-term contracts, long-term contracts, franchising, licensing, joint ventures, and hierarchy (integration). Although there is no unified theory of vertical integration, transaction cost economics, agency theory, and more recently property rights theory have been influential not only in analyzing make-or-buy decisions but also in understanding “hybrid forms” or inter-firm alliances, such as technology licensing contracts, equity alliances, joint ventures, and the like. Before Coase’s work became widely known, whatever theoretical underpinnings there were of vertical integration were provided by applications of neoclassical theory. Here, the firm was viewed as a production function that utilized the most technologically efficient way to convert input into output. In particular, neoclassical theory was concerned primarily with market power and the distortions that it created in markets for inputs or outputs as the main driver of vertical integration. Hence, the boundaries of the firm—that is, where to draw the line between transactions that occur within the firm and those outside the firm—were irrelevant within this framework. It was Coase’s question “Why is there any organization?” that first suggested that price mechanisms in the market and managerial coordination within firms were alternative governance mechanisms. That is, the choice between these alternative mechanisms was driven by a comparative analysis of the costs of implementing either mechanism. Oliver Williamson built on Coase to provide the theoretical foundations for vertical integration by joining uncertainty and small numbers with opportunism in defining exchange hazards, and consequently established comparative analysis of alternative governance forms as the way to analyze vertical integration. More recently, property rights theory brought attention to ownership of key assets as a way to distinguish between the governance of internal organizations and those of market transactions, where ownership confers the authority to determine how these assets will be utilized. And lastly, agency theory also provides important building blocks for understanding contractual choice by placing the emphasis on the different incentives that vary with different contractual arrangements between a principal and its agent. Transaction cost economics, property rights theory, and agency cost theory complement one another well in explaining vertical integration in terms of alternative governance forms in a world of asymmetric information, bounded rationality, and opportunism. These theories have also been utilized in analyzing “hybrid” organizational forms, in particular strategic alliances and joint ventures. Together, vertical integration and alliances account for a significant part of corporate strategy decisions, and more research on the theoretical foundations as well as novel ways to apply these theories in empirical analyses will be productive avenues for a better understanding of firm behavior.

Article

University Technology Commercialization  

Kathleen R. Allen

For decades researchers have studied various aspects of the technology transfer and commercialization process in universities in hopes of discovering effective methods for enabling more research to leave the university as technologies that benefit society. However, this effort has fallen short, as only a very small percentage of applied research finds its way to the marketplace through licenses to large companies or to new ventures. Furthermore, the reasons for this failure have yet to be completely explained. In some respects, this appears to be an ontological problem. In their effort to understand the phenomenon of university commercialization, researchers tend to reduce the process into its component parts and study each part in isolation. The result is conclusions that ignore a host of variables that interact with the part being studied and frameworks that describe a linear process from invention to market rather than a complex system. To understand how individuals in the technology commercialization system make strategic choices around outcomes, studies have been successful in identifying some units of analysis (the tech transfer office, the laboratory, the investment community, the entrepreneurship community); but they have been less effective at integrating the commercialization process, contexts, behaviors, and potential outcomes to explain the forces and reciprocal interactions that might alter those outcomes. The technology commercialization process that leads to new technology products and entrepreneurial ventures needs to be viewed as a complex adaptive system that operates under conditions of risk and uncertainty with nonlinear inputs and outputs such that the system is in a constant state of change and reorganization. There is no overall project manager managing tasks and relationships; therefore, the individuals in the system act independently and codependently. No single individual is aware of what is going on in any other part of the system at any point in time, and each individual has a different agenda with different metrics on which their performance is judged. What this means is that a small number of decision makers in the university commercialization system can have a disproportionate impact on the effectiveness and success of the entire system and its research outcomes. Critics of reductionist research propose that understanding complex adaptive systems, such as university technology commercialization, requires a different mode of thinking—systems thinking—which looks at the interrelationships and dependencies among all the parts of the system. Combined with real options reasoning, which enables resilience in the system to mitigate uncertainty and improve decision-making, it may hold the key to better understanding the complexity of the university technology commercialization process and why it has not been as effective as it could be.

Article

The Application of Real Option Approach in International Business Research  

Tailan Chi and Yan Huang

The real option theory (ROT), a theory on investment decision making under uncertainty, has been applied to analyzing a broad range of questions in international business (IB). In the face of uncertainty, any discretion that the managers of a multinational enterprise (MNE) have over the timing, scale, speed, and sequence of investing or using the firm’s resources, in the forms of physical or intellectual capital or managerial time and effort, can be a real option. Such options confer upon the managers the right, but not the obligation, to exploit the upside potential while limiting the downside risk. Uncertainty, irreversibility, and absence of immediate and complete preemption are three necessary conditions for a real option to create value. Uncertainty offers opportunities to gather more information in the future, and such information can help managers make better decisions or alter prior decisions for improvement. Irreversibility is defined as the proportion of the investment committed to a project that cannot be recouped if the project is abandoned. Preemption refers to the revocation of the decision-making discretion that nullifies the option. It is possible to distinguish seven types of real options that have been examined in IB studies: (a) option to defer, (b) option to abandon/exit, (c) option to exchange, (d) option to grow/scale up, (e) option to contract/scale down, (f) option to switch, and (g) compound options. These types of options are found to influence a firm’s international market-entry strategies (e.g., location, timing, scale, speed, and mode) and the configuration and organization of the firm’s geographically dispersed production network. ROT has also been integrated with other economic theories, such as transaction cost economics and resource-based view, to better understand these decisions. Although ROT assumes a strong form of rationality on the part of the decision maker, it is also possible to incorporate cognitive or cultural biases into the theory and give the theory’s analysis greater realism. ROT represents a theoretical approach that can be integrated with various economic and noneconomic theories. More work in such theoretical integration can potentially help researchers gain deeper or more complete understandings of IB questions. Extant studies in IB typically analyze only a single type of option in isolation. But the global production network of a MNE typically has a portfolio of different types of options embedded, and the different types of options inevitably interact. The study of interactions among two or more types of options under different sources of uncertainty is likely to yield new insights on the strategy and organization of the MNE.

Article

The Uppsala Model in the Twenty-First Century  

Jan-Erik Vahlne

When it was developed in 1977, the Uppsala internationalization process model (Uppsala model for short) had three basic premises: process ontology, behavioral assumptions, and the presence of uncertainty. Multinational business enterprises (MBEs), among all actors, were in their infancy, and their future could not be known. Later on, the model was extended to cover the evolution of the MBEs, with factors such as internationalization, globalization, and the development of characteristics prompting changes and making them possible. Likewise, the knowledge concept was substituted for by capabilities, operational and dynamic, fitting well the other concepts of the model. The neoclassical view of the firm as an independent unit on the market is considered unrealistic. Instead, firms, MBEs, and small and medium enterprises are seen as embedded in networks with other cooperating and competing actors. The mechanisms of the 2017 version, though, are the same as in the original version. Hopefully, the latest version can be used as a tool within the scope of the “theory of the firm” research and as a platform for more studies on causal mechanisms, later to be applied in normative conclusions. It follows that static cross-sectional statistical methods are not fully satisfactory. Application of dynamic analytical methods requires investment in longitudinal data collection, which is costly, and has to be performed by institutions rather than individuals. A dream is that the Uppsala model can be used as a stepping stone in the construction of realistic macro-level studies of the economy.

Article

Pay Transparency: Conceptualization and Implications for Employees, Employers, and Society as a Whole  

Peter A. Bamberger

Pay transparency refers to the degree to which pay communication policies and practices governing employee pay knowledge facilitate or restrict the sharing of pay-related information. While relatively few enterprises have adopted transparent pay-communication practices, a variety of institutional factors, such as government regulations and social norms, are driving employers to provide their employees with greater pay knowledge. Consensus has emerged around the existence of three main dimensions or forms of pay transparency, namely pay-outcome transparency, pay-process transparency, and pay-communication transparency. Research findings indicate that pay-outcome transparency, which relates to the degree to which pay rate information is disclosed by the employer, has both beneficial and problematic consequences, depending on the outcome. For example, while pay-outcome transparency has been consistently found to be associated with enhanced individual task performance and reduced gender-based pay discrepancies, it has also been associated with higher levels of envy, diminished helping, heightened levels of counterproductive work behavior, and pay compression (which could elicit negative sorting effects). In contrast, pay-process transparency, which relates to the degree to which employees are informed about the parameters underlying reward-related decisions, has been found to have largely beneficial consequences and few unintended negative consequences. Finally, while it is least studied, pay-communication transparency, capturing the degree to which restrictions are placed on employees’ ability to share pay knowledge with others, is positively associated with employee perceptions of employer fairness and trustworthiness and can have significant implications for employee retention.

Article

From Decision Making to Decision Support  

Frederic Adam

In such a complex and well-researched domain as decision support systems (DSS), with a long history of authors making insightful contributions since the 1960’s, it is critical for researchers, especially those less experienced, to have a broad knowledge of the seminal work that has been carried out by prior generations of researchers. This can serve to avoid proposing research questions which have been considered many times before, without having consideration for the answers which have been put forward by previous scholars, thereby reinventing the wheel or “rediscovering” findings about the life of organizations that have been presented long before. The study of human and managerial decision-making is also characterized by considerable depth and seminal research going back to the beginning of the 20th century, across a variety of fields of research including psychology, social psychology, sociology or indeed operations research. Inasmuch as decision-making and decision support are inextricably linked, it is essential for researchers in DSS to be very familiar with both stream of research in their full diversity so they are able to understand both what activity is being supported and how to analyze requirements for developing decision support artefacts. In addition, whilst the area of decision support has sometimes been characterized by technology-based hype, it is critical to recognize that only a clear focus on the thinking and actions of managers can provide decisive directions for research on their decision support needs. In this article, we consider first the characteristics of human cognition, before concentrating on the decision-making needs of managers and the lessons that can be derived for the development of DSS.