Collaborative Ventures and Value of Learning: Integrating the Transaction Cost and Strategic Option Perspectives on the Choice of Market Entry Modes

Abstract

Abstract:This paper employs a simple stochastic model to investigate how transaction cost and strategic option considerations interact to influence a firm's evaluation of collaborative venturing as a market entry mode. After demonstrating how uncertainty about the market and about the potential partner can add to the value of a collaborative venture, the paper explicates a condition under which the option to acquire or sell out generates a positive economic value for both of the partners. The interaction of transaction cost and strategic option considerations is then examined, and a number of testable hypotheses are proposed based on the theoretical analyses of the paper. We are grateful to Paul Beamish, Editor of JIBS, and to three anonymous reviewers for their constructive comments and valuable suggestions. All remaining errors, however, are solely our own responsibility.Published in the Journal of International Business Studies, 27(2): 285-307, 1996. as a market entry mode. After demonstrating how uncertainty about the market and about the potential partner can add to the value of a collaborative venture, the paper explicates a condition under which the option to acquire or sell out generates a positive economic value for both of the partners. The interaction of transaction cost and strategic option considerations is then examined, and a number of testable hypotheses are proposed based on the theoretical analyses of the paper.Collaborative Ventures and Value of Learning: Integrating the Transaction Cost and Strategic Option Perspectives on the Choice of Market Entry Modes. Journal of International Business Studies, 27 (2), 285-307. Publisher's Official Version: http://www.jstor.org/stable/155286 Open Access Version:

The internationalization process of firms: From exports to FDI

“…Chi, 2000) and can help to obtain knowledge about local market conditions (Chi and McGuire, 1996). Once uncertainties have been reduced, firms involved in joint ventures may choose to purchase more equity in the venture, sell their equity share, or dissolve the venture (e.g.…”

Moral Hazard in VC Finance: More Expensive than You Thought

“…When risks can be substantially influenced by organizational activity, the VC can reduce his exposer by learning (Chi & McGuire, 1996): by investing the VC observes the performance of the project and aggregate beliefs about the effort of the entrepreneur.…”

“…Conversely, if market conditions turn out to be bad, the VC abandons the project to confine high downside losses (Li, 2008). On the other hand, the VC mitigates the endogenous risk by learning about the behavior of the entrepreneur (Chi & McGuire, 1996): by investing the VC observes the performance of the project and aggregates beliefs about the effort of the entrepreneur.…”

Real Options: Taking Stock and Looking Ahead

“…Real options studies propose that the embedding of strategic options in a particular mode of governance can alter a firm's assessment of different modes and ultimately its choice of a particular mode (Chi and McGuire 1996). Since Kogut (1991), it has been held that the joint venture (JV) as a collaborative form may contain an explicit or implicit option to acquire or divest at a price specified ex ante, or more often, negotiated ex post.…”

“…More recent works from a real options lens have also reached out to consider issues such as agency and economic incentive problems (Arya, Glover, and Routledge 2002), transaction costs (Chi and McGuire 1996), resources, capabilities and learning (Bernardo and Chowdhry 2002;Childs and Triantis 1999;Vassolo, Anand, and Folta 2004), and game-theoretic aspects of investment (Grenadier 2000;Smit and Ankum 1993;Smit and Trigeorgis 2004;Trigeorgis 1991). These extensions of real options build on critical differences between financial options and real options.…”