Filling a gap in traditional transaction cost economics:

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. KylaK heiko
, 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 governance structure between markets and hierarchies, called hybrid by Williamson. We call these hybrid governance structures partnerships and interpret them as individual contracts between

* Corresponding author. Tel.: #358-5-6212612; fax: #3585-621-2699. E-mail addresses: kirsimarja.blomqvist@lut." (K. Blomqvist), kalevi.kylaheiko@lut." (K. KylaK heiko), veli-matti.virolainen@ lut." (V.M. Virolainen).

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 partnerships between companies in the world economy. Di!erent types of partnerships are a logical and timely response to intense and rapid changes in economic activities, technologies, and globalization of world markets [3]. Partnerships have gained much theoretical interest in strategic literature during 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 knowledge-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

Production & Cognition-based-' Transaction & management benexts Exchange-based-' Transaction & managements costs

Temporal dimension Static

Dynamic

A: Resource-based view based on static capabilities and given cognitive frames [15,38] added with [18] innovation-related transaction costs C: Static Coasean [1] & Williamsonian [19] transaction cost economics

B: Dynamic capability view based on learning and changing cognitive frames [8,5] D: Dynamic transaction cost economics (embryos launched by [20,9,39]

capabilities and knowledge as a source for competitive advantage. The key organizational issue is whether to develop the needed competencies, capabilities and knowledge internally or whether it is rational to exploit and integrate external knowledge. 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 obtained through 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 characterized as the economics of organization-inspired contractual or governance approach, which in its explanations emphasizes either the Coasean transaction 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 metatheoretical 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 that we share has important implications as to the analysis 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 capability 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 exchange 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

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the insightful ideas introduced "rst by Winter [14] and worked out by KylaK heiko and Miettinen [17]. The distinctions used are between (i) staticness and dynamics on the one hand and (ii) production and cognition-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 represented in Table 1. The largely neglected theoretical bridge between the production and the exchangebased focal points of Table 1 can be built by introducing 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 combine 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 of static and dynamic routines introduced by Nelson and Winter [22]. Static routines replicate existing organizational and technological competencies. Through partial replication 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 from other "rms. The dynamic capability concept rests on dynamic routines and can be de"ned as `the capacity 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 information (`logya). Heterogeneity of capabilities implies that the boundaries of the "rm have to be interpreted as strategic devices when outlining

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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 capabilities and resources in the most e$cient way. In our opinion, this message has to be imported into the static Coasean framework in order to make it more comprehensive for coping with the inter-xrm arrangement issues. Fig. 1 summarizes the basic #ows and determinants 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 transferring 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 (relating 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 transactions which economizes on the sum of production, transaction and management costs at the same time when the surplus value obtained through transaction and management bene"ts is maximized as 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 following determinants 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].

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Fig. 1. Dynamic transaction and management costs and bene"ts.

In such a situation there opens up an opportunity for opportunistic ex post behavior for the non-investing partner, who may threaten to stop the cooperation, 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 the more, the more ine$cient are their markets. This implies higher transaction costs and, consequently, more integrated solutions. The appropriability criterion 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, whether it is more e$cient (i) to generate new and develop old internal capabilities through continuous learning and R&D investments (`a conglomerate strategya) or (ii) to acquire external capabilities from the market (`a hollow "rm strategya) or (iii) to exploit economies of scale and scope through networking (`a partnership strategya). Henceforward, the costs of transferring capabilities over the "rm's boundaries are called dynamic governance costs. They can further be divided into dynamic transaction costs (i.e. persuading, negotiating 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 persuading, 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 paper and pulp industry). Following this logic, one can predict a tendency towards vertically more integrated inter-"rm arrangements as the technological trajectory becomes more stabilized because of decreased 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 implicitly assume that these bene"ts are somehow independent 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 introduce 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 competenceenhancing innovations or exploit monopoly power over other "rms. They all are benexts related to the vertical integration strategy. We call them management or xrm-internal benexts. On the other hand, when the "rm uses the market option it can exploit high-power incentives through "erce competition, economies of scale through specialization, and utilize #exibility and variation generated through many alternative partners 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 `markets are identixed with the right to bargain and, when necessary, to exit with the assets owned. This... provides entrepreneurial incentivesa [10]. Through the market a "rm can also better cope with radical uncertainty and competence-destroying innovations. 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.

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In order to clarify all the transaction and management-related categories we extend and modify Dietrich's [24] approach, which is based on two crucial distinctions. The "rst one is between static transaction 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 dynamic transaction benexts (Bm) and dynamic management benexts (Bf). Our own extensions dynamic transaction and management costs can be di!erentiated 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 positively correlated with the ability to exploit economies of scale, high-powered incentives and #exibility. They also allow to generate more ideas through the market variation and to cope with competence-destroying innovations. Cm static transaction costs, which are positively correlated with opportunism, few partners available, asset or capability speci"city, inability to cope with parametric uncertainty, dependence on complementary assets holders, systemic nature of innovation, low appropriability, and organizational inertia against newcomers. Cm* dynamic transaction costs related to persuasion and learning costs with the providers of outsourced external capabilities. Bf* dynamic management bene"ts, which are positively correlated with the ability to exploit monopoly power, asymmetric knowledge, economies of scope, and cumulative tacit know-how when facing competence-enhancing 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 costs of persuading, negotiating and teaching within 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 equations (1) and (2) above when explaining the rise of inter-"rm partnerships in light of our approachrelated 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 transaction 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 explanatory 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 markets and 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 capabilities, and (iii) trust between partners is lacking. The market option is preferred when (i) the degrees 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 as strange 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 highpowered incentives). A typical precondition for the emergence of networks is also the pursuit of economies 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 nature 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 investment, (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 preferable 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 explanandum (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 transaction and management bene"ts may give rise to inter-"rm partnerships. The necessary (but not suf"cient) reason for a partnership is that the aggregate 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"
partnership is that the expected net joint surplus is positive, i.e. <'
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(b) This case, which is not that rare in the R&D context, refers to the issue where the joint surplus can be created only through melting by complementary skills, routines and capabilities of specialized partners (cf. modern biotechnological "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 learning-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 cooperation that they trust each other. Trust decreases both the static and dynamic transaction costs, thus generating more market-oriented partnerships. Trust-generating mechanisms eliminate the 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 productivity, 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-operative game) 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 and trust 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 expected 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 expected NPV 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 particular model there is a built-in tendency towards cooperative games, i.e. trustworthy relations. These results can be generalized when taking into account the values of cells and the rate of interest. The Section 6 will analyze further the role of trust in asymmetric partnerships typical in telecommunications sector. Finally, we can introduce perhaps the most decisive piece of criticism coming from the dynamic capability camp against the contractual governance camp. It deals with the inability to treat properly the genuine coordination problems, which are due to dispersed knowledge, radical uncertainty,

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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 situations where the Pareto criterion is too weak to bring to the cooperative equilibrium, which maximizes the joint surplus, the partners should organize 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 the proponents 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, potential economies of scale and scope, etc., is more or less imperfect, partly non-existent and necessarily dispersed. 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 mechanisms, (ii) alert entrepreneurs as catalysts of new combinations, and (iii) trust-generating mechanisms as vehicles to mitigate unsolvable (due to dispersed knowledge and unforeseen contingencies) interest con#icts.

This radical dynamic capability view with emphasis 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 reaction against too centralized (integrated) and too planned hierarchies, which cannot cope with radical uncertainty when facing turbulent time in not yet fully developed industries. One interesting answer to this challenge could be the evolutionary economics-based view, which starts from the idea that in the situations of radical uncertainty it is most advisable to build on backwardlooking 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 hierarchy. The partnership is however challenging governance 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 with major 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 determinants 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.

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6. Role of trust as a mechanism for e7cient solution in telecommunications In the telecommunications both technological and 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 (uncertainty) 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 telecommunications the partnering "rms clearly need trust, yet they have little chance to commit themselves gradually to the relationship or experiment the values and goals of the other. In telecommunications partnerships between a resourceful large incumbent player and a specialized supplier are common. We call these complementary 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 partnerships, 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 balance is more equal resulting in mutual dependence, which may counterbalance the need for trust. Asymmetry in the relationship sets additional challenges for the creation of trust due to the dissimilarity and cultural distance of the parties. In this

context trust may be de"ned as `an actor's expectation of the other party's competence and goodwilla. Thus, both the competence (technical capabilities, skills and know-how) and the more abstract goodwill 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, information 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 ability to establish and sustain similar values 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/character similarity are also commonly cited mechanisms for trust building. Personal trust has been seen as a mechanism for promoting organizational trust and subsequently enhancing economic performance of organizations [33]. Organizations develop 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 homogeneous organizational values promoting trust. Asymmetric partnerships in the telecommunications 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 communication, 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 industry where technological discontinuities give rise

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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 competencies (see [37]). In today's telecommunications the incumbent large players are looking for specialized suppliers to learn from them and to leverage technology options provided by technology suppliers. Emerging new technologies also enable new business 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 Communications Technology industry. Interviews have been carried through as a part of the forthcoming Ph.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, complementarity, 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. However, 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 telecommunications 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 there may 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 accomplish within a hierarchy. In the telecommunications sector the software is often systemic, i.e. the customer is o!ered a systemic product consisting of di!erent layers and components, often provided by several specialized suppliers. Development of systemic software in a partnership is complex and demands close collaboration. The complexity of systemic development would call for vertical governance, i.e. hierarchy, yet the need for specialized know-how of several technologies calls for cooperation 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.

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In a hierarchy it is possible to build on existing knowledge and enjoy economies of scale in learning. Some of the innovations are competence enhancing making it possible to enter new business areas. E.g. combining innovations and knowledge in mobile technologies, large-scale customer service and Internet makes it possible to o!er global services 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$ciently and focuses its e!orts, it may be able to launch new products faster. A quite common `notinvented-herea resistance common to technology partnerships may be avoided in the hierarchy, even if internal politics also play a role. Higher process and project quality may be reached without the need to adjust and educate external partners. Internal communication in a hierarchy may be e$cient yet the quality of the communication is dependent on the level of organizational trust. If the specialized suppliers operate alone, they are most probably faster to reach and implement decisions. Risk for opportunistic behavior and unintended disclosure of information is less. Internal management costs of vertical hierarchy (e.g. costs for R & D and personnel development, 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 higher specialization 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 risk inherent in new technologies and new projects by o!ering a technology window to new technologies. Asymmetric partnerships with complementary and diverse "rms may generate new innovative practices and processes. Learning is often cited as a major positive outcome of partnerships.

Established partnerships are used in announcements for signalizing technological and market power. They also legitimize new entrants and emerging technologies. Partnerships and alliances are 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 technologies, products and services. High risks inherent in technological development and the uncertain direction 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$cient solution only if it creates some extra value compared with markets and hierarchies. It can be concluded that partnership is not a panacea, which can be transposed into any conditions. Transaction cost economics explains why possibly disappointing outcomes can arise from a partnership agreement. There may be problems with asymmetric information and potential opportunism. We believe that inter-organizational trust may act as a mechanism providing an e$cient solution. Because of the extremely high volatility in the converging telecommunications partnerships seem to have

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become increasingly as temporary arrangements. This volatility sets great challenges for trust building. Trust-building mechanisms in this risky and turbulent business will be left for further research.

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