Renegotiation of Joint Venture Contracts: the Influence of Alternative Governance Mechanisms

Valérie Duplat (Vrije Universiteit Amsterdam)
Elko Klijn (Leeds University Business School)
Jeffrey Reuer (Leeds School of Business – Boulder)
Henri Dekker (Vrije Universiteit Amsterdam)

Abstract : Research on the governance of joint ventures has pointed out the difficulties associated with anticipating behaviors and contingencies at the outset of a collaboration. When initial contracts are inherently incomplete, renegotiation represents a strategic opportunity for enhancing contractual safeguards or coordination guidelines. Costs and risks entailed by renegotiating joint venture arrangements are far from trivial however. In accordance with our theoretical arguments, analysis of survey data shows that partners’ decision to renegotiate incomplete joint venture contracts is moderated by their reliance on alternative relational and formal governance solutions. More particularly, results reveal that prior ties between partners (i.e., relational governance) obviate the need for enhancing safeguards ex post. By contrast, such ex post adjustment is facilitated by an involved board of directors (i.e., formal governance). Our findings highlight the multidimensional nature of joint venture governance, and the interrelations between governance elements in the execution and dynamics of joint ventures.

Assignment of Call Option Rights in Franchise Contracts: a Transaction Cost and Real Option Perspective

Ilir Hajdini (University of Vienna)
Josef Windsperger (University of Vienna)

Abstract : The objective of this study is to explain the franchisor’s choice of using call option rights as a contractual clause in franchise relationships by applying transaction cost and real options theory. The call option clause gives the franchisor the contractual right, but not the obligation, to acquire franchisee outlets after contract termination. We argue that the franchisors more likely use a real option clause in franchise contracts under the following conditions: high environmental uncertainty, high behavioral uncertainty, high franchisors’ transaction-specific investments relative to franchisees’, and long contract duration. The results of the regression analysis based on 111 German and Swiss franchise systems provide some support to these hypotheses. This is the first study that applies real option and transaction cost reasoning to explain the explicit call options in franchise contracting.

Finding Mr. Schumpeter: an Empirical Study of Competition and Technology Adoption

Jeffrey T. Macher (Georgetown - McDonough)
Nathan H. Miller (Georgetown - McDonough)
Matthew Osborne (Toronto - Rotman)

Abstract : We estimate the effect of competition on the adoption of a cost-reducing technology in the cement industry, using data that span 1953-2013. The new technology, the precalciner kiln, reduces fuel usage and hence fuel costs. We find adoption is more likely if the fuel cost savings are large, and less likely if there are many nearby competitors. We also find that competition damps the positive effect of cost savings. The results are consistent with a dynamic theoretical model in which competition can deprive firms of the scale necessary to recoup sunk adoption costs.

Microfoundations of Value Creation and Relational Contracting in B2b Relationships: the Role Cross-understanding

Jon Bingen Sande (BI Norwegian Business School)
Kenneth H. Wathne (UiS Business School, University of Stavanger)
Mrinal Ghosh (Eller College of Management, University of Arizona)

Abstract : This paper develops the construct of cross-understanding in interorganizational relationships to further our understanding of how firms create value and solve the problem of clarity in relational contracting. Whereas much interorganizational research considers the problem of credibility – how the parties to a relationship can convince each other that they will honor the relational contract–, we examine the problem of clarity – how the parties can reach a joint understanding of their relational contract. We argue that cross-understanding, the accuracy with which the parties’ understand each other’s mental models, helps the parties to solve the problem of clarity. We test our hypotheses on a sample of 214 relationships between small and medium-sized manufacturing firms and their suppliers. This study is one of few studies that examine the effects of relational contracting, measured using subjective survey scales, on firm-level profitability measured objectively about one year later than the initial survey. We validate the cross-understanding measure using data from both sides of the dyad. We find that both the effect of cross-understanding on firm profitability and it’s complementarity with relational contracting increases with product complexity and technological uncertainty. Relational contracting can have negative performance effects if the parties fail to match product complexity and technological uncertainty with appropriate levels of cross-understanding.