Governance and uncertainty: the trade-off between administrative control and commitment

Authors

  • Timothy B. Folta

    Corresponding author
    1. Krannert Graduate School of Management, Purdue University, West Lafayette, Indiana, U.S.A.
    • Krannert Graduate School of Management, Purdue University, West Lafayette, IN 47907–1310, U.S.A.
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Abstract

This study elaborates upon the motives for initiating equity-based collaborations vs. acquisition of another firm already having a desired technology. We characterize both minority direct investments and joint ventures as options to defer either internal development or acquisition of a target firm. In domains where learning about growth opportunities dominates investment activity, this incremental mode of governance economizes on the cost of committing resources to a technology with an uncertain value. Using a sample of 402 transactions in the biotechnology industry, we find strong support for the theoretical model. The findings suggest that the cost of commitment in the face of technological uncertainty may offset the administrative benefits of hierarchical governance. © 1998 John Wiley & Sons, Ltd.

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