| This study uses real option theory to explain and predict why and when different types of inter-firm exchange governance are chosen under different levels of uncertainty. While transaction cost theory successfully addresses a firm's exchange governance choices, it has also received criticism regarding some of its major assumptions and predictions. In this dissertation, real option view is introduced as an alternative to transaction cost theory to explain and predict a firm's governance choice while responding to the criticisms to the transaction cost theory of firm. The first step to build real option theory of governance is to recognize the fact that a market contract can be designed as a real option which is written on the partner's uncertain strategic capability. Based on this premise, uncertainty and asset specificity--the two central variables in transaction cost theory--play different roles in the real option view of governance. First of all, it can be expected that under high levels of capability uncertainty, firms will choose market governance because of its high real option value. Hierarchical governance such as acquisition will be considered only when the uncertainty surrounding the partner's capability is low. Also, transaction-specific investment or asset specificity can be considered positively because it generates real option value for the investing firm. Moreover, learning-by-doing type asset specificity is even better because it can provide the firm with an exclusive right to exercise the real option. However, since both market governance and joint venture can be designed as real option, a general framework that influences the initial governance form under real option view is presented. Specifically, types of learning required to identify the value of real asset, and the concern for securing underlying property are suggested as two major factors that influence the choice between market contract, and more hierarchical governance such as joint venture. The empirical study, which used alliance samples from biotechnology industry, supported the major hypothesis regarding capability uncertainty, learning and property rights. Finally, it is suggested that a firm can be conceptualized as a collection of real assets rather than a nexus of contract. |
