Moderating effects of asymmetric power on the relation between specific investments and mode of governance : a research proposal
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- Master Thesis 
This master thesis is a research proposal focusing on the extent to which asymmetric power impacts the effects of specific investments on governance mode. Williamson’s (1975, 1981, 1985, 1991a, 1991b) transaction cost economics (hereafter, TCE) has been a leading theory of inter‐firm governance. Although TCE has received widely recognition, it has been subject to criticisms. One of which I pay particular attention is its empirical validity and applicability, since TCE seems to give insufficient explanation on mode of governance used in asymmetric power relationships. TCE focuses on the dichotomy between market and hierarchy. However, researchers critique that TCE overstates the desirability of partners on integration and explicit contract. In facts, firms conduct collaborative exchange which is neither market nor hierarchy (Dyer, 1997). Moreover, Geyskens’s et al. (2006) meta‐analysis shows that studies support that as asset specificity increases relational governance becomes preferred over market governance. In general the logic is the same with original TCE that if specific investments are high, an investing firm exposes itself to its partner’s opportunisms, so that a firm needs to safeguard such investments. In this proposal I incorporate relational governance in the model to improve TCE’s ability to explain the relation between specific investments, firm power, and mode of governance. Asymmetric power is hypothesized to increase the degree of hierarchical governance when specific investments are deployed by the stronger firm in a dyadic relationship because a stronger firm will exploit its weaker partner (Bannister 1969; Robicheaux & El‐Ansary 1975) by prescribing its weaker partner to agree with a contract that governs both parties to work more closely than usual, enabling the stronger firm to gain more protection of its assets at risk, and increase its access to the weaker partner’s information (Dwyer & Walker, 1981; Frazier & Rody, 1991; Frazier et al., 1989; Heide & John, 1992; Kale, 1986; Roering, 1977; Wilkinson & Kipnis, 1978). On the contrary, asymmetric power is expected to lower the degree of hierarchical governance when the investing party is the weaker party in the relationship. A stronger partner is likely to prefer market based governance because it can gain benefits from market competition when it has no assets at risk (Williamson, 1985). A weaker firm is prone to accept a high tolerance level for the use of power by its strong partner (Bucklin, 1973; Blalock and Wilkin 1979). On the other hand, symmetric power where two parties possess the same levels of power is hypothesized to increase the degree of relational governance when both parties hold mutual specific investments. TCE suggests that under such conditions firms will tend to employ integrated governance to safeguard their specific assets and reduce transaction costs. However, under such conditions it seems hard to develop hierarchical governance where one party will have a legitimate authority to direct another party because both parties possess the same degree of power. They are, therefore, likely to employ relational governance that expresses the sentiment of joint responsibility (Cannon et al., 2000). Moreover, under relational exchange both partners can avoid high costs of establishing and maintaining the bilateral contract (Harrigan, 1983). Expected contribution of this research is to improve TCE’s ability to explain make, buy, or ally decisions across exchange partners. Other constructs may be needed to augment TCE perspective. This research proposes that TCE should be augmented with a construct of asymmetric power.