Academic journal article Entrepreneurship: Theory and Practice

The Governance Paradox: Preferences of Small Vulnerable Firms in the Homebuilding Industry

Academic journal article Entrepreneurship: Theory and Practice

The Governance Paradox: Preferences of Small Vulnerable Firms in the Homebuilding Industry

Article excerpt

This article explores the variables that drive small firms to choose quasi-integration as an alternative to vertical integration in situations of high asset frequency. Drawing on transaction cost theory and institutional approaches, we develop and test several hypotheses regarding quasi-integration among homebuilders and land developers in a major Canadian city. Our focus is on the preferences of small, vulnerable firms operating in an environment where quasi-integration has been institutionalized as a trusted form of governance. The findings indicate that the preference for quasi-integration is driven by asset specificity, bargaining power, and opportunistic expectations, supporting a paradoxical view that small, vulnerable firms pursue both efficiency and institutional legitimacy in making governance choices regarding large dominant suppliers.

Introduction

The means by which firms organize their relationships with key suppliers and customers is a critical area of concern for both managers and scholars as efficient governance mechanisms are a prerequisite for firm survival (Williamson, 1991). Due to asymmetric bargaining power, situations often arise where some firms are able to dominate their vulnerable suppliers or buyers (Subramani & Venkatraman, 2003). In such situations, dominant firms may choose quasi-integration, which is a form of governance that allows them a degree of managerial control over certain aspects of the activities of their suppliers or buyers, without the associated costs and rigidities of ownership (Blois, 1972). Perhaps a question of equal importance (but less analyzed) is under what circumstances will a vulnerable firm also prefer quasi-integration? This question is particularly important in the study of new ventures and small businesses because such firms frequently find themselves in a position of weakness vis-a-vis their suppliers or buyers (cf. El-Ansary & Stern, 1972; Zacharakis, 1997). Furthermore, unlike large firms, small and new ventures often do not have the financial resources necessary to make vertical integration a viable option. Rather, small and new firms must develop cooperative relationships with other firms in order to improve performance and gain access to resources they cannot control (Golden & Dollinger, 1993; Jarillo, 1989; Lorenzoni & Ornati, 1988). For example, Gales and Blackburn (1990) found that small hardware retailers with close relationships with wholesalers perceived reduced uncertainty and increased autonomy and were better able to engage in planning and marketing activities. Likewise, Park and Krishnan (2001) found that rational normative, external control, and strategic choice models could explain supplier choices.

In this article, we apply transaction cost theory (Coase, 1937; Williamson, 1975, 1985) as a framework for testing the preferences of vulnerable firms. From an efficiency perspective, transaction cost theory provides a simple, yet powerful, analytical framework for determining governance structures. Based largely on a need to safeguard against the potential for opportunistic behavior, Williamson (1985) predicts that transactions with recurring frequency and high asset specificity are most efficiently managed through vertical integration. However, the dichotomy between market and integration (also referred to as hierarchy) governance modes may be bridged with the "hybrid" governance option, typified by "long term contractual relations into which security features have been crafted" (Williamson, 1999, p. 1091). Unfortunately, the literature provides little clarification as to when a firm's most efficient choice is vertical integration (Williamson, 1985) or a hybrid governance mode, such as strategic partnerships (Heide & John, 1990), quasi-integration (Zaheer & Venkatraman, 1995)), or joint ventures (Harrigan, 1985).

Although perhaps the most widely applied framework for understanding the boundaries of the firm, transaction cost theory has been criticized for focusing on cost minimization while neglecting or underestimating sociological influences, such as trust and opportunities for information exchange (Dyer, 1997; Dyer & Chu, 2003; Ghoshal & Moran, 1996; Granovetter, 1985; Macaulay, 1963; Zaheer & Venkatraman, 1995). …

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