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A third rational explanation of the IJV formation rests on the possession and development of firm’s resources. Resource-based theory has recently appeared as an alternative approach to understanding the IJV formation. Penrose (1959) pioneered this approach, which views a firm as equivalent to a broad set of resources which it owns. When Penrose’s book was first published in 1959, inter-firm collaboration was relatively rare, but interest in resource-based theory has recently been revived by Wernerfelt (1984: 172) who defines resources as “those (tangible and intangible) assets which are tied semi- permanently to the firm”. Das and Teng (2000) argue that, unlike traditional industrial organisation economics which draw heavily on analysis of the competitive environment, the resource-based view focuses on analysis of the various resources possessed by the firm.

Because many of these are firm-specific and not perfectly mobile or imitable, firms are continuously heterogeneous in terms of their resource bases. Sustained resource heterogeneity thus, becomes a possible source of competitive advantage for a firm, which can lead to economic rents or above normal returns.

Leiblein (2003) argues that resource-based theory provides two principal conceptual insights. First, it recognises that factor markets exist in which firms may develop or acquire the resources necessary for product-market competition. Second, resources which lead to persistent performance differentials are much broader in nature and more difficult to accumulate than the tangible assets and factors of production typically emphasised in neo-classical economic theories.

The assumptions underlying the resource-based view fall into two broad categories. The first set holds that firms are profit-maximising entities directed by ‘boundedly rational’ managers (Conner, 1991; Rumelt, 1984). Consequently, managers are assumed to lack the knowledge, foresight, and skills to accurately predict and plan for all the various contingencies which may arise in their search for profitable opportunities. The second set of assumptions suggests that firms must make up-front investments for the opportunity to engage in the process of creating new resources, whose eventual value is inherently ambiguous and uncertain (Lippman and Rumelt, 1982). These assumptions lead to the critical concepts of resource heterogeneity and resource immobility. The idea of resource heterogeneity is that competing firms possess different bundles of resources, while the concept of resource immobility suggests that many of these resource differences will persist over time.

Das and Teng (2000) refer to imperfect mobility as a difficulty, involving appreciable costs, when attempting to move certain resources from one firm to another. According to Dierickx and Cool (1989), factor markets are often incomplete and imperfect, so that many resources are either not tradeable at all or not perfectly tradeable. They offer as an example the fact that such resources as a firm’s reputation and organisational culture are not simply tradeable. Many resources, such as the tacit knowledge of firms, lose much of

their value if moved from their current organisational context and used in conjunction with other resources.

Whereas imperfect mobility concerns barriers to acquiring resources from their owners, imperfect imitability and imperfect substitutability refer to barriers to obtaining similar resources from elsewhere (Barney, 1991; Peteraf, 1993). Das and Teng (2000) cite Lippman and Rumelt (1982) regarding the concept of causal ambiguity, a lack of clarity about which resources are responsible for competitive advantage. Causal ambiguity makes the connection between resources and competitive advantage less clear, and thus constrains a firm’s ability to imitate its competitors and/or to employ substitutes. Reed and DeFillippi (1990) categorise three resource characteristics that give rise to causal ambiguity: tacitness, complexity, and specificity.

Resource-based theory has been applied to IJV formation for two main reasons: exploitation of resources, and development of resources. Firms have to form IJVs if they want to exploit the resources of their partners since these resources cannot be found in the market (because of the imperfect condition of the factor market mentioned above). This motive is directly related to the nature of the firm as a rent-seeking institution. The rent earned by a firm is defined as a return in excess of the firm’s opportunity cost (Tollison 1982). Harrigan and Newman (1990: 425) argue that a virtue of IJV formation is that “often they make use of a resource which hereto has been left dormant because it was not coupled with the necessary handmaiden”. The exploitation of such ‘dormant’ resources creates rents because their opportunity costs are zero. Many more IJV formations are, however, motivated by the desire of at least one partner to make a better use of its competitive advantage. Penrose (1959) comments that firms tend to expand whenever profitable opportunities exist. A firm may therefore want to exploit its competitive advantage in a different country and/or industry.

Resource-based theory is concerned not only with efficient utilisation of a firm’s resources, but also with their efficient development. Development of resources is another principal reason for forming IJVs (Tsang 2000; Das and Teng, 2000; Leiblein, 2003). In this case, Tsang (2000) argues that rent generation is not an immediate objective. Rather, the objective is to manage and develop the resources in a rational manner, to acquire and

develop resources that are needed, and to dispose of those that do not fit into a firm’s core competence (Prahalad and Hamel, 1990). By so doing, a firm’s long term competitiveness is strengthened. A firm’s whole portfolio of resources is taken into account when such IJVs are formed. That is, within the constraint of bounded rationality, the entrepreneur has to consider global efficiency, and is therefore seen by resourced-based theory as having an important role to play (Tsang, 2000).

Ohmae (1989: 145) argues that “today’s products rely on so many different critical technologies that most companies can no longer maintain cutting-edge sophistication in all of them. Tapping external sources of know-how becomes a must. Suppose a firm wants to obtain a specific capability possessed by another firm. It is usually not wise for the former to acquire the latter just for the sake of obtaining the capability. The very essence of capabilities is that they cannot be readily acquired through markets (Kogut and Zander, 1992; Teece et al, 1997). It makes more sense to learn the capability from its owner.

An IJV is formed from resources contributed by its partners, with the result that there is intimate interaction and communication between the staff of the parent companies. This flow of information offers a great opportunity for learning, which encompasses not only resources within the IJV but which also, to some degree, extends to the resources of the parent firms. Tsang (2000) points out two key factors which affect how successful learning is. The first is the degree of specificity of the resource to a firm. If a resource is highly “firm-specific”, it is difficult to transfer it to another firm without a major loss of value. It is difficult to acquire a highly firm-specific resource through learning, since the learner may be unable to disentangle the intricate linkages of the resource from its owner’s other routines. The second factor affecting the success of learning is the learner’s ability to absorb, his ability to “recognise the value of new information, assimilate it, and apply it to commercial ends”. (Cohen and Levinthal, 1990: 128) Mowery (1989: 26) asserts that the “ability of a junior firm to utilise or exploit the technological assets contributed by a technologically advanced firm to a collaboration depends on the development of in-house research and engineering capabilities that aid the firm in absorbing these assets”.

As can be seen, resource-based theory emphasises analysis of the resources which firms possess rather than analysis of the competitive environment. Since a number of resources are firm-specific and non-transferable, firms can gain competitive advantage and enhance performance if they gain access to their partners’ unique resources by forming an IJV. Nevertheless, the theory assumes that a firm can be profitable in a highly competitive market providing it can exploit advantageous resources. This is not necessarily the case. This theory ignores external factors concerning the industry as a whole. The industry structure as well as other external factor analysis should also be considered. Furthermore, for this theory a prominent source of sustainable competitive advantage is causal ambiguity. While this is undeniably true, it leaves an awkward possibility that the firm is not able to manage a resource it does not know exists, even if a changing environment requires it (Lippman & Rumelt, 1982). Through such external change the initial sustainable competitive advantage could be nullified or even transformed into a weakness (Priem and Butler, 2001a; Peteraf, 1993; Rumelt, 1984).

Furthermore, the concept ‘rare’ seems to be obsolete. Although prominently present in this research framework, the concept that resources need to be rare to be able to function as a possible source of a sustained competitive advantage is unnecessary (Hoopes et al, 2003). Because of the implications of the other concepts (e.g. valuable, inimitable and non- substitutability) any resource that follows from these characteristics is inherently rare. Priem and Butler (2001b; 57) further crticise that the resource-based view is ‘tautological’ or self-verifying. This paradigm has defined competitive advantage as a value-creating strategy that is based on resources that are, among other characteristics, valuable. However, Priem and Butler (2001a: 31) argue that this reasoning is circular and therefore ‘operationally invalid’.