Effective governance

basis for integration processes¹⁹⁸ and can lead to CAs. Dyer and Singh (1998: 668) state that “The ability of alliance partners to generate relational rents from complementary strategic resources increases with the degree of compatibility in their organizational systems, processes, and cultures (organizational complementary)”. In fact both aspects are critical factors to success for the alliance partners in order to use the benefits created by the complementary of strategic relevant resources and the achievement of relational rents.

669). Gulati and Singh (1998: 781) understand the term “governance structure” as

“the formal contractual structure participants used to formalize [the alliance]”.

Dyer and Singh (1998: 670) argue that “The greater (…) the ability is to align transactions with governance structures in a discriminating (transaction cost minimizing and value maximizing) way, the greater the potential (…) for relational rents”.

5.3.4.1 Enforcement of governance mechanisms

The willingness to implement a governance structure underlines the intention of the alliance partners to engage in a common value creation.

Nevertheless, due to the risk of the partners facing opportunistic behavior, enforcement agreements are necessary to stabilize the relationship between the partners and to present a base of common understanding. Dyer and Singh (1998:

669) distinguish between two classes of governance: (1) “third-party enforcement agreements” and (2) “self-enforcement agreements”.

Third-party enforcement agreements, e.g. like legal contracts, need an enforcing party to solve a dispute between the parties. Such a third party can be the state or a legal authority. In case of a dispute or conflict between the alliance partners it is often a decision by the court (as the third party) that solves the conflict.

This can for examply apply to the deviation of required installation material (e.g. electric wires, pipelines, etc.) during the installation of a BHS on a customer’s site, which can lead to deviations from the negotiated BoM and to an increase or decrease in the supplier´s achievements. The main issue is not that the costs to solve the conflict are probably high, but that the alliance partners, who cannot solve a dispute or conflict without a forced third-party involvement or decision, obviously face difficulties in creating a trustful relationship to each other. In the worst case scenario, they are not able to establish a trustful relationship in order to generate relational rents. In the best case the relationship between the partners survives the third party decision, meaning that each partner accepts the decision and the partner continue to try to generate relational rents. In this case the relationship could be burdened by the continuous uncertainty of renewed opportunistic behavior, as there is no more inhibition to involve a third party.

However, the partners may also be protected from future opportunistic behavior

due to the fact that there is less hesitation to involve a third party, and each partner has a very clear understanding of the rules to solve the dispute.

Nevertheless, that means that third-party enforcement agreements do not seem ideal or preferred as a governance structure to achieve relational rents.

In contrast, self-enforcement agreements are agreements where “no third party intervenes to determine whether a violation has taken place” (Telser, 1980:

27). Here the alliance partners are forced to communicate with each other, without help from third parties, and to deal with the conflict and solve it by common agreement. Duschek (2004: 64) argues that “Especially relevant for preventing the eminent danger of opportunism in the context of achieving relational profits is the ability to utilize self-enforcement governance mechanisms, and informal self-enforcement governance structures, in particular, which mainly contribute toward building trust among the partners”.

Assuming that the mutual expectations of the partners will not be disappointed, self-enforcement agreements provide an opportunity to build trust²⁰¹ between partners. Mutual and open communication between the partners, clear ideas about the goals, processes and practices to achieve the desired results and the common development of mutual understanding may then result in a strengthened relationship.

Compared with third-party enforcing governance mechanisms Dyer and Singh (1998: 670) argued that self-enforcing mechanisms have a higher efficiency by lower transaction costs and higher value-creating initiatives, which lies in the fact that (a) the alliance partner have confidence in the equitable disbursement of the generated revenue which thus can lead to reduced contract costs, (b) they need not invest in expensive monitoring systems, (c) incur lower adaptation costs due to the mutual trust, so that adjustments in the process according to changing environmental or market conditions can be made at any time (Uzzi, 1997: 48), (d)

"are superior to contracts minimizing the transactions costs over the long run because they are not subject to the time limitation of contracts" (Dyer and Singh, 1998: 670), and (e) "superior incentives for value-creation initiatives" (Dyer and Singh, 1998: 671). Thus, self-enforcement agreements are a relevant basis for the achievement of relational CA and the generation of relational rents.

201 Cf. Subchapter 5.3.4 (fn. 200).

5.3.4.2 Employment of governance mechanisms

In the previous chapter self-enforcing governance mechanisms are discussed as a basis for achieving relational rents. Dyer and Singh (1998: 669) divide self-enforcing governance mechanisms into formal and informal safeguards (formal / informal self-enforcing agreements). They understand formal self-enforcing agreements as economic resources (e.g. equity) which will be consciously designed and aligned to be able to control opportunistic behavior by encouraging the economic objectives of the partner (Dyer and Singh, 1998: 669).

The joint venture that was already discussed in Subchapter 5.3.3.2 could be a useful example. Through the connection that both partners enter by means of the joint venture and the common manufacturing facility, a close connection is established between the two initiating firms. This is not only done in connection with capital, but also for joint investments in equity visible to other strategic groups, for example, in a common manufacturing facility or in machinery and equipment. Opportunistic behavior would increase the risk in the consumption of investments, and thus the partner of the joint venture would risk losing his entire investment value. Therefore, the associated uncertainty and the fear of this risk support a trustful relationship between the partners. In a positive development of the joint venture the investments of both partner gain value. This strengthens the original decision taken for the joint venture investment and reduces the incentives for opportunistic behavior. Informal safeguards²⁰² (e.g. like goodwill trust²⁰³,

202 Dyer (1997: 535-556) describes that Japanese auto companies use informal safeguards such as trust and financial hostages rather than legal contracts to reduce transaction costs with their suppliers. Dyer argues that on one hand the initial developing costs of trust are high; on the other hand-over a longer period trust is more effective than contracting, because contracting requires a revision process for every transaction. He also found that the transaction costs of General Motors were twice as high as Chrysler´s and six times higher than Toyota´s, due to the evaluation of suppliers that the General Motor´s organization is less trustworthy.

203 Trust can be divided into two dimensions: goodwill trust and competence trust (Das and Teng (1998; 2001). Goodwill trust with its linkage to relational risks refers to the expectation that a partner has the intention to fulfill its role in a

reputation²⁰⁴, etc.) are based on personal (e.g. direct experience) or indirect (e.g.

reputation) trusting relationships among actors, which makes imitation difficult or almost impossible for competitors.

Large parts of the literature²⁰⁵ argue that informal safeguards constitute an efficient and cost-effective governance mechanism and can have a positive impact on the level of transaction costs (e.g. regarding the negotiation, monitoring, and control of agreements) compared with contractual agreements. The more it is possible to minimize the transaction costs and at the same time to maximize the transaction value, the higher the potential to generate relational rents (Dyer and Singh, 1998: 670). This is supported by the fact that it requires a certain time until informal safeguards can be developed, because they must be based upon a positive transaction history. Moreover, developing trust between partners follows certain rules which are connected with positive expectations in terms of minimizing the risk of opportunistic behavior and the behavior of the partners associated in the relationship. A study by Zaheer et al. (1998) among manufacturers of components for the electronics industry on the inter- organizational and interpersonal influence of trust on performance, found that mutual trust reduces transaction costs for the partners in negotiations and conflicts and thus trust has a positive influence on the performance of the alliance partners. Therefore, informal safeguards in the form of social capital, such as

certain relationship (Lui and Ngo, 2004: 474). The partners rely on perceptions and attitudes of key personnel (trust guardians) or organizational boundary persons (Child, 2001; Currall and Judge: 1995). Competence trust is linked to performance risk (and to resources and reputation) and refers to the expectation that a partner has the ability to fulfill its dedicated role (Lui and Ngo, 2004: 474).

204 The term reputation describes the experience based on external assessments (possibly also trust), which an individuum or an organization has with other actors. Reputation plays a significant role in the assessment of future behavior of A as a potential interaction partner of B, especially in situations that are contractually incomplete or cannot be detected. Reputation today represents the equivalent of the traditional expressions of honor or virtue.

205 See also Sako (1991), Barney and Hansen (1995), Hill (1995), Uzzi (1997).

goodwill and trust, are a basis requirement to achieve relational CA (Duschek, 2004: 64) and relational rents.