Transferring tacit know-how through licensing or joint venture: Is opportunism really redundant?

Alex Eapen The University of Sydney Business School Discipline of International Business NSW 2006, Australia Tel: + 61-2-903 66435 Email: alex.eapen@sydney.edu.au

Rekha Krishnan Simon Fraser University Department of International Business 8888 University Drive Burnaby, BC V5A 1S6, Canada Tel: +1-604-291-3047 Email: rekhak@sfu.ca

Version: Mar, 2012

We thank Aks Zaheer, Anand Nandkumar, Anita McGahan, Anoop Madhok, Harbir Singh, Kannan Srikanth, Klaus Meyer, Peter Liesch, Rajiv Krishnan, Sarah Kaplan, and seminar participants at the Indian School of Business and the University of Sydney, for helpful comments on earlier drafts of this paper.

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Transferring tacit know-how through licensing or joint venture: Is opportunism really redundant?

Abstract Transaction cost economics scholars argue that firms exist due to failure of markets, a main stimulus of which is opportunism. On the contrary, proponents of the knowledge based view claim that the opportunism assumption is redundant in explaining why firms exist. A key feature of this debate, however, is that despite competing causal mechanisms, predictions of both theories are identical. We see this lack of predictive uniqueness as the prime bottleneck in resolving the question of whether opportunism matters, and contribute to the debate in two ways: (1) we exploit the contingency logics inherent in knowledge based and transaction cost approaches to build distinctive predictions from both theories, and (2) we empirically test their competing logics, bringing empirical evidence to the debate which has this far been largely on conceptual turf. Our results, based on an analysis of tacit know-how transfer in strategic alliances between foreign and local firms in India, and subject to certain caveats we discuss in the paper, indicate that opportunism matters. (165 words)

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INTRODUCTION A key debate in the theory of the firm is on the role of opportunism. Some scholars, primarily from a transaction cost economics (TCE) standpoint, argue that firms exist due to market failure, a main stimulus of which is opportunism (Hennart, 1982; McFetridge, 1995; Williamson, 1985; 1991; 1993). Others maintain that the opportunism assumption is redundant, that is, the existence of the firm can be explained without the notion of opportunism (Conner & Prahalad, 1996; Ghoshal & Moran, 1996; Kogut & Zander, 1993; Madhok, 2006). Yet another group suggests that opportunism may be relevant, but not to the encompassing extent that TCE portrays (Madhok, 2006), nor always directed by guileful selfinterest seeking (Verbeke & Greidanus, 2009). Conceptual disagreement aside, empirical evidence on whether opportunism is critical to explaining the boundaries of the firm is also very scant. Even within the huge body of empirical research on TCE (David & Han, 2004; Macher & Richman, 2008), scholars usually assume but omit testing the underlying opportunism assumption (Tsang, 2006; Verbeke & Griedanus, 2009). A specific context in which this debate has gained significant play in recent years is the international strategy literature on the implications of ownership advantages of firms on their boundaries. Examining how firms transfer their knowledge-based advantage into new countries, Kogut & Zander (1993) suggest that firms, as social communities with superior cooperation and coordination mechanisms, are simply better vehicles to transfer know-how. Transferring knowledge across borders, particularly when it is tacit, is hence more likely to occur within the firm than on the market. This is a key prediction of the knowledge-based view (KBV) of the multinational enterprise. Transaction cost theorists agree that tacit knowledge is more efficiently transferred within the firm, but emphasize that this is because contracting for tacit knowledge on the market is rendered inefficient by opportunism-related hurdles (McFetridge, 1995; Hennart, 1982). Within firms, on the other hand, members have

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fewer incentives to behave opportunistically (Williamson, 1985). Thus, unlike KBV, the transaction cost theory of the multinational enterprise turns on the notion of opportunism. This debate in the international strategy literature has witnessed passionate arguments from all sides (Kogut & Zander, 1993; McFetridge, 1995; Love, 1995; Verbeke, 2003) and little sign of being settled (e.g., Fransson, Hakanson, & Liesch, 2011). We seek to advance the literature surrounding the opportunism debate in both conceptual and empirical ways. Our starting point is the observation that despite fundamentally different views from KBV and TCE on the relevance of opportunism, both sides arrive at the same prediction that tacit know-how is more efficiently transferred internally than on the market. In other words, while the causal mechanisms differ, predictions from transaction cost and knowledge-based views are identical. This lack of predictive uniqueness poses a key conceptual bottleneck in this debate 1. A second critical gap, given that the debate has been largely on conceptual turf (e.g., Conner & Prahalad, 1996; Foss, 1996a; 1996b; Kogut & Zander, 1992; Fransson et al., 2011), is the lack of empirical evidence on whether or not opportunism matters. There is indeed abundant empirical research on KBV and TCE, but as Verbeke & Greidanus (2009) rightly say, very few studies “…assess directly whether…opportunism is actually instrumental [or not] to governance choices” (p.1476). The question of whether opportunism is critical to understanding the boundaries of the firm, yet, is ultimately an empirical one (Tsang, 2006). We seek to get around these conceptual and empirical issues in this paper. Conceptually, we exploit the contingency logics inherent in KBV and TCE to build distinctive predictions from both theories. Contingency propositions also better represent the causal mechanisms underpinning both theories (cf. Rajan & Zingales, 1998). Our theoretical strategy involves identifying situations where opportunism is likely to be a concern, and then
1 The predictive similarity of TCE and KBV in spite of their different theoretical mechanisms has been highlighted by scholars in other contexts as well (e.g., Poppo & Zenger, 1998; Sampson, 2004).

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examining whether the likelihood of internal transfer of tacit know-how increases in those circumstances. In other words, we test whether the potential for opportunism makes any difference to how tacit know-how is transferred. We expect tacit know-how, in general, to be transferred internally, but if the effect of tacitness on transfer through hierarchical means increases with the level of opportunism faced by transferor and recipient, this could be the ‘smoking gun’ to suggest that opportunism matters. On the contrary, if the effect of tacitness on the mode of transfer is insensitive to the potential for opportunism, then perhaps as KBV suggests, opportunism is not so crucial for the theory. So the difference in the magnitude of the effect of tacitness under conditions of low and high opportunism serves as our litmus test for whether opportunism matters. To obtain a complete picture, we also frame a contingency argument for KBV. We argue that while the likelihood of internal transfer increases with the tacitness of know-how, this effect is weaker when the transferor and unaffiliated recipient have similar routines. That is, when routines are similar, transferring tacit know-how should be easier, even to unaffiliated firms. Any evidence for this would corroborate the KBV view that ease of transfer (and not opportunism) is what drives firms’ proclivity to internal transfer. Empirically, we test these notions using unique data from a survey of technology transfer arrangements between foreign and domestic firms in India. We surveyed licensing contracts, which are closer to a market transaction, as well as joint ventures, which have overtones of hierarchy or internal transfer (Gulati & Singh, 1998; Hennart, 1988; Osborn & Baughn, 1990; Oxley, 1997; Phene & Tallman, 2012). We collected detailed micro-level data on the nature of know-how transferred such as its tacitness, importance to the recipient, and the extent of specific investments required to be made by the recipient for its implementation. As we argue below, the latter two variables are reasonably good indicators of potential opportunism. We also measured the similarity between transferor and recipient – in this case, between foreign and domestic partners – in their routines and culture. Employing logistic

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as we discuss later on in the paper. we find that tacit know-how is more likely transferred through joint venture than through licensing. when the know-how being transferred is central to the recipient. Granovetter. This is consistent with prior literature. and secondly. 1996. 1995). or when the recipient needs to make specific investments.. 2003). i.regression analyses. inter alia. 1985). that opportunism is the likely causal mechanism behind the often observed empirical link between tacitness of know-how and its internal transfer. have fairly significant implications for the debate over opportunism and the theory of the firm. 1996). These conceptual and empirical observations. 1990. Not all of it has been positive.. BACKGROUND The assumption of opportunism has received a significant amount of attention and commentary in the organization. elaboration (Wathne & Heide. and international business literatures. Kogut & Zander. 1992. 1996. 2000). Hodgson. 2009. Williamson. 1993). Subject to certain caveats we discuss later on. But we do not find the effect of tacitness varying with whether or not the recipient has routines similar to that of the transferor. Kogut & Zander. scholars have attacked opportunism. However. and irrelevant to understanding why firms exist (Conner & Prahalad. While there is seldom any disagreement over the need to carefully identify the nature of human beings that underlies their behavior (Simon. that opportunism is relevant to understanding the boundaries of the firm. 2009). and for issues related to the question of what firms really do (cf. 1985. we interpret these results to mean two things – firstly. as being an undersocialized and narrow view of human behavior (Donaldson. Verbeke & Greidanus. we also find that the effect of tacitness on the choice of joint venture is stronger under conditions of high potential opportunism. and reconceptualization of the opportunism construct (e. 1998. 5 .g. Love. of little normative value (Ghoshal & Moran. Verbeke & Greidanus. 1992). This critical commentary has been reciprocated in equal measure with extensions (Rugman & Verbeke.e. strategy.

the transfer of tacit knowledge across borders through hierarchical modes can be attributed simply to the efficiency of firms in transferring knowledge internally. In building their case. 2003). 1976. In some instances. 2001). necessitating the internalization of that transfer. whether the cross-border transfer of a firm's ownership advantage. and assumptions are shared within the firm. 1996b. markets fail for reasons related to opportunism (Williamson. due to the difficulty in describing and teaching it. it turns out less costly to transfer tacit knowledge internally. its proprietary knowledge. Hennart. 1985). 1995. 2003). rebuttals 6 . Kogut and Zander’s thesis received a lot of support (e. values. 1981). Love. However. 1995). By questioning the need for the opportunism assumption. Verbeke. Hence. the existence of the MNE was largely attributed to the failure of markets for critical intermediates such as knowledge. By bringing tacitness of knowledge into the picture. Rugman.g. 1996a. 2003.In the international strategy literature. Kogut and Zander (1993) took issue with this explanation and argued that it is overdetermined with its reliance on opportunism. and distribution (Hennart. but also provoked a series of critiques (Foss. they established that the transfer of tacit knowledge. according to Kogut and Zander (1993). 1982. According to proponents of this approach. the study of how tacitness of know-how influences the boundaries of the MNE has turned out to be a duelling ground for this debate. Until Kogut and Zander (1993). e. The notion of opportunism is redundant. may not be easy even among willing parties..g. McFetridge. or more precisely. Tallman. because routines. raw materials. Kogut and Zander (1993) reshaped the way scholars understood the MNE and its boundaries (Tallman. they introduced the concept of tacitness of knowledge to the literature which until then considered knowledge as a public good that is easy to transfer but hard to protect. occurs on the market or through hierarchical modes such as joint ventures or wholly-owned subsidiaries depends on whether or not there is a viable market for that advantage (Buckley & Casson. the existence of the MNE.

Love (1995) maintains that firms exist because of market failure. a key bottleneck in the opportunism debate as it has played out in the international strategy literature is that predictions from TCE and KBV regarding the transfer of tacit know-how are identical.. what would help make progress. Furthermore. 1996a. Madhok’s (1996) argument is similar and largely consistent with Kogut & Zander’s. 1995). 2006). THEORY Theoretical Strategy As we have indicated. is a way to draw and empirically test distinctive predictions based on the 'with opportunism' and 'without opportunism' logics of both theories. on the other hand. so portraying them as such is really just more precise articulation. Hence. but a different class of it that comes not from opportunism but from genuine unbridgeable differences in routines.. McFetridge (1995) argued that the reason firms transfer tacit knowledge internally is because the potential for opportunism is subdued when transactions are organized through hierarchical modes. But unlike them. not only in the TCE literature that rests on the notion of opportunism (Tsang. Foss. 2011).(Kogut & Zander. Like Kogut and Zander. and reflections (Kogut & Zander. Empirical evidence for whether or not opportunism matters is rare. thus.g. Ghoshal & Moran. As we demonstrate below. From a transaction cost perspective. Kogut and Zander’s finding that MNEs transfer tacit knowledge internally rather than externally. Love (1995) too asserts that opportunism is not necessary to explain the existence of the firm.. is entirely consistent with transaction cost reasoning that is based on opportunism (McFetridge. Several other scholars too have weighed in on this issue of whether opportunism matters (e. 1996). 1996b. contingency arguments are native to the key logics of both KBV and TCE. but largely on conceptual terrain. Fransson et al. this can be done by means of contingency arguments. in our view. and the debate continues (e. 2003). 7 . 1995). but also in the KBV literature that refutes it.g.

By ‘embedded capabilities’.. structures. Firms are simply better at transferring tacit knowledge. This contingency argument is inherent in the knowledge based view of the firm. And this is largely because they are a “. 1995: 402).. Although there is a bit of confusion over which side of the debate Teece (1986) stands (cf.fail if it must take place between unaffiliated enterprises with different internal cultures (and) codes of communication.. 1986: 29) also attests to the point we are making. but less easily so. Love essentially means routines. Firms are indeed relatively efficient in 8 .by differential 'embedded capabilities' that exist between creators of knowledge and its users” (p. Tacit knowledge can be transferred (it is transferred within the firm.. his statement that trying to transact tacit knowledge may “.. after all). Love. Kogut and Zander do emphasize that differential routines between transferor and recipient are what matter (p.Take the KBV for example....repository of social knowledge that structures cooperative action. Herein lies the key contingency in the knowledge based view. when the recipient lacks similar routines.. Let us move on to TCE.400). a point that Love (1995) too nicely summarizes: “. 1995). An important rebuttal from TCE to Kogut and Zander's thesis is that the relationship between tacitness and internal transfer can easily be explained by transaction cost theory (McFetridge.. is not the real barrier to its transfer. Transferring tacit knowledge is problematic only to the extent that the recipient lacks the appropriate routines..630).. The reverse argument then is also true. Tacitness of know-how.the boundaries of the firm are determined. Kogut and Zander (1993) argue that firms are social communities that specialize in the creation and internal transfer of knowledge. In other words. the key hurdle in transferring knowledge to unaffiliated firms is that transferor and recipient lack a common social fabric. When unaffiliated firms lack the same routines.627). and identity as the transferor. and transfer becomes costly. firms naturally beget the cooperation and coordination necessary to transfer tacit knowledge.” (Teece. per se. extra effort needs to go into teaching the recipient..” (p.

the combination of uncertainty and asset specificity is what necessitates hierarchical solutions. thus. 1985). is consistent with the conceptual core of both theories. And “whenever assets are specific in nontrivial degree. and in turn. It is also widely acknowledged in the TCE literature that uncertainty coupled with asset specificity begets contractual problems (Leiblein & Miller. (tacitness) need not burden market and unified governance differentially”. uncertainty arises from the difficulty in defining and specifying tacit knowledge. allow us to test the competing logics. for example. Williamson. And according to TCE theorists. In our context of know-how transfer. 1998). Tacitness matters only to the extent that transferor and recipient face circumstances that beget opportunism concerns. Rajan & Zingales. McFetridge (1995: 410) clarifies this and says: “if there were no transaction-specific investments and hence no lock-in. 1985: 60). One such condition. In other words. 2003. They bring sharper focus to the terms of disagreement by better capturing the underlying causal mechanisms of both theories (cf. is when transaction specific investments are needed. So the kernel of transaction cost theory too is a contingency argument. but more so in the presence of transaction specific investments. The first set of contingency arguments we propose below are on how the effect of tacitness varies with the 9 . [an increased] degree of uncertainty makes it more imperative that the parties devise a machinery to 'work things out'” (Williamson. So tacitness could pose a problem to contractual exchange. There are also empirical benefits of employing contingency arguments in the KBV-TCE debate. opportunism is what drives this failure. The key implication of this argument is that contracting for tacit knowledge on the market becomes a problem only to the extent that conditions of opportunism exist.transferring tacit knowledge but this is because the market for tacit knowledge fails. Phrasing our KBV and TCE predictions as contingency statements. 1985). Transaction specific investments and the resulting lock-in problems are a breeding ground for opportunism related contractual problems (Williamson.

potential for opportunism. Sampson. This problem only gets compounded when the knowledge is tacit as well. in the following sections we frame propositions as contingency statements. And for this reason. transacting any kind of knowledge on the market is inherently difficult because the buyer does not completely know what he is buying (Arrow. that the seller is exploiting the information asymmetry and quoting a higher price. 1962. the buyer maybe concerned. This information asymmetry between buyer and seller is the first contributor to market failure for knowledge. Hennart. opportunism. 1995). 1988. the more likely it will be transferred through hierarchical modes than on the market. And so. 1989. The seller too may have similar opportunism 10 . 2005). and the second. 1962. or that. and internal transfer. ex-post. 1997. on how it varies with similarity of routines and culture between transferor and recipient. and as TCE and KBV scholars in the international strategy field have suggested. Contracting on the market works well when the buyer and seller have a fairly good understanding of what is being exchanged (Arrow. With room for such opportunistic manoeuvres. it is unlikely that the buyer will consent to a market-based contractual transfer of the knowledge. is opportunism. we maintain that tacit know-how is more likely to be transferred through hierarchical modes than on the market (Kogut & Zander. So our baseline hypothesis is that the more tacit the know-how. Hypotheses Development As a baseline. the seller has sufficient room to behave opportunistically. in order to accurately portray and test TCE and KBV predictions relating to how tacit know-how is transferred. 1982) and the seller cannot describe it to the buyer because in doing so he reveals it free of charge. Oxley. the seller will not deliver what was promised. McFetridge. The second. However. ex-ante. 1993. The safeguards and opportunism-mitigation inherent in hierarchy (Hennart. Tacitness. 2004) become necessary. Barzel. When it is difficult to clearly specify the details of the knowledge being transferred. Mayer & Nickerson.

the potential for the recipient to misappropriate know-how that is central to its operations is higher because the recipient may have better ability and incentive to do so. We focus on two such conditions – when the know-how is of central importance to the recipient. he/she will be particularly wary about the transferor being opportunistic and misrepresenting the value or defaulting on the delivery of the know-how. Everything else constant. These are always concerns for the recipient when contracting for know-how. 1988. It is likely that recipients are more capable of misusing technologies in the areas of operation they are most familiar with. When the know-how being transferred is central to the recipient. more of a concern when the know-how being purchased is critical to its operations. the seller may lose access to rents that are legally due to him/her. the threat of opportunism is not uniform across all transactions. but arguably.concerns. the stakes are high. The stakes are higher since the recipient has more to lose from the poor performance of know-how related to its core operations. or not deliver as promised. If the buyer uses the knowledge ex-post in ways not covered by the contract. And given the opportunism-mitigating properties of hierarchy (Hennart. and when it requires specific investments by the recipient. The market for tacit know-how thus fails under conditions of opportunism. the key concern is that the transferor may misrepresent the value of the knowhow. and so the ability to prevent such misappropriation is weak. by definition. Oxley. From the transferor's side too. Recall that from the recipient's perspective. Thus from both 11 . Sampson. 1997. Some conditions beget greater opportunism concerns than others. this raises the sceptre of opportunism for both the transferor and recipient. However. Tacit knowledge. 1997). 2004). but mainly around whether or not he/she will be able to fully appropriate rents on the knowledge (Oxley. such know-how is likely to be transferred through hierarchical modes. And the gains from doing so are higher. Consequently. is not patentable.

as discussed above. 1985). through licensing).. where the incentives to act opportunistically are drastically reduced (Hennart.. 1995). but more so when the know-how is central to the recipient's operations. Putting these arguments together. a key concern for the recipient in attempting to contract for tacit know-how is that the transferor may change terms of the contract ex-post and not deliver as promised. In such cases. but because of associated opportunism concerns. and the need to replace markets with internal transfer. the combination of asset specificity with uncertainty raises significant transaction costs (Williamson. is not due to tacitness per se. The cost to the recipient of the transferor opportunistically reneging on the contract is immensely higher. concerns over opportunism are likely to be higher when the know-how is central to the recipient. Again.g. it becomes clear that transferring tacit know-how on the market is likely to fail. Hypothesis 1: Tacit know-how is more likely to be transferred through hierarchical modes (e. This is always a concern but a greater one when the recipient has invested heavily in specific investments. And as mentioned earlier. 1985). through joint ventures) than on the market (e. McFetridge. It is perhaps useful to reiterate our key point that from the TCE point of view. Williamson. 1993. 1995. the market failure for tacit know-how. another situation likely to give rise to opportunism concerns is when the recipient is required to make specific investments to implement the know-how (Shelanski & Klein.the recipient's and transferor's perspectives. The problems associated with asset specificity and how it yields room for opportunism concerns have received a lot of commentary in the TCE literature (for the sake of brevity we do not repeat them here). both parties are likely to take recourse to transfer through more hierarchical modes. As we briefly alluded to earlier. By specifying the following contingency hypothesis we directly capture this underlying causal mechanism. but more so when it is central to the recipient. Thus: 12 .g.

guide the behavior of organizational members (Rousseau. then firms should be more likely to transfer tacit knowledge externally when routines and organizational culture of the recipient are similar to their own2.. through licensing). 2001. In the context of knowledge transfer. Schein... Park & Ungson.there may be conditions. Tacit knowledge is not easy to describe and makes systematic transfer cumbersome (Nonaka. Smircich.g. 1983).knowledge in house than through market transactions. Compared to their culturally distant counterparts.. Simonin. as yet unspecified.. 1985) and allows them to develop common interpretations (Klimoski & Mohammed.. 1994. similarity of routines and culture. is when potential recipients have a culture and routines dissimilar routines to those of the transferor. 1997. 1994). 1990. The key condition under which firms are better at transferring knowledge. 1991:491. 1999). Scholars argue that shared mental models held by organizational members result in effective coordination (Klimoski & Mohammed. 2011). 1994). which involves translating events consistently and developing shared meanings and conceptual schemes (Daft & Weick. If that is indeed the case. through joint ventures) than on the market (e.. 1984. but more so when the recipient needs to make specific investments to implement the know-how.Hypothesis 2: Tacit know-how is more likely to be transferred through hierarchical modes (e. organizations that share similar expectations and 2 The need for articulating the knowledge based view as a contingency argument is evident in commentary by Fransson et al. when this might be the case. Such shared cognition. Culture is typically considered “a set of cognitions shared by members of a social unit [such as an organization]” (O’Reilly et al. Tacitness. Klimoski & Mohammed. operating procedures and interpretation of strategic issues (Olk. 1997..it cannot be assumed that firms are always better at transferring..g. Scott.. 1994). Codifying tacit knowledge in order to make it teachable requires extensive communication and coordination between source and recipient. prior research suggests that similarity in management styles between the source and recipient results in similarity of work expectations. 13 . (2011: 430) that “. 2001. Srikanth & Puranam. and internal transfer. as we argue.” The only disagreement we have is that the conditions are not unspecified. The knowledgebased view of the MNE contends that it is not opportunism but the difficulty in effectively coordinating with third parties that prevents firms from transferring tacit knowledge on the market.

that similarity facilitates better communication and effective coordination. besides providing a framework for information processing. 1994. enables it to store knowledge (Brief & Downey. because tacit knowledge is firmly embedded in context. 1990). In turn. 1983. 2000). this should encourage the transfer of tacit knowledge on the market rather than through a more hierarchical mode. Busenitz & Lau. scholars have argued that an organization’s culture represents its history and is therefore considered one of the facilities where the organization’s memory is retained for future reference (Klimoski & Mohammed. a recipient that is similar to the transferor in terms of organizational culture is more likely to understand the context in which the transferor’s knowledge is embedded. problem-solving. Their framework for decision-making. Gray. In knowledge-exchange. 1985. Hence: 14 . Bougen. 2001) and reduces knowledge exchange costs (Jensen & Szulanski. which makes the transfer of tacit knowledge easier. This in turn facilitates better communication between them (Park & Ungson. Walsh & Ungson.interpretations need to expend less effort and energy in devising compatible interorganizational routines. 2004). 1996. 1991). 1994). Second. 1993) as well as retrieve knowledge from their memory in similar ways (Klimoski & Mohammed. Thus. Taken together. it is important to understand the context in which knowledge is stored and retrieved (Nonaka. Therefore. such as joint venture. organizations that are culturally similar tend to organize and store knowledge in a mutually understandable manner (Schneider & Angelmar. when an unaffiliated knowledge recipient shares similar values and cognitions with the transferor. these arguments suggest that the relative efficiency of internal transfer of tacit knowledge reduces when the knowledge recipient shares the same (or similar) routine and culture as the transferor.. & Donnellon. Thus. 1994. Shaw. Accordingly. Harris. an organization’s culture. information and knowledge processing tends to be comparable as well (Mitchell et al. 1994). 1997.

.g. as well as our decision to survey the recipient and not the transferor were deliberate.. Secondly.g. through licensing). 1997). 1995. What might seem simple or codifiable technology to the transferor may appear complex and unclear to a recipient who lacks the relevant experience or capabilities. say.. depends on the experience and repertoire of capabilities of the recipient. wholly-owned subsidiaries). and perhaps more importantly.Hypothesis 3: Tacit know-how is more likely to be transferred through hierarchical modes (e. “. Scholars in the past have relied on secondary data to study licensing and joint ventures (Gulati. Oxley. a survey is more appropriate.such as tacitness or age. centrality of know-how to the recipient and the extent of specific investments it needed to make.. Our decision to survey the technology recipient is rather unique but necessary in our case for two reasons. Whether a technology is perceived as tacit or not. Our choice of the survey method and the target population of licensing and joint ventures (as opposed to. as those very scholars admit.it is very difficult to obtain data on aspects of technology transferred.. some of the moderating variables we propose in our hypotheses.” (Oxley. First. Hence. Surveying the recipient automatically precludes foreign wholly-owned subsidiaries from our sampling frame because in wholly-owned operations there is no unaffiliated recipient. METHODS Empirical Context We test these hypotheses using data from a survey of technology recipients in joint ventures and technology licensing arrangements between foreign and domestic firms in India.g. But with secondary data. are obviously best measured by surveying the recipient.. So the recipient's perception of tacitness is at least equally (and perhaps even more) relevant to the choice of mode of transfer. to get at the attributes and details of the technology transferred.. Our empirical focus is thus on 15 . e. 1997: 394)... it seems to us appropriate to measure tacitness of the technology being transferred through the eyes of the recipient. but less so when the transferor and recipient are similar in their organizational routines and culture. through joint ventures) than on the market (e.

Following Parkhe (1993) and Simonin (1999). 1988. Focussing on the choice between licensing and joint ventures thus only raises the bar for us.licensing and joint ventures and on the choice between them. if anything. This yielded 16 . 1998. the variation in tacitness in our dataset is likely to be limited. which suggests several ways to encourage response. We obtained the names of these target respondents from Capitaline and chambers of commerce data. Hennart. but these differences are not as stark as between licensing and wholly-owned subsidiaries. 1991). 1997. given that most tacit know-how is perhaps transferred through wholly-owned subsidiaries. We used university faculty and doctoral students to assess the content of the items and to ascertain whether the items tapped into the conceptual domain of the focal construct (DeVellis. makes our empirical tests more conservative. and member lists of various international chambers of commerce in India to identify a sample of 700 international licensing and joint venture agreements operating in India. They do for sure differ in transaction cost mitigating and knowledge transfer properties (Oxley. the differences between licensing and joint venture are less distinctive. considering licensing closer to a market contract and joint ventures closer to a hierarchical solution to knowledge transfer (Gulati & Singh. which we do not observe. Surveying only licensing and joint ventures. We designed our questionnaire and implemented our survey according to Dillman’s (2000) 'Tailored Design Method'. Oxley. Also. a secondary database. we aimed to target respondents highly knowledgeable about the relationships. Data We used Capitaline. 1997). All these factors militate against us in finding any significant results. 2012). Compared to the differences between licensing and wholly-owned subsidiaries. In our case these were mainly managing directors and chief executive officers. Phene & Tallman. Our measurement items were generated through a review of prior literature. making it even harder to find any significant results.

four weeks later. and 19% for Mexico (Robins. Porter & Rawlison (1986). 1999). All relationships in our sample are dyadic. electrical and electronic equipment. The first wave of questionnaires was sent to managing directors and senior executives of the 700 Indian firms we identified that had licensing and joint venture agreements with foreign firms.g. 2000). This was followed. Some of our key measures were collected using the same survey instrument and from 17 . 1993). 30 from presidents. vice presidents and general managers. and of these almost 25% for more than 20 years.. and transportation equipment). Simonin. Of the 700 managing directors and senior executives that received questionnaires. All the responses to our survey came from individuals directly responsible for the relationships: 80 came from chairpersons and managing directors of the alliances. 2002). 1993. Nearly 75% of the respondents had been with the firm for more than five years. This is comparable to surveys of such relationships in other emerging economies: e.g. and belong to industries in the manufacturing sector where licensing and joint ventures are more prevalent (e. These steps allowed us to check for any item ambiguity.. Tests of proportions show that the distribution of our responses according to their two-digit manufacturing SIC is not statistically different from that reported in two landmark studies by Harrigan (1988) and Ghemawat. The foreign partners of Indian firms we surveyed were spread over 21 countries. Makino & Montgomery. 14. and as others have also found (e. Parkhe. Tallman & Lindquist. and 16 from full-time directors.4% for China (Isobe.g. by a second wave of survey mailings. 126 responded. yielding an 18% response rate.a set of fine-tuned questionnaire items that were used in personal interviews and early pretests with managing directors of Indian firms involved in international licensing and joint venture agreements. Parkhe. are relatively high-tech (industrial machinery and equipment. The top four industries in our sample rank in the same order as in these studies. chemicals and allied products.

scale reordering. took the value 1 when know-how was transferred via joint venture. Hence we undertook multiple procedural and statistical remedies to address the potential concern of common method bias and single informant bias. exclusivity (Gallick. We found no significant difference between early and late respondents on characteristics such as number of employees of the Indian partner (p = 0.344) revealed no significant differences between respondent and non-respondent groups. We carefully considered using on a more nuanced version of this variable based on the fact that an ideal test of transaction cost theory requires a dependent variable that captures finer aspects of safeguards built into the contract (Malhotra & Lumineau. 2011. This variable. 1988. the extent of contractual 18 . 1984). Specifically. Mesquita & Brush. we undertook procedural remedies such as protecting respondent anonymity. we also tested for non-response bias by comparing early and late respondents. we are confident that common method or single respondent bias is not a serious problem in our study. 1985. 2006) could meet the same opportunism-mitigation purposes.284) and age of the Indian firm (p = 0. Dependent Variable We used a dummy variable to represent the mode of know-how transfer. So ideally. Based on these. Armstrong & Overton (1977) argue that late respondents are more representative of nonrespondents.a single respondent. Joskow.18) and relationship duration (p = 0. or even relational assets (Madhok. and 0 when it was through a licensing agreement. 2008). Hierarchy is not the only solution to transaction costs. T-tests for the size of the firms (p = 0. We checked the potential for non-response bias by comparing the characteristics of our respondents to those of the targeted population sample. 1987). JV. and reducing item ambiguity. other safeguards such as contracts of longer duration (Crocker & Masten. In line with Mohr & Spekman (1994) and Poppo & Zenger (2002). as well as statistical remedies like Harman’s (1967) one factor test.29).

Without specific guidance from the literature on specific contractbased measures. should be our dependent variable. Firstly. and not to distract from the main goal of the paper. 2009). why tacit know-how is transferred internally as opposed to on the market. However. eases the cost of transfer. While finer details of the contract would help in better capturing opportunism-mitigation elements of the governance structure. whether sets of clauses still serve opportunism mitigation when they interact with each other. and indeed the definition of a contractual safeguard (Mayer. Thirdly. we needed our measure to be relevant to the debate we are contributing to. while Mesquita & Brush (2008) measure contract completeness with the number of contingency clauses included in the contract. we decided to stick with our parsimonious measure. Crocker & Reynolds (1993) consider those with fewer contingency clauses more complete because such contracts potentially cover broader areas of dispute. In other words. Our measure is not without precedent. according to KBV. we persisted with our dichotomous variable. the debate at the center of our work has primarily been around why firms are more efficient carriers of tacit know-how. Several other scholars – both from KBV and TCE approaches – have dichotomized the governance choice 19 . irrespective of it source. These include issues like which clauses of the contract to look at. As TCE scholars duly acknowledge. Secondly. it picks up whether the know-how transfer was within-firm or to an unaffiliated party. As a simple example. or alternatively. we needed a dependent variable that would be flexible enough to reflect both KBV and TCE mechanisms and thus appeal to both camps. despite recent advances. contract research is an area where the enterprise as a whole needs to improve (Mayer. it is unclear how it would better represent the commonality of social fabric that. we stuck with the more conventional market – hierarchy dichotomy measure for three reasons. For the sake of relevance to this question. 2009).safeguards. the terrain of contract research – where scholars micro-analyze contracts to capture their finer transaction cost mitigation characteristics – still has teething problems. though.

Capable recipients need fewer skills and vice-versa. and our moderator variables fall under two groups: the potential for opportunism and the commonality of social fabric across transferor and recipient. et al. and other technical assistance to implement the technology contributed by the transferor. Nickerson & Silverman. Sampson. Odagiri. but also the surrounding supporting skills. Tacitness. we focussed on the tacitness of the know-how package being transferred. 2006. The know-how package thus varies with the range of supporting skills needed from the foreign partner by the recipient. so does the overall tacitness of the know-how package. Kogut & Zander. 1993. Specifically.into market or hierarchy (Colombo. 2010). The key insight underpinning this measure is that as the need for tacit skills such as marketing and management increases. Phene & Tallman. 20 .. 2003. Mayer & Salomon. Hall and Johnson. we used a five-item measure that captured the recipient’s need for supporting skills to implement the core technology. we conceptualized tacitness as tacitness of the know-how package being transferred. and whether they required production process. As we explain below. We also used two indicators of potential opportunism . The ‘know-how package’ refers to the entire package being transferred. We captured the commonality in social fabric across transferor and recipient using a variable similarity of routines and culture (hypothesis 3). 1970.centrality of know-how to the recipient (for hypothesis 1) and size of specific investment (for hypothesis 2). and includes not only the core technology. 2003. we operationalized this variable by asking recipients whether or not the marketing and production skills they possessed matched those required to produce and sell the product for which know-how is being sourced. So to measure tacitness of the know-how package. 1990. In measuring tacitness. based on prior conceptual descriptions (Baranson. Osborn & Baughn. 2012. marketing. 1969. management. 2004) Independent Variables Our main independent variable is tacitness.

the ordinal reliability alpha improved significantly from 0. using direct survey questions to capture negative constructs such as narcissm (Chatterjee & Hambrick. For our main analyses we therefore chose to retain only the last three items in the scale. As research on personality traits has shown.68 to 0.68.This measure had satisfactory reliability. Following an orthogonal rotation. 1998. To be sure though. & Tait. and coded the variable 1 if the answer was in the affirmative. An important consideration when using binary items in a scale. Also. For our five items. as we do. we resorted to unobtrusive measures (Webb & Weick. is likely to elicit low response rates and social desirability bias. We asked the respondent – who in our case was also the recipient – whether the know-how was central to its operations. 1997). We measured centrality of know-how to the recipient using a dummy variable. we used unobtrusive indicators of opportunism (Gulati & Singh.65 and the 0. we ran our regressions with both the three-item and the five-item index and obtained substantially similar results. Oxley. We also conducted factor analysis to assess construct validity. 1979). 2007). 1979). rather than trying to measure opportunism itself as some scholars have done (Anderson. Moderators. is more appropriate (Zumbo. Hence. 1978. the ordinal alpha was 0. racism (Newman & Krzystofiak. & Zeisser.. MacCallum. Sako & Helper. 1998). and 0 otherwise. The last three out of the five items loaded well onto this one factor with loadings greater than 0. 2007). Klein et al.40 cut-off normally prescribed (Ford. Gadermann. 1988. based on tetrachoric or polychoric correlations. or in our context.79. 1986). 21 . opportunism. Redoing factor analysis with only the last three items returned factor loadings that were higher than 0. is that the traditional Cronbach alpha can be negatively biased.71. In capturing the potential for opportunism. an ordinal alpha. we extracted one factor that had an eigenvalue greater than 1 and accounted for 85% of total variance.

and was less relevant to other uses. 4 for investments between US$110 and 220 million. we used a two-item measure to capture the extent to which there was overlap in the transferor's and recipient's organizational routines and culture. That is. details of the know-how become more established and well known.To measure size of specific investment. Tacitness of a technology could be correlated with its age. As time wears on. we asked the recipient to indicate the size of investment that had to be made specifically to implement the know-how. we included controls for industry. and 5 for those above US$ 220 million. 3 for investments between US$45 and 110 million. This variable was coded in five bands: 1 for specific investments of less than US$10 million. and organizational culture and management style were similar to that of their foreign partner. we used five point likert type items to ask the respondents to what extent their business practices and operational mechanisms. To measure similarity of routines and culture. 2 for investments between US$ 10 and 45 million. and prior export experience of the foreign firm in India. age of the technology. 22 . And it has been shown that older technologies are more likely to be transferred on the market (Davidson & McFetridge. Our contention is that higher values on this variable indicate greater levels of asset specificity (Dyer. our item captures the specificity of the investment. Control Variables To control for alternative explanations for the relationship between our dependent and independent variables. 1985). and we obtain this information from the firm making the investment and not from just any of the firms involved in the transaction. cultural distance between home country of the foreign firm and India. the size (and not only the presence) of the investment. This measure meets the three guidelines Mayer (2009) offers to increase construct validity of empirical measures of transaction-specific investments. Specifically.80. 1996). This scale had an ordinal alpha of 0.

& Sánchez-Lorda. and cultural distance has been shown to influence the choice between licensing and joint venture (García-Canal. we specifically controlled for it. we included Prior Export. RESULTS We report descriptive statistics and pair-wise correlations in table 1. as a control. we included industry dummies for chemicals. Valdés-Llaneza. To test our 23 . to control for possible industry effects. Finally. Hence we included cultural distance. 2 when it was two to three years old. We are unable to include dummies for all industries in our data because the number of observations per industry is not large enough to justify that. a dummy variable that was coded 1 if the foreign firm had exported its products to India prior to the present collaboration and 0 otherwise. electronics. i. Cultural distance between the foreign and Indian firm could be correlated with both the latter's perception of tacitness and the mode of transfer. Whether a given technology appears tacit or not to a recipient could be partly a function of the cultural distance between the sender and recipient. we used logistic regression to estimate the coefficients in our model. Given the binary nature of our dependent variable. 2008). Age of technology was coded 1 when the respondent indicated that the core technology transferred (the technology stricto sensu) had been introduced in the transferor’s home country within the past year. industrial machinery and transportation equipment industries. A technology transferor who has been exporting to India in the past may be more willing to make greater resource commitments.To rule out any correlation we observe between tacitness and choice of transfer mode being due to the common correlation with age of the technology.e. 3 when it was three to five years old and 4 when its first introduction was more than five years ago. The results of our conventional logistic regression analyses are in table 2. measured using the Kogut & Singh (1988) index. To control for this. to choose an EJV over a licensing agreement.

the effect of each variable is non linear. Interpreting interaction terms is even less straightforward. we mean-centered these variables before multiplying them to create the interaction terms. --------------Please insert tables 1 and 2 about here----------However. at low and high levels of tacitness . models 2 and 3 include the main independent variables. Unlike in linear regressions.indicates the 'effect' of tacitness on the probability 24 . The difference between these two predicted probabilities (Δπ) – i. estimates of coefficients in non-linear models. To make interpretation easy and to draw valid conclusions from logistic regressions. we find support for hypotheses 1 and 2. we include in our models interaction terms between tacitness and each of our moderator variables. The coefficients of interaction terms are not equal to their marginal effect (Ai & Norton. Looking at the coefficient estimates and their standard errors in model 7. In the logistic case. are the interaction terms. Zelner (2009) recommends computing differences in predicted probabilities (Δπ) at different values of the independent variables. do not represent the actual marginal effect of independent variables. and depends on its own values as well as on the values of other independent variables in the model. such as the logistic one.hypotheses. and the interaction terms. To attenuate problems related to multicollinearity. this time holding tacitness at its maximum value. and 6 include interaction terms one at a time. 2003. Model 1 includes only control variables. 2009) and conventional tests of statistical significance are wrong (Zelner. Zelner. Model 7 is the full model that includes all three sets of variables – controls. 2007). 5.e. The main variables of interest.. but not for hypotheses 3. interpreting results in logistic regression models is notoriously difficult (Hoetkar. For example. we could calculate the predicted probability of joint venture (π) while holding tacitness at its minimum value and other independent variables at some theoretically interesting level. 2009). We could then repeat this. given our hypotheses. independent variables. and models 4.

column 1 in table 3). In a similar 25 .96 in cases where the know-how transferred is highly tacit (row 1(b). If we find that the effect of tacitness is different when the know-how transferred is central to the recipient and when it is not. & King. The predicted probability of joint venture at low levels of tacitness and when the know-how is central to the recipient is 0. Essentially here. Wittenberg. we could calculate and compare the effect of tacitness (Δπ) when the know-how is central to the recipient as well as when it is not. Zelner (2009) recommends a simulation-based method drawn from the political science discipline (King. The results of these analyses are in tables 3 and 4. Using these confidence intervals. when know-how is central to the recipient. And if we find that the effect of tacitness on joint venture is stronger when know-how is central to the recipient.66. We implemented this procedure by using the – clarify – suite of programs written for Stata (Tomz. That is. we still do not know if these magnitudes are statistically significant. the difference in the ‘effect’ of tacitness (Δπ) when know-how is central to the recipient and when it is not. is thus 0. While examining differences in predicted probabilities (Δπ) and double differences (ΔΔπ) gives us a sense of the magnitude of the effects we are interested in.to joint venture. and double differences are computed by drawing several values of these estimates from a simulated distribution. This increases to 0. & Wittenberg. To calculate statistical significance. ---------------Please insert tables 3 and 4 about here------------Table 3 shows the effect of tacitness (Δπ) at minimum and maximum values of other variables. differences in predicted probabilities. Tomz. we could calculate Δπ at different values of the moderating variable. 2000). we can make inferences about statistical significance. This double difference (ΔΔπ). this supports hypothesis 1. 2001).30 (row 1(b). The “effect” of tacitness. To get a sense of the magnitude of interaction effects. confidence intervals for coefficients. represents the interaction effect. this suggests an interaction effect. column 2 in table 3).

tacitness increases the probability of joint venture by 0. we also plot these results in figures 1. 2. We also construct confidence intervals that allow us to run statistical significance tests. Based on Zelner’s (2009) recommendation. and by 0. Table 4 shows that there are large differences in the effect of tacitness at various values of the moderator variables. As per Zelner's recommendation we compute double differences (ΔΔπ). column 3). The line in the plot that is bounded by confidence intervals represents the ‘effect of tacitness’ (Δπ) at various levels of centrality of know-how to the recipient. if the confidence interval contains 0.15 when the size of specific investment variable is held at its minimum (row 2(a). Figure 1 depicts the estimated effect of tacitness (Δπ) along with its 95 percent confidence intervals at various (mean-centered) values of centrality of know-how to the recipient. Figures 2 and 3 show the plots for size of specific investment and similar routines respectively. Δπ is insignificant. the effect of tacitness is significant only at higher levels of the other variables.way. We find that tacitness has a much stronger effect when know-how is central to the recipient and when the need for specific investment is high. Essentially. Also. column 3). 2. and 3. This is suggestive of interaction effects. We also compute the confidence intervals for these effects. These are the differences between the effects of tacitness at lowest and highest values of the moderating variables. and vice-versa. -----------Please insert figures 1.96 when the size of specific investment is very high (row 2(b). These 26 . The narrow vertical rectangles denote the confidence intervals associated with these estimates. and 3 about here----------The statistical test of the interaction hypotheses is essentially whether the effect of tacitness at low and high values of the moderator variables are significantly different. An interesting result that is not revealed in the conventional logistic regression results is that the effect of tacitness varies in magnitude across values of other variables. This is what we represent in table 4.

The ordinal alpha for this measure was 0. Using multiple items on the other hand generally allows for averaging out 27 . Our results are robust to the use of these two different measures of tacitness. Sensitivity Analysis We tested if our results were sensitive to alternative measures of tacitness. and by leaving respondents with greater ambiguity to interpret the item in their own way. Contrary to the prediction from the knowledge based view though tacitness seems to lead to the choice of joint venture when transferor and recipient have similar routines. We also ran our analysis with another measure of tacitness – tacitness of the core technology – a set of three items that tapped into the extent to which the technology being transferred could be codified and taught. Measurement error in single-item scales could arise out of not being able to capture the multiple dimensions of a construct. Specifically. based on the literature on (psychometric) measurement is that single-item measures are prone to measurement error.. 2011). One argument. one cannot compute a reliability statistic such as the cronbach or ordinal alpha in a single-item measure (Hoeppner et al. Moreover.two results are consistent with transaction cost theory. again measured from the recipient's perspective. and the extent to which manufacturing the product and/or implementing the process requires the on-site guidance of employees of the know-how transferring firm.75. We recoded tacitness of the know-how package as a count measure that took values from 1 to 5 depending on the number of types of supporting skills required. the five point likert type items captured the extent to which the technology transferred could be described in a manual. the extent to which the recipient can learn to manufacture the product or implement the manufacturing process by looking at a set of blueprints. A possible threat to internal validity in our study lies in our use of single-item measures for centrality of know-how to the recipient and size of specific investment. and all three items loaded well onto one factor.

et al. Schmiediche. is likely to be small. but we do not directly measure the perception of opportunism (e. single-item measures are usually sufficient (e. we employed regression calibration (Carroll & Stefanski. 2003) to check the sensitivity of our estimation to measurement error. Specifically. In other words.. Gulati & Singh.. for reasons mentioned before and as several others have done (e. Oxley. 1978. 2003). 2006).g. 2006. 1988. we infer the potential for opportunism from certain objective characteristics of the transaction. Anderson.random measurement error.. We are indeed interested in the potential for opportunism in each transaction. 1997 etc.). & Carroll. we did some additional analysis to assess the resilience of our results to potential measurement error. 1998). making it more difficult to detect significant effects (Anderson. Sako & Helper. however. The first is likely not a problem for our study because for the interaction terms that include our two single-item variables centrality of know-how to the recipient and size of specific investment. Instead. we get significant effects even when measurement error should have made finding support for our TCE hypotheses more difficult. and (b) induces bias in the coefficient estimates (Carroll. Hardin. In each sequence we progressively attributed a larger proportion of the total 28 . And for such objective characteristics.. on the other hand.g.g. Klein et al.. and better means of capturing a complex construct. Measurement error in our single-item measures. Sako & Helper. In our study. The latter problem of potentially biased coefficients. is something we would like to rule out.. Carroll et al. To do this. measurement error is unlikely to be a significant problem given that our single-item variables – centrality of know-how to the recipient and size of specific investment – capture objective and not perceptual data. one for centrality of know-how to the recipient and the other for size of specific investment. Hardin et al. 1998. Nevertheless. Measurement error in independent variables generally poses two problems for regression estimates: (a) it reduces the power of the test. 1988: 255. thus. we estimated two sequences of regression calibration models. 1998: 396).. 1990. we do find significant effects.

2006). This obviously is not very disconcerting.. In subsequent reruns of the model. 2003. 1996). such as equity joint ventures.. while our results show that firms use structural solutions. the unbiased coefficient estimate of the interaction terms are much larger than what we report in our main results table. however.. Gulati (1995) shows that partners formed non-equity alliances instead of equity alliances when they had prior ties. given the inherent tendency in regression calibration models to trade off variability of the coefficient estimates in favour of unbiasedness (Carroll et al. to mitigate opportunism concerns in the transfer tacit knowledge. in the sequence of regression calibration models for size of specific investment. and twenty-five percent. Finally. Hardin. more likely than not. we initially assumed that all the variance in size of specific investment and its interaction term is due to actual variance in the true measures (i. We find that as we assume greater levels of measurement error. which he argued indicates the presence of prior trust between partners. 1995..e. It is perhaps useful to also note that the interaction term with size of specific investment remains significant in the regression calibration models. 2003. and produces unbiased coefficients (Hardin & Carroll. twenty. such as trust-based governance (Madhok. In other words. zero measurement error). Carson et al. The interaction term with centrality of know-how to the recipient has the correct sign. but is significant only in a one-tailed test. We 29 . Regression calibration modelling takes these estimates of error variance into account. This is not cause for excessive concern. is attenuation bias. fifteen. Ghoshal & Moran. For example. 2003). the coefficients we report here are smaller than what they ought to be. et al. we progressively increased the proportion of total variance due to measurement error to five.variance in the (single-item) variable and its interaction term to measurement error. in the other words. there is a rich line of research on how firms can handle opportunism but through informal solutions. what we will have. ten. if measurement error were present in our data.

we predicted that the likelihood of tacit know-how being transferred through hierarchical modes will be stronger when opportunism inducing conditions are prevalent—i. In this paper. We examined whether opportunism matters to how tacit know-how is transferred. Irrespective of our empirical findings. they arrive at identical predictions for how tacit know-how is transferred. We see this as the key bottleneck in the debate this far. DISCUSSION Our study seeks to contribute to the KBV-TCE debate on the relevance of opportunism for the theory of the firm. we predicted that the likelihood of tacit know-how being transferred through hierarchical modes will be weaker when the organizational culture and routines of the transferor and recipient are similar. We included in our regressions a dummy variable that indicated whether or not the recipient and transferor had a licensing or joint venture relationship before the focal one. when know-how is core to the recipient firm in the host country and when the specific investments made by the recipient firm is high.. Both TCE and KBV predict that tacit know-how is more likely to be transferred through hierarchical modes than on the market. This lack of predictive uniqueness has also hindered empirical tests of the competing causal mechanisms. And the results were not different from what we report here. Framing arguments from KBV and TCE as contingency statements brings 30 . In testing contingency arguments from TCE. this theoretical approach confers several advantages.tested if our results held even after controlling for prior familiarity between partners.e. While both theories disagree on the relevance of opportunism. in testing contingency arguments from KBV. Similarly. we sought to move the KBV-TCE debate forward by crafting and testing contingency arguments from both theories. but TCE attributes this to market failure arising from opportunism concerns and KBV. to the difficulty in transferring tacit know-how owing to the absence of similar routines.

greater clarity to the debate. From a TCE point of view we argue that when know-how is core to the recipient. McFetridge. It is difficult to draw an opportunism-based explanation for why similarity in routines should make the transfer of tacit know-how any easier. all the other articles critiquing or defending their contention (e. This is what has primarily guided our choice of moderators.g. Love. On the one hand. are distinctively TCE hypotheses. 1995. we conduct more direct tests of TCE and KBV positions (Tsang. it is likely to trigger opportunism concerns among both parties—with the transferor being concerned about potential knowledge leakage and the recipient. about misrepresentation of knowledge. our third moderator – similarity in routines and culture – closely relates to the conceptual mechanisms of the knowledge-based view. 1995. separating TCE and KBV predictions. Our second moderator. Similarly. many potential moderators that signal opportunism concerns can also be argued to signal transfer costs. These two. viz. They are useful for our purpose because it is difficult to come up with knowledge-based explanations that result in the same predictions. Fransson et 31 . but not all of them were useful for our purpose. Contingency arguments also allowed us to tease out and isolate the different causal mechanisms in KBV and TCE and as a result.. 2006). Except for Kogut and Zander’s (1993) article.distinctiveness to the predictions of both theories. in our view. Besides the novelty of our theoretical approach that is based on contingency arguments. We considered several candidate moderators of the relationship between tacitness and transfer mode to use in our study. and in the process. Madhok. the fact that we bring some empirical evidence to bear on this debate is also valuable because the literature surrounding the debate has so far been largely on conceptual turf alone. specific investment by the recipient. but more importantly. the moderators that will do the job for us are those that deliver distinctive predictions for TCE and KBV. closely mirrors the TCE emphasis on asset specificity.. 1996.

.al. based on only licensing and joint ventures. As Kogut & Zander (1993: 633) themselves indicate. 2011) have been conceptual. and across both. When routines are similar. we set up two separate tests – hypotheses 1 and 2 – for whether opportunism matters. we find consistent results that it does. was not able to partition out the causal mechanisms underlying KBV. Secondly. although empirical in nature. 32 . “. although this result is not statistically significant.. And this is better afforded through JVs than licensing. Even Kogut and Zander’s (1993) article. In particular. If we assume for a moment that similar routines reflect the ability of the recipient to compete back against the transferor. both in terms of magnitude and statistical significance. Our paper has taken an empirical step forward in this direction. we find that the likelihood of joint venture is higher when tacit know-how is transferred to recipients with similar routines and culture as the transferor. this result may also be considered additional support for TCE. the transferor is likely to want better avenues for monitoring the use of know-how. So opportunism necessitates recourse to hierarchy whenever the transferor seeks to transfer tacit know-how. the robustness of this conclusion also comes from the fact that our results hold even when characteristics of our empirical test militate against finding any significant results. Implications The key implication of our study is that opportunism matters. Firstly. when the knowhow is core to the recipient and when the recipient has made transaction specific investments.. Several aspects of our findings lend robust credence to this conclusion. That is.this test is by no means fully specified. is very conservative. we do not find evidence that that transfers will be via licensing when transferor and recipient share the same routines and culture. Thirdly. As discussed earlier. we do not look at the capabilities of the recipient”. our test. In fact we find the opposite. The likelihood of tacit know-how being transferred through hierarchy is significantly greater.

1985). hierarchy reduces the payoffs from opportunism for the members of a firm (Kale & Puranam. However. Kogut & Zander. that would have been sufficient to support the KBV contention. an important point of contention in the KBV-TCE debate is that the link between tacitness and hierarchy is equally amenable to both KBV and TCE explanations. The way we set up our tests. As we have mentioned. There were three occasions in our empirical analysis for the KBV argument to receive support and show through.. Williamson.market contracting would be ubiquitous in the face of nonopportunism”. Williamson (1985:66) says: “. opportunism and not similarity of routines is the relevant causal mechanism in play. Had the effect of knowledge tacitness on transfer mode choice been insensitive to opportunism concerns (in hypotheses 1 and 2). our results support the contention that opportunism matters. Conner & Prahalad. 1996. 2004. Our result for this prediction too was not significant. 2000. 1996a. We also examined separate contingencies for KBV that transferring tacit knowledge hierarchically might be less likely if organizational culture and routines are similar.The second key implication of our results is that the causal mechanism underlying the often observed link between tacitness and hierarchical transfer modes is opportunism and not ease of transfer due to similar routines. By virtue of better monitoring and incentive-alignment mechanisms. at least in our empirical context. Departing from 33 . Across these three sets of results. we were able to directly test which of these two mechanisms is in play. but also for the study of joint ventures (Gulati & Singh. 1988). we think it is fairly robust conclusion that. 1992. 1996b). Foss. 1998. Finding this would have lent support to KBV that it is transfer costs and not opportunism that guides transfer mode choice. To this end. Wathne & Heide. A third important implication of our study is that it speaks to the question of “what do firms do?” This is a significant issue for the theory of the firm in general (Conner. 1996.. Hennart. The dominant view until recent times has been that the raison d'etre for firms is their ability to curb opportunism. 1996. 1991. Grant.

but even extended the transaction cost construct to include communication and coordination costs as well (Rugman & Verbeke. other scholars have suggested that what firms offer. 2004). coordination comes from reduced incentives of members of a firm to act opportunistically. over and above markets. To TCE proponents. however. and common procedural rules (Kogut & Zander. 2004. 1992: 384). A similar opportunism-mitigation versus coordination argument has played out in the strategic alliance literature as well. 1988. The knowledge based view on the other hand ascribes coordination benefits to higher-order organizing principles (Kogut & Zander. is superior coordination abilities (Grant. Mesquita & Brush. TCE scholars in strategy and international business have not only highlighted the importance of coordination (Williamson. scholars have converged on the notion that hierarchical governance mechanisms simultaneously serve both opportunism-mitigation and coordination functions (Kale & Puranam. In recent times. Phene & Tallman. 2012). 1993). One view in this literature is that joint ventures mainly serve an opportunism reduction purpose. 1992).. their incentives are aligned and they are less likely to act opportunistically (Hennart. Madhok. 1985. 1993: 97). 2003. 1993. 1996). In fact.this emphasis on opportunism and transaction cost mitigation. 1996). a shared identity among members of a firm. is its view on where the coordination benefits of hierarchy come from. Kogut & Zander. 2006. 1998. Ghoshal & Moran (1996) suggest that coordination arises from a 34 . 1995. since partners in a joint venture share from the gains of the venture. Somewhat similarly. the origins of which are in the “social community of voluntaristic action” inherent in firms (Kogut & Zander.e. An alternative view is that joint ventures are chosen because they facilitate better coordination between partners (Gulati & Singh. 2008). “ex-post maladaptation problems” are less likely to arise in firms due to the absence of opportunism (Williamson. however. What still distinguishes TCE and other perspectives on the question of what firms do. Kale & Puranam. i. 2012). Phene & Tallman.

or in other ways integrate their specialized knowledge. and develop valueenhancing organizing principles among themselves. Mors.. cannot be effected on the market as well. Hansen.the gains from. is difficult unless specific mechanisms are in place (Bechky. Srikanth & Puranam (2011) find similar results showing that fairly intensive coordination can be effected even in arms-length (offshoring) contracts. 1998:391). Firms would not be necessary” (Foss & Klein. with some effort. Contrasting the TCE view with theirs. Secondly.. 35 . Srikanth & Puranam (2010) conclude that there is no unique coordination mechanism within firms that cannot be implemented in 3 To be fair. which we think is reflected also in our empirical results. Hierarchy and superior coordination are thus not synonymous 3. 42). 2010). Kogut & Zander do allude somewhat briefly to the difficulty in transferring knowhow between departments (1992: 389) and to the fact that firms differ in what they can do well (1996: 515).. investigating the kinds of coordination mechanisms within and across firms. Coordination. If this statement is true. can facilitate hierarchy-like coordination between alliance partners while at the same time. In other words. they do not adequately safeguard from opportunism (p. but in leveraging the human ability to.. hierarchy need not automatically or always confer coordination benefits (Sako & Helper. own their own pieces of physical capital equipment or rent it to each other.. But their mainstream emphasis is on the coordination-enabling features of the firms through shared identities and higher order organizing principles. 2003. they remark: “the advantage of organizations over markets may not lie in overcoming human pathologies through hierarchy. then hierarchy may not be essential to generating coordination benefits..sense of shared purpose. Moreover. Foss (1996a) makes this very point: “. even within firms. rests on the following three observations. with some embellishments. So where do cooperation and coordination in firms really come from? Our view.803).being embedded in higher order organizing principles could be realized over the market”.cooperate” (p. 2008. Firstly. 1999. “agents could simply meet under the same factory roof. there is no reason why coordination. This view resonates well with Mesquita & Brush's (2008) empirical results that contracts. italics added).

higher order coordination routines generally seen within firms could very well be because of the reduced payoffs from being opportunistic for members of the firm. Firstly. we certainly do believe that coordination is crucial to transferring tacit knowledge (Nonaka. Coordination-benefits do not seem unique to hierarchy since firms can still suffer coordination problems. And despite that we find results supporting TCE. But on the other hand. and various sets of commitments. our tests are very conservative. the argument that coordination arises from high-order organizing principles need not be inconsistent with an opportunism-based argument. What hierarchy really does is opportunism mitigation. these three observations suggest that the while the need for coordination is important in alliance governance. we do not find managers choosing joint venture over licensing.. information exchange. And we think our results reflect this. three important caveats to our story. Transaction cost theorists would suggest that “. which is precisely what [is] packed into the concept of higher order organizing principles” (Foss. So. Thirdly. To be clear. as a first step. but not that this is what fundamentally distinguishes hierarchy and markets.. but we think this is likely only because. 1996a: 473). 2011). its role in driving the preference for hierarchy over market is not unequivocally clear. they mitigate opportunism. such as when routines and culture of partners are dissimilar. There are. what do firms do? They may very well facilitate coordination. and in that respect consistent with transaction cost theory. cooperation.contracts. Taken together.. and effective coordination can occur on the market (Foss. the managers we surveyed chose joint ventures when opportunism concerns were high. In conditions were coordination is likely to be difficult. however. 1996a. one could argue that hierarchy is critical to curtailing opportunism but not to ensuring coordination. This strengthens 36 . 1994).the absence of opportunism that hierarchy may help to create stimulates the emergence of trust. Simply put. Extrapolating from these results. as we have said. Srikanth & Puranam.

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07 0.22 7.62 Min Max 0 0 0 1 1 1 1 1 5 5 1 2 3 4 5 6 7 8 1 0.TABLE 1 Descriptive statistics and pair-wise correlations Variable 1 JV 2 Tacitness of know-how package 3 Centrality of know-how to recipient 4 Size of specific investment 5 Similarity of routines and culture 6 Age of technology 7 Prior export 8 Cultural distance Mean SD 0.15 0.25 0.03 1 0.5 0.74 0.09 1 0.31 1 0.16 -0.06 -0.01 0.38 0.71 0.63 12.16 44 .16 0.16 -0.92 0.19 -0.02 0.33 0.19 1 0.04 -0.05 1 -0.03 0.06 -0.14 -0.02 1 0.41 0.44 2.03 0.11 -0.79 1.05 -0.42 1.06 -0.13 0.19 -0.04 -0.58 0.01 1 1 4 0 1 2.92 3.23 0.96 0.

637** (0.362) 1.111 (0. ** p<0.643) -0.295) 0.268) 5.609) 0.811) 5.777 (1.308*** (0.876) 112 -0.920*** (0.248) 3.521 (1.118 (0.005* (0.TABLE 2 Results of logistic regression analysis: Choice of equity joint venture as dependent variable Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Tacitness of know-how package 2.126) Industry dummies Constant included 0.764) 2.01.877) 0.941 (0.466) Observations 116 *** p<0.05.779) 0.800 (1.637) -0.531 (0.870 (0.352*** (0.535) Cultural distance -0.812) 0.832 (1.230 (1.218 (0.191 (0.925) 1.557) 0.270 (0.251) 2.781) 112 0 (0.160 (0.378) 1.992 (0.204 (1.402) 0.121 (0.351*** (1.694) -0.787 (0.412*** (0.112 (0.114 (0.046) 1.1 Standard errors in parentheses 45 .920** (2.347) 0.558** (0.194 (0.702) 0.945* (0.02 (0.758) -0.975 (0.194 (1.325) 0.164) included 0.417) Centrality of know-how to recipient Size of specific investment 0.808) 112 0.956) 112 Tacitness X Similar routines Age of technology 0.891** (2.356) 0.505 (0.573) -0.247) Tacitness X Centrality of know-how to recipient Tacitness X Size of investment 3.136 (0.812) 112 Prior export by transferor 0.152) included 2.577) 0.239 (0.513) 0.149) included 2.156) included 1.290) -0.350) 0.467) 0.04 (0.277* (0.06 (0.193 (0.323) 1.149) included 2.136) included 1.435 (0.361*** (0.297 (0.127 (0. * p<0.570) 2.0798 (0.296) Similarity of routines and culture 0.720) 2.438 (0.670** (1.198** (0.772) 0.647) -0.635) 116 -0.0607 (0.787) 0.256) 2.240 (1.07 (0.936* (0.

.05 0. [2] – [1] 1 Centrality of know.71 0.92 0.39 -0.99 3 Similarity of (a) Minimum value routines and culture (b) Maximum value held at its: 0.03 0.29 0.49 0.24 0.86 0.50 0.80 0.85 0.62 -0.15 0.99 -0. change in bound predicted probability of JV.21 0.58 0.96 -0.42 0.30 0.45 0.65 0.38 0.TABLE 3 The effect of tacitness (Δπ) at various levels of other independent variables [1] Predicted probability of JV at low tacitness (πlow tacit) [2] Predicted probability of JV at high tacitness (πhigh tacit) [3] [4] 95 % CI of Δπ [4b] Upper bound Effect of [4a] tacitness (Δπ).93 ** significant at p < 0.66 0.42 0.(a) Minimum value how to recipient held at its: (b) Maximum value 2 Size of specific investment held at its: (a) Minimum value (b) Maximum value 0.e.30 0.96 0. Lower i.05 46 .27 0.

TABLE 4 Test of interaction effects: Difference in effect of tacitness at high and low values of moderator variables Effect of tacitness (Δπ) when moderator variable at its minimum value (Δπmoderator at min) Moderator variables: Centrality of know-how to the recipient -0.42 0.27 Similarity of routines and culture **significant at p < .26 1.62 0.66 0.44 Size of specific investment 0.Δπmoderator at min ) 95 % CI of Δ Δπ Lower bound Upper bound 0.21 -0.81** 0.66 1.87** 0.21 Effect of tacitness (Δπ) when moderator variable at its maximum value (Δπmoderator at max) Double difference: Difference in the effects of tacitness at low and high values of the moderator variable: ΔΔπ = (Δπmoderator at max .16 1.96 0.15 47 .15 0.05 0.

FIGURE 1 Effect of tacitness at various values of centrality of know-how to recipient 48 .

FIGURE 2 Effect of tacitness at various values of size of specific investment 49 .

FIGURE 3 Effect of tacitness at various values of similar routines 50 .