Make, Buy, Ally

Make, Buy, or Ally: A Transaction Cost Theory Meta-Analysis
Author(s): Inge Geyskens, Jan-Benedict E. M. Steenkamp and Nirmalya Kumar

Source: The Academy of Management Journal, Vol. 49, No. 3 (Jun., 2006), pp. 519-543
Published by: Academy of Management
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? Academy of Management Journal
2006, Vol. 49, No. 3, 519-543.
MAKE, BUY, OR ALLY: A TRANSACTION COST THEORY

META-ANALYSIS
INGE GEYSKENS
Tilburg University
JAN-BENEDICT E. M. STEENKAMP
University of North Carolina at Chapel Hill
NIRMALYA KUMAR
London Business School
Since the publication of Williamson's Markets and Hierarchies, many empirical

articles have investigated the tenets of transaction cost theory. Using meta-analytic
techniques, we quantitatively synthesized and evaluated transaction cost-based em
pirical research on organizational boundary (make, buy, or ally) decisions. We found
strong support for the theory for both make versus buy and ally versus buy decisions.
However, we did not find evidence that asset specificity had stronger predictive power
than uncertainty. Hierarchical and relational governance appropriately aligned with
transaction dimensions both led to enhanced performance. On the basis of our meta
analysis, we provide directions for future research.
Transaction cost theory has become the predom ity, uncertainty, and transaction frequency. Efforts
inant theoretical framework for explaining organi to subject transaction cost theory to empirical test
zational boundary decisions. Like most influential ing began shortly after the publication of William
theories, transaction cost theory was not fully de son's (1975) seminal book Markets and Hierarchies
veloped at the outset. It has been and continues to and have continued unabated since then in a vari
be refined and reformulated, corrected and ex ety of disciplines. Now, about three decades later,
panded, in response to new theoretical and empir few other organizational frameworks have been
ical developments. The basic premise of transac studied for a longer period of time or have been
tion cost theory has its origins in Coase's (1937) accorded as much scholarly attention as transac
classic article, The Nature of the Firm, in which he tion cost theory.
described markets and hierarchies as alternative Despite the large number of empirical studies
governance structures. Coase argued that the choice conducted to test transaction cost theory?or per
between markets and hierarchies was determined haps because of this large number?insights from
principally by differences in transaction costs. transaction cost applications have not always been
However, the difficulty of directly measuring trans cumulative. Two specific challenges hamper re
action costs resulted in Coase's 1937 article being searchers who try to build on the existing transac
"much cited and little used" (Coase, 1972: 67). tion cost literature. First, there is the breadth of
The operationalization problem of transaction transaction cost research to contend with. Though
cost theory was resolved by Williamson, who dem the extant empirical research has led to important
onstrated that testable hypotheses could be devel refinements of early versions of the transaction cost
oped by associating the relative efficiency of alter framework, many of these refinements have ap
native governance structures with observable peared in different disciplines, including econom
dimensions of transactions, namely asset specific ics, organization, law, sociology, marketing, fi
nance, accounting, and operations management.
The authors thank Editors Thomas Lee and Nandini Unfortunately, the lack of integration across these
different disciplines has limited their overall im
Rajagopalan; the anonymous reviewers; and Erin Ander
son, Kent Grayson, William Greene, Jan Heide, Jean pact on the development of transaction cost theory.
Fran?ois Hennart, Xavier Martin, Niels Noorderhaven, Second, even within a given discipline, the depth
and Akbar Zaheer for valuable comments and sugges of transaction cost theory has been a problem. The
tions on previous versions of the paper. The first author past 30 years have witnessed a veritable explosion
gratefully acknowledges support from the Netherlands of research efforts. In a recent narrative review of
Organization for Scientific Research (NWO). the transaction cost literature covering multiple so
519
520 Academy of Management Journal June
cial science disciplines, Boerner and Macher (2002) consequence of endogeneity bias (Masten, 1993), as
identified more than 600 articles that investigate the majority of studies have assessed the effect of
some aspect of transaction cost theory. Transaction governance choice on performance without ac
cost theory has grown so large in both breadth counting for the fact that firms purposely, as op
(number of disciplines) and depth (number of stud posed to randomly, choose their governance modes
ies within disciplines) that it seems desirable to (Hamilton & Nickerson, 2003). Through our meta
bring into sharper quantitative focus this diverse analysis, we provide more insight into the relation
and sizable literature. between governance choice and performance by
To date, several authors have presented narrative explicitly incorporating the selection decision.
reviews of transaction cost theory (e.g., Boerner &
Macher, 2002; Rindfleisch & Heide, 1997; Shelan
ski & Klein, 1995). Recently, a review using the TRANSACTION COST HYPOTHESES
vote-counting method, which consists of a tabula
Transaction Cost Theory and Hierarchical
tion of significant and nonsignificant findings, ap Governance
peared (David & Han, 2004). Although bringing
some degree of coalescence to a broad field, these The central question of transaction cost theory is
reviews leave several issues unaddressed. Through whether a transaction is more efficiently performed
this meta-analysis, we aim to contribute to the within a firm (vertical integration) or outside it, by
transaction cost literature in the following ways: autonomous contractors (market governance).
First, to the best of our knowledge, no study has Transactors are assumed to be "boundedly ration
quantitatively synthesized the empirical research al" and "risk neutral," and at least some actors are
over a wide variety of disciplines and studies, al assumed to be "opportunistic." The a priori trans
though such a synthesis would result in significant action cost theory assumption is that market gover
gains of inferential power over traditional narrative nance is more efficient than vertical integration
reviews and vote-counting methods. owing to the benefits of competition. Transactions
Second, the lack of quantitative integration limits within integrated companies may be insulated from
a full understanding of the relative importance of competitive pressure and subject to bureaucratic
the transaction dimensions vis-?-vis governance phenomena. However, certain dimensions of trans
choice. Researchers have rarely examined all trans actions raise transaction costs and combine to cre
action dimensions in the same study or attempted ate "market failure," making vertical integration
to compare the effects of each. more efficient than market governance. These di
Third, doubts have been raised as to the ade mensions are asset specificity, uncertainty, and
quacy of the explanation of relational governance transaction frequency (Williamson, 1975, 1985).
modes provided by transaction cost theory. Zajac According to transaction cost theory, economic or
and Olsen (1993) contended that transaction cost ganization is an effort to "align transactions, which
theory's exclusive focus on single-party cost mini differ in their attributes, with governance struc
mization provides little insight into relational gov tures, which differ in their costs and competencies,
ernance, which is not only about cost minimization in a discriminating (mainly, transaction cost econ
but also about joint value maximization. In addi omizing) way" (Williamson, 1991: 79).
tion, Noorderhaven (1994) maintained that transac Transaction-specific assets aie assets that are tai
tion cost theory pictures governance structures as lored to a particular transaction and cannot be eas
the fruits of planned and intentional action, ily redeployed outside the relationship of the par
whereas relational governance modes can also have ties to the transaction. Their idiosyncratic nature
spontaneous origins in the accumulation of trust gives rise to a safeguarding problem, because mar
over time. As a result, the deliberative choice as ket competition will not restrain opportunistic ex
sumed by transaction cost theory may not always ploitation. The solution to the safeguarding prob
be implicated in the case of relational governance lem identified in transaction cost theory is vertical
modes. This analysis has provoked the question of integration. In contrast to markets, the authority
whether transaction cost theory can be "stretched" relationships and hierarchical control procedures
to explain relational governance modes. available through vertical integration are assumed
Finally, the normative implications of transac to embody greater safeguarding capabilities.
tion cost theory have been questioned (Dyer, 1997; The second dimension, uncertainty, arises either
Ghoshal & Moran, 1996), partly because empirical when the relevant contingencies surrounding an
findings have been divergent with respect to the exchange are too unpredictable to be specified ex
effect of governance choice on performance. The ante in a contract (there is environmental uncer
divergent and often inconsistent results may be a tainty) or performance cannot be easily verified ex
2006 Geyskens, Steenkamp, and Kumar 521
post (there is behavioral uncertainty). The primary greater degree of control available through vertical
consequence of environmental uncertainty is an integration is assumed to embody greater evalua
adaptation problem; that is, difficulties with adjust tion capabilities.
ing agreements raise transaction costs, a problem The complete transaction cost framework also
that can be addressed through hierarchical gover includes transaction frequency, although this con
nance. However, a number of authors have argued struct has received limited attention in the transac
that high environmental uncertainty also encour tion cost literature. Transaction frequency refers to
ages firms to maintain flexibility, which would ar the extent to which transactions recur. Williamson
gue against hierarchical governance. As Klein (1985) argued that transaction frequency provides
noted, "It appears that uncertainty is too broad a an incentive for firms to employ hierarchical gov
concept and that different facets of it lead to both a ernance because the overhead cost of hierarchical
desire for flexibility and a motivation to reduce governance will be easier to recover for recurring
transaction costs" (1989: 256). Different ways of transactions. We did not include transaction fre
splitting the environmental uncertainty construct quency in this meta-analysis because of the lack of
have been proposed (Klein, 1989; Walker & Weber, research including this construct. Rindfleisch and
1984). In this study, we adopted Walker and Heide noted in 1997 that transaction frequency had
Weber's (1984) classification. They extended Wil received far less attention in the empirical litera
liamson's basic framework by distinguishing be ture than asset specificity and uncertainty, and this
tween two types of environmental uncertainty: vol has not changed.
ume uncertainty and technological uncertainty. The conceptual and empirical research launched
Their classification has become particularly influ in the shadow of Williamson's (1975) book led to
ential, and our meta-analysis tested its relevance the proposition that asset specificity is the critical
for understanding governance choice. determinant of the choice between markets and
Volume uncertainty is the inability to accurately hierarchies (Williamson, 1985). Indeed, transaction
forecast the volume requirements in a relationship cost theory maintains that "asset specificity is the
(Walker & Weber, 1984). When volume uncertainty big locomotive to which transaction cost econom
is high, suppliers experience unexpected produc ics owes much of its predictive content" (William
tion costs or excess capacity, and buyers experi son, 1998: 36). Williamson's contention that asset
ence "stock-outs" or excess inventory. Since a firm specificity is the critical driver has been supported
should be able to coordinate variations in a hierar by much other research, including prior reviews
chically organized production stream more effi (e.g., David & Han, 2004; Shelanski & Klein, 1995).
ciently than variations occurring with market sup Subsequent theoretical extensions have shown
pliers, volume uncertainty should increase the that the benefits of vertical integration stem not
likelihood of hierarchical over market governance. from ownership or integration per se, but rather
Technological uncertainty is the inability to accu from the ability to exercise decision control (Heide,
rately forecast the technical requirements in a rela 1994). As Stinchcombe argued, the ability to govern
tionship (Walker & Weber, 1984). Such uncertainty by means of authority is not limited to intrafirm
may follow from unpredictable changes in the stan settings, but also can be achieved between firms by
dards or specifications of components or end prod means of contractual provisions, which essentially
uct, or from general technological developments. "produce the effects of hierarchies" (Stinchcombe,
Unlike volume uncertainty, which motivates hier 1985: 165). Therefore, following Stinchcombe
archical governance to facilitate adaptation, tech (1985) and Heide (1994), we define hierarchical
nological uncertainty is managed more efficiently governance as explicitly based on enforcement by
through market governance. By using market gov means of legitimate authority, either through an
ernance, firms retain the flexibility to terminate employment relation or a contractual arrangement
relationships and switch to partners with more ap that provides decision-making authority in certain
propriate technological capabilities (Balakrishnan areas.
& Wernerfelt, 1986), and they avoid being locked Finally, it should be pointed out that the original
into a technology that may become obsolete (Heide transaction cost framework prediction is that u
& John, 1990). certainty is only problematic in the presence o
The effect of behavioral uncertainty is a perfor specific assets. Uncertainty coupled with transa
mance evaluation problem?that is, difficulty in tion-specific assets demands hierarchical gov
ascertaining ex post whether contractual compli nance, since uncertainty allows for expropriatio
ance has taken place. According to transaction cost when a party's investment is exposed. Uncertaint
theory, the general response to the performance without transaction-specific assets favors the m
evaluation problem is vertical integration. The ket. If asset specificity is absent and thus potent
transaction partners are numerous, a new transac phasizing expectations of payoffs from future coop
tion arrangement can easily be arranged if neces erative behavior that prompt present cooperation
sary (Williamson, 1975). The effect of uncertainty (Axelrod, 1984). In this view, if trust arises, it is
on governance choice thus is conditional on asset carefully calculated. Sociologists emphasize shared
specificity being present to a nontrivial degree. values and affective feelings that emerge from a
In summary, we set out to assess the generaliz history of trustworthy interactions (Uzzi, 1997). De
ability of transaction cost theory's classic frame spite differences, both economists and sociologists
work over a wide variety of available studies and have argued that repeated exchanges provide infor
tested the following hypotheses: mation about the cooperative behavior of exchange
partners that may allow for informed choices of
Hypothesis 1. As asset specificity increases,
whom to trust or not trust (Poppo & Zenger, 2002).
hierarchical governance becomes preferred
In addition, both economists and sociologists have
over market governance.
argued that relational governance operates as a self
Hypothesis 2. As volume uncertainty in enforcing safeguard: the value of a future relation
creases, hierarchical governance becomes pre ship is sufficiently large that neither party wishes
ferred over market governance. to renege (Telser, 1980). Thus, there is considerable
overlap in the arguments of sociologists and econ
Hypothesis 3. As technological uncertainty in
omists concerning relational governance.
creases, market governance becomes preferred
Over the past two decades, relational governance
over hierarchical governance.
modes have become more prominent. This devel
Hypothesis 4. As behavioral uncertainty in opment has motivated transaction cost analysts to
creases, hierarchical governance becomes pre incorporate them into transaction cost theory's ex
ferred over market governance. planatory framework. High asset specificity should
favor relational governance over market gover
Hypothesis 5. Asset specificity has a greater
nance since the former is another way (in addition
effect than uncertainty on choices between hi
to hierarchical governance) to address the safe
erarchical and market governance.
guarding problem posed by asset specificity. How
Hypothesis 6. The transaction dimensions in ever, Williamson (1991) argued that relational gov
teract in shaping governance choice. ernance addresses uncertainty less effectively than
market governance, since relational adaptations
cannot be made unilaterally, as can market adapta
Transaction Cost Theory and Relational
Governance tions, but require mutual consent. Building consent
takes time, which may be in short supply in uncer
Originally, transaction cost theory focused on the tain environments. Finally, we also tested whether
dichotomy between market and hierarchical gover Williamson's proposition that asset specificity is
nance. However, researchers have argued that more important than uncertainty in shaping gover
transaction cost theory overstates the desirability of nance is supported for relational versus market
integration and of explicit contractual safeguards to governance.
protect against transaction hazards (Poppo & In sum, we tested the following hypotheses:1
Zenger, 2002). This view recognizes that in many
industries managers engage in collaborative ex Hypothesis 7. As asset specificity increases,
relational governance becomes preferred over
changes (Dyer, 1997). That is, relational governance
market governance.
(alliance) may be a viable alternative to hierarchy
when the market fails. Hypothesis 8. As uncertainty (volume, techno
Relational governance modes incorporate a large logical, and behavioral) increases, market gov
informal component and are therefore not easily ernance becomes preferred over relational
legally enforceable. Instead, nonjuridical mecha governance.
nisms such as mutual dependence, trust, parallel
expectations, joint action, and procedural fairness
1 Although interaction effects have been primarily dis
sustain them (Bradach & Eccles, 1989). They are cussed in the context of hierarchical governance, there is
usually open-ended relationships, with no finite or no a priori reason to assume that they are not applicable
foreseeable termination points (Heide, 1994). The to the relational governance context. However, we do not
mechanisms through which relational governance state an explicit hypothesis for the relational governance
mitigates exchange hazards are both economic and case because we discovered only six interactions be
sociological. Economists emphasize the rational, tween the transaction cost constructs for relational gov
calculative origins of relational governance, em ernance (of which four were significant).
Hypothesis 9. Asset specificity has a greater relationships with respect to the following four
effect than uncertainty on choices between re transaction cost constructs:
lational and market governance. (1) Asset specificity. We compared four con
structs, testing site specificity (idiosyncratic invest
ments in facilities) versus physical asset specificity
Transaction Cost Theory and Performance (idiosyncratic investments in equipment) versus
Although the previous hypotheses pertain to human asset specificity (idiosyncratic investments
whether firms follow the prescriptions of transac in human capital) versus goodwill asset specificity
tion cost theory, transaction cost theory is explic (idiosyncratic investments in brand name capital)
itly normative. Firms that follow its prescriptions (Williamson, 1991).2
and align organizational form with transaction di (2) Hierarchical governance. Vertical integra
mensions will economize on transaction costs, tion (the performance of a transaction within a
which in turn should translate into performing bet firm) was contrasted with formal governance (gov
ter than those who do not (Williamson, 1985). Note ernance modes characterized by explicit contrac
that this position is not without its critics. For tual provisions that simulate the effects of organi
example, Ghoshal and Moran (1996) expressed sub zational hierarchies) (Heide, 1994).
stantial skepticism about the normative implica (3) Relational governance. We contrasted good
tions of transaction cost theory because of its will relational governance (measures emphasizing
strongly self-fulfilling assumptions (for example, socially derived norms and social ties that have
the assumption of opportunism can become a self emerged from prior exchange) and calculative rela
fulfilling prophecy in that opportunistic behavior tional governance (measures emphasizing the ra
increases when hierarchical controls are imposed). tional, calculative origins of relational governance,
Dyer (1997) criticized transaction cost theory's ex particularly stressing expectations of future ex
clusive focus on minimizing transaction costs as an
changes that prompt present cooperation) (Poppo &
efficiency criterion as governance may also influ
Zenger, 2002).
ence transaction value. In this article, we set out to
(4) Performance. Cost-inclusive performance
assess transaction cost theory's normative value by
(measures that encompass the costs of generating
testing the following hypotheses:
performance, such as profitability) versus cost-ex
Hypothesis 10. Hierarchical governance appro clusive performance (measures that do not directly
priately aligned with transaction dimensions encompass the costs of generating performance,
leads to enhanced performance. such as sales performance) was our comparison
(Poppo & Zenger, 2002).
Hypothesis 11. Relational governance appro Second, we tested the following ten study char
priately aligned with transaction dimensions
acteristics as potential moderators of all focal rela
leads to enhanced performance.
tionships: (1) year of publication, (2) year of sam
ple, (3) publication outlet (top-tier journal versus
EXPLORATORY MODERATOR ANALYSES other source), (4) data source (primary versus sec
ondary data), (5) design (cross-sectional versus lon
In addition to testing the hypotheses described gitudinal/experimental), (6) direction of integration
above, we conducted two exploratory moderator (vertical versus horizontal), (7) domain (purchasing
analyses. First, we examined differences in the op versus distribution), (8) country (U.S. versus other),
erationalization of the variables in individual stud
(9) industry type (products versus services), and
ies contributing to our meta-analysis. It has been (10) product/service type (consumer versus
observed that the various transaction cost con
industrial).
structs are rather broad (e.g., David & Han, 2004).
Because we had no a priori reason to believe that
Although broad constructs give a theory flexibility
specific operationalizations or study characteristics
and relevance for a wider range of organizational
would lead to stronger relationships, we do not
contexts, they may be so broad as to subsume com
offer directional hypotheses for these moderators.
ponents whose relationships with other constructs
are, although directionally similar, of differing
magnitudes. We examined this issue by testing
whether the focal relationships proposed in trans 2 Williamson (1991) also identified dedicated assets
action cost theory are different for different compo and temporal specificity. The number of correlations in
nents/operationalizations of a particular construct. volving these types of asset specificity was too small for
More specifically, we tested for differences in focal them to be included in our moderator analysis.
524 Academy of Managemen t Journal June
METHODS searches involved 19 major journals of widely ac

cepted scholarly value from 1975 (the year in
Rationale for Conducting a New Meta-Analysis which Williamson's Markets and Hierarchies ap
To date, six major narrative reviews of transac peared) through 2003.4 In the third phase, we con
tion cost theory (Boerner & Macher, 2002; Joskow, sulted the reference sections of all the articles re
1988; Lyons, 1996; Masten & Saussier, 2000; Rind trieved in the second phase as well as the reference
fleisch & Heide, 1997; Shelanski & Klein, 1995) sections of all major previous reviews of transac
have been presented. Whereas narrative reviews tion cost theory to identify any studies that we
can marshal and summarize work on a particular might have overlooked. In the fourth and final
topic, they allow scope for subjective interpreta phase, we contacted 113 researchers in the area in
tion. Narrative reviews do not subject the studies order to obtain unpublished studies.
they examine to statistical tests. Thus, they cannot We used several decision rules to determine the
estimate whether those who conducted the studies studies that would be retained for the meta-analy
mistook chance results for meaningful ones (and sis. First, although transaction cost theory has been
thus reached falsely positive conclusions based on applied to explain a variety of problems of eco
sampling error) or used samples so small that nomic organization, ranging from marriage to cor
chance factors concealed important results (leading porate finance, we restricted this meta-analysis to
to falsely negative conclusions) (Hunt, 1997; make, buy, or ally decisions. Second, a study had to
Hunter & Schmidt, 1990). Recently, David and Han either (1) report on one or more relationships be
(2004) performed the first quantitative review of tween these constructs: asset specificity, volume
the transaction cost literature. Our meta-analysis uncertainty, technological uncertainty, behavioral
builds on and extends their study in several ways. uncertainty, hierarchical (vs. market) governance,
First, we quantitatively summarize 200 articles in relational (vs. market) governance, and perfor
various disciplines, a number that compares favor mance; or (2) report on one or more relationships
ably with the 63 articles David and Han reviewed. between one of the constructs and one or more of
Second, those authors relied on the vote-counting these control variables: competitive intensity, envi
method, which consists of a tabulation of signifi ronmental munificence, and firm size (see below).
cant and nonsignificant findings. This technique is Table 1 summarizes our definitions of the con
essentially a dichotomous accept-reject method. structs. As noted above, transaction frequency was
Our approach refines David and Han's study by not included, because the number of correlations
incorporating degree of support (for instance, col involving it was too low (more specifically, no cor
lectively five p-values of .06 constitute much stron relations were available between transaction fre
ger evidence of a relationship than five p-values of quency and volume and technological uncertainty).
.45); thus, we are able to provide information on the Third, a study had to report sample sizes and an
magnitude of effects. Third, David and Han's meta
analysis treats all studies alike, taking their au
thors' results to be as stated. In contrast, we cor tional substantive keyword and at least one methodolog
rected for the influence of statistical artifacts such ical keyword (cf. David & Han, 2004). The additional
substantive keywords included were "organization,"
as sampling error and measurement error. Fourth, "governance," "opportunism," "rationality," "integra
we give extensive attention to the performance im tion," "hierarch*," "make-or-buy," "merger*," "rela
plications of governance choice, a topic David and tional," "cooperation," "alliance*," "uncertainty," "asset
Han (2004) only briefly discussed. A general over specificity," "transaction-specific," "performance," and
view of our meta-analytic procedures follows. "Williamson." The methodological keywords introduced
were "data," "empirical," "test," "statistical," "finding*,"
"result*," and "evidence."
Literature Search
4 The following journals were searched: Academy of
We used four phases of data collection for iden Management Journal, Administrative Science Quarterly,
American Economic Review, American Journal of Soci
tifying studies (articles, book chapters, and unpub
ology, American Sociological Review, Bell Journal of Eco
lished reports) as input for our meta-analysis. First,
nomics, International Journal of Research in Marketing,
we examined two computerized databases, ABI/ Journal of Economic Behavior and Organization, Journal
INFORM Global and EconLit.3 Second, manual
of International Business Studies, Journal of Law and
Economics, Journal of Law, Economics, & Organization,
Journal of Marketing, Journal of Marketing Research,
3 We used the following search terms: "transaction* Management Science, Marketing Science, Organization
cost*" (where the asterisk indicates that variations on the Science, Rand Journal of Economics, Review of Econom
ending of the word are permitted) plus at least one addi ics and Statistics, and Strategic Management Journal.
TABLE 1
Definitions of the Transaction Cost Constructs and Representative Measures
Transaction Cost
Construct Definition and Measures
Asset specificity Construct definition: The degree to which the assets that support a given
transaction are tailored to it and cannot be redeployed easily outside
of a particular exchange relationship. Includes investments in
buildings, equipment, learning, and/or brand name capital that are
specific to a particular relationship.
Representative measures: Anderson (1985); Heide & John (1990).
Volume uncertainty Construct definition: The inability to accurately forecast the volume
requirements in a relationship.
Representative measures: Anderson & Schmittlein (1984); John & Weitz
(1988).
Technological uncertainty Construct definition: The inability to accurately forecast the technical
requirements in a relationship.
Representative measures: Stump & Heide (1996); Walker & Weber
(1984).
Behavioral uncertainty Construct definition: The degree of difficulty in verifying whether
compliance with established agreements has occurred.
Representative measures: Anderson (1985); Poppo & Zenger (2002).
Hierarchical governance Construct definition: Governance modes that, by means of an authority
structure, provide one exchange partner with the ability to develop
rules, give instructions, and in effect impose decisions on the others.
Includes vertical integration and formal governance modes that are
characterized by explicit contractual provisions that simulate the
effects of organizational hierarchies.
Representative measures: Parkhe (1993); Walker & Weber (1987).
Relational governance Construct definition: Governance modes characterized by the parties to a
transaction jointly developing policies directed toward the
achievement of certain goals.
Representative measures: Carson, Madhok, Varman, & John (2003);
Subramani & Venkatraman (2003).
Performance Construct definition: Includes "cost-inclusive" performance measures
(measures that encompass the costs of generating performance, such as
level and growth of profit and abnormal stock returns) and "cost
exclusive" performance measures (measures that do not directly
encompass the costs of generating performance, such as level and
growth of sales).
Representative measures: Dyer (1996); Murray & Kotabe (1999).
outcome statistic (e.g., r, uni var?ate F, t, x2) that not a problem for calculation-based coding (e.g.,
allowed the computation of a correlation coeffi coding effect sizes, sample sizes, and reliabilities)
cient with the formulas provided by Hunter and but may be a problem for judgment-based coding,
Schmidt (1990: 272). such as categorizing operationalizations into trans
We read each article in the final set and extracted action cost constructs (Heller, Watson, & Hies,
data on the variables of interest, including outcome 2004). To address this issue, the second and the
statistics, sample sizes, statistical artifacts, and third authors rechecked those categorizations; in
study characteristics. The first author coded all the terrater agreement was 98 percent, and we resolved
articles and categorized all harvested correlations remaining discrepancies via discussion and reach
on the basis of the construct operationalizations. ing consensus.
We ensured investigator blindness in making deter
minations that could substantially affect our find Data Set
ings by keeping the methods sections separated
from the results sections and by having the papers Nonindependence. We used the following three
photocopied in such a way that their origins could criteria to ensure an acceptable level of indepen
not be determined (Orwin, 1994). Intercoder agree dence among correlation coefficients in our data
ment in extracting information from primary stud base: (1) For studies with multiple independent
ies is an important concern in meta-analysis; it is samples, correlations from each sample were in
eluded. (2) If a sample reported more than one the variance in correlations was also corrected for
correlation for a single relationship (because it in sampling error (artifact 1). Third, we corrected the
volved multiple operationalizations of the same mean and variance obtained in step 2 for measure
construct, for instance), we combined these corre ment error (artifacts 2-3), using the method of arti
lations into a linear composite correlation using fact distributions (see Hunter and Schmidt [1990]
formulas provided by Hunter and Schmidt (1990: for details), as this information was not available
457-460). Reliabilities of the newly formed com for all data points. These corrections yielded the
bined measures were computed accordingly with following summary statistics for each bivariate
the Mosier formula (Hunter & Schmidt, 1990: 461). analysis of interest to our study: the average cor
In the few cases where this was not possible, we rected correlation (average rho; p), the correspond
averaged the correlations and entered only the ing standard deviation of the corrected correlations
average into the meta-analysis. (3) When studies in the population (s.d.p), the 95% confidence inter
were based on the same or on partially overlap val around the average rho (CIp), and the true resid
ping data sets, we were careful not to include ual variance in the observed correlations (s.d.res)
correlations between two identical variables from after removal of variance due to artifacts 1-8.
more than one study. In such cases, preference We further examined whether the individual cor
was given to the correlation that was based on the relations on which the average correlations were
larger sample size. based were drawn from the same population using
Outliers. We computed Hufcutt and Arthur's two tests (Hunter & Schmidt, 1990): (1) the 75%
(1995) sample-adjusted meta-analytic deviancy sta rule-of-thumb, stating that looking for moderators
tistic to detect outlying observations (i.e., correla is warranted if statistical artifacts explain less than
tions). On the basis of these analyses, we identified 75 percent of the observed variance in correlations,
28 outliers. These were subsequently dropped from and (2) Hunter and Schmidt's chi-square test, a
the data set. This exclusion resulted in a final data statistical significance test for whether the ob
set of 557 correlations from 200 studies containing served variation is greater than that expected by
209 independent samples and having a total sam chance; a significant value suggests the presence of
ple size of 91,006. Of the studies used, 8 were possible moderator variables. Finally, we tested for
unpublished papers at the time our meta-analysis possible publication bias using the "trim and fill
was conducted, and 2 were in press. method" (Duval & Tweedie, 2000). Publication bias
may occur if studies producing null results or ef
fects opposite those envisaged are less likely to be
Meta-Analytic Calculations
accepted for publication (Hunter & Schmidt, 1990).
Our meta-analyses were conducted via Hunter
and Schmidt's (1990) approach, which allows for
the correction of statistical artifacts and thus pro
Testing Transaction Cost Hypotheses
vides a relatively accurate estimate of the true av
erage strength and variance of a relationship in the Hypotheses 1?11 required that we simulta
population of interest. We corrected the retrieved neously test a system of equations that explained in
correlation coefficients (r's) for the biasing influ turn the impact of the transaction dimensions on a
ence of eight statistical artifacts: (1) sampling error, firm's governance choice and the relationship be
(2) measurement error in the dependent variable, tween governance choice and performance. Testing
(3) measurement error in the independent variable, these equations independently would introduce bi
(4) dichotomization of a continuous dependent ased estimates due to the endogeneity of gover
variable, (5) dichotomization of a continuous inde nance choice in the performance equation (Hamil
pendent variable, (6) range restriction in a depen ton & Nickerson, 2003). For hierarchical (vs.
dent dichotomous variable, (7) range restriction in market) governance, we estimated the following
an independent dichotomous variable, and (8) system of equations:
downward bias in the retrieved correlation coeffi
cient as a measure of the population correlation. Hierarchical vs. market governance
For each data point (i.e., for each r), we had
= ?1 asset specificity + ?2 volume uncertainty
information on artifacts 4-8. Following Hunter and
Schmidt (1990), we first corrected each data point + ?3 technological uncertainty
for these artifacts. Next, the partially corrected data
points were meta-analyzed, a process that yielded a + ?4 behavioral uncertainty + e, (1)
sample-size-weighted mean correlation and vari
ance, both corrected for artifacts 4-8. In this step, and
Performance studies are all zero (H0: it = .5, where rr is the

proportion of significant interaction effects in the
= ?5 hierarchical vs. market governance population), was employed.
+ ?6 size + ?7 competitive intensity
+ ?8 environmental munificence + e. (2) Exploratory Moderator Analyses
For continuous moderators (e.g., year of publica
In these equations, we included two industry tion), we correlated the moderators with the cor
variables and one firm variable (competitive inten rected correlations (p's). For categorical moderators
sity, environmental munificence, and firm size, re (e.g., data source), using the Z-statistic we divided
spectively) to control for other key factors that may the data into subsets based on the level of the
affect performance (Leiblein, Reuer, & Dalsace, moderator in question and determined whether the
2002). A similar system of equations was estimated average rho statistically differed between subsets
for examining how the transaction dimensions af (Hunter & Schmidt, 1990).
fected relational governance choice and how rela
tional governance influenced performance.
Our meta-analytic path analysis required that in RESULTS
addition to estimating the correlations between the Bivariate Correlations
predictors and the criterion variable, we also esti
mate the correlations between all predictors (cf. In Table 2, for the three dependent variables ex
Geyskens, Steenkamp, & Kumar, 1999). Thus, we amined in this article (hierarchical versus market
also conducted meta-analyses relating all predic governance, relational versus market governance,
tors to one another using data from all primary and performance), for each predictor we report: the
studies in our database providing this information. number of data points (k), total sample size (N), the
We corrected correlations between the predictors average rho (p), the standard deviation of rho in the
for statistical artifacts and removed outliers using population (s.d.p), and the 95% confidence interval
the procedures described in the previous section. around the mean rho (CIp). We also report the true
Our analyses were conducted using the full in residual variance in the observed correlations
formation maximum likelihood method and LIS (s.d.res) with variance due to artifacts 1-8 removed,
REL software on the meta-analytically derived cor the percentage of observed variance accounted for
relation matrix. This estimation method explicitly by artifacts, and Hunter and Schmidt's (1990) chi
accounted for potential simultaneity bias in the square test for heterogeneity (Q).
choice of governance mode and performance Heterogeneity for the various relations was sig
(Greene, 2000). Given the variability in sample nificant. Absence of heterogeneity would have
sizes associated with each correlation coefficient in been preferable for testing Hypotheses 1-11, but
the meta-analytic correlation matrix, we based this did the degree of heterogeneity reported in Table
analysis on the harmonic mean of the sample sizes 2 preclude quantitative meta-analyses? Drawing
comprising each entry in the meta-analytic correla on recent work by Cortina (2003), we argue that
tion matrix (Viswesvaran & Ones, 1995) (harmonic this is not the case. Cortina analyzed 1,647 meta
mean N = 1,265 [1,075] for hierarchical [relational] analyses and reported a mean residual standard
governance). deviation (s.d.res) of .122. Our mean residual
Since our meta-analytic path analysis was based standard deviation is .129. More importantly, he
on a pooled correlation, we could only test relation developed a cut-off value for an acceptable stan
ships for which an adequate number of correlations dard deviation of rho in a population (s.d.p). Ac
appeared in the existing literature. Since correla cording to Cortina (2003), if s.d.p is less than .05,
tions involving interactions between transaction then there is absolutely no reason to be con
dimensions were seldom available, we were not cerned about interpretation of effect sizes. On the
able to include interaction effects (Hypothesis 6) other hand, if s.d.p is larger than .265 (a number
between the transaction dimensions in our path Cortina labeled "the point of no return"), then the
model. As an alternative, we employed a vote average correlation must be regarded as uninter
counting procedure whereby prior studies are cat pretable because it is a mean of sample values
egorized on the basis of the direction and signifi that are no less discrepant than would be values
cance of the findings (Bushman, 1994). A taken from k populations. The area in between
nonparametric sign test, which tests the hypothesis .05 and .265 is a grey zone: analyses can proceed,
that the interaction effects between the transaction
though a note of caution is in place. The s.d.p's of
dimensions from a collection of k independent our focal relationships varied between .10 and
TABLE 2
Meta-Analytic Results for the Focal Relationships9
% Variance
Accounted
Predictor N s.d., CIp 5% CI5 95% s.d., For Q
Predictors of hierarchical governance
Asset specificity 75 40,444 .16 .16 .09 .16 .13 10.7 756.6*
Volume uncertainty 16 3,315 .04 .14 -.03 .09 .10 31.7 50.8*
Technological uncertainty 7 2,991 .08 .11 -.13 .01 .08 25.8 27.6*
Behavioral uncertainty 20 7,238 .13 .15 .04 .15 .11 19.0 109.6*
Predictors of relational governance

Asset specificity 51 11,681 .28 .21 .17 .27 .17 12.6 432.6*
Volume uncertainty 6 1,430 .27 .19 .34 .08 .15 15.4 41.2*
Technological uncertainty 7 2,137 .07 .17 .17 .05 .14 14.9 47.3*
Behavioral uncertainty 9 2,121 .03 .20 .13 .09 .15 15.1 59.7*
Predictors of performance
Hierarchical governance 22 8,246 .09 .13 .03 .12 .10 20.0 112.0*
Cost-inclusive performance 16 7,293 .07 .10 .01 .11 .08 25.6 63.3*
Cost-exclusive performance 10 1,472 .20 .21 .04 .27 .17 19.5 53.2*
Relational governance 27 5,149 .44 .21 .31 .45 .18 11.8 259.5*
Cost-inclusive performance 15 3,279 .40 .22 .24 .45 .19 9.4 176.2*
Cost-exclusive performance 10 1,630 .57 .12 .40 .55 .10 32.2 40.9*
a k ? number of data points; N ? total sample size; p = estimate of corrected population correlation; s.d.p = estimated standard deviation
of corrected correlations in population; CI? 5% = lower bound of confidence interval for p; CIp 95% = upper bound of confidence interval
for p; s.d.res = residual standard deviation; % variance accounted for = percentage of observed variance accounted for by statistical
artifacts; Q = Hunter and Schmidt's chi-square test for heterogeneity.
* p < .05
.21. Nevertheless, concern about heterogeneity Meta-Analytic Correlation Matrix

was legitimate, and the Q-statistics for the meta
Table 3 presents the meta-analytic correlation
analyses that populated the pooled correlation
matrix. Each cell in this matrix represents one in
matrix indicated that most relationships were
dividual meta-analysis. Thus, the table is the cul
moderated by unknown variables.
mination of 44 individual meta-analyses. Each en
try in the matrix contains a sample-size-weighted,
average correlation coefficient corrected for arti
Assessing Publication Bias
facts (p), the standard deviation of rho (s.d.p), the
For each focal relationship, we applied the trim total sample size for each correlation (N), and the
and fill method to assess publication bias (Duval & number of samples included in each weighted av
Tweedie, 2000). For 11 out of 14 relationships re erage (k). Standard deviations marked with a dag
ported in Table 2, we estimated the number of ger indicate relationships in which moderator vari
studies missing because of publication bias to be 0 ables are present. With the exception of one
(using the estimator R0; see Duval and Tweedie relationship involving a control variable, all rela
[2000] for details). For the remaining three relation tionships included data from at least two samples
ships (i.e., asset specificity, volume uncertainty, [Ns = 194-40,444). All focal relationships in
and technological uncertainty with hierarchical cluded data from at least three samples (Ns = 576
governance), the number of studies missing be 40,444).5 Note that no sample included all variables
cause of publication bias was estimated to be 2, 1,
and 3, respectively. Only the last number was sig
5 Some relationships in our meta-analytic correlation
nificant [p < .05). We then imputed the missing
matrix were based on rather small numbers of samples
values to derive effect-size estimates adjusted for
and sample sizes. Thus, the magnitudes of those relation
the missing studies, finding the adjusted (original; ships should be interpreted with caution. However, it
cf. Table 2) estimates to be .16 (.16), .03 (.04), and should be noted that the problem of small numbers of
? .04 (?.08), respectively. The extent of bias is very samples and small sample sizes is less likely to seriously
modest and did not affect any of our research con affect the estimates of average correlations (p) than it is to
clusions reported below. In sum, publication bias influence estimates of the standard deviation (s.d.p) of
did not appear to be a serious issue. the correlations (Hunter & Schmidt, 1990).
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of interest. Thus, the number of samples contribut asset specificity (A^2[l] = 12.56, p < .01). Thus,
ing to each meta-analytic correlation is far fewer Hypothesis 5 was not supported.
than the total number of samples. Ten out of 21 studies in our meta-analytical da
tabase that reported interaction results found sig
nificant interaction effects between the transaction
Transaction Cost Theory and Hierarchical dimensions in their models of hierarchical gover
Governance nance choice. The sign test described above yielded
an estimate of pi (77 ) of .48 (10/21), which corre
Table 4 presents the results for the path analysis.
sponded to a cumulative probability of .5 from a
Since path analysis controls for redundancy in
binomial table. Thus, we could not reject the null
measures of independent variables, our analysis
hypothesis that the interaction effects between the
provides a more precise test of our hypotheses than
transaction dimensions were all zero. In addition, it
could be obtained by bivariate analyses. Asset spec
is plausible that 10 out of 21 was the upper limit for
ificity (? = .19,p<.01), volume uncertainty [? =
the number of studies finding interaction effects, as
.07, p < .01), and behavioral uncertainty [? = .13,
p < .01) led to a choice of hierarchical governance some of the studies in our meta-analytical database
might have tested for interaction effects but not
over market governance, supporting Hypotheses 1,
reported nonsignificant findings (the so-called file
2, and 4. As predicted by Hypothesis 3, technolog
drawer problem). The preponderance of empirical
ical uncertainty increased the likelihood of market
evidence therefore suggested that the transaction
governance [? = -.14, p < .01).
dimensions worked primarily through main effects
Whereas volume uncertainty had a weaker im
and did not support Hypothesis 6.
pact on governance choice than asset specificity
(A*2[l] = 10.96, p < .01), the effects of technolog
ical uncertainty (A*2[l] = 2.88, p = .09) and behav
Transaction Cost Theory and Relational
ioral uncertainty (A^2[l] = 2.77, p = .10) were not Governance
significantly different in magnitude from the effect
of asset specificity. Moreover, the joint effect of Supporting transaction cost theory's predictions,
uncertainty (volume, technological, and behav asset specificity [? = .29, p < .01) motivated rela
ioral) on governance choice was larger than that of tional governance over market governance, but vol
TABLE 4
Results of Analyses of Transaction Cost Hypotheses3
Performance for Performance for
Hierarchical Hierarchical Relational Relational
Governance Governance Governance Governance
Predictors
Transaction dimensions
Asset specificity .19 < .01 .29 < .01
Volume uncertainty .07 < .01 -.24 < .01
Technological uncertainty -.14 < .01 -.14 < .01
Behavioral uncertainty .13 < .01 -.05 .01
Governance choice
Hierarchical governance .10 < .01
Relational governance .44 < .01
Control variables
Competitive intensity .02 > .10 .04 > .10
Environmental munificence .15 < .01 .04 > .10
Firm size .02 > .10 .03 > .10
Harmonic mean N 1,265 1,075
X*(7) 162.65 278.07
GFI .97 .95
RMSR .05 .06
a A positive beta coefficient (?) signifies that the higher the corresponding variable, the more likely it is that hierarchi
governance will be chosen. Negative coefficients indicate that higher values of the corresponding variable encourage mar
urne uncertainty (? = -.24, p < .01), technological tween governance choice and cost-inclusive versus
uncertainty [? = -.14, p < .01), and behavioral cost-exclusive performance, suggesting that the
uncertainty [? = -.05, p = .01) led to market gov how performance is measured moderates the
ernance. Thus, Hypotheses 7 and 8 were also sup strength of relations (hierarchical governance: p =
ported. Since all transaction dimensions had a sig .07 for cost-inclusive performance versus .20 for
nificant effect on the choice between relational as cost-exclusive performance; relational governance:
opposed to market governance, and the direction of p = .40 for cost-inclusive performance versus .57
the effects was consistent with transaction cost the for cost-exclusive performance). We therefore rees
ory predictions, this finding attests to the relevance timated our system of equations, estimating Equa
of transaction cost theory in shaping relational gov tion 2 separately for cost-inclusive and cost-exclu
ernance as well. Asset specificity had a greater im sive performance. We found that the effect of
pact on governance choice than technological un governance mode (hierarchical or relational) on
certainty (A#2[l] = 19.12, p < .01) and behavioral performance did not differ significantly [p < .05)
uncertainty (A#2[l] = 36.55, p < .01), but the effects by type of performance. The moderators pertaining
of asset specificity and volume uncertainty were to different operationalizations of asset specificity
not significantly different in magnitude (A*2[l] = and relational governance were not significant.
1.45, p = .22). However, the overall (joint) effect of With respect to the study characteristics, 13 out
the three uncertainty constructs on the choice be of 71 effects were significant [p < .05). We discov
tween relational governance and market gover ered, however, no systematic pattern in the signif
nance was larger than the effect of asset specificity icant effects, either in terms of the moderator being
(Ax2[l] = 6.35, p = .01). Therefore, Hypothesis 9 tested, or in terms of the relationship being ana
was not supported. lyzed. Thus, the study characteristics we examined
could not adequately explain the heterogeneity in
effect sizes.
Transaction Cost Theory and Performance
The empirical results provide support for Hypoth DISCUSSION AND DIRECTIONS FOR FUTURE
eses 10 and 11. The coefficient estimates for the gov
EMPIRICAL RESEARCH
ernance choice-performance relationship were posi
tive and highly significant, for both hierarchical [? = Despite what almost 30 years ago may have ap
.10, p < .01) and relational governance [? = .44, p < peared to be insurmountable obstacles to acquiring
.01), which indicated that choosing hierarchical or the relevant data, today transaction cost theory
relational governance in response to transaction haz stands on a remarkably broad empirical founda
ards increases performance. tion. Through this meta-analysis, we have contrib
uted to the transaction cost literature in the follow
Exploratory Moderator Analyses ing ways: First, by psychometrically meta

analyzing the results from 200 empirical papers on
We tested whether the focal relationships pro transaction cost theory?papers that all concerned
posed by transaction cost theory were different for the make, buy, or ally decision and that represented
different operationalizations of four transaction 209 independent samples and 557 correla
cost constructs and ten study characteristics, con tions?we were able to test a comprehensive model
ducting a total of 84 analyses.6 With respect to that no individual study has tested. Second, we
hierarchical governance, with one exception no sig found no evidence supporting the superior predic
nificant differences were found for vertical integra tive power of asset specificity over uncertainty, in
tion as opposed to formal governance, the excep contrast to previous reviews that have supported
tion being the relationship with volume Williamson's contention that asset specificity is the
uncertainty. However, for both vertical integration critical driver of governance choice. Third, we
and formal governance, the correlation with vol showed that the transaction cost approach can be
ume uncertainty was positive (p = .02 for vertical used to explain relational governance modes, a re
integration versus .15 for formal governance). The sult that differs from David and Han's (2004) con
average corrected correlations (p's) were signifi clusion that transaction cost theory is less effective
cantly [p < .05) different for the relationships be in predicting the choice of relational governance
over market governance than in predicting the
choice of hierarchy over markets. Fourth, we rebut
6 To ensure a minimum stability of the results, we only ted critics and found strong support for the norma
tested moderator effects when at least three observations tive implications of transaction cost theory.
were available for each level of the moderator variable. Although we endeavored to overcome depth and
breadth limitations of previous reviews of the search should examine which is true by, for exam
transaction cost literature, limitations to our cover ple, using experiments in which asset specificity
age remain. First, we only included studies related and uncertainty are manipulated by using role
to make, buy, or ally decisions. Second, the data playing scenarios.
bases used (ABI/Inform and EconLit) did not con Enormous empirical attention has been paid to
tain all relevant studies. Third, we used only stud the asset specificity construct. Empirical investiga
ies whose results could be converted to correlation tions of asset specificity in the future will fruitfully
coefficients. Fourth, we did not specifically at deepen researchers' understanding only if they go
tempt to include dissertations on transaction costs. beyond simply demonstrating a main effect into the
We did find, however, that a number of the pub more complex unresolved questions such as distin
lished articles were based on dissertations. Despite guishing between transaction cost reasoning and
these limitations, we have performed the largest alternative arguments. Different theories some
quantitative review of transaction cost theory as it times make the same predictions but specify quite
applies to interorganizational relationships in or different underlying motivations. For example,
der to take stock of what is known, answer some does asset specificity motivate hierarchical gover
persisting questions, and point out directions for nance because it renders contract formation trou
future research. blesome and potentially exposes firms to opportu
nistic behavior, or do firms integrate because such
internalization facilitates the coordination of asset
Hierarchical Governance
specific activities in their quest for sustainable
Williamson originally intended transaction cost competitive advantage (as in knowledge-based the
theory to predict the choice between markets and ories)? In a similar vein, do firms integrate in the
hierarchies. Our meta-analysis shows that the the presence of transaction-specific assets to econo
ory performs well with respect to main effects, pro mize on the costs resulting from planning and
vided refinements in conceptualizing uncertainty adapting contracts because of a continuing trading
are incorporated. We found that asset specificity, relationship, or do they integrate to reduce resource
volume uncertainty, and behavioral uncertainty dependence? Given the congruity of several ante
promote a choice of hierarchical governance over cedents of governance choice over competing the
market governance. In contrast, in the face of tech ories, in future empirical work researchers should
nological uncertainty, market governance is pre attempt to gain insight into the underlying mecha
ferred over hierarchical governance. nisms driving governance decisions, by measuring
In two areas, however, Williamson's claims were the managerial motivations mediating the relation
not supported. First, we were unable to demon ships between transaction dimensions and gover
strate superior predictive power for asset specific nance mode chosen. Schilling and Steensma (2002)
ity. Thus, Williamson's contention that asset spec have taken a step in this direction.
ificity is the "locomotive" was unsubstantiated. A According to Williamson, transaction frequency
future area of empirical investigation might be to makes hierarchical governance more likely because
assess the conditions under which asset specificity the overhead costs of hierarchical governance
may have greater impact than uncertainty. should be easier to recover for recurring transac
Second, Williamson argued for the interactive tions. Unfortunately, the available correlations re
effects of the transaction dimensions rather than lating to transaction frequency were too few to in
the main effects. However, empirical testing has clude this construct in our meta-analysis.
primarily concentrated on the main effects. Only 21 Transaction frequency is deserving of greater em
studies reported testing for interactions, and 10 of pirical attention.
these reported significant effects. Thus, we were
unable to reject the null hypothesis. These results Relational Governance
must be considered in light of the reasonable as
sumption that some (other) studies probably did Our meta-analysis showed strong support for the
test for interactions but did not report insignificant application of transaction cost theory to relational
results. There are at least two possible reasons for governance. In fact, the variance explained was
why interaction effects were not found. First, the higher than for hierarchical versus market gover
search for empirical evidence of interaction effects nance. This higher variance is probably seen be
may have been disappointing because of the low cause relational governance is usually measured as
power of interaction effects (McClelland & Judd, a perceptual variable, while the choice of hierarchi
1993). Second, the transaction dimensions may op cal versus market governance is usually measured
erate primarily through main effects. Future re with a secondary data indicant. Thus, there is sub
stantially less shared method variance between the information about behavior and increasing the
independent and dependent variables when re costs of malfeasance (Jones, Hesterly, & Borgatti,
searchers examine hierarchical (vs. market) 1997). Collective sanctions (i.e., group members
governance. punishing other members who violate group
Our test examined relational versus market gov norms, values, or goals) reduce behavioral uncer
ernance choices. We were unable to model rela tainty by increasing the costs of opportunism and
tional versus hierarchy choices because there were by decreasing the costs of monitoring to any indi
simply too few correlations between relational gov vidual party. Similarly, reputations?which have
ernance versus hierarchical governance and the economic consequences for participants in net
constructs in our model. We encourage future re works?reduce behavioral uncertainty by provid
search to further pursue this area. ing information about the reliability and goodwill
Following Williamson, empirical researchers of others.
have considered market, hierarchical, and rela Future empirical research should move transac
tional governance as discrete and mutually exclu tion cost theory beyond a dyadic focus and apply a
sive governance modes rather than as comple network lens. Although the transaction cost per
ments. To a large extent, the validity of this spective stresses the efficacy benefits gained from
approach depends on what one considers a trans reducing the governance cost of a transaction, a
action. Often, when a firm outsources a process, the network approach allows consideration of the ben
decision is made that while a third party will per efits from optimizing not just a single relationship
form part of the contract, the firm will keep a small but a firm's entire network of relationships.
percentage in-house to retain learning. This deci
sion allows for a more informed (as one knows the
Transaction Cost Theory and Performance
true costs of doing the activity and the challenges)
and balanced (as a threat, one can take the process We found support for the performance implica
in-house) negotiation when the contract is up for tions of transaction cost theory. Choosing hierar
renegotiation. The exploration of governance chical or relational governance in response to trans
modes as complements is a fertile area for empiri action hazards increases performance. We further
cal work. found that the effect of relational governance on
Although we found that each of the three dimen performance was substantively larger than that of
sions of uncertainty rendered relational governance hierarchical governance. This result may be attrib
a less preferred option, this distinction may be con utable to at least three not mutually exclusive
ditional upon the network in which a particular causes. First, there is the fact that relational gover
dyadic exchange is embedded. More specifically, nance measures, as opposed to hierarchical gover
the negative effects of uncertainty on relational nance measures, often confound a governance de
governance attest to relational governance's poten cision per se with the quality ofthat decision (e.g.,
tial dark side in that it may lock firms into unpro achieving a collaborative exchange). Another plau
ductive relationships or preclude partnering with sible explanation is the uniqueness of relational
other viable firms. By forging multiple alliances, governance as a governance mechanism because it
each of which is viewed as a "real option," firms not only minimizes transaction costs but also cre
can isolate themselves from such lock-in effects ates value in the exchange relationship through
(Gulati, Nohria, & Zaheer, 2000). They may main superior information sharing (Dyer & Chu, 2003). A
tain their flexibility by using alliances as a portfolio third explanation is possible bias due to shared
of options. As such, relational governance may be method variance. In general, the relational gover
come a more suitable alternative than market gov nance studies in our review employed multi-item
ernance in the face of high volume or technological perceptual measures to tap both relational gover
uncertainty if it is embedded in a network that nance and performance. In contrast, common meth
allows a firm to flexibly use different specific kinds ods were less of a problem for hierarchical gover
of expertise and production facilities from the var nance. The studies in our review measured
ious firms in the network (Hage & Alter, 1997). hierarchical governance using "objective" dichoto
Behavioral uncertainty is also expected to have a mous measures (e.g., a dummy variable represent
differential effect on relational governance in the ing whether hierarchical or market governance had
context of a network. More specifically, one would been chosen), whereas they measured performance
expect a positive effect of behavioral uncertainty on using either perceptual measures or secondary data
relational governance, since the social mechanisms indicants. Future research should investigate
of reputation and collective sanctions safeguard which cause or causes give rise to the larger effect
specific exchanges in the network by dispersing of relational governance. To disentangle the effect
of shared method variance from that of substantive Methodological Findings

causes, longitudinal studies using recent advances Our examination of the measures used in trans
in structural equation modeling are needed (Baum action costs research led to several observations.
gartner & Steenkamp, 2006).
Often, the empirical studies were limited by single
Although our meta-analysis supports the asser item survey measurement and proxy measures. The
tion that transaction cost considerations are impor use of proxy measures was most apparent in the
tant drivers of governance choice, most of the stud
studies that investigated transaction frequency.
ies included in our meta-analysis were limited to Some studies have treated frequency as synony
documenting whether firms followed transaction mous with business size, while others have mea
cost descriptions rather than to examining how sured frequency as an indicator of production
firm decisions impacted performance. The studies costs. However, neither of these captures the mean
that did examine performance differences between ing Williamson afforded the construct.
governance modes usually failed to appropriately The literature is further complicated by the
correct for the selective adoption of governance presentation of measures without a description of
modes. Consequently, with a few exceptions, this psychometric properties, rendering it difficult to
research ends up answering the question "How assess the quality of measures and/or their rela
does the performance of firms that adopt a partic tionships to other variables. In addition, the ma
ular governance arrangement compare to that of jority of studies analyzed were correlational, and
firms that adopt alternatives to that arrangement?" causal interpretations should therefore be made
when the correct question, from a governance cautiously. Notable exceptions include the study
choice perspective is "How does the performance by Ohanian (1994), who estimated changes in the
of a firm that adopted a particular arrangement pattern of vertical integration over time. Other
compare with how that same firm would have per notable exceptions are Silverman, Nickerson, and
formed had it adopted an alternative?" (Masten,
Freeman (1997) and Nickerson and Silverman
1993: 124). Greater effort to understand the influ (2003), studies that respectively explore the or
ence of governance choice on performance is ganizational failure and adaptive actions over
needed. time of inappropriately aligned organizations;
both studies take advantage of the natural exper
Related to the above performance question, our
iment associated with a deregulatory shock
study looked at the performance implications of
(which ensures unusually high environmental
alignment and showed that hierarchical and rela
change and consequently a need for organization
tional governance appropriately aligned with the al change). To remedy these problems, future
transaction dimensions led to enhanced perfor research should use multi-item scales, provide
mance. What we did not study was the cost of adequate data on reliability, and examine longi
misalignment. Some promising research emerging tudinal data.
in this area has suggested that the performance In sum, transaction cost theory is well estab
implications from deviations of optimal alignment lished and empirically corroborated. Yet, for all its
may be asymmetric (Leiblein et al., 2002; Sampson, depth and scope, transaction cost theory has only
2004). begun to explore the variety and complexity of
Also, a more complete understanding of gover organizational forms. There is still much to learn. It
nance choice requires a greater sensitivity to the is hoped that further research will explore some of
interdependence of production and exchange re the above issues in more detail.
lations. If hierarchies are superior to markets for
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Make, Buy, or Ally: A Transaction Cost Theory Meta-Analysis

Author(s): Inge Geyskens, Jan-Benedict E. M. Steenkamp and Nirmalya Kumar

MAKE, BUY, OR ALLY: A TRANSACTION COST THEORY

Since the publication of Williamson's Markets and Hierarchies, many empirical

METHODS searches involved 19 major journals of widely ac

Performance studies are all zero (H0: it = .5, where rr is the

Predictors of relational governance

.21. Nevertheless, concern about heterogeneity Meta-Analytic Correlation Matrix

Exploratory Moderator Analyses ing ways: First, by psychometrically meta

of shared method variance from that of substantive Methodological Findings

tives. Administrative Science Quarterly, 36: 269 ?

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