This dissertation is concerned with expanding the scope of transaction cost theory from its primary concern with governance alignment to also encompass transaction value. The aim is to provide strategic management guidance, not only on how transactors best can structure their transactions, but also on how they can maximize the joint value created through these transactions.
Value creation is implicitly embedded in the governance alignment literature in that efficient governance contributes to creating value by reducing transaction costs. But this literature does not account for the value creation effects of transaction-specific investments even though these investments are made for this very purpose. To resolve this shortcoming, a transaction value model is proposed that incorporates both sets of effects.
The proposed model rests on the relationship between transaction-specific investments and transaction governance structure. Within the transaction cost literature, the effects of specific investments on governance structure is one of the most important, tested and confirmed tenets. However, the origins of specific investments are less explored. Yet, understanding the origins of these investments is strategically important, as they may contribute significantly more towards joint value maximization among the transactors than investments into general purpose assets. Hence, this study turns the possibly most central TCE tenet upside-down and asks: How does the choice of governance structure affect the transaction parties’ specific investments?
To explore this question, I have carried out a microanalytic study of transactions between theatrical feature film producers and distributors in the North American motion picture industry. These transactions require substantial specific investments into both production and distribution, and they are governed by a variety of contracting forms spread across the market-hierarchy continuum. As such they offer a rich empirical setting for exploring the effects of contracting on specific investments.
The study finds that contracting does affect specific investments in the production-distribution transactions. Patterns emerged from the data that showed, first, that more integrated types of contracting reduce certain kinds of uncertainty that encourage specific investments by lowering the associated risk. Second, certain specific investments have inherent coordination requirements that are only satisfied by more integrated contracting. Third, the relationship between structure and specific investments may be better understood in terms of interdependence, which is a product of specific investment requirements and affects contracting. Finally, the data suggests that in the presence of positive spillovers, integrated contracting induces specific investments by internalizing these effects, thereby creating greater economies of scale and scope for a transactor’s investments.
These findings support the proposed transaction value model, which provides a basis and framework for further transaction value research.