R&D Outsourcing and the Effectiveness of Intangible Investments: Is Proprietary Core Knowledge Walking out of the Door?

Intangible relationship‐specific investments can be double‐edged swords, as they facilitate not only the governance of business relationships but also undesired knowledge transfers. Building on transaction costs theory and the relational view of alliances, we analyse the effectiveness of these investments in R&D outsourcing agreements from the viewpoint of the client. We argue that, when outsourcing to business firms, the safeguards adopted by the clients to prevent spillovers may reduce the effectiveness of the supplier's specialized investments. Using original survey data from 170 European and US technology‐intensive firms, we find that the contribution of these investments to client performance decreases the more a client's core knowledge is required to perform the service, except when outsourcing to non‐profits. This suggests that as the appropriability hazards associated with outsourcing to business firms rise, the client is able to capture less value from the supplier's relationship‐specific investments.     

Applying real options theory to HRM: an empirical study of IT software firms in India

Environmental uncertainties can impact the market value of a firm's human assets both positively and negatively, and make return on human assets uncertain over time. However, the strategic human resource management (SHRM) literature has so far focused almost exclusively only on the upside value of human assets of a firm. Real options theory can provide the process heuristics as well as the economic logic for guiding investments in human assets to create sustainable market value for firms operating in uncertain environments. In spite of the growth in popularity of the real options approach, no meaningful progress, however, has been made towards application of this approach to HRM. This study, using data from 108 IT software development firms in India, seeks to address this gap and make three important contributions to the SHRM literature: (1) operationalise the concept of HR options by identifying the HR practices that possess option value; (2) investigate how use of HR options affects firm-level performance; and (3) develop and test a causal model that links the various types of HR options that firms use to exploit uncertainties faced by them with the firm-level operational and financial outcomes. The results support the central hypothesis of the article that use of HR options by firms operating in uncertain environments would have positive impact on their operational and financial performance. Significant differences were observed in the nature of linkages between different types of HR options used to address different types of uncertainties, and the operational and financial performance of the firm.     

Effects of Firm R&D Investment and Environment on Acquisition Likelihood*

abstract R&D investments contribute to the development of firm technology resources, and the possession of such resources often increases a firm's attractiveness as a potential acquisition target. However, the value ascribed to a firm's technology resources by would‐be acquirers may be moderated by its industry's environmental characteristics. Using data from 2886 firms, we find that investments in R&D predict acquisition likelihood and that R&D investments are most strongly associated with acquisition of firms under conditions of high environmental munificence and dynamism. Theoretical and managerial implications are discussed.     

Human resources in Sino-foreign joint ventures: selected case studies in Shanghai,compared with Beijing

This article examines HRM in joint ventures (JVs) in Shanghai compared with those in Beijing using a case-study approach. It focuses primarily on issues relating to labour contracts, rewards and benefits, social insurance, trade unions and personnel policies, and describes current developments in China in each of these areas. In order to place these JV human resource practices in context, we also draw on interviews in state-owned enterprises (SOEs) in Shanghai and Beijing. Taking as a starting point a summary of traditional SOE 'iron rice-bowl' ( tie fan wan ) practices in the management of personnel, we ask to what extent HRM in the present JV sample differs from traditional methods and to what extent 'iron rice-bowl' practices continue despite foreign ownership. The extent to which HR practices in JVs are distinct from those in contemporary SOEs is also examined. We conclude that, although, as one would expect, foreign ownership has modified traditional practice, the degree and extent to which this is true varies widely. There is strong evidence of institutional and organizational continuity in 'iron rice-bowl' practices in both JVs and SOEs. Finally we propose a framework for categorizing the companies investigated in terms of their distance from traditional 'iron rice-bowl' HR practices and proximity to 'imported' practices. This consists of two 'pure' and two hybrid categories: pure 'iron rice-bowl'; hybrid I (predominantly local); hybrid II (predominantly imported): and, finally, pure imported. In this schema, the companies examined do not however group neatly according to whether they are JVs or SOEs.     

Partner Characteristics,Information Asymmetry,and the Signaling Effects of Joint Ventures

We provide theory and evidence regarding the signaling effects of joint venture (JV) announcements. We argue that when a firm characterized by information asymmetry with respect to the stock market announces a JV, the growth opportunities and the quality of resources of the partner provides a signal to investors about the true value of the firm. Our study shows that (i) apart from synergies, JV announcements impact firm value also because of the information they convey about future growth opportunities; and (ii) JVs may not only validate but also ‘invalidate’ the quality of a firm by revealing that it is unable to attract strong partners. Copyright © 2011 John Wiley & Sons, Ltd.     

Acquisitions and Real Options: The Greenfield Alternative

Although acquisitions are a popular way to enter new markets, empirical evidence tends to indicate few benefits accrue to acquiring firms. This might be the case because firms use acquisitions when they should be employing an alternative mode of expansion. Applying real options theory to this issue, we suggest that greenfield start‐up ventures provide a real option alternative to acquisitions for firms establishing new international subsidiary units. To test this notion we examine a sample of Western European firms entering the emerging economies of Eastern Europe. The evidence suggests that acquisitions are a good choice only when firms enter markets containing low demand uncertainty and when these firms possess acquisition‐based strategic flexibility. Overall, our analysis indicates that greenfield ventures appear to provide firms with a real option when making the acquisition decision.     

Options and earnings announcements: an empirical study for the European Options Exchange

In this paper we give an introduction in option pricing theory and explicitly specify the Black-Scholes model. Although market participants use this and similar models to price options, they violate one of the fundamental assumptions of the model. They do not set a constant value for the volatility of the underlying asset over time, but change the volatility even during a day. By means of event study methodology we investigate the volatility of the underlying asset and the volatility implicit in option prices around earnings announcements by firms. We find that the volatility in option prices increases before the announcement date and drops sharply afterwards. The volatility of the underlying stocks is higher only at the announcement dates and we do not observe a higher volatility around these dates. Hence, the constant volatility of the underlying asset, which is one of the assumptions in the Black-Scholes model, does not hold. However, the market seems to correctly anticipate the change in volatility, by correcting option prices.     

Mandated Recognition of Employee Stock Option Expense – The Case of Canada

On December 18, 2003 the Accounting Standards Board of Canada announced that all firms registered in Canada would be required to expense stock options‐based compensation effective January 1, 2004. While a few firms had voluntarily opted to expense stock options prior to this date, the vast majority of firms had not. This study investigates the market reaction to this announcement by listed firms in the Toronto Stock Exchange that continued to disclose option expense rather than report it in the financial statement. We find no average market reaction by our sample firms affected by this mandate around the announcement date, but a significantly negative market reaction during the 5‐day window around the issuance date of the exposure draft. However, in cross‐sectional tests around the mandated expense announcement date, we find a significant negative relationship between the cumulative abnormal returns and the Black–Scholes value (and number) of options outstanding and of options granted the previous year. These results suggest that the magnitude of the market reaction to the mandated expense announcement is related to the firm's usage of options. Our results provide further evidence that stock prices may not fully impound information disclosed in footnotes.     

Real Options, International Entry Mode Choice and Performance

abstract    Recent scholarship suggests that combining insights from real option theory with transaction cost economics may improve decision-making models. In response to this suggestion we develop and test a model of international entry mode choice that draws from both perspectives. Examining samples of Dutch and Greek firms entering Central and Eastern European markets, we found that adding real option variables to a transaction cost model significantly improved its explanatory power. Additionally, firms that used the combined real option/transaction cost predicted choices had significantly higher levels of subsidiary performance satisfaction than firms that did not. Our results suggest that effective managerial decision-making may involve more than mere transaction cost minimization considerations; real option value creation insights also appear to influence the success of decision outcomes.     

The moderating effect of environmental uncertainty on the relationship between real options and technological innovation in high-tech firms

In the past decade, management scholars have applied aspects of real options theory to organizational settings, considering it an approach to enhancing strategic flexibility in the firm. They have also recognized that technological innovation is a critical mechanism through which high-tech firms try to secure a place in the competitive world of the future. Uncertainty about the environment makes it very important to analyze both factors, since the use of real options obligates managers to reflect constantly on future scenarios for which they will have to propose innovative solutions. This paper attempts to apply the theory of real options to innovation theory to propose a model in which real options reasoning improves the level of product/process technological innovation. We argue that this improvement will increase when the environment's level of uncertainty is higher. The proposal is supported empirically by a study performed on a sample of technology firms from different countries in the European Union.     

Infringing use as a path to legal consumption: Evidence from a field experiment

Digitization has transformed how users find and use copyrighted goods, but many existing legal options remain difficult to access, possibly leading to infringement. In a field experiment, we contact firms that are caught infringing on expensive digital images. E-mails to all firms include a link to the licensing page of the infringed image; for treated firms, we add links to a significantly cheaper licensing option. Making infringers aware of the cheaper option leads to a 14-fold increase in the ex-post licensing rate, albeit from an extremely low baseline for the control firms. Two additional experimental interventions, designed to reduce search costs for (i) price and (ii) product information, also have large positive effects. Our results suggest that ex-post monetization (e.g., licensing after use) may expand the market, and that rights holders can create value by minimizing search and transactions costs.     

Does corporate environmental protection increase or decrease shareholder value? The case of environmental investments

This study examines share price effects of environmental investments using data from the Finnish forest industry from 1970 to 1996. The results indicate that the instantaneous market reaction is negative, and that the larger the investment, the larger the fall in prices. However, contrary to the view that corporate actions have a permanent effect on firm value, we observe rapid price recovery after the instantaneous negative reaction. This may support a hypothesis that environmental investments create goodwill for the investing firms and are thus not negative net present value investments. Unexpectedly, we find that the instantaneous negative market reaction was stronger in the most recent sample years. Explanations for this finding relate to the slowness of institutional change within the financial community as well as to the growing share of international investors seeking short‐term holding gains. In conclusion, it appears that not only finance theory but also notions from institutional theory and corporate environmental management literature are needed to explain stock price behaviour in conjunction with environmental investments. Copyright © 2001 John Wiley & Sons, Ltd and ERP Environment     

Supplier relationship-specific investments and the role of safeguards for supplier innovation sharing

The vast majority of the supplier innovation literature has focused on how buying firms can effectively “pull” innovations from their suppliers. Yet, we know remarkably little about the factors that contribute to a supplier voluntarily “pushing” innovations to its customers. The present study addresses this research gap in the context of industrial buyer–supplier relationships and with a specific focus on relationship-specific investments. Drawing on theory from the relationship-marketing literature and on transaction cost theory, we devise and test a proposed theoretical model that links the level of a supplier's relationship-specific investments to its sharing of innovative ideas regarding products and processes with customers. The model also considers the role of contract length, relationship age, and buyer–supplier cooperation as possible safeguards. The empirical results suggest that a supplier's relationship-specific investments encourage a supplier to suggest ideas of process innovations but to refrain from suggestions about product innovations. The latter effect, however, can be attenuated by appropriate formal and informal safeguards.     

The optimal timing of initial public offerings in the course of privatization: Theory and an illustrative application

Privatization has been studied primarily from the standpoint of the post-privatization performance of state-owned firms (SOEs) or of various ways of valuing and privatizing them, but little attention has been paid to the timing of privatization. In this paper we use real options analysis to consider a situation where the government has the option to delay a planned privatization in the expectation that exogenous events may make the firm more valuable to outside investors in the future. In addition to considering the theoretical aspects of the problem, we apply our model to Taiwan's privatization program to add to the understanding of the role of option value in an actual privatization program. Our results suggest that the (mis)timing of privatization represents significant losses for the government and for investors.     

Temporary workers as real options

Firms experiencing or anticipating substantial workforce expansion face increasing pressure to accurately project the costs associated with human asset investments and potential future layoff requirements. With that in mind, the decision whether to take on temporary workers in lieu of hiring permanent employees is a decision that involves significant risk. Traditional valuation methods assume that investments are fully reversible and thus do not capture the idiosyncrasies of workforce management, in which investments are not fully reversible. However, real options theory offers managers the ability to consider irreversibility and to make workforce investment decisions under conditions of minimum uncertainty and maximum flexibility. We present real options theory as an especially useful means for managers to more accurately value human asset investment decisions, achieve expansion and defer commitment until future uncertainties can be at least partially resolved.     

The Importance of Alliances in Firm Capital Structure Decisions: Evidence from Biotechnology Firms

Building on finance research, we argue that the ex post hazards arising from alliance formation depend upon the firm's financial condition. Financial distress jeopardizes the continuity of an alliance and the value of the investments involved. Thus, firms should reduce leverage to signal continued commitment and to induce investments from alliance partners. Accordingly, we find that a firm's current alliance propensity predicts its subsequent capital structure decisions and that this relationship is most pronounced in the presence of other exchange hazards. Our paper contributes to alliance research and to the growing literature discussing the strategic consequences of capital structure. Copyright © 2015 John Wiley & Sons, Ltd.     

Finite project life and uncertainty effects on investment

This paper revisits the important result of the real options approach to investment under uncertainty, which states that increased uncertainty raises the value of waiting and thus decelerates investment. Typically in this literature projects are assumed to be perpetual. However, in today's economy firms face a fast-changing technology environment, implying that investment projects are usually considered to have a finite life. The present paper studies investment projects with finite project life, and we find that, in contrast with the existing theory, investments may be accelerated by increased uncertainty. It is shown that this particularly happens at low levels of uncertainty and when project life is short.     

Learning Through Joint Ventures: A Framework Of Knowledge Acquisition

Joint ventures (JVs) are becoming an increasingly important organizational form in international business. When JVs are formed, valuable learning opportunities may be created for the venture partners. The primary objective in this paper is to explore the conditions under which firms exploit JV learning opportunities through the acquisition of knowledge. A framework of knowledge acquisition by JV partner firms is proposed. Using JV partner organizations as the primary level of analysis, the paper identifies various factors that influence the acquisition of learning, its value to the learning organization, and the migration of knowledge from the JV to the parent. Two firm specific learning-based concepts are developed: alliance knowledge accessibility and knowledge acquisition effectiveness.     

Information systems and technology sourcing strategies of e-Retailers for value chain enablement

In the e-Retail industry, a well-designed IT infrastructure is essential in creating a tightly integrated value chain and delivering high quality service. With intense competition for market share and profits, information systems and technology (IST) sourcing decisions are becoming increasingly important to e-Retail firms to support continued growth and market responsiveness. Drawing on the contingency theory, we examine organizational and environmental factors that influence an e-Retailer's IST sourcing strategy of make versus buy in enabling its value chain activities, and we also look at firm-level performance impacts of IST sourcing decisions that involve bundling across value chain activities. We test the proposed model and hypotheses using a panel data set of 307 firms over the period of 2006–2010. The results show that firms that make transformative IT investments tend to source a smaller portion of IST for their e-Retail value chain activities than firms that pursue automate or informate as their strategic role for IT investment. Capabilities are positively associated with IST sourcing. Firms experienced in e-Retail are more likely to build rather than buy their IST. In addition, we find mimicking behavior for IST sourcing among firms in the same merchandizer category. We find that IT strategic role is strongly associated with growth metric, whereas sourcing decisions predominantly impact operational performance measures. There is partial evidence that alignment between IT strategic role and IST sourcing decisions results in better performance effects. Moreover, complementary IST sourcing of synergistic marketing and sales activities positively impacts Web sales and conversion rate, but the sourcing combination of logistics, operations, and sales activities is associated with lower Web sales and conversion rate.     

Venture Capital Investments in Europe and Portfolio Firms' Economic Performance: Independent Versus Corporate Investors

Using a new European Commission‐sponsored longitudinal dataset—the VICO dataset—we assess the impact of independent (IVC) and corporate venture capital (CVC) investments on the economic performance of European high‐tech entrepreneurial firms during the period 1992–2010. After controlling for potential sources of endogeneity and selection bias, our results indicate that both IVC and CVC investments boost portfolio firms' economic performance. These effects are mostly due to an increase in real sales value. Moreover, the dynamics of the impact of VC investments on firms’ overall economic performance and its components—real sales value, real fixed assets, and real labor costs—differs depending on the type of investor. Finally, we do not detect any impact related to the syndication of investments by both IVC and CVC investors.