An alliance building perspective on exchange governance

Abstract

This paper intends to explain and predict a firm’s exchange governance decision based on a firm’s alliance building perspective. In the past, market vs. hierarchy decision was mainly approached from transaction cost theory, which relied on market failure framework. However, transaction cost theory has received numerous critiques since it became dominant theory of the firm. In response to such problems, new perspectives such as competence or knowledge based theory of the firm have been suggested in the past. However, these new perspectives focus narrowly on the advantage of organization without much attention to broader strategic objectives of the firm. The alliance perspective introduced here pays attention to a rather different incentive that does not rely on either market failure or organization advantage. It is hoped that the alliance building perspective can shed a new light on the neglected side of market vs. hierarchy decision by emphasizing the need to look beyond the dyadic relationship between two transaction parties.