Relative importance, specific investment and ownership in interorganizational systems

  • Authors:

  • Kunsoo Han;Robert J. Kauffman;Barrie R. Nault

  • Affiliations:

  • Desautels Faculty of Management, McGill University, Montreal, Canada H3A 1G5;W. P. Carey School of Business, Arizona State University, Tempe, USA 85287;Haskayne School of Business, University of Calgary, Calgary, Canada T2N 1N4

  • Venue:
  • Information Technology and Management
  • Year:
  • 2008

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Abstract

Implementation and maintenance of interorganizational systems (IOS) require investments by all the participating firms. Compared with intraorganizational systems, however, there are additional uncertainties and risks. This is because the benefits of IOS investment depend not only on a firm's own decisions, but also on those of its business partners. Without appropriate levels of investment by all the firms participating in an IOS, they cannot reap the full benefits. Drawing upon the literature in institutional economics, we examine IOS ownership as a means to induce value-maximizing noncontractible investments. We model the impact of two factors derived from the theory of incomplete contracts and transaction cost economics: relative importance of investments and specificity of investments. We apply the model to a vendor-managed inventory system (VMI) in a supply chain setting. We show that when the specificity of investments is high, this is a more critical determinant of optimal ownership structure than the relative importance of investments. As technologies used in IOS become increasingly redeployable and reusable, and less specific, the relative importance of investments becomes a dominant factor. We also show that the bargaining mechanism--or the agreed upon approach to splitting the incremental payoffs--that is used affects the relationship between these factors in determining the optimal ownership structure of an IOS.