Relative Importance, Specific Investment and Ownership in Interorganizational Systems
Date
2008-09
Journal Title
Journal ISSN
Volume Title
Publisher
Springer
Abstract
Implementation and maintenance of interorganizational systems (IOS) require investments by all the participating firms. Compared with intraorganizational sys-
tems, 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.
Description
Author's post-print on any open access repository after 12 months after publication. Must link to publisher version http://www.ucalgary.ca.ezproxy.lib.ucalgary.ca/bnault/files/bnault/itm_sep_2008.pdf
Keywords
Economic Theory, Incomplete contracts, Interorganizational information systems, Investment specificity, Information systems, IT investments, Ownership, Property rights, Relative importance, Supply chain managment
Citation
Han, K., Kauffman, R.J., and Nault, B.R., "Relative Importance, Specific Investment and Ownership in Interorganizational Systems", Information Technology and Management, 9, 3 (September 2008), 181-200.