study guide 4 Flashcards
Firms, regardless of their size, encounter informational risks in two primary areas
internally with employees
Externally with parties like suppliers, customers, and intermediaries. These risks primarily manifest in two ways: misrepresentation of information (hidden information) and misrepresentation of actions (hidden actions)
hidden information risks
also known as adverse selection risks, these arise when firms face challenges due to the misrepresentation or concealment of information. This can severely hinder a firms ability to secure necessary resources and establish crucial business partnerships, such as R&D contracts or marketing agreements
Hidden action problems
these are related to moral hazard, occurring when firms cannot verify or observe the actions of their employees or external contractors. This inability poses significant challenges in ensuring that contributions and actions align with the firms interests and expectations
Both hidden information and hidden action impact the strategies and incentives for firm owners and managers, influencing how they navigate and strucutre exchanges and relationships
Reducing hidden information risks
firms attempt to lesson the risks associated with hidden information by engaging in signaling. this involves taking costly actions to demonstrate the quallity of their technology or activities, which are typically hard to verify or observe directly. Signaling helps differentiate a firms offerings and capabilities to investors and partners
Mitigating hidden action problems
firms adress the challenges posed by hidden actions through the design of incentives and carfully crafted contracts. by incorporating specific clauses into contracts, firms aim to deter moral hazard by aligning the interests of employees and contractors with those of the firm itself
Transaction cost economics
is a framework that examines the costs and challenges involved in conducting business transactions. These transactions costs encompass the efforts and resources expended in searching for information, negotiating prices and enforcing contracts, which are essential for making economic exchanges.TCE highlights the significance of institutions like contracts, organizations, and markets - in facilitating and structuring economic interactions to reduce these costs
A key focus of TCE is on the “make or buy” decision, where firms must choose between producing goods or services internally or outsourcing/purchasing them from external suppliers. This decision is guided by the aim to minimize transactino costs associated with each option
Transaction costs
these are the expenses incurred during economic exchanges including the costs of information gathering, negotiation, decision-making, and contract enforcement
Asset specificity
TCE pays particular attention to the degree to which an asset is tailored to a specific transaction or firm. High asset specificity can increase transaction costs, as specialized assets are less versatile and harder to repurpose for other transactions
Uncertainty
TCE also considers the uncertainty inherent in transactions , which can be categorized into behavioral, technological, and market uncertainties. These forms of uncertainty are especially relevant in the fields of innovation and technology management, affecting both small and large firms. Uncertainty can evelvate transaction costs as parties strive to mitigave risks and ensure the fulfillment of the transaction terms.
Legal institutions
courts and business law
IP laws - contract enforcement
Social instiutions (e.g. culture and local context)
inter-country laws and relations
International laws (e.g. world trade organnization)
Bilateral and multi-lateral treaties and friendships (e.g. Eu-china trade links)C
Corporate renewal
A firm can modify its resource base to gain and sustain a competitive advantage. An advantage is gained from reconfiguring a firms resource and capability base
Knowledge-based asset
Is mostly non-excludable meaning that others have access to it and can utilize the asset. furthermore, these dont wear out but lose value at a rapid pace. Property rights are limited, and enforcement is relatively difficult.
Intellectual property has several legal forms
<Patents: rights to exclude others. these protect an invention and are costly to obtain and maintain
Trade secrets: Right to make , use, and sell secrets, but also protect against misues. they feature secrecy, proprietary information
Trademarks: Right to make, use, and sell secrets, but also protect against misuse
Copyrights: right to reproduce, distribute, and use for further work. These protect ideas and artwork
The term appropriability refers tot he ability of an innovator (a firm or individual) to appropriate some of the social gains that result form an innovation.
