Distinguishing costs of cooperation and control in alliances

Strategic Management JournalStrat. Mgmt. J., 26: 913–932 (2005)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.490

DISTINGUISHING COSTS OF COOPERATIONAND CONTROL IN ALLIANCES

STEVEN WHITE1* and STEVEN SIU-YUN LUI2

1 Asian Business and Comparative Management Area, INSEAD, Singapore2 Department of Management, City University of Hong Kong, Hong Kong, P.R.C.

Firms simultaneously face the need to cooperate with and control an alliance partner. Tocomplement the transaction cost perspective’s emphasis on the need to control and limitopportunistic behavior, we examine the sources and impact of the cooperation costs incurredin order to work with a partner. We propose that these costs increase with greater jointtask complexity and interpartner diversity, and perceptions of equitable behavior affect theperceptions of these costs. Hypotheses derived from the framework are tested in a sample of 231contractual alliances between architects and general contractors in the Hong Kong constructionindustry. We find that both cooperation costs and transaction costs affect the level of time andeffort a manager expends on an alliance, supporting our fundamental proposition that the costsof cooperation and control are conceptually and empirically distinct. We argue that cooperationcosts should be incorporated into studies that compare the choice of alternative partners andalliance structures, as well as among the broader categories of market, hierarchy, and hybridgovernance forms. Copyright 2005 John Wiley & Sons, Ltd.

CRITICAL COSTS TO ACHIEVEALLIANCE BENEFITS

Managers are increasingly using alliances1 to pur-sue strategic objectives, allowing them to gainaccess to resources they lack and which are oftennot available on factor markets or which are pro-hibitive to acquire (Barney, 1986; Sakakibara,1997; Harrigan, 1986; Child and Faulkner, 1998;Spekman, Isabella, and MacAvoy, 2000). Man-agers and academic researchers also know thatmanaging alliances so that they achieve suchbenefits and strategic objectives, however, is amanagerially challenging and costly endeavor.

Keywords: alliances; cooperation; transaction costs; coor-dination costs; comparative governance*Correspondence to: Steven White, INSEAD, 1 Ayer RajaAvenue, Singapore 138676. E-mail: [email protected] In this paper, we use the term ‘alliance’ to refer to thevery diverse group of hybrid governance forms that Ring andVan de Ven (1994) describe as cooperative interorganizationalrelationships.

In analyzing these challenges, dialectic ap-proaches to research in comparative governanceand alliance management (Das and Teng, 2000;de Rond and Bouchikhi, 2004) suggest two man-agerial imperatives—the need to control and theneed to cooperate—that are the bases of coststhat can be particularly salient in alliances. Thecontrol imperative, emphasized in the transactioncost framework, is the need to minimize the like-lihood of suffering from a partner’s opportunis-tic behavior (Williamson, 1985) and the bargain-ing and political influence costs in an ongoingrelationship (Milgrom and Roberts, 1992; Pearce,1997). The appropriate managerial focus, fromthis perspective, is on limiting vulnerability toopportunistic behavior by a partner and choosingalliance structures that minimize the costs of doingso (Williamson, 1991). Dyer’s study of Japaneseautomakers is illustrative of this focus, concludingthat these firms manage to ‘control opportunism’(Dyer, 1997: 549) and reduce transaction costssuggested by a high level of transaction-specific

Copyright 2005 John Wiley & Sons, Ltd. Received 8 March 2001Final revision received 21 April 2005

914 S. White and S. Siu-yun Lui

investments in their exchange relationships withsuppliers through self-reinforcing rather than legalsafeguards.

The second imperative is the need to cooperatewith a partner to achieve joint or individual objec-tives. Studies that focus on this imperative empha-size the impact of collaborative strategies andprocesses on alliance outcomes (e.g., Doz, 1996;Kumar and Nti, 1998; Lui and Ngo, 2005) andthe generation of interorganizational trust (Ringand Van de Ven, 1992). Such behaviors, however,are not costless. Successful collaboration requiresthat the partners be able to communicate, estab-lish and maintain an interorganizational interface,and make internal adjustments in response to apartner’s action or changes in the environment ofthe alliance. Conversely, the objectives or benefitsdesired from an alliance may also dictate particu-lar types of alliances, in terms of not only partnersbut also the structure and process of interactionbetween them.

Strategy research on alliances often draws onWilliamson’s transaction cost framework as itsconceptual base. Focusing primarily on the needto control a partner that may behave opportunis-tically, however, this framework has two distinctlimitations with regard to analyzing alliances. First,as applied to comparisons of alternate governanceforms, it does not recognize the particular benefitsthat may be possible from an alliance relation-ship but not through other governance options.Alliance scholars have clearly shown the ben-efits particularly associated with alliance strate-gies, including learning from a partner, resourcepooling, and reduced environmental uncertainty aspartners develop trust in each other (e.g., Arinoand de la Torre, 1998; Faulkner and de Rond, 2000;Ghoshal and Moran, 1996; Hamel, 1991; Ring andVan de Ven, 1994). Zajac and Olsen (1993) madean initial attempt at redressing this weakness of asingular focus on costs, arguing that benefits mustalso be included in order to draw conclusions aboutthe efficiency (or ‘transaction value’) of alternativegovernance structures. Others have built on thisnotion, calling for a ‘value perspective’ in ana-lyzing alliances because the nature and level ofbenefits they make possible are often a functionof the costs, not independent as suggested by thetransaction cost perspective (e.g., Madhok, 2000;Madhok and Tallman, 1998).

The second limitation of a transaction cost focuson the control dimension of alliance relationships

is, as noted by Ghoshal and Moran (1996), that itinappropriately discounts the potential for partnersto cooperate in good faith. The strong behavioralassumption of opportunism on which transactioncost theory is based does not allow for the coop-erative element that is usually a raison d’etre formost alliances (Ring and Van de Ven, 1994; Gulatiand Singh, 1998). A more balanced view of therelationship between alliance partners draws ondialectics to show how cooperation and conflictcoexist (Das and Teng, 2000; de Rond and Bouch-ikhi, 2004), with the relative balance of the twovarying both across alliances as well as within agiven alliance over time.

Because it does not allow for cooperative intent,the transaction cost perspective is conceptuallyinadequate for addressing a set of costs that areparticularly relevant to most alliances; namely,the costs of cooperation. Even in the completeabsence of opportunistic threat (i.e., transactioncosts are zero), the firm must still incur costsas it undertakes a joint task with a partner toachieve alliance-dependent benefits. Cooperationcosts arise from the task-related coordination needsand social integration that are necessary in orderfor partners to combine resources and integratetheir activities in the course of undertaking a jointtask.

In this paper, we propose a conceptual frame-work specifying the sources and impact of cooper-ation costs, and test derivative hypotheses address-ing both the costs of cooperation and the costs ofcontrol in the context of an alliance. Cooperationcosts are those incurred in order to undertake acollaborative activity with a partner, separate fromthose incurred in reducing the threat of oppor-tunism from that same partner. As elaborated inthe following section, they arise from two sourcesinherent in a collaborative effort. The first are task-related coordination needs, which have been theprimary focus of research in this area. The secondarise from social differences—in culture, values,framing, and so on—that require partners to inter-pret and in some cases adjust to resulting differ-ences in behavior and preferences.

COOPERATION COST FRAMEWORK

Research on the costs of control and their implica-tions has benefited by having a unifying frameworkrepresented by transaction cost theory. Research

Copyright 2005 John Wiley & Sons, Ltd. Strat. Mgmt. J., 26: 913–932 (2005)

Costs of Cooperation and Control 915

on cooperation, in contrast, has had no such uni-fying framework. As a result, research on coop-eration is much more conceptually diverse andincludes extensive in-depth analyses based on‘thick description’ and case studies. So far, no par-simonious yet comprehensive conceptual frame-work comparable to the transaction cost frameworkhas emerged that would allow more systematiccomparisons across studies and contexts.

The building blocks for an explicit coopera-tion cost framework can be found in the exten-sive prior work focused on alliances, which high-lights the difficulty of achieving effective coordi-nation of interdependent tasks, sharing informa-tion and control, overcoming cultural differences,and managing conflict. These factors have beenaddressed through conceptual arguments (e.g., Dasand Teng, 1996, 2003; Dyer and Singh, 1998;Kumar and Nti, 1998; Park and Ungson, 2001;Parkhe, 1991; Ring and Van de Ven, 1994) andempirical studies (e.g., Colombo, 2003; Gulatiand Singh, 1998; Parkhe, 1993; Reuer, Zollo, andSingh, 2002; Zollo, Reuer, and Singh, 2002; Sax-ton, 1997). Most empirical work, although quanti-tative studies more so than qualitative studies, hasfocused on task-driven coordination costs and theirimplications in interorganizational relationships.For example, Reuer et al. (2002) relate task scopeand division of labor to post-formation governancechanges, and Colombo (2003) relates technologi-cal specialization to coordination costs and allianceform. Gulati and Singh (1998) operationalize coor-dination costs only in terms of the degree of taskinterdependence between partners in the alliance,which they find to be correlated, in addition toappropriation concerns (i.e., costs of control), withthe choice of alternative alliance governance struc-tures.

Other researchers have gathered data on processand affective elements of relationships betweenpartners. For example, Artz and Brush (2000)show that relational norms—collaboration, con-tinuity expectations, and non-coercive communi-cation patterns—reduce the impact of transac-tion cost factors in negotiation costs. Bensaouand Venkatraman (1995) frame their analysis ofinterorganizational relationships based on infor-mation-processing needs and capabilities and, likeArtz and Brush, include affective and process vari-ables in their framework.

The affective dimensions of relationshipsaddressed by such studies, however, are actually

task-related, or what Heide and John (1990) callthe ‘focal activities’ of the relationship. Thesediffer fundamentally from the dimension suggestedby a social-psychological perspective on alliances(e.g., de Rond, 2003) and prior research onorganizational fit (e.g., Jemison and Sitkin, 1986).A more complete conceptualization of cooperationcosts would account for both the task and socialdimensions of the interaction between partners.

Explaining the difference in time and effort fora manager to undertake the same task with dif-ferent partners requires an explicit recognition ofthe social distance, or differences in organizationalfit, with these alternative partners. The importanceof this distinction can be seen through a hypo-thetical example in which a firm is engaged inalliances with two different partners to undertakethe same task, and the firm trusts each partnerequally (i.e., to simplify the discussion, the threatof opportunism and associated transaction costs arethe same in the two cases). The firm is very similarto one partner in terms of organizational culture,formal structure, informal processes, and manage-rial orientation, but quite different from the otherin these characteristics. The firm will likely expendconsiderably more managerial effort in its interac-tion with the latter partner to avoid or mitigate theeffects of miscommunication, conflict, and otherproblems arising from these differences. Indeed,this is a common situation facing firms relying onalliances to expand simultaneously into differentregional or national markets as, for example, theymust deal with different franchisees or joint ven-ture partners to accomplish the same joint task ineach local market.

To address both the task and social dimensionsaffecting the costs of cooperation, the followingsections consolidate the divergent but complemen-tary empirical findings from quantitative and qual-itative studies of alliances to propose three prin-cipal elements as central to the cooperation costframework. The first two—joint task complexityand interpartner diversity—are posited as directsources of cooperation costs. The third—equity—is proposed to affect managerial perception ofa given level of overall costs associated with analliance relative to perceived benefits. The discus-sion linking these elements as well as transactioncosts to the managerial time and effort required ofan alliance lead to hypotheses that are tested in theempirical section of this paper.



Joint task complexity

Joint task complexity increases as either the scopeor depth of interaction between two partners in-creases, and is a common basis for relationshiptaxonomies (e.g., Garrette and Dussauge, 1995;Bensaou and Venkatraman, 1995). Scope refers tothe area of the task interface between the part-ners, and it increases as the range of joint taskscovers more of the firm’s value chain (Childand Faulkner, 1998). It will also increase as thegeographic, hierarchical, market, or technologicalscope of the joint task increases. Depth refersto the intensity of interaction between the part-ners and could be measured, for example, bythe man-hours that each devote to a commontask. As either scope or depth of task-relatedinteraction increases, we also expect coordinationneeds and therefore overall cooperation costs toincrease.

Two types of alliances, one for co-brandingand another for joint applied research and prod-uct development, illustrate the difference in jointtask complexity and implications for cooperationcosts. In the co-branding agreement, the scopeand depth of interaction and related coordina-tion costs are very low. The alliance task is lim-ited to a very small part of the partners’ valuechain, and relatively few people from each firmwork together on this task. An alliance for appliedresearch and product development, on the otherhand, suggests that the firms must cooperate moreintensely and across a much wider range of value-chain activities, from R&D to engineering andpossibly procurement, manufacturing, and mar-keting. Similarly, we would expect an allianceinvolving a particular task between two multina-tional firms to be more costly to coordinate in thecase of a global alliance (very broad geographicalscope, such as for airlines) than in a more limitedregion (cooperation limited to a single country orregion).

Some researchers have related task complex-ity to appropriation and other control concerns inalliances from a transaction cost perspective (e.g.,Reuer et al., 2002). Just as, if not more, impor-tant is the requirement that complexity implies forsuccessful collaboration, including coordination,information exchange and other linkage activities,integration mechanisms, and supporting bureau-cratic structures (Gulati and Singh, 1998; forother examples, see the review by Spekman et al.,

1998). As the scope or intensity increases, so doinformation-processing needs that, in turn, requiregreater information-processing capabilities (e.g.,Daft and Lengel, 1986; Bensaou and Venkatraman,1995).

The literatures on information processing andproblem solving suggest that the size of the inter-face across which two partners interact is directlyrelated to coordination costs and, consequently,inversely proportional to efficiency. According tothis logic, it is more efficient to limit the need forinteraction between two or more units involved in ajoint task. Indeed, this is the thrust of the literatureon task partitioning (von Hippel, 1990) and mod-ularization—of both activities and components ofa complex system—as a means of increasing theefficiency of problem solving.

Such an efficiency argument, however, is prem-ised on benefits being fixed or independent ofthe nature of the interorganizational interface. Asalready argued, such a premise may not be appro-priate for two reasons. First, the partners may berestricted in the degree to which they can adjustthe interface between them. Alliances are usuallymotivated by the desire of both parties to jointogether to accomplish a task that they otherwisecould not or would rather not undertake alone.The task or range of tasks of the alliance, then,will necessarily involve at least some minimumlevel of interaction between the organizations and,accordingly, coordination between them. Second,the fundamental argument of those emphasizingtotal alliance value (e.g., Zajac and Olsen, 1993;Madhok 2000; Madhok and Tallman, 1998) is thatthe nature and degree of benefits vary with thedegree of interaction. Accordingly, additional costsof a greater interface may be more than offset bythe benefits possible from more extensive interac-tion.

Regardless of the impact on benefits, the levelof interdependence in undertaking a joint taskhas cost implications. Earlier work on interdepen-dence within workgroups and between organiza-tional units suggests that different tasks requiredifferent types of coordination modes (Thomp-son, 1967; Lawrence and Lorsch, 1967; Van deVen, Delbecq, and Koenig, 1976). More complextasks with higher levels of interdependence simi-larly require greater coordination (Bensaou, 1997;Gulati and Singh, 1998) and incur proportionallyhigher costs (Gulati and Singh, 1998). We restatethis relationship as:



Hypothesis 1: More complex joint tasks willrequire managers to expend greater time andeffort to work with an alliance partner.

Interpartner diversity

Differences in resources and capabilities may be akey reason for two firms to ally and the sourceof their mutual or shared benefit (Sakakibara,1997), and increase what Jemison and Sitkin(1986) call the ‘strategic fit’ between two part-ners. However, differences along social and cog-nitive dimensions—culture, managerial personali-ties, priorities, operating logics, and so forth—mayreduce what they call the ‘organizational fit’ oftwo partners and make an alliance difficult orimpossible to manage (de Rond, 2003; Child andFaulkner, 1998). Prior research has shown howa lack of organizational fit can lead to deleteri-ous interpartner conflict (Doz, 1996; Mohr andSpekman, 1994) and alliance failure (Salk andShenkar, 2001; Arino and de la Torre, 1998; Dasand Teng, 2000). Specific examples include dif-ferences in strategic goals and objectives (Borysand Jemison, 1989; Doz, 1988, 1992; Dwyer andOh, 1988); organizational or national culture (Bai-ley and Shenkar, 1993; Parkhe, 1991; Lorangeand Roos, 1993); decision-making styles (Ohmae,1989), and other formal and informal organiza-tional processes (Shenkar and Yan, 2002; Salk andBrannen, 2000; Brannen and Salk, 2000; de Rond,2003; de Rond and Bouchikhi, 2004). Althoughthe construct of cultural distance and its useful-ness in predicting outcomes have been criticized(Shenkar, 2001), studies of cross-border joint ven-tures and entry mode decisions have found a corre-lation between cultural distance and choice of gov-ernance structure (Anderson and Gatignon, 1986)and alliance failure (Li and Guisinger, 1991). Therelationship is not unambiguous, however, as Parkand Ungson (1997) found that a history of inter-action moderates the impact of cultural distance.

Overcoming or accommodating such differences(whether individual, organizational, industrial, ornational) requires adjustment by the partners inorder to achieve the objectives of the alliance,causing one or both partners to incur related costsin terms of time and effort. Therefore, we expect:

Hypothesis 2: Greater interpartner diversity willrequire managers to expend greater time andeffort to work with an alliance partner.

Perceptions of (in)equity

Since alliances entail both costs and benefits foreach partner, the perception of equity or inequitybetween partners is a particularly relevant dimen-sion for alliances. Equity theory focuses on anactor’s perceptions of the benefits he receives com-pared to the inputs he must supply or costs hemust incur. While an actor may evaluate the ratioof benefits to costs in absolute terms or by aninternal standard, research on individual behaviorshows that an actor’s evaluation of this ratio is usu-ally strongly influenced by his perception of otheractors’ ratios (Adams, 1963). In other words, theevaluation is relative to the perceived ratio of areferent.

In an alliance, a partner is a primary refer-ent. Prior research shows that partners are par-ticularly sensitive to perceptions of differencesin the benefit-to-cost ratio and any lack of reci-procity between partners (Kogut, 1989; Ouchi,1980; Arino and de la Torre, 1998; Inkpen andBeamish, 1997; Larsson et al., 1998; Powell,1990). This could involve perceived imbalancesin information sharing (Borys and Jemison, 1989;Mohr and Spekman, 1994), commitment (Ander-son and Weitz, 1992), or dependence (Sriram,Krapfel, and Spekman,1992; Doz, 1988, 1992).Kumar and Nti (1998) have shown that a part-ner’s assessment and reaction to perceived inequity(cost/benefit asymmetry) in the partnership havean important impact on alliance outcomes. As theperception of inequity increases, in either abso-lute terms or relative to a partner or other refer-ent, a firm will be less willing to undertake analliance or continue a particular alliance in thesame form.

We propose that perceptions of equity in arelationship will have two distinct effects. Thefirst, which we address in this study, is theimpact on commitment and investment in analliance. Following Blau’s (1964) emphasis onreciprocity and equity norms, we would expectmanagers to be more willing to invest moretime and effort to cooperate if they perceivetheir partner as bearing the same or greater costs(assuming that marginal benefit is proportionalto marginal cost). In other words, the perceptionof mutual commitment and a cooperative atmo-sphere between two partners may lead to greatereffort—objectively measured—expended on therelationship. Within such an atmosphere, however,



the managers involved may not perceive that effortas high. Of course, we would also expect managersto be rational, and the degree to which they areamenable to bearing additional costs to be boundedby the total value of the alliance, or the bene-fit–cost ratio, as suggested by Zajac and Olsen(1993) and others proposing a ‘value perspective’on alliances (Madhok, 2000; Madhok and Tallman,1998).

In contrast, when managers see themselves asbearing greater costs or receiving relatively lessbenefit than their partner, we would expect themto perceive the same level of effort as high or evenonerous. In this study, we test hypotheses address-ing two examples of inequity; namely, when man-agers perceive a lack of mutual willingness toadapt to a partner’s work styles or to solve prob-lems cooperatively.

Hypothesis 3a: Perception of a lack of willing-ness to adapt to each other’s work styles will becorrelated with managers reporting greater timeand effort to work with an alliance partner.

Hypothesis 3b: Perception of a lack of coop-erative problem solving will be correlated withmanagers reporting greater time and effort towork with an alliance partner.

A second effect of perceptions of equity orinequity in an alliance relationship suggested byprior literature and represented in Figure 1 is onmanagerial evaluations of the overall costs andbenefits of an alliance. This is a major inputinto the subjective evaluation of alliance valuethat drives future decisions, including whether tocontinue an alliance or make changes in the formal

Figure 1. Conceptual framework and hypotheses tested in the current study



(contractual) or informal structure and processesof the alliance. Furthermore, to the extent thatthe nature of interaction has an impact on thebenefits that a partner can receive from an alliance,decisions such as whether to expend more or lesseffort, or to adapt or not to a partner, will alsoimpact the prospective benefits of an alliance.These issues, however, are beyond the scope ofthe empirical analysis presented in this paper.

Control and transaction costs

Transaction cost theory was originally developedto explain the decision of a firm to vertically inte-grate (‘make’) rather than rely on market-basedrelationships (‘buy’) to obtain intermediary manu-facturing inputs (Coase, 1937). Williamson (1985)and others have developed this framework into amajor source of costs that a firm should try toreduce in order to increase economic efficiency. Inthis formulation, the threat of opportunistic behav-ior by a transacting partner is (or should be) astrong influence on a firm’s decision to inter-nalize a transaction or not. This threat increaseswhen the firm makes transaction-specific invest-ments (Williamson, 1985; Monteverde and Teece,1982), but may be reduced by elements of trust inthe relationship (Gulati, 1995; Gulati and Gargiulo,1999; Williamson, 1985). In some cases, the costsof negotiating, monitoring and enforcing a con-tract may be considerable, even to the point ofmaking a particular governance form (especiallymarket or alliances) uneconomical. Considerableempirical research has shown the influence oftransaction costs and the threat of opportunism onfirm behavior, especially on its make-or-buy deci-sion for technology (Pisano, 1990; White, 2000),distribution channels, and manufacturing inputs(Walker and Weber, 1984; Provan and Skinner,1989; Argyres, 1996). It has also been extended tothe study of contractual alliances, increasing nego-tiation costs (Artz and Brush, 2000) and the like-lihood of more hierarchical controls (Gulati andSingh, 1998).

This framework has been extended to accountfor sources of inefficiencies within particular gov-ernance forms, especially in alliances that aredescribed as neither-market-nor-hierarchy gover-nance structures and collectively termed ‘hybrids’.In this context, transaction costs are sources ofeconomic inefficiency because they increase theneed for a firm to monitor and control a partner to

reduce the partner’s ability to act opportunistically,even if such measures do not eliminate any under-lying opportunistic orientation of a partner. Thisleads to such behavior as competitive bargain-ing between partners (Milgrom and Roberts, 1992;Pearce, 1997) and the use of hierarchical con-trols to offset appropriability problems (Gulati andSingh, 1998). Accordingly, we propose that thefactors suggested by transaction costs as increas-ing the threat of opportunism also increase the timeand effort spent on an alliance:

Hypothesis 4: The threat of opportunism leadsmanagers to expend greater time and effort towork with an alliance partner.

Finally, a fundamental proposition of our frame-work is that the costs incurred in order to cooperatecontribute to the total costs of an alliance, in addi-tion to those incurred to control a partner. Whilethe preceding hypotheses have addressed specificsources of these costs, behind this cooperation costframework is the premise that the costs incurred inorder to cooperate with a partner represent a cat-egory of costs that are distinguishable from trans-action costs and the need to control a partner. Weformally state this proposition as:

Hypothesis 5: The costs of cooperation and costsof control both contribute to the managerial timeand effort expended on an alliance.

METHODS

Industry setting and alliance type

The construction industry and the relationshipbetween an architect and building contractor pro-vide a suitable situation for studying the impactof sources of costs of control and cooperationsuch as proposed in this paper. Indeed, Williamson(1985) uses the construction contract as an exam-ple to illustrate why neither market nor hierar-chy arrangement is efficient when a transactioninvolves mixed asset characteristics and occasionalfrequency. He argues that the medium to high assetspecificity of the transactions of a constructionproject increases the duration and complexity ofits contract beyond the control of market arrange-ment. At the same time, the frequency of thesetransactions is not high enough to compensate for



the high set-up costs of the within-firm hierarchy(Williamson, 1985: 68–80).

Typically, the contractor and the architect enterinto a separate contractual agreement with theproperty developer to complete a constructionproject. The architect agrees to design and man-age the construction, and the contractor agrees tosource materials and provide labor for the con-struction. There are strong relational elements inthese alliances to the extent that there the partnershave a history of prior relationships, are relativelydependent on each other, and have expectationsof future business ties. Thus, relational norms areobserved throughout the exchange process, wherelegal promises or binding terms of a contractare very often of limited role (Macaulay, 1963).They are not viewed as absolute rules; instead,‘much promise breaking is tolerated, expected and,indeed, desired’ (MacNeil, 1980: 9).

While the governance form for architect–con-tractor relationships falls into the broad domainof inter-organizational cooperation between marketand hierarchy, it is necessary for both researchand practice to distinguish such relationships fromthe other divergent forms that alliances may take(Parkhe, 1993). To this end, we draw on priorresearch (e.g., Dussauge and Garrette, 1999, Gulatiand Singh, 1998; Mowery, Oxley, and Silverman,1996; Nooteboom, 1999; Oliver, 1990) to identifythree dimensions leading to alternative allianceconfigurations: the degree of hierarchical control,power symmetry, and interdependence (Table 1).

The architect–contractor dyads in our study rep-resent one configuration of alliance relationshipsthat can be described by these dimensions. Specif-ically, they operate with low hierarchical controls,as the relationships are governed by non-equity,project-based contracts that the architect and thegeneral contractor sign separately with a propertydeveloper (an example of trilateral governance; seeWilliamson, 1985: 74). Because each partner con-tributes complementary resources, power is dis-tributed relatively symmetrically. Finally, interde-pendence in the alliance is high; construction tasksand activities are highly coordinated although notintegrated across the partners. As the partnershippools resources together and the outcomes of onepartner become inputs for the other, it resemblesreciprocal interdependence discussed in Thompson(1967), which is the most difficult type of interde-pendence to coordinate. The two sides must con-tinuously make minor asset adjustments (such as

those related to recurring construction details andspecific materials sourcing) in order to accomplishthe construction project. Moreover, the allianceinvolves both competitive and cooperative motiveswhen architects and contractors interact.

Data collection

The hypotheses were tested using a subset of ques-tionnaire items from a more extensive survey ofarchitects in Hong Kong. We rely on a single infor-mant, along the lines of similar studies (e.g., Artzand Brush, 2000; Parkhe, 1993; Provan and Skin-ner, 1989). The sample included 808 architectsworking in 80 architectural firms in Hong Kong.Their names were listed either on the Internet web-site of the Hong Kong Institute of Architects or inthe phone directories of their firms. Coded sur-veys were sent to these architects, and a secondmailing was sent to non-respondents 10 days afterthe initial mailing. The final statistical analysisis based on data from the 231 returned surveysthat had complete data. The response rate of 29percent compares favorably with the 15–24 per-cent of similar studies in the United States (e.g.,Mohr and Spekman, 1994; Parkhe, 1993; Provanand Skinner, 1989; Sarkar, Aulakh, and Cavus-gil, 1998). These 231 architects work in 56 (70%)of the 80 architectural firms operating in HongKong.

We collected our data at the alliance level, i.e.the construction project. The respondents wereasked to report on a self-selected constructionproject for which they had acted as the projectarchitect. The project architect is responsible forthe overall management of a construction project,and is the only one who interacts with the generalcontractor on a day-to-day basis and is knowledge-able about the full details of the interaction. Asthere is only one project architect for a single con-struction project, each questionnaire represents aunique architect–contractor relationship; i.e., wehave data on 231 alliances from the same numberof different architects.

We tested for non-response bias by comparingthe respondents and the non-respondents in termsof their gender and organizational rank, as wellas the size of their affiliated firm. We also com-pared early and late respondents on the major vari-ables examined. The t-tests on all variables werenot significant, showing that non-response bias did



Table 1. Dimensions of interorganizational relationships

Dimension Focus Theoretical base Key variables Architect–contractor partnership

Hierarchicalcontrol(Hennart, 1988;Parkhe, 1993;Stinchcombe,1990)

Governancestructure

Transactioncost

Transactionfrequency

Assetspecificity

Equity vs.contractual

Opportunisticbehavior

Architect and contractor partnership is ashort-term contractual agreement.However, they may cooperate again inother projects. Hierarchical control ismainly through a standardconstruction contract signed separatelywith the property developer (trilateralgovernance)

Relationshipsymmetry(Blau, 1964;Pfeffer andSalancik, 1978;Ring and Vande Ven, 1994;Saxton, 1997)

Partner Resourcedependence

Embeddedness

Firmsimilarity

PowerAffinityEquity

Architects and contractors arenon-competitors located in differentstages of the construction industryvalue chain. The architects haveformal authority over the contractorsas the architects oversee theperformance of the contractors onbehalf of the property developers.However, some contractors may gainpower as they have a closerrelationship with property developersor have expertise in a specificconstruction type

Interdependence(Thorelli, 1986;Thompson,1967; Dyer andSingh, 1998)

Task Learning theoryResource-based

view

Resourcetypes

Integrationscope

Taskdependence

Architects and contractors providecomplementary resources andexpertise for construction. The task ishighly coordinated but not highlyintegrated. Negotiation andcoordination throughout projects resultin reciprocal task dependence

not pose a significant threat. We tested for com-mon method variance using the post hoc Harman’ssingle-factor test, which revealed that no singlefactor accounted for the majority of the variancein the variables.

Of the 231 projects included in the final sample,30 percent were residential projects and 23 percentwere community and institutional projects, withhotel, hospital, airport, and recreational facilityprojects accounting for the remaining. The medianproject sum was U.S. $23.3 million and the aver-age project duration was 23 months.

Variables

The questionnaire responses provided the datafrom which the variables used in the quanti-tative analysis were derived. The measures ofproject cost and duration are continuous variables.The others are ordinal (ordered categorical) data,based on 7-point Likert scale responses, exceptfor the 4-point scale for the variable repeatedrelationship. Specific questionnaire items and the

coding scheme are presented in Table 2, along withthe hypothesized relationship with the outcomevariable. Descriptive statistics and zero-order cor-relations are presented in Table 3.

Several of our variables are drawn from sin-gle items from the questionnaire. Depending onthe nature of the construct being measured andpotential ambiguity from the perspective of therespondents, single-item measures may or may notbe appropriate. Wanous and Hudy give three con-ditions suggesting use of such items; namely, whenthe construct of interest is a) unidimensional ratherthan multidimensional, b) clear to the respondents,and c) sufficiently narrow (Wanous and Hudy,2001; 368). The constructs measured in this studyand reported by the respondents in the empiricalcontext studied meet these criteria. This issue isdiscussed in more detail for each variable below.

Dependent variable

The central proposition of this study is that bothimperatives in an alliance—the need (or desire)



Table 2. Variables, measures and hypotheses

Variable Item Hypothesis,predicted sign

Time and effort to coordinatewith a partner

The time and effort our firm spent tocoordinate with this contractor in this projecthas been substantial.

Joint task complexity How much was the original main contract sumfor this project? (ln HK $ value)

H1 +Interpartner diversity (Organizational goals +

Organizational procedures)/2H2 +

Organizational goals The goals and objectives of both firms (thearchitect firm and the contractor) arecompatible with each other. (reverse coded)

Organizational procedures The organizational procedures of both firms arecompatible. (reverse coded)

Lack of mutual adaptation Both firms have changed their ways ofworking to suit the specific need of eachother. (reverse coded)

H3a −

Lack of cooperative problemsolving

When problems occurred in this project, howoften did you and the main contractorcooperate with each other (e.g., fully complywith the request of the other partner, even atthe expense of own short-term interests).(reverse coded)

H3b −

Threat of opportunism This contractor may use opportunities that ariseto profit at our expense.

H4 +Asset specificity If this project was discontinued, our firm’s

non-recoverable investments (in specificdrawings, equipment, etc.) would benegligible. (reverse coded)

H4 +

Interpersonal trust I know how my contact person is going to act.He/she can always be counted on to act as Iexpect.

H4 −

Repeated relationship Set to 0 if they had not worked togetherbefore; 1 if 1–3 prior projects; 2 if 4–6projects; 3 if more than 6 projects.

H4 −

Project length How long was the project, from granting thecontract to the main contractor untilobtaining an occupation permit from theBuilding Department? (ln months)

to cooperate with and the need to control a part-ner—represent distinct sources of costs to eachpartner. These costs arise from the particularalliance characteristics in which those two impera-tives are manifest. In this paper, we have presentedhypotheses linking these characteristics with theamount of time and effort that a manager mustspend on an alliance. We operationalized this costby asking the architects to report to what degreethey had to spend a significant amount of time andeffort to coordinate with their alliance partner. Thisprovided the ordered ordinal responses—fromstrongly disagree to strongly agree—used as the

dependent variable in the ordinal regression anal-ysis (described below). This question was unam-biguous for the respondents, although as with anyperceptual measure there is inevitably variationamong respondents in terms of how much (abso-lute) time and effort is high or low.

Cooperation costs

We have proposed that joint task complexity andinterpartner diversity are direct sources of coopera-tion costs, while perceptions of equity in the rela-tionship affect managerial willingness to engagein behaviors that incur increased time and effort.



Table 3. Descriptive statistics and zero-order correlations

Mean S.D. 1 2 3 4 5 6 7 8 9

1 Time and effort 5.04 1.292 Joint task complexity 19.01 1.63 0.13∗

3 Interpartner diversity 3.95 1.21 0.22∗∗ −0.14∗

4 Mutual adaptation 3.61 1.35 −0.01 0.10 −0.105 Cooperative

problem-solving4.78 1.31 −0.09 0.04 −0.43∗∗ 0.09

6 Threat ofopportunism

4.26 1.39 0.22∗∗ 0.06 0.24∗∗ 0.04 −0.20∗∗

7 Asset specificity 3.44 1.50 0.15∗ 0.17∗ −0.18∗∗ 0.05 0.08 0.088 Interpersonal trust 4.36 1.25 −0.06 0.06 −0.26∗∗ 0.06 0.24∗∗ −0.15∗ 0.039 Repeated relationship 1.29 1.20 −0.15∗ 0.18∗∗ −0.10∗ −0.05 0.08 −0.01 0.10 0.03

10 Project length 3.05 0.46 0.09 0.60∗∗ −0.02 0.11 0.05 −0.02 −0.12 −0.02 0.10

N = 231; ∗ p < 0.05; ∗∗ p < 0.01

In this study, the log value of the project costwas used as a proxy for joint task complexity.This single-item measure does not allow us to dif-ferentiate different sources of construction projectcomplexity, such as design uniqueness. However,the costing of these projects is largely based ontheir technical and logistic complexity that, sub-sequently, require more extensive project man-agement. Because the architects are also projectmanagers (including oversight of the contractorsfor compliance), larger projects do require greaterinteraction between the architects and contractors.

For interpartner diversity, we expect that alli-ances between firms with great organizational, cul-tural, and other differences will, ceteris paribus,require more managerial time and effort than thosein which the partners are more similar. In oursample, both firms are local, so we would notexpect language, social customs, or other types ofcross-cultural or cross-industry differences to berelevant. On the other hand, architects and con-tractors are very specialized organizations withinthe construction industry, with different types ofpersonnel and operating systems, in addition todifferences in task-related resources and capabili-ties. Furthermore, they could have very differentpriorities and objectives that they are trying toachieve through the same joint project. We tookthe average response of two highly correlated ques-tionnaire items (r = 0.50, p < 0.001) to create ameasure of interpartner diversity (reliability 0.75).Interpartner diversity increased to the extent thatthe architect indicated that the goals as well as theobjectives and organizational processes of the twoorganizations were not compatible.

We have proposed that managers will be morewilling to expend greater time and effort on analliance if they consider the partnership to beequitable (and as long as resulting total costs donot exceed overall benefits). Following prior workon reciprocal norms and collaborative behavior(e.g., Blau, 1964; Artz and Brush, 2000), we haveincluded two measures of equity, both of whichwe expect to be positively correlated with greatertime and effort expended on an alliance. The firstvariable identifies cases of mutual adaptation inwork styles, which would be expected when twoorganizations collaborate closely but which alsoentails considerable managerial time and effort.This was estimated based on the degree to whichthe architects perceived both partners as havingchanged their ways of working to suit the needs ofthe other. The second variable measures perceptionof equity in the problem-solving process; namely,when problems arose, to what extent did theycomply with the request of the other partner evenat the expense of their own short-term interests?

Transaction costs

The transaction cost framework draws attention tothe costs of controlling a partner to reduce the like-lihood of opportunism. We have included four vari-ables that are central to the transaction cost frame-work and that prior empirical research has investi-gated extensively. Perhaps the most direct measureis of a manager’s perception of the likelihood thata partner will act opportunistically. Therefore, fol-lowing Parkhe (1993), we first asked respondents



to evaluate this threat from their alliance part-ners. Threat of opportunism was measured by thearchitect’s opinion that the contractor would takeadvantage of opportunities to profit at the archi-tect’s expense. Although this single-item measuredoes not specify why a contractor may be able tohold up the architect or act opportunistically, itsadvantage is that it represents a direct measure ofa manager’s perception of that threat.

As Godfrey and Hill (1995) note, however, thethreat of opportunism is both measurement- andstate-unobservable, and we include additional vari-ables that might indicate situations in which theneed to control a partner would be high. Otherresearchers have used proxies for this threat basedon observable factors, including the degree of assetspecificity (Artz and Brush, 2000), number of sup-pliers or competitors (Pisano, 1990; White, 2000),or industry categories (Gulati and Singh, 1998).In our study, we use a subjective measure of assetspecificity, i.e., in the context of a specific relation-ship from the point of view of a particular respon-dent. Architects estimate the degree to which theyfeel they would lose non-recoverable investments(drawings, equipment, etc.) if the project were dis-continued.

Numerous researchers have shown the role thattrust plays in reducing uncertainty (Dyer, 1997)and bargaining and monitoring (Barney andHansen, 1994), thereby mitigating transaction costs(Das and Teng, 1998; Parkhe, 1998; Sheppard andSherman, 1998; Gulati, 1995). We have includedtwo variables related to trust and uncertainty. Thefirst is interpersonal trust, indicating the degreeto which an architect believes that their contactperson in the contractor firm will look out forthe architect’s interests even when it is costlyto do so. This corresponds to ‘personal trust’in Williamson’s (1993) typology. The second isrepeated relationship, in which the architects indi-cated the number of prior projects on which theyworked with the contractor: none, one to three, fourto six, or more than six projects. Gulati (1995) hasargued that repeated voluntary ties are evidenceof at least a minimum level of satisfaction with apartner’s behavior, otherwise they would not haveselected them subsequently (assuming the choicewas voluntary). In transaction cost terms, infor-mation from a prior relationship reduces the likeli-hood of adverse selection that may otherwise occurin situations of high information asymmetry. This

corresponds to trust arising from past exchanges,one category proposed by Zucker (1986).

Control variable

The overall length of time that the project took isan obvious and simple alternative explanation tothe cooperation costs and transaction costs pro-posed in this study. We would logically expectmanagers to expend more time and effort to coor-dinate with a partner as the length of a projectincreases. Therefore, we include the log value ofthe length of the project in months as a controlvariable. This allows us to test for the impact of thefocal independent variables while statistically con-trolling for the length of time that the project took.While this measure is also a single item, it is clearto the respondents and, furthermore, an objectivemeasure (as all of the projects were completed).

Statistical model

The Likert-scale questionnaire item that was thesource of the dependent variable allowed us todistinguish among ordered outcomes. The orderedlogit regression model (ordinal regression proce-dure in SPSS 10.0), derived from the binomiallogit model, is appropriate for such dependentvariables (McCullagh, 1980; Peterson and Harrell,1990). Although several of the independent vari-ables were continuous (i.e., joint task complexityand project duration), the others were ordinal vari-ables drawn from the 7-point Likert scales. In theregression, these were treated as continuous vari-ables.2 In practice, results are nearly identical tothose obtained from a full dummy variable regres-sion approach (Lewis-Beck, 1980).

The general specification of the ordered logitregression model is:

Pr(outcomej = i) = Pr(κi−1 < B1X1j

+ B2X2j + . . . BkXkj + uj ≤= κi)

where uj is assumed to be logistically distributed.The coefficients Bκ are estimated, along with the

2 Another alternative would have been to create a dummy vari-able for each level of each ordinal variable (e.g., Hardy, 1993:10). However, that would have created 36 dummy variables, anda model incorporating all of these would have risked overfittingof the variables to the sample and thereby losing generalizability.



threshold values κi , where i is the number ofpossible outcomes.

RESULTS

Table 4 presents the results of the ordered logis-tic regression analysis. A positive and significantcoefficient indicates that the variable is positivelycorrelated with a greater likelihood that the man-ager spent a significant amount of time and effortto coordinate with a contractor. Overall, the signsand significance of the coefficients of the focalvariables are consistent with our hypotheses pre-dicting the impact of both cooperation costs andtransaction costs. The coefficient for project length,our control variable, was significant at the p <

0.010 level only in the models omitting coopera-tion cost variables (Table 4, Models 1 and 2).

Taking each hypothesis in turn, the differingsigns for the first- and second-order polynomialterms suggest a curvilinear effect of joint task

complexity on the dependent variable. Specifically,in the case of less complex projects, the net effectis negative; i.e., the architect is less likely to spenda significant amount of time and effort coordinat-ing with the partner. After a certain threshold level(in this sample, projects with budgets above U.S.$4.7 million, compared to the average value ofU.S. $23.3 million), task complexity has a net pos-itive effect on the dependent variable across mostof the range of this independent variable in thissample.

Interpartner diversity in goals, objectives, andoperating procedures was also correlated with ahigher likelihood of an architect spending moretime and effort, thereby supporting Hypothesis 2.In contrast, the results did not support Hypothesis3. The coefficients for the equity variables were notsignificant alone, and a log-likelihood ratio test3

3 C = (−2 log -likelihoodMc) − (−2 log -likelihoodMu), where Mcis the constrained model and Mu is the unconstrained model. Cfollows a chi-square distribution with the degrees of freedom

Table 4. Ordinal regression results Dependent variable: Likelihood of spending substantial time and effort to coordinatewith a partner

Model 1 Model 2 Model 3 Model 4 Model 5

Cooperation and cooperation costsJoint task complexity −2.95∗∗ −3.27∗∗ −3.40∗∗

(1.10) (1.10) (1.12)(Joint task complexity)2 0.08∗∗ 0.09∗∗ 0.10∗∗∗

(0.03) (0.03) (0.03)Interpartner diversity high 0.42∗∗∗ 0.46∗∗∗

(0.11) (0.12)InequityLack of mutual adaptation −0.004

(0.09)Lack of cooperative problem solving 0.10

(0.10)Control and transaction costsThreat of opportunism high 0.28∗∗ 0.25∗∗ 0.16∼ 0.17∼

(0.09) (0.09) (0.09) (0.09)Asset specificity high 0.13 0.13 0.21∼ 0.21∗

(0.08) (0.08) (0.09) (0.09)Interpersonal trust −0.03 −0.02 0.07 0.06

(0.10) (0.10) (0.10) (0.10)Repeated relationship −0.23∗ −0.27∗∗ −0.24∗ −0.25∗

(0.10) (0.10) (0.10) (0.10)Control variableProject length 0.49∼ 0.48∼ 0.17 0.05 0.02

(0.26) (0.26) (0.32) (0.33) (0.33)−2(log-likelihood) 747.2 728.3 718.0 704.3 703.4χ 2 2.9∼ 21.8∗∗∗ 32.1∗∗∗ 45.8∗∗∗ 46.7Cox–Snell pseudo-R2 0.01 0.09 0.13 0.18 0.18

N = 231; ∼p < 0.10; ∗ p < 0.05; ∗∗ p < 0.01; ∗∗∗ p < 0.001



shows that entering them together (Model 5) doesnot result in a significant increase in fit over theconstrained model (Model 4; χ 2 = 0.9, d.f. = 2,n.s.).

Results for the set of variables representingsources of transaction costs and the need to con-trol a partner generally support Hypothesis 4. Interms of specific variables, the perceived threat ofopportunistic behavior by a contractor and assetspecificity were positively correlated as predicted.Results for variables representing interpersonal andinterorganizational trust, which other studies havefound to mitigate the impact of transaction costs(e.g., Gulati and Singh, 1998; Gulati and Gargiulo,1999), were mixed. More prior relationships werecorrelated with an architect reporting less time andeffort, while the degree of interpersonal trust hadno significant relationship with the outcome.

Hypothesis 5, stating that cooperation costs andcontrol costs contribute independently to the timeand effort an architect will spend working with acontractor, is also supported. A log-likelihood ratiotest shows that the addition of the transaction costvariables resulted in a significant increase in modelfit (Model 2; (χ 2 = 18.9, d.f. = 3, p < 0.001).Similarly, adding task complexity and interpartnerdiversity variables resulted in a further significantincrease in fit (Model 4; χ 2 = 24.0, d.f. = 3, p <

0.001).Although the zero-order correlations (Table 2)

do not suggest any problems with multicollinearityamong the independent variables, several correla-tions warrant note. In particular, while coopera-tive problem solving was not correlated with thedependent variable of this paper, it was signifi-cantly correlated with several of the other indepen-dent variables: interpartner diversity (r = −0.43,p < 0.01), threat of opportunism (r = −0.20, p <

0.01), and interpersonal trust (r = 0.24, p < 0.01).We discuss the potential implications of suchresults in the next section related to logical exten-sions of this study.

DISCUSSION

While the transaction cost framework is usefulin analyzing the control issues in an alliance, its

equal to dfMu − dfMc if the null hypothesis that removing theconstraints (i.e., including the additional variables in the estima-tion) increases the overall fit of the model (Aldrich and Nelson,1984: 55).

singular focus on the threat of a partner actingopportunistically ignores a fundamental motiva-tion for most alliances. Specifically, organizationsform alliances to reap the benefits of cooperation,including the joint creation of tangible and intan-gible resources, economies of scale, synergies ofscope, and organizational learning. They do thisthrough various means of pooling, exchanging andsharing their resources and capabilities.

Even when the partners in such alliances com-pletely trust each other (i.e., the threat of oppor-tunistic behavior is zero) and other appropriationconcerns are absent, cooperating to achieve thesebenefits can be costly in terms of coordination,adjustment to a partner, and mechanisms to smoothcommunication and integrate activities. We haveused the term ‘cooperation costs’ to capture thesecosts.

A fundamental proposition of this paper is thatthe costs of cooperation and control are concep-tually distinct but both contribute to the total costof an alliance. The results reported in this paperprovide empirical support for this proposition. Wefind both sources of costs to contribute to the timeand effort required to work with an alliance part-ner. This suggests that any model of the total costsof an alliance should incorporate cooperation costsas well as transaction costs.

Within cooperation costs, we have further dis-tinguished between the task and social dimensionsof an alliance relationship, arguing that these arerelated in different ways to the managerial costsof an alliance. The empirical results also supportthis distinction, showing that both of these dimen-sions help predict the time and effort that managersreport that they spend to work with a partner.

We also proposed that managers will be morewilling to incur such costs if they perceive therelationship between them and their partner to beequitable; i.e., each receiving benefits in propor-tion to their costs. The results did not support thehypotheses linking equity in a relationship (in theform of either mutual adaptation of work styles orcooperative problem solving) to the time and effortan architect spent working with a contractor. Wewould have expected such behaviors to be relatedto increased commitment to the partnership, or atleast to represent greater managerial effort. Oneexplanation for the lack of apparent impact couldbe the perceptual nature of the dependent variableand the positive atmosphere suggested by relation-ships that are equitable on these dimensions; i.e.,



the respondents do not feel that such activities areonerous or require ‘effort.’ If that is the underlyingfactor, then we would expect a positive correlationbetween such ‘equitable’ behaviors and actual (i.e.,objectively measured) managerial time and effort.Alternative measures, although difficult to gather,include records of the time spent by a managerto implement changes in response to a partner’sneeds, or time spent in joint problem-solving meet-ings.

Taken together, however, the findings from thisstudy suggest that the notion of cooperation costsshould be incorporated into the broader compara-tive governance literature. Prior research has iden-tified transaction costs, bureaucratic costs and pro-duction costs, as sources of inefficiency in mar-ket, hierarchy, and hybrid governance structures.We propose that cooperation costs should also beincluded in studies of the sources of inefficiencyin alternative governance forms. Such costs rep-resent perhaps the most salient feature of hybridgovernance forms; namely, the need for coopera-tion, integration, and coordination—not just con-trol—between two or more organizations under-taking a joint task. Accordingly, cooperation costscould help explain why either market or hierar-chies are selected rather than particular hybrid oralliance alternatives, complementing explanationsbased on transaction cost factors.

A similar interpretation is possible for the appar-ent lack of importance of project length on thereported time and effort spent. Respondents arelikely adjusting their expectations of time andeffort in proportion to a project’s scale; in otherwords, architects expect to spend more time andeffort on more complex projects, and such timeand effort may be considered reasonable, not ‘sub-stantial.’ Such an expectations effect could thusreduce the statistical impact of project length onthe outcome. This provides another reason forfuture research designs to incorporate both objec-tive and subjective measures of time and effort,and the comparison (objective vs. perceived) couldprovide important insights into the factors drivingcognitive processes in alliance contexts.

Our central conclusions must be considered withthree methodological caveats. First, we focusedonly on the architect’s side of the alliance, andignored the view of the building contractor. Thislimits our understanding and analysis of the rela-tionship to only one partner’s perspective. How-ever, it was impossible to measure both sides of

the cooperation dyad in this study owing to con-fidentiality issues. Future research should try tocollect data from both sides of the alliance for amore complete picture.

Second, we have restricted the survey to onespecific form of alliance, namely alliances withlow hierarchical controls, a symmetrical powerrelationship, and high interdependence (Table 1).While this allows us to control for confoundingcontextual factors that might be present if differentalliance forms were surveyed, it also represents apotential limitation to the generalizability of theresults. Future research should attempt to verifywhether the relationships found in this study holdtrue in other alliance forms.

Third, other than joint task complexity, wehave tapped the constructs in our proposed model(Figure 1) with perceptual measures. This is drivenby constructs such as transaction costs and coop-eration costs to be both measurement and stateunobservable. We have asked respondents abouttheir perceptions of their partner and interactions,following similar research by Parkhe (1993) andArtz and Brush (2000). Future research shouldincorporate objective measures not only to trian-gulate on the constructs, but also to compare theimpact of objective and subjective variables.

Although not central to this paper, the correla-tions involving cooperative problem solving andother independent variables suggest an importantextension of this analysis. Cooperative problemsolving was negatively correlated with interpart-ner diversity and the threat of opportunism, whilepositively correlated with interpersonal trust anduncorrelated with task complexity. One interpre-tation is that the social—perhaps even more thantask—dimensions of an alliance are relevant forsuch behaviors. Clarifying the relationships amongtask, social and, behavioral dimensions of alliancescould be a useful direction for further analyses andempirical investigation.

The relationship between perceptions of (in)equity and the interdependence of benefits anddegree of interaction between partners in alliancesis a major element of the cooperation cost frame-work, and this needs to be explored in two ways.The first way is to study the behavioral impli-cations under conditions of perceived equity andinequity vis-a-vis a partner. In our study, wedid not find a correlation between two measuresof equitable behavior and the outcome variable.One possibility is that the respondent had already



adjusted to any prior perception of inequity, eitherbehaviorally (reducing effort, or increasing efforton the part of the contractor) or cognitively (reduc-ing dissonance by, for example, re-evaluating theirown costs and benefits or those of their coun-terpart). Empirical work could identify responsesto perceptions of inequity, and resulting insightscould be the basis for designing a series of con-trolled experimental studies.

Another avenue for exploring the implicationsof (in)equity, which is fundamentally an actor’sperception of benefits relative to costs, would leadto a clearer conceptualization of the endogeneityof costs and benefits, with implications for com-parative studies of alternative alliance forms or,at a higher level, among governance forms. Thetransaction cost perspective, which frames interac-tion with a partner as a source of costs, does notexplicitly recognize the different benefits that mayaccrue with greater interaction (Ring and Van deVen, 1994; Ghoshal and Moran, 1996). In equityterms, transaction cost logic implicitly assumes thebenefits of each alternative governance structureto be fixed, so it is appropriate to focus only onreducing costs to increase the benefit-to-cost ratio.

However, just as different governance structureoptions imply different types of costs, so too maythey imply different types of benefits. Ignoringpotential differences in the nature and mix of ben-efits could be a major shortcoming in, for exam-ple, analyzing technology make-buy-or-ally deci-sions (e.g., Pisano, 1990; Poppo and Zenger, 1998;Argyres, 1996; White, 2000), in which the ‘benefit’is implicitly restricted to the acquisition of a giventechnology. Comparing the alternatives only interms of their costs could inappropriately discountimportant ancillary and unique benefits that eachalternative could provide. For example, by under-taking joint R&D (ally), a firm could gain insightsinto how to organize R&D activities more effec-tively. Such insights may be the source of evengreater long-term benefits than the initial objec-tive (technology acquisition) that was studied, andmay even be part of the explicit strategic decisionmaking of the managers.

This is in line with arguments by a number ofscholars that cooperative interorganizational rela-tionships may provide benefits that are not pos-sible through market transactions or internaliza-tion (Borys and Jemison, 1989; Doz and Hamel,1998; Hennart, 1988; Thorelli, 1986; Zajac andOlsen, 1993; Madhok, 2000; Madhok and Tallman,

1998). Building on this, even among alternativealliance structures (differing, for example, in termsof scope of a joint task), the benefits may vary.By including equity considerations, the coopera-tion cost framework also draws attention to theendogeneity between alliance benefits and differ-ent types of interaction, defined in terms of thecomplexity of the joint endeavor and differencesamong partners.

The potential endogeneity between benefits andcosts associated with different types of interac-tion between alliance partners was not a significantfactor in our study. The architect–contractor rela-tionships are examples of non-equity (contractual),project-based alliances between functionally spe-cialized and highly interdependent organizationsin the same industry and national context. Thebenefits of the alliance to the focal firm (i.e., thearchitect’s project commission) were fixed, as wasthe type of joint task, and none of the alliances‘failed’ (i.e., none were terminated prematurely).The architectural firms are not able to expandthe scope of their interaction that might requiremore time and effort but which could lead to evengreater benefits. Other potential benefits (such asreputation or technical learning) are generally notaffected by their working with a particular contrac-tor. (In contrast, contractors will include examplesof the well-known architecture firms with whichthey have worked in their promotional materials.)Accordingly, they naturally view any marginalincrease in time and effort as a cost that will notbe offset by additional benefit.

More generally, potential endogeneity betweenbenefits and costs should be explicitly addressed inany study of alliance structure choice or compar-ative governance (Zajac and Olsen, 1993). Theremay be multiple equilibria; i.e., different allianceconfigurations that are equivalent in terms of theirperceived ‘equity ratios’ (benefits to costs) andtherefore acceptable and substitutable, as sug-gested by White (2005). These would be efficientin the sense that the managers were able to achievea desired level of benefit at an acceptable levelof total costs. The implication is that there couldbe many different possible configurations for suc-cessful alliances, and managers have a wide rangeof choices for configuring an alliance ex ante, orreconfiguring it after it is formed. Moreover, sincedifferent managers and firms will have differentperceptions of acceptable benefit-to-cost ratios, thediversity of ‘acceptable’ alliances is quite great.



CONCLUSIONS

We have proposed that cooperation costs—thoseincurred in order to collaborate with a partner inan alliance—are conceptually and empirically dis-tinct from the costs of control incurred to reducethe likelihood or impact of opportunistic behaviorby a partner. Results from our quantitative anal-ysis of the factors affecting the time and effort amanager devotes to working with a partner sup-ported hypotheses derived from our cooperationcosts framework, as well as those predicted bytransaction cost logic. We found that both jointtask complexity (in the case of medium- to large-scale projects) and greater interpartner diversityincreased the likelihood of a manager spendingmore time and effort working with an alliance part-ner. These factors were in addition to the impactof variables representing transaction costs, namely,the perceived threat of opportunism and invest-ments in relationship-specific assets. Since the fac-tors affecting cooperation costs can vary over thecourse of an alliance, they also suggest importantvariables to consider when studying changes inalliances over time, including alliance restructur-ing or premature termination.

The results of this study have important implica-tions for comparative governance research becausethey identify an important source of costs in at leastone type of alliance. This opens up the possibil-ity that they are also relevant in the case of othertypes of alliances and other broader categories ofgovernance forms (although perhaps more so forhierarchy than market). The conceptual frameworkalso represents a step towards explicitly incorporat-ing the notion of transaction value (e.g., Zajac andOlsen, 1993; Madhok, 2000; Madhok and Tallman,1998) into empirical studies of alliances. Specifi-cally, any study of the relative efficiency of alter-native governance structures must consider boththe unique benefits that each alternative presentsas well as their unique costs.

ACKNOWLEDGEMENTS

This paper has benefited from suggestions by ErinAnderson, Ben Bensaou, Mary Yoko Brannen,T.K. Das, Andrew Delios, Philippe Lasserre, ShigeMakino, Subi Rangan, Maurizio Zollo, and Asso-ciate Editor Ed Zajac, as well as two anonymousreviewers.

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Distinguishing costs of cooperation and control in alliances

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