Timothy B. Folta

Governance and uncertainty: the trade-off between administrative control and commitment

This study elaborates upon the motives for initiating equity-based collaborations vs. acquisition of another firm already having a desired technology. We characterize both minority direct investments and joint ventures as options to defer either internal development or acquisition of a target firm. In domains where learning about growth opportunities dominates investment activity, this incremental mode of governance economizes on the cost of committing resources to a technology with an uncertain value. Using a sample of 402 transactions in the biotechnology industry, we find strong support for the theoretical model. The findings suggest that the cost of commitment in the face of technological uncertainty may offset the administrative benefits of hierarchical governance. ? 1998 John Wiley & Sons, Ltd.

Entrepreneurial information search

Abstract Information is a key resource for the new venture. Despite the importance of information search practices, little research has examined whether entrepreneurs show a tendency to search for more or less information under particular conditions. This article considers whether information search might be explained by concepts of bounded rationality. Such theories lead to the counterintuitive expectation that entrepreneurs with less experience or those entering unfamiliar fields would search less because of their more limited understanding of what is needed. In addition, entrepreneurs with higher levels of initial confidence would search less because their “entrepreneurial euphoria” may limit their ability to assess their own needs for additional information. This study examined the information search practices of 1176 entrepreneurs. It considered six sources of information that were widely used: accountants, friends or relatives, other business owners, bankers, lawyers, and generally available books and manuals. Three measures of search intensity were developed, with the first reflecting the relative importance of all six sources and the remaining two focusing upon the subcategories of professional and personal sources. It was found that those who had no entrepreneurial experience, on the average, sought more, not less, information. However, as expected, those who ventured into fields which were different and those who had higher levels of initial confidence sought less information. An interaction effect provides insight into these findings and reveals that inexperienced entrepreneurs varied their search depending upon whether they were in familiar or unfamiliar domains. In particular, novice entrepreneurs searched less extensively in unfamiliar domains, a behavior consistent with bounded rationality. By contrast, experienced entrepreneurs did not vary their search pattern. It was also found that entrepreneurs having high levels of confidence sought less information, as expected. The behavioral tendencies observed here appear to have clear implications for entrepreneurs and their advisors. We might expect that those venturing into fields they do not know would have more to learn and thus would search more aggressively. However, neither inexperienced nor experienced entrepreneurs acted in this way. In fact, inexperienced entrepreneurs lessened their search as they entered fields they did not know, consistent with the bounded-rationality model. Many prior studies have found that entrepreneurs entering unfamiliar fields are, on the average, less successful (Cooper and Gimeno-Gascon 1992). This certainly raises questions about whether entrepreneurs, both experienced and inexperienced, might benefit from greater emphasis upon gathering and utilizing external information as they enter fields that are new to them. Outside advisors (if the entrepreneur will utilize them) may be helpful in urging and assisting entrepreneurs who enter unfamiliar fields to engage in more extensive information search, even though they may have less developed networks of contacts and less of a feeling for what is needed in such fields. With respect to initial confidence, entrepreneurs and their advisors should recognize that high levels of confidence may lead to lower levels of information search. Recognizing this tendency, they should use care to ensure that entrepreneurial euphoria does not lead to blinders in the search for information.

Location Matters: Where We Have Been and Where We Might Go in Agglomeration Research

Agglomeration research investigates the geographic concentration of economic activity. The authors explicate the various explanations for this phenomenon while focusing on a particular class of agglomerations—the spatial concentrations of related firms. The authors review theoretical explanations and empirical evidence around the performance implications of clustering in proximity to related firms. Moreover, they motivate future research by identifying challenges facing researchers in this area and discuss eight distinct groups of research questions with the potential to contribute to the continuing growth of this important research area.

Temporary workers as real options

Abstract Firms experiencing or anticipating substantial workforce expansion face increasing pressure to accurately project the costs associated with human asset investments and potential future layoff requirements. With that in mind, the decision whether to take on temporary workers in lieu of hiring permanent employees is a decision that involves significant risk. Traditional valuation methods assume that investments are fully reversible and thus do not capture the idiosyncrasies of workforce management, in which investments are not fully reversible. However, real options theory offers managers the ability to consider irreversibility and to make workforce investment decisions under conditions of minimum uncertainty and maximum flexibility. We present real options theory as an especially useful means for managers to more accurately value human asset investment decisions, achieve expansion and defer commitment until future uncertainties can be at least partially resolved.

Demand- and Supply-Side Agglomerations: Distinguishing between Fundamentally Different Manifestations of Geographic Concentration

Agglomeration research investigates the benefits that firms receive from locating in close geographic proximity. Despite a substantial surge in interest in this topic over the past 20 years, a lack of distinction among unique manifestations of spatial concentrations of similar firms threatens continuing progress in this stream of research. We argue that agglomerations of related firms that draw benefits from the supply-related externalities of increased access to specialized labour, specialized inputs, and knowledge spillovers are fundamentally different from those that draw benefits from heightened demand realized through reduction in consumer search costs. Extending agglomeration theory, we explicate the differences between these distinct phenomena, discuss how the nature of key theoretical relationships varies across these agglomeration types, and demonstrate significant implications for research. We discuss how the differences affect a host of theoretical relationships and empirical research decisions.

The effect of national culture on partner buyouts in cross-border biotechnology alliances

Abstract This study examines how national culture influences the likelihood and rate of buyouts among R&D equity alliances and joint ventures in the biotechnology industry. We hypothesize that the interaction of specific national culture attributes and cultural differences between alliance partners have an impact on: (1) the amount of endogenous uncertainty surrounding the potential integration of the target firm and (2) the marginal rate of learning in hierarchical versus collaborative governance. Applying a competing hazard model to a sample of 173 joint ventures and minority equity collaborations in the biotechnology industry, we found that investing firms from high power distance and high uncertainty avoidance countries are more likely to buy out their alliance partners. Furthermore, greater cultural distance between alliance partners increases the likelihood of partner buyout when investing firms are from high power distance countries.

A Real Options Model of Stepwise Entry Into Self-Employment

This paper tests a real options model of stepwise entrepreneurial entry. We distinguish between part time and full time entry among the self employed in Swedish knowledge intensive industries. Two multinomial logit models tests the entry from employment to part- or full time entry in 1998, and to subsequent full time entry in 1999. The empirical evidence indicates the need to distinguish between part time and full time entry, something overlooked in earlier research. We find strong support for our notion that entrepreneurs used part time entry as a strategy to test the value of their conceived business opportunity without risking their full income. However, our hypothesis that entrepreneurs use a real options heuristic shaped by the uncertainty and the irreversibility of entry received only mixed support.

Market Versus Managerial Valuations of Real Options

We examine a central tenet of real option theory – whether real options influence managerial thresholds for investment. In contrast to prior studies that have focused on whether real options influence discrete investment decisions, our focus is on empirically isolating real options’ effects on thresholds. In particular, we examine the real options inherent in acquisition decisions. Our model posits that there are good reasons why we might expect there to be information asymmetry around the value of real options. Accordingly, if managers have unique information about growth options we might expect to observe them lowering their thresholds, perhaps to the point where they are willing to accept negative market returns. We further expect that the degree of information asymmetry for firm-specific growth options should be higher than for industry-specific growth options. Finally, we believe that managerial thresholds will be more prone to influence from growth options than deferment options. While thresholds are unobservable, we are able to isolate the effects of real options on acquisition thresholds by borrowing a method used originally in labor economics to isolate the determinants of reservation wages. Using a sample of over 28,000 acquisitions in the U.S., we find strong support for the model. These findings suggest that firms with low thresholds may choose to acquire despite comparatively low expected performance.

Rationalizing Organizational Change: A Need for Comparative Testing

Behavioral theory explains that organizational change is prompted by performance relative to a firm-specific aspiration. Although this explanation has been empirically confirmed, it has not been tested comparatively alongside other explanations, most notably rational choice. This lack of comparative study implies that prior research may be committing Type I errors—confirming aspiration-level decision making when it is not actually occurring. This paper contributes to behavioral theory in two specific ways. First, we show that several foundational studies purporting to provide empirical support for aspiration-level decision making may actually represent maximizing behavior. To consider this potential, we simulate a sample of subjectively rational agents who choose strategies by maximizing expectations. We show that it is possible and highly probable to diagnose satisficing when agents are, in fact, maximizing. Second, we develop and implement recommendations for comparative testing to demonstrate reliability. Analysis shows that the recommendations are effective at reducing Type I and II errors for both behavioral theory and rational choice. This paper is meant to inspire the design of future studies on aspirations and, indeed, all studies of organizational change.

Are Real Options “Real”?

I am interested in clarifying the discussion of how researchers might try to isolate real option effects to identify whether managerial decisions are guided by a real option heuristic. If we are to claim that the theory of real options illuminates managerial behavior, then as a field, we must converge on an understanding as to what constitutes a real option effect, and what does not. The discussion centers on hypothesis development, measurement issues, and research methodology.