Governance mechanisms

In alliances, different reasons are found that result in a lack of trust; uncertainties in the environment, the incomplete nature of contracts, bounded rationality, and the behaviour of partners (opportunism) (Williamson, 1975). To prevent opportunistic behaviour (e.g., evasion and violation of agreements, refusal to adapt and forced renegotiation (Wathne and Heide, 2000)), firms use governance mechanisms (Gulati, 1995). Two types of governance mechanisms exist; control and trust-based governance mechanisms.

13 2.3.1. Control-based governance

Control-based governance mechanisms aim at reducing the chance that a partner behaves in an opportunistic manner and protects the company via the use of the use of formal rules and procedures (De Man and Roijakkers, 2008; Das and Teng, 2001). The use of control-based governance mechanisms makes it more expensive for organizations to implement activities that only benefit their own goals. The consequences of opportunistic behaviour are determined in contracts (i.e. fines) (Parkhe, 1993). Control also specifies the labour division between firms; it functions as a guideline for the integration of activities, decision-making and how to handle in case of disagreements (Faems, Janssens, Madhok and Looy, 2008). There are different instruments to exercise control (Poppo and Zenger, 2002; Das and Teng, 2001; De Man, 2006).

Control can be classified into external measure-based control and internal value-based control. The former focuses on the establishment of formal rules, procedures, and policies to monitor and reward desirable outcome whereas the latter focuses on the establishment of organizational norms, values, culture, and the internationalization of goals to encourage desirable behaviour and outcome. The ideal form of control depends on the extent to which the output is measured and the knowledge that managers have regarding the transformation process (Das and Teng, 2001).

External measure-based control can be categorized into behavioural control and output control.

Behavioural control focuses on influencing the behaviour of partner firms via, for example, reporting devices, written notice of departure from agreements, accounting examinations, cost and quality controls, arbitration clauses and lawsuit provisions (Das and Teng, 1998). Output control focuses on defining the preferred output of an alliance via setting alliance goals, establishment of incentive systems and reward structures, and formal monitoring procedures (Dekker, 2004). Internal value-based control is also known as social- or clan control. Social control does not define behaviour or output; it rather focuses on socialization via the development of organizational consensus. It aims at developing organizational norms, values, culture and the internalization of goals to encourage desirable behaviour and outcomes (Das and Teng, 1998; Das and Teng, 2001). An overview of the different types of trust and control can be found in table 3.

Table 3 Control types

Control Types Examples

External measure-based Behavioural control  Reporting devices

 Written notice of departure from agreements

 Accounting examinations

 Cost and quality controls

 Arbitration clauses

 Lawsuit provisions Output control  Setting alliance goals

 Incentive systems

 Reward structures

 Formal monitoring procedures Internal value-based Social control  Common culture

 Socialization processes

 Common values

 Decision-making consensus

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To summarize, control-based governance mechanisms focus on value creation by sharing both costs and risks, creating market power, and the optimisation of cooperation processes. Value capture aims at sharing the cake equally among all partners (De Man and Roijakkers, 2008). Strategy, structure, and systems are the main focus, whereas informal aspects do not receive much attention (De Man, 2006).

Partners will never become an entity as they have their own agendas, which are more important than the collective goals (Sundaramurthy and Lewis, 2003).

2.3.2. Trust-based governance

In contrast to control, trust is presented in literature as a more flexible governance form; it is based on positive expectations of partners. The more firms cooperate, the more trust increases and the less control is used (Gulati, 1995). When trust-based governance mechanisms are used, every partner is allowed to join, leadership is decentralized, and cultural differences are valued leading to more long-term relations (De Man, 2006). The aim is to reach complementary goals with internally motivated actors that trust one another (De Man and Roijakkers, 2008; Gulati, 1995). In case of trust, firms worry less about opportunistic behaviour and, as such, reduce control-specific actions (Das and Teng, 2001). In unpredictable environments, trust is a valuable mechanism as contracts are not able to fully capture the market dynamics (De Man and Roijakkers, 2008).

An initial level of mutual trust is required to start arrangements (Hagedoorn et al., 2008). Repeated ties (e.g., common history of collaborations) increase the level of trust (Hagedoorn et al., 2008; Gulati, 1995;

Roijakkers, 2003). As partners get to know each other and trust increases, they are often more willing to share information. There are different instruments for trust (Grandori, 1997; Schrader, 1991; Martinez and Jarillo, 1989; Saxton, 1997; Thomas and Ely, 1996; Chua, Chrisman , Steier and Rau, 2012; Thomas and Ely, 1996; Chatenier, Verstegen, Biemans, Mulder and Omta, 2010; Roijakkers and Hagedoorn, 2006, 2014; Kale, Singh and Perlmutter, 2000).

Two different types of trust are identified; goodwill- and competence trust. Goodwill trust is based on the expectation that a partner intends to fulfil their role and is influenced by previous experience with a partner. In general, the goodwill is based on attitudes of specific personnel, also described as trust guardians (Child, 2001). This type of trust is based on personal trust between persons and is related to relational risk; goodwill trust reduces the perceived relational risk (Lui and Ngo, 2004; Das and Teng, 1998; Das and Teng, 2001). Competence trust is based on the expectation that a partner has the ability to fulfil their roles and is based on resources and reputation of a partner (Das and Teng, 1998; Das and Teng, 2001). This type of trust based on the resources and reputation of a partner and is related to performance risk; competence trust reduces the perceived performance risk (Das and Teng, 1998; Das and Teng, 2001). An overview of the different types of trust can be found in table 4.

Table 4 Trust types

Trust Examples

Goodwill trust  Attitudes of specific personnel

 Trust guardians

 Previous experience

 Common history

Competence trust  Resources

 Reputation

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Thus, trust-based governance mechanisms create value by learning and working together. Trust-based mechanisms aim at the commitment of all partners, good internal relations and mutual adjustments to eventually create trust (De Man and Roijakkers, 2008). Value capture aims at enlarging the size of the cake (De Man and Roijakkers, 2008). An overview of the differences between trust and control-based governance mechanisms can be found in table 5.

Table 5 Governance mechanisms and their characteristics

Characteristic/governance

Value capture Sharing cake equally among all partners

Enlarging the size of the cake Value creation Sharing costs and risks Learning and innovating

together

Main focus Strategy, structure, and systems Commitment, good internal relations and mutual adjustments

Entity or not? No Yes

Types Behavioural, output and social

control

Goodwill and competence trust

Relational risk High Low

Performance risk Depending on market characteristics

Depending on market characteristics

Examples  Governance structures;

 Formal rules;

16 2.3.3. Substitutes or complements?

Trust and control are different concepts, but they are often implemented in combination (De Man and Roijakkers, 2008; Hagedoorn et al., 2008). Whether trust and control are complementary or substitutes, depends on the level of relational and performance risk. Relational risk is the risk that partners behave opportunistically, whereas performance risk is the risk that factors like market uncertainty, competition, and governmental regulation result in an alliance not performing as expected (Das and Teng, 2001). De Man and Roijakkers (2008) state that different combinations of relational and performance risk result in varying usages of control and trust-based governance mechanisms, as found in table 6. The number of previous contacts between firms and the market risk thus influences the role of trust and control. Note that when trust and control act as complements, initial trust is essential. However, contracts are used to prevent possible opportunistic behaviour at the start. Over time, the role of control mechanisms decreases and the role of trust mechanisms increases (Hagedoorn et al., 2008).

Table 6 Relations risks and governance mechanisms

Performance risk/

relational risk

High Low

High Trust and control as

complements

Only trust

Low Only control Trust and control as substitutes

In this section, different concepts were explained to understand the insights that existing literature provides. We found that ecosystem literature is still in the concept phase when it comes to understanding governance mechanisms; authors have tried to grasp important aspects regarding governance, but seem to show little understanding of how different types of governance mechanisms are used within innovation ecosystems. Also findings regarding innovation ecosystem literature were mainly based on research on focal actors, ignoring the importance of partners within innovation ecosystems. In alliance literature governance mechanisms have been extensively described, also in relation to different types of alliances. In alliance literature also the use of management capabilities was described, that according to literature, mediate the relation between governance structures and alliance performance. As innovation ecosystems has its own specificities compared to alliances, this thesis will investigate whether it is meaningful to apply governance mechanisms as described in alliance literature directly to innovation ecosystems and whether a construct comparable to alliance management capabilities is present in innovation ecosystems. Still, as innovation ecosystems are a subset of alliances, it could be interesting to use the general definitions of types of governance mechanisms from the alliance literature and investigate how governance mechanisms are used by focal actors within an innovation ecosystem setting. Second, when it is understood how the focal actors use governance mechanisms within innovation ecosystems, it also can be understood how focal actors influence partner alignment within the innovation ecosystem by means of these mechanisms.

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