A reconceptualization of asset specificity in the regionalization literature : a perspective on the oil majors

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A RECONCEPTUALIZATION OF ASSET

SPECIFICITY IN THE REGIONALIZATION

LITERATURE

A PERSPECTIVE ON THE OIL MAJORS

Master Thesis

MSc. Business Administration – International Management

University of Amsterdam

Supervisor:

Dr Johan Lindeque

Second reader:

Dr Michelle Westermann-Behaylo

Student:

Martin Poodt

Student ID:

10663541

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Statement of originality

This document is written by Student Martin Poodt who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

This study applies Williamson’s four dimensional typology of asset specificity as a theoretical framework for appraising the nature of inter-regional liability of foreignness of five leading oil majors as listed in the Fortune 500. The thesis begins by addressing how asset specificity is reflected in an unsophisticated and rather ad hoc operationalization of the construct in the regionalization literature. Following a review of the multifaceted nature of asset specificity from a mainstream strategy perspective, the role of asset specificity on the internationalization process of the oil majors is analyzed by using a qualitative multiple case study design. Site specificity and physical specificity appear to be the most pertinent dimensions of asset specificity in the sample of MNEs investigated. The two dimensions’ interaction with high institutional distance contexts resulted in a high degree of inter-regional liability of foreignness. Because of the high potential gain from expropriation of quasi-rents, opportunistic host-country actors used all available cost-effective means to seize that return. By implication, this directly affects the way the regional presence of these MNEs is measured.

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Acknowledgements

First and foremost, I wish to thank my supervisor Johan Lindeque for his support and excellent guidance during the execution of this research. Our regular discussions, your positive attitude, and patience had been invaluable for completing my thesis. Also, I would like to express my gratitude to Michelle Westermann-Behaylo for taking the time to read my thesis. Last but not least, I would like to say the following words to my American friend Ryan Donovan: Gracias por tu apoyo, sos un gran amigo!

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Index of Tables

Table 1: exemplary studies that acknowledge asset specificity in the regionalization literature ... 14

Table 2: operationalization of the asset specificity construct ... 18

Table 3: prior empirical work that draws on asset specificity ... 29

Table 4: cases of indirect and direct expropriation of oil and gas assets... 31

Table 5: sample and collection of newspaper articles ... 32

Table 6: codebook ... 33

Table 7: within-case analysis Royal Dutch Shell ... 36

Table 8: impact appropriation quasi-rents on regional profile ... 39

Table 9: within-case analysis ConocoPhillips ... 42

Table 10: within-case analysis BP ... 47

Table 11: within-case analysis ENI ... 52

Table 12: within-case analysis Chevron... 56

Table 13: cross-case analysis ... 59

Table 14: incremental improve in the expropriation of quasi-rents ... 62

Table 15: working propositions and their level of support ... 66

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Acronyms

CSA

Country Specific Advantage

FSA

Firm Specific Advantage

FDI

Foreign Direct Investment

IOC

International Oil Company

LoF

Liability of Foreignness

MNE Multinational Enterprise

NOC National Oil Company

OFSC Oilfield Service Companies

PSA

Production Sharing Agreement

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1. Introduction

Transaction cost theory (Coase, 1937; Williamson, 1975, 1979, 1985, 1991, 1996) has received extensive attention from a variety of disciplines, but it holds a particularly central place in strategic management (Mayer, 2009). Williamson’s work in the 1970’s and 1980’s has been instrumental in the rise to prominence of this theory and provided a strong foundation for analyzing governance decisions resulting in hundreds of empirical papers in a wide variety of research streams (Macher and Richman, 2008). Williamson (1996) identified asset specificity as the main source of exchange hazards in transaction cost economics (TCE), where asset specificity refers to the degree to which one or both parties are tied to a transaction because the assets required for the transaction have less value in the second-best use. This key construct has recently emerged in regionalization theory as well and has been defined as “the substantial ‘linking’ or ‘melding’ investments in order to integrate a multinational enterprise’s (MNE) existing firm specific advantages and exogenous country specific advantages” (Rugman, 2005. P. 225), which is argued to differ between business units (Proff, 2002, Rugman and Verbeke, 2008; Kolk et al., 2013).

In spite of the potential that lies in the cross-fertilization of this construct between the TCE and the regionalization framework, the concept of asset specificity – as originally intended by Williamson (1975) – does not travel well between these two theoretical perspectives. Despite the acknowledgement of the construct’s importance in the regionalization literature, it has been poorly developed. Asset specificity has been conceptualized in the form of additional, location-specific linking investment (e.g. the development of location-bound FSAs to complement non-location bound FSAs), implying that such transactions come at costs in comparison to conventional deployment of FSAs in locations where these location-specific linking investments are not necessary (Rugman, 2004). However, the original TCE notion of asset specificity should not play a role in the FSA transferability evaluation in the pre-investment period, but is expected to be most pertinent in explaining changes in regional presence after transaction parties contracted and investment has occurred. In the post-investment period the interaction of asset specificity with high institutional distance locations results in significant additional transaction cost to the MNE because their quasi-rents are appropriated. Therefore, this construct might not drive the initial perception of the potential for internationalization based on the degree to which existing FSAs are transferable, but where misappreciation does occur, asset specificity explains why MNE’s regional presence is reduced in the post investment period. Secondly, asset specificity framed in the regionalization theory has been treated as a clear and homogenous construct. Scholars in the strategy literature, however, have acknowledged the multidimensional property of asset specificity (Williamson, 1983; Malone et al.,

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1987; Joskow, 1987) and identified four dimensions of asset specificity; site asset specificity, physical asset specificity, human asset specificity, and dedicated asset specificity. Williamson’s (1983) discussion of the four distinct types of relationship-specific investments is very helpful for identifying variations in the importance of asset specificity (Joskow, 1987). It is likely that by giving asset specificity in the regionalization literature this multi-dimensional property, it can provide greater explanatory power of the drivers of inter- and intra-regional liability of foreignness (LoF) in sectors featured by foreign direct investment (FDI) with high degrees of asset specificity. In other words, the use of asset specificity as a multidimensional construct potentially refines the regionalization literature’s arguments, especially in industries featured by a high degree of asset specificity.

The relatively uncommon occurrence of truly global firms (Rugman and Verbeke, 2004), with a balanced distribution of their sales and asset across the extended triad of North America, Europe, and Asia, has been addressed in a variety of industries and (sub)sectors, by an increasing number of scholars (Filippaios and Rama, 2008; Gardner and McGowan, 2010; Grosse, 2005; Kolk and Margineantu, 2009; Oh and Rugman, 2006; Rugman and Collinson, 2004; Rugman and Girod, 2003; Rugman and Verbeke, 2008b). Most of these sectors do not exhibit characteristics that one would associate with the classic conceptualization of asset specificity. This thesis argues that the concept of asset specificity is at the forefront for companies operating in industries such as oil and gas extraction (Barham et al., 1998) and it should therefore play a much more pivotal role in regionalization theory than it does at present for such firms. The oil and gas production chain is characterized by high degree of investment specificity. Firstly, assets have a fixed location and cannot be moved; secondly, equipment is engineered for a specific project; thirdly, the infrastructure is constructed in order to connect a fixed set of participants (Mironova, 2013). Through drawing clear examples of TCE theory driven asset specificity, one can directly analyze how MNE’s regionalization is affected through this construct. There is reason to predict that internationalization strategies in these industries are influenced by the combinative effect between institutional factors and transaction cost economics dimensions (e.g. asset specificity) (Demirbag, et al., 2010), because formal and informal institutions that shape interactions, provide the structure in which transactions occur (North, 1990). Specifically, it can be argued that asset specificity enhances the effect of institutional distance because it causes MNEs to be concerned more about their specific assets. Facing high institutional distance, MNEs may be more likely to be exposed to local partners with a higher tendency of opportunism. In addition to the fundamental role of asset specificity, natural resource seeking firms are often constrained in selecting the most efficient location from a supply side perspective. The locus of available reserves dictates the location of capital intensive upstream projects, limiting the potential locations in which these MNEs can operate. Note, oil and gas reserves distribution is highly skewed as the Middle East’s oil accounts for 48,4% of total proved oil and gas

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reserves (BP, 2013). The cumulative effect between institutional factors and asset specificity, and the unequal distribution of reserves are likely to be a strong underlying force driving the LoF. This thesis aims to contribute by answering the following question:

How does the institutional environment effect the internationalization of MNEs with firm specific advantages (FSAs) of differing types and degrees of asset specificity?

In exploring firm strategies and developing a theoretical representation of asset specificity within the regionalization literature, this study concentrates on a sample of the leading oil and gas firms (as listed in the 2013 Fortune Global 500) over the period 2009 to 2013. This sample consists of the firms that emerged out of the original seven sisters – Chevron of the US, Europe’s BP (UK), and Royal Dutch Shell (The Netherlands) – accompanied by two comparative newcomers to the ranks of international majors: ConocoPhillips (US) and ENI (Italy). The geographic dispersion of assets, sales, as well as proved developed and undeveloped reserves, are tracked from their annual reports over the period 2009 to 2013 for analyzing their international presence. To obtain further insights into the oil major’s strategies, Financial Times publications on the seven firms were scrutinized.

The remainder of this paper is structured as follows. The literature review opens with the regionalization debate and a review of the existing conceptualization of asset specificity in this stream of research. This is followed by an examination of the occurrence of asset specificity in the stream of strategy research, employing earlier references by Williamson (1979). The subsequent section seeks to identify, discuss and integrate Williamson’s (1979) perspectives on the nature of asset specificity into more recent contributions to regionalization theory. Research propositions will also be developed by combining the TCE determinant and institutional theory. The research methodology will then be detailed in the following sections, as well. Chapter 4 presents the analysis and results of the research. In chapter 5, the study outcomes and their implications for academics and practitioners will be discussed. Ultimately, limitations of the study are presented and directions for future research are provided.

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2. Literature review

The first section of this literature review discusses the regionalization versus globalization debate. Section 2.2 starts by analyzing the current conceptualization of asset specificity in the regionalization literature. Subsequently asset specificity will be discussed from a mainstream strategy perspective addressing the necessity to treat asset specificity as more than a composite construct. These sections seek to identify, discuss, and integrate perspectives on the nature of asset specificity into more recent contributions to regionalization theory. This will be done in section 2.3 by developing research propositions that combine asset specificity and institutional theory in the international context.

2.1 Regionalization debate

“As a global company that operates in more than 90 countries worldwide, Royal Dutch Shell is, by its nature, a diverse organization.”

– Peter Voser, Former CEO Royal Dutch Shell

Globalization is widely viewed as one of the dominant imperatives driving business strategy in the twenty-first century (Douglas et al., 2011). As markets become increasingly integrated, more firms from all parts of the world are expanding operations on a global scale (Gupta et al., 2008; Peng, 2009). Some have suggested that globalization has become so pervasive that multinational enterprises (MNEs) that do not think and act globally will be at a competitive disadvantage to firms that have global orientations (Levitt, 1983; Ohmae, 1989).

By the mid-1980’s, a growing number of academics started to question the appropriateness of this view on ‘global strategy’, resulting in considerable scholarly attention on regional strategy as opposed to global strategy for MNEs (Birkinshaw et al., 1995; Morrison et al., 1991). Studies have shown that pressures for global integration are often misinterpreted and that competitors frequently adopt strategies that are either too global or not global enough (Douglas and Wind, 1987; Morrison, 1990; Yip, 1992). Hamel and Prahalad (1985) argued that the perspective on globalization of markets and global competition was incomplete and misleading. The integration responsiveness framework (Bartlett and Ghoshal 1989; Prahalad and Doz, 1987) identified the increase in pressures for global integration coupled with pressures for local responsiveness as key forces influencing the MNE’s organizational design.

However, the debate on the tension between regional and global strategies did not gain its full momentum until the publication by Alan Rugman (2001) of ‘The End of Globalization’, where he

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takes the position that global business is dominated by a relatively small number of MNEs, and the majority of operations for these MNEs occur regionally rather than globally. This assertion is based on the observation that a vast majority of MNE activities of a sample of the largest 500 global MNEs (i.e. by sales, assets, and employment) are concentrated in their home regions (Rugman & Verbeke 2004). In other words, the data clearly refutes the view that most MNEs undertake activities globally on a significant scale. The reason of this regional concentration is the economic significance of triadism (Li et al., 2010), where no complete economic integration can be observed, but, by shifting towards regionalization, the world is in a state of semi-globalization (Ghemawat, 2003). Regionalization is a firm-level manifestation of semi-globalization (Kolk, 2010). Countries within a region are argued to be more homogeneous in terms of institutions, culture, and economic development than countries in other regions (Rugman and Verbeke, 2005; Ghemawat, 2005). Regional strategy theory suggest that the LoF for intra-regional expansion appears to be much lower than the LoF for inter-regional expansion: the additional costs of doing business abroad are often much higher when moving into other regions of the world than when expanding intra-regionally, in the home triad region (Rugman & Verbeke, 2007). The regionalization literature here builds on Zaheer’s (1995) conceptualization of liability of foreignness defined as the differential costs arising from spatial distance, unfamiliarity with the host country environment, and home and host country restrictions.

Following Rugman and Verbeke (2004), there is a growing body of work that seeks to understand how this regional orientation prevails in specific sectors, with sectors that have been studied including food and beverages (Filippaios and Rama, 2008), soft drinks (Gardner and McGowan, 2010), accounting services (Kolk and Margineantu, 2009), cosmetics (Oh and Rugman, 2006), automotive (Rugman and Collinson, 2004), retail (Rugman and Girod, 2003). Different industries tend to vary in terms of their internationalization motives due to differences of technological intensity, capital intensity, economies of scale, etc. (Shan & Song 1997; Sarkar et al., 1999). These motives create differences in the potential of value creation by adopting a specific international strategy (Li and Li, 2007). While scholars in the field of regionalization theory have showed the prevalence of regional focus of MNEs, they have not fully addressed the interaction of asset specificity and geographic scope choices. Interestingly, mainstream internalization theory, i.e., the TCE framework developed to address MNE expansion patterns, Buckley and Casson (1976), Rugman (1981) and Hennart (1982), has not fully addressed this issue either. Internalization theory does address MNEs entry mode choice, and acknowledges that the LoF is not necessarily identical in nature to every host country, but, to date, it has not fully incorporated geographic scope as a key determinant driving managerial decision making on internationalization (Rugman and Verbeke, 2005). The lacking criteria with conventional Williamsonian (Williamson, 1975, 1979, 1985, 1991,

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1996) TCE reasoning is that it does not fully address the impact of geographic scope choices to solve the bounded rationality problems critical to MNE decision-making (Rugman and Verbeke, 2005). TCE and institutional theory adopted in regionalization theory to explain the degree of intra- and inter-regional LoF can be complementary to cope with internationalization strategy in providing a full-scale explanation of organizational behavior of firms operating in resource seeking sectors. Though, it can be argued that conventional drivers of contractual hazards are amplified by the presence of nation-state border and institutional differences (Rugman and Verbeke, 2005).

2.2 A reconceptualization of asset specificity in the regionalization literature

The task of understanding the impact of asset specificity on geographic scope options can be facilitated through an examination of the research into its dimensions. This section starts by analyzing the current conceptualization of asset specificity in the regionalization literature, in which it is used for explaining the degree to which FSAs are internationally transferable. Asset specificity will then be discussed from a mainstream strategy perspective (Williamson, 1979; Teece, 1988; Saussier, 1997). It is illustrated how the concept of asset specificity – as originally intended by Williamson (1975) – increases the hazards of opportunism, and how relationship performance responds differently to the different dimensions of asset specificity.

2.2.1 Conceptualization of asset specificity in the regionalization literature

Despite the centrality of asset specificity to the strategy literature, it is surprising that the concept of asset specificity has not received more attention in regionalization theory. It has only recently been the case that any regionalization studies highlighted asset specificity and those that did have failed to unravel these “linking” investments into its various elements or dimensions to explain intra- and inter-regional LoF. Table 1 summarizes regionalization studies that conceptualized asset specificity, underlining the limited empirical research into the topic.

Rugman (2009) argues that the scope of geographic expansion is determined by the MNE’s ability to link its firm specific advantages (FSAs) with location specific advantages (CSAs) in host countries. He emphasizes that each MNE commands an idiosyncratic set of FSAs, which gives a firm a competitive advantage relative to other firms (Rugman, 1981). These FSAs arise when the MNE has developed special knowhow or a capability that is unavailable to others and cannot be duplicated by them, except in the long run at high costs (Rugman et al., 2011). Two types of FSAs can be

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14 TABLE 1:

Exemplary studies that acknowledge asset specificity in the regionalization literature

Total Studies in Regionalization Literature with Asset Specificity as a Central Issue: 2

Exemplary Studies and their Approaches to Including Asset Specificity in the Regionalization Literature

Article Definition

Rugman (2005: 13) A form of asset specificity: host regions require substantial “linking” or “melding” investments.

Kolk, et al. (2013:1) Distinct regionalization patterns for business units and different firm-specific advantages.

Li and Rugman (2007: 696)

Irreversibility of initial investment in a foreign market. Irreversibility may result from asset specificity that characterizes the MNE’s investments in a foreign country.

Rugman and Verbeke (2008:399)

Linked to human asset specificity (meaning here, the specific, cost increasing or service-provision delaying requirements to satisfy potential purchasers in terms of desired features of the individuals providing the service).

Arregle, Beamish, and Hébert (2009: 90)

Each foreign location requires location-specific linking investments to meld existing FSAs with CSAs (Rugman & Verbeke, 2005: 13), which creates asset specificity.

Collinson and Rugman (2008: 226)

This guided the quality control and process improvement efforts that underpinned its FSAs in manufacturing relative to British Steel, tailoring innovation efforts towards particular customers. Other studies have termed this "contingent knowledge" to refer to the context specificity of expertise, where familiarity with the idiosyncrasies of the equipment, people, processes and client requirements helps in perform.

distinguished; non-location bound (NLB-FSAs) and location-bound ones (LB-FSAs) (Rugman and Verbeke, 1992). The former are defined as company strengths that can easily be transferred across locations at low cost and globally exploited, leading to benefits of scale, scope, or exploitation of national differences. The NLB-FSA can be used effectively in foreign operations with only limited need for adaptation. In contrast, LB FSAs (a resource-based expression of host country national responsiveness), reflects company strengths deployable and exploitable only in particular locations (or set of locations, such as a country or region), but cannot be profitably exploited outside of this area without significant adaptation (Rugman et al., 2011). Rugman (1980, 1981) notes that possessing FSAs is a necessary, but not a sufficient condition for FDI to take place. There are country factors, unique to the business in each country which can lead to country-specific advantages (CSAs). The CSAs can be based on natural resource endowments (minerals, energy, forests) or on the labor force, physical infrastructure, the innovatory system or educational facilities, and associated cultural factors, which may be unique to a country (Rugman, 2008). These CSAs are reflected in Dunning’s (1998) broadly adopted FDI motives; natural resource seeking, market seeking, efficiency seeking, and strategic asset seeking.

A successful expansion does not follow from proprietary knowledge in R&D and marketing, but from a MNE’s ability to adapt successfully, the deployment of its existing FSAs to the specific circumstances of foreign markets (i.e. aligning FSAs and CSAs). Rugman (2005) gives a simple TCE

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explanation to explain geographic expansion. He refers to the requirement of substantial “linking” or “melding” investments in host country regions, which he considers as a form of asset specificity, in order to integrate the MNEs’ existing FSA and exogenous CSAs. Rugman (2005) argues that such “linking” or “melding” investments are much lower in the home region than in host regions as a result of Ghemawat’s (2001) cultural, administrative, geographic, and economic distances. In other words, entry and exit barrier may be higher or lower, depending upon the adaptation investments required in the host environment and the potential for redeployability of the resources invested (Rugman and Verbeke, 2008). It is the extent of adaptation costs, taking into account the redeployability of the resulting additional knowledge in the relevant locations, which explains why most MNEs expand first in their host region, and may face severe constraints as their expansion leads to other regions (Rugman, 2004).

The problem of the additional investments is multiplied by the fact that the MNE’s commitment of resources to meld its existing collection of FSAs with foreign location advantages (for example the presence of a large market) through crafting location-bound FSAs in foreign markets, is no way to ensure success for market induced geographic expansion (Rugman, 2004). The resource commitments made to entice budding foreign customers and to raise sales are fully one-sided. Rugman (2004) argues that this differs for example for resources-seeking or strategic asset-seeking FDI. Foreign locations may again need location-specific melding investments from the MNE, but whereby all relevant parties, such as foreign suppliers, themselves engage in reciprocal commitments to make these investments worthwhile. However, Vernon’s (1971) obsolescing bargain model might challenge this view. This model suggest that with time and increasing resource commitment into fixed assets, bargaining power shifts from the MNE into the host country government authorities. This leads to an obsolescing bargain that is likely to be renegotiated at the initiative of the host government (Vernon, 1971). Investments with a high degree of asset specificity weaken the stance of the foreign firm relative to the host country authorities and decrease the reciprocal commitments of related parties.

More recently, scholars have argued that the firm’s redeployability of resources invested may differ along the value chain, establishing the importance of asset specificity in explaining degrees of MNE regionalization (Oh & Rugman, 2012). In general, manufacturing MNEs are able to decouple upstream and downstream activities, and to adapt those two activity types separately to host environment requirement (Rugman & Verbeke, 2008) and many of the regionalization studies reflect this argument (Proff, 2002, Kolk et al., 2013). R&D-based intangible assets seem to reflect a firm’s central capability of performing upstream activities (e.g., product development and manufacturing), while marketing-based intangible assets indicate the firm’s capability of managing downstream activities (e.g., branding, packaging, distribution) (Li, 2008). MNEs are often not capable

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of effectively coping with LoF outside the home region at the downstream end of the value chain (Rugman and Verbeke, 2008a). While some MNEs have global spread of upstream activities, especially to take advantage of market imperfections in markets of raw materials and labor, the downstream end has a regional distribution (Rugman and Verbeke, 2008a). The above argument is consistent with Porter’s (1986) insight that downstream activities create competitive advantages that are largely country-specific: a firm’s reputation, brand name, and service network in a country grow largely out of a firm’s activities in that country and create entry/mobility barriers in that country alone. Competitive advantage in upstream and support activities often grows more out of the entire system of countries in which a firm competes than from its position in any one country (Porter, 1986).

2.2.2 Conceptualization of asset specificity in the strategy literature

Transaction cost economics (Coase, 1937; Williamson, 1975, 1979, 1985, 1991, 1996) has received extensive attention in strategic management for over the last three decades. Williamson’s work in the 1970s and 1980s has been instrumental in providing a strong foundation for analyzing governance decisions resulting in a significant number of empirical papers in a wide variety of disciplines (Macher and Richman, 2008). Williamson’s TCE theory relies on two main behavioral assumptions, namely bounded rationality and opportunism (Crook, 2005). First, TCE theory expects that economic actors are boundedly rational (Simon, 1945; Williamson, 1975), which means that the transacting parties cannot anticipate and specify all exchange contingencies before they surface. Second, TCE theory assumes that economic actors are opportunistic (Williamson, 1975), which means that transacting parties will seek advantages at each other’s expense (Crook, 2005). As a result, bounded rationality and the threat of opportunism create exchange hazards for transacting parties. Klein (1980) defines exchange hazards as situations wherein one party has the ability to take advantage of contractual agreements by capitalizing on unwritten or unenforceable parts of the contract (Klein, 1980). Exchange hazards give rise to adaptation problems. These problems refer to a firm’s inability to respond to disturbances in the environment. To protect against potential exchange hazards and adaptation problems, transacting parties can either form more complete agreements that protect each party’s long-term interests, which increase transaction costs, or hierarchical governance structure can be used (Crook, 2005).

Williamson (1975, 1979) depicts three main transaction attributes: uncertainty, frequency, and asset specificity. The uncertainty determinant deals with an inability of a firm to predict future events (Williamson, 1985), and often depends on the unpredictability of environmental conditions of

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the host country market (Hill and Kim, 1988). In volatile environments, external partners will have several opportunities to renegotiate to their advantage. Frequency refers to how often a transaction occurs (Williamson, 1981), and provides an incentive for firms to employ hierarchical governance, because ‘the costs of specialized governance structures will be easier to recover for a large transactions of a recurring kind’ (Williamson, 1985 p. 60). To date, frequency has only received limited attention in the TCE literature (Geyskens et al., 2006), therefore this thesis will not address this part of the TCE framework. Asset specificity refers to the degree of investment required or that is uniquely dedicated to support a transaction (Klein et al., 1978; Williamson, 1979). Asset specificity is of special interest for the purpose of this thesis. Attention will hereafter be focused on this attribute, uncertainty will be marginally discussed.

When ‘the degree to which an asset can be redeployed to alternative uses and by alternative users without sacrifice of productive value’ (Williamson, 1996: 59) is limited, the MNE faces a risk of ex-post opportunistic recontracting from their partners in trade in the amount of the quasi-rents at stake (Murtha, 1991). Quasi-rent is the profit an investor in a specific asset expects for using the asset if he has to turn to the next best alternative. The potentially appropriable specialized portion of the quasi-rent is that amount, if any, in excess of its value to the second highest-valuing user (Klein et al., 1978). If the supplier's transaction-specific investments are high and those of his transacting partner are low, the opportunism risk is high because his partner may appropriate the supplier's quasi-rents under asymmetric dependency (Anderson and Weitz, 1992, Buvik and John, 2000). If asymmetric specific investments exist, the quasi-rents of the more dependent party create a hold-up situation for the less dependent, therefore transaction costs rise with transaction-specificity (e.g., Anderson, 1988). Scholars have acknowledged the multidimensional property of asset specificity (Williamson, 1983; Malone et al., 1987; Joskow, 1987) and in order to operationalize the analysis of asset specificity, four dimensions of asset specificity were identified, see table 2.

Site specificity, pertains to the decision of the buyer and the seller to locate their operations within physical proximity of each other (Joskow, 1987). Previous studies suggest that site-specific investments can substantially reduce inventory and transportation costs and can lower the costs of coordinating activities (Dyer, 1996a), but once sited, the assets in place are highly immobile (Joskow, 1987). Physical asset specialization has been found to allow for product differentiation and may improve quality by increasing product integrity or fit (Clark & Fuji-moto, 1991). Human asset specificity pertains to transaction-specific know-how accumulated by transactions through long-standing relationships. Dedicated assets refer to general investment by the seller which is made with the expectation of a considerable amount of trade with one particular buyer. Should the relationship expire, excess capacity will result (Lamminmaki, 2005). Joskow (1987) acknowledges that these four categories point to essentially the same phenomenon, but the differentiation between dimensions

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18 TABLE 2:

Operationalization of the asset specificity construct Type of asset specificity Definition

(i) Site specificity The situation whereby successive production stages are located close to one another. Once in place, the assets involved are highly immobile and, thus, the cost of their relocation is very high (Joskow, 1987).

(ii) Physical asset specificity

Physical asset specificity regards investments in equipment with low value outside of the transaction relationship (Joskow, 1987).

(iii) Human asset specificity

Investments in knowledge specific assets, which often arise through a learning-by-doing process (Williamson 1996). These intangible assets are not easily transferable, owing to their limited application in other work settings (Lamminmaki 2005).

(iv) Dedicated asset specificity

Large discrete investment made in expectation of continuing business. Should this relationship end prematurely, excess capacity will, however, be created (Joskow, 1987).

is highly valuable when it comes to empirical applications.

According to TCE theory, these types of asset specificities give rise to a problem because of the of long-term contract specification. Hart (1988) and Sassier (1997) argue that a complete contract includes stipulations regarding every possible circumstance, and as such, these contracts will never (need to) be adjusted. For Williamson (1985, 1996) and Hart (1988), a contract is incomplete if it cannot anticipate all appropriate actions for all future events. Thus, incomplete contracts only define appropriate behaviors for a limited list of situations. For this reason, Williamson (1985, 1996) asserts that contracts must explain not only the devices ex ante but also the governance structure required to establish desired implementation of contracts ex post.

In most transactions, incomplete contracts are sufficient to induce cooperation among individuals. In other words, for transactions with a low degree of asset specificity and a high transaction frequency, cooperation between economic agents can be restored easily (Quinn, 2010). For example, for an activity with a low degree of asset specificity in competitive market, if the supplier reduces ex post the quality of the product to increase its profit, the buyer can easily cancel the contract and switch to an alternative suppliers without incurring significant costs (Walker & Weber, 1984). Thus, when switching costs are low, the threat of competition can deter the supplier from attempting to hold up the MNE. However, in sectors featured by high transaction costs, the incompleteness of contracts impedes their functioning as a coordination mechanism (Nicita and Vatiero, 2009), and in this situation transaction costs are associated with the establishment of a new cooperative relationship. The greater the asset specificity and lower the frequency of relations means that actors will have larger difficulties in redefining a cooperative relationship. In such cases, coordination mechanisms should be crafted to induce the transacting parties to coordinate their

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actions and will make noticeable effort to design an exchange relation that has good continuity properties (Williamson, 1981).

Relating to asset specificity and external uncertainty, under the header of internalization theory (e.g. Buckley and Casson, 1976; Rugman, 1981; Hennart, 1982), these two transaction cost-based parameters have been dominant in explanations of MNEs’ selection of foreign market entry modes (Madhok, 1995). In volatile environments, external partners will have several opportunities to renegotiate to their advantage and therefore entrants are better off accepting low control entry modes to retain their flexibility (Anderson and Gatignon, 1986). Though low control provides MNEs flexibility, in the case of high specificity this has already been given up (Anderson and Gatignon, 1986; Teece, 1986). Since investments are specific to a transaction, firms are confronted by high exit barriers and lower flexibility due to switching cost (Spanjer, 2009) and they are thus confronted with a lock-in situation (Williamson, 1985). In case of renegotiation of an arrangement with a local (contractual) partner, a MNE can exert less influence because of this loss of flexibility. Johanson and Vahlne (1977) argue that firms start internationalizing using low-commitment entry modes, e.g. exporting, sales agents, and contractual agreements. Teece (1986) asserts that in the presence of specialized assets, firms tend to adopt high degree of integration and control, making equity entry modes more advantageous. Market expansion through equity modes advocate for internalization of foreign activities in order to have greater control over the use of high asset specific investments.

While the TCE explanation for governance decisions has been widely investigated (e.g. Anderson and Schmittlein, 1984; Klein et al. 1990; Levy, 1985; Masten 1984; Monteverde and Teece 1982), the TCE’s implication for the performance of inter-firm relationships in the presence of asset-specific investments has only received limited attention (De Vita, 2010). As noted by De Vita et al. (2010), this is particularly striking because it is maybe even of greater importance to know what happens to those firms that do choose to enter market transactions under conditions of high asset specificity, especially when one considers that TCE theory posits that this relationship is ‘subject to costly haggling and maladaptiveness’ (Williamson, 1985, p. 89). The next section will address this relationship, and illustrates which impact asset specificity is expected to exert on MNEs internationalization by merging TCE and regionalization theory.

2.3 Asset specificity and inter-and intra-regional liability of foreignness

Countries vary in the level of their institutional development, which has consequences for different aspects of business activities (North, 1990). The institutional environment itself operates at two levels: an informal level - sanctions, taboos, customers, traditions, norms - and a formal level -

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constitutions, laws, and property rights - (North, 1991). Regulatory distance, including the political environment or any other regulatory difference between two countries, captures the similarity or dissimilarity between the host and home countries in terms of rules, laws and regulations which can ensure the stability of a society, and almost becomes the foremost concern of a firm when entering a foreign market (Xu and Shenkar, 2002; Yiu and Makino, 2002). In presence of high institutional distance, a firm faces a greater level of LoF (Eden and Miller, 2004), a phenomenon referring to MNEs experiencing additional costs that are not experienced by local firms (Hymer, 1976), resulting from sources such as market ambiguity (Martinez & Dacin, 1999) and discrimination hazards (Kostova and Zaheer, 1999). Using the TCE interpretation, the presence of nation-state borders and institutional differences amplifies the threat of opportunism and bounded rationality constraints (Rugman, 2005; Henisz and Williamson, 1999). It is likely that asset specificity may strengthen the effect of LoF on internationalization strategies because the broader geographic scope choices create additional costs, in the sense that it increases MNEs' concerns about appropriation of quasi-rents through bounded rationality and opportunism. There will be more or less quasi-rents available to the local partner as a result of institutional distance which is driven by either opportunism through the presence of discriminatory LoF or bounded rationality through the presence of incidental LoF. The institutional environment influences the direct relationship between asset specificity and intra- and inter-regional LoF. The positive effect of contractual hazards created by asset specificity on MNEs inter-regional LoF is either magnified or reduced in the presence of high or low institutional distance respectively.

Discriminatory LoF may strengthen the effect of asset specificity on internationalization strategies because it increases MNEs' concerns about local partners' opportunism. Discriminatory LoF comprises explicit regulations exclusively targeting MNE subsidiaries, in order to benefit indigenous firms and also includes costs due to implicit prejudices and nationalism (Sethi and Judge, 2009). Discriminatory LoF affects the MNEs’ relationships with host country stakeholders (the host country government, consumers, and other firms) (Eden, 2004), as discriminatory hazards might encourage a host country partner to become more opportunistic in its dealings with the multinational (Henisz and Williamson, 1999). Where quasi-rents are large, an opportunistic host-country actor will use all available cost-effective means to seize that return (Henisz and Williamson, 1999) and the result is often a costly ex-post process of haggling, renegotiating and bargaining between the parties (Williamson, 1985). A low level institutional distance implies a low probability of partners achieving a change in the current regulations and local partners will not find lobbying host-country political actors for a policy intervention that would alter the distribution of returns between the local partner and the MNE to have a positive expected value (Henisz and Williamson, 1999). In other words, the level of contractual hazard through asset specificity is not independent from the level of political

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hazards, in reality the two hazards are closely intertwined (Gatignon and Anderson, 1988; Henisz and Williamson, 1999; Henisz, 2000). The host-country partner may opportunistically approach the government with a request to take actions that have the effect of favoring them at the expense of the MNE or the MNE may be affected directly by state-sector opportunism (Henisz and Williamson, 1999). In a less developed regulatory setting, legal protection and enforcement are fragile (Peng and Heath, 1996; Zhou and Poppo, 2010) and conflict resolutions still rely heavily on ties with governmental officers (Child, et al., 2003; Peng and Luo, 2000). Property rights of assets are more sensitive to regulatory distance because they are anchored in legal provisions, as property protection law (Xu and Shenkar, 2002). In host countries with high political hazards, one mechanism through which expropriations of quasi-rents may occur is through manipulation of the political system, which means that the MNE will participate more political gaming and more frequent appeals to arbitration or courts (Henisz, 2000). Whereas opportunistic use of the state are a general concern, they are a special concern in cross-national contracting and investment (Williamson and Henisz, 1999). Once the quasi-rents are appropriated, MNEs can do nothing to salvage the damage done since local partners may conspire with governmental officers (Luo, 2006). In these cases of opportunistic behavior the MNE faces added hazards relative to the host-country firm due to the differential access to the political process that arises from discriminatory LoF (Henisz and Williamson, 1999). MNEs seek credible commitments from governments in the form of regulations to uphold a stable environment that eliminates the costs of repeated bargaining, which is expected to be lower intra-regional than inter-regional since the political relations with the home government are generally much better than with host country governments (Baron, 1995).

Incidental LoF may strengthen the effect of asset specificity on internationalization strategies because it results from MNE managers’ bounded rationality problems. Incidental LoF reflects a foreign MNE’s lack of host country knowledge or experience compared to domestic firms in the host country (Sethi and Judge, 2009). It contains non-discriminatory costs of learning and adaptation to cope with the unfamiliarity and lack of roots in the host-country environment. Following TCE argumentation, a broader geographic scope leads to additional costs, in the sense of more severe bounded rationality (Rugman, 2005). Distance creates challenges for an MNE, which must accustom itself to different subsidiary environments (Verbeke and Greidanus, 2009). The lack of reliable business information systems and established institutions to support business activities creates uncertainty in the sense that it limits the MNE’s ability to absorb, process, and purposefully act upon complex and often insufficient information (Khanna and Palepu, 1997; Verbeke, 2009; Verbeke and Kenworthy, 2008). In a less developed regulatory setting, MNEs lack sufficient support from market monitoring mechanisms (Boisot and Child, 1996; Keister, 2009). Incidental LoF leads to more

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bounded rationality because the MNE can neither imagine all of the possible contingencies that should go into the contract nor articulate them.

Proposition 1: A high degree of asset specificity of FDI will result in greater inter-regional LoF in high institutional distance host country contexts for internationalizing MNEs.

In presence of contractual hazards caused by discriminatory and incidental liabilities, MNEs may design ownership with a lower level of control (Dacin, et al., 2007; Eden and Miller, 2004; Yiu and Makino, 2002). Though low control provides MNEs flexibility, in the case of high specificity this has already been given up (Teece, 1986). Teece (1986) asserts that in presence of specialized assets, firms tend to adopt high degree of integration and control, making equity entry modes more advantageous. Conceptually, the optimal decision given a high degree of asset specificity would therefore be internalization. However, the formal institutional environment in the host country might shape the contracting options available to the MNE. A wide body of empirical evidence support the proposition that, ceteris paribus, local partners will be more likely to receive a share of equity ownership in host countries with high political hazards (Aggarwal and Ramaswami, 1992; Brouthers, 1995; Gatignon and Anderson, 1988; Goodnow and Hansz, 1972; Kogut and Singh, 1988; Oxley, 1999; Philips-Patrick, 1991; Scholhammer and Nigh, 1984; Shane, 1992). Note that from the perspective of the MNE this involves a less hierarchical governance structure.

Proposition 2: A high degree of institutional distance will result in sub-optimal entry modes for the given degree of asset specificity.

LoF not only relates to additional costs that are not experienced by local firms, but it also reduces the usefulness of accumulated knowledge and hinders the transfer of managerial practices to the local subsidiaries (Brouthers, et al., 2008; Xu and Shenkar, 2002). The effectiveness of an international strategy is contingent upon the transferability of firm specific intangible assets developed through strong CSAs (e.g., Severn and Laurence, 1974; Kotabe et al., 2002; Li, 2003; Lu & Beamish, 2004). A major problem with deriving benefits from leveraging global firm-specific intangible assets is that certain intangible assets (e.g., experiential knowledge) are sticky and do not move easily across countries (Kogut & Zander, 1993; Szulanski, 1996; Rugman & Verbeke, 2001). Vernon (1971) used the product life cycle to explain the foreign activities of MNEs, taking into account the role of innovation and the diffusion of knowledge, arguing that the technology transfer through FDI will mainly take place where the products that the technologies are associated with are in mature stages of the product cycle. Today, Vernon’s (1971) analysis of stages in product

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development, with relation to international expansion, might be interpreted as supporting the proposition that early innovation is better sustained by locating close to headquarters and home-country markets (Hedge & Hicks, 2005). In the case of the oil and gas industry, it is expected to find that the transferability of intangible FSAs is a less of a meaningful explanation for the relative degree of inter-regional LoF because of the sectors’ mature technology. It is more standardized, widely known and easily duplicated (Jones et al., 1978), and therefore expected to be more internationally transferable. However, when knowledge-based assets are explicit and therefore highly transferable, but significantly featured by asset specificity once the investment is made, MNEs may still face a high level of inter-regional LoF. Facing high institutional distance, MNEs may be more likely to be exposed to local partners with a higher tendency of opportunism to appropriate quasi-rent. The very nature of specialized knowledge makes it subject to maladaptation and opportunism, which in turn constitutes a risk for the owner (Hennart, 1988). The further importance of this dynamic by type of asset specificity and context will be addressed in greater detail throughout section 2.4.

2.4 Disaggregated measure of asset specificity in the oil and gas industry

Studies grounded in the regionalization theory draw little distinction between different dimensions of asset specificity related to specific investments. Even with TCE literature, a large number of studies have computed an aggregated measure of asset specificity (De Vita et al., 2010). However, according to Joskow (1987, p. 17) the differentiation between dimensions is highly valuable when it comes to empirical applications. The economic organization of the international oil industry may serve as a good example of investment in specific assets to examine this multifaceted nature and its effect on MNE’s internationalization. The oil and gas production chain is characterized by high degree of investment specificity. Firstly, assets have a fixed location and cannot be moved; secondly, equipment is engineered for a specific project; thirdly, the infrastructure is constructed in order to connect a fixed set of participants (Mironova, 2013). Under conditions of high institutional distance as described in proposition 2, each of the sub-dimensions of asset specificity can be expected to be more significant in terms of effecting inter-regional LoF than under low institutional distance. The following propositions will each deal with the effect of each asset specificity dimension with respect to upstream business units, starting with the notion of the effect of upstream segment’s physical asset specificity on the MNE’s experienced level of inter-regional LoF.

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24 Physical asset specificity

Because of the specific nature of tangible assets of the upstream segment, the investing MNE is vulnerable to ex post opportunism by the owner of the oil or gas field to which the particular tangible assets are dedicated. This is because assets are often custom built to handle a particular type of crude oil mix and they are fairly dependent on it, as switching costs can be very high (Meijknecht, et al., 2012; Al-Obaidan & Scully, 1993; Kearney, 2012). Therefore, asset specificity in terms of the extent of the actual investments in physical assets made by the transaction partner specifically for the purpose of the relationship is considerably high. The contention would be that as physical asset specificity increases, so does the pressure for predictable and stable institutional arrangements (Guthrie, 2002). It is expected that discriminatory LoF will encourage a host country partner to become more opportunistic in its interaction with the MNE (Henisz and Williamson, 1999), which is likely to be lower for intra-regional expansion than for inter-regional expansion.

Proposition 3: Oil and gas MNEs are expected to experience high inter-regional LoF as a result of a high physical asset specificity of their investments.

Human asset specificity

To recall, human asset specificity could be characterized as unique technical skills and experience required in carrying out the activity being transacted (John and Weitz, 1988; Walker and Poppo, 1991). It has also been described as knowledge specific assets (Dibbern et al., 2005) that arise from learning-by-doing (Williamson 1996), and which are not easily transferable, owing to their limited application in other work settings (Lamminmaki, 2005). In case of human asset specificity, IOCs heavily lean on service providers for complementary FSAs of specialized nature (Rowlands, 2000). In this sense, IOCs do not have to provide an extremely specific training to their employees carrying out the activity being transacted. Moreover, skills, knowledge and experience of MNE’s employees cannot be considered being specific to the requirements of dealing with another firm; it is rather industry specific. Therefore, employees obtain knowledge which has applicability for other transactions, as well. Conclusively, the level of human asset specificity in the oil and gas sector is at least quite low and consequently this is not be expected to lead to high inter-regional LoF.

Proposition 4: Oil and gas MNEs are not expected to experience high inter-regional LoF as a result of human asset specificity of their investments.

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25 Site asset specificity

Site specificity is prevalent in the upstream industry. Building facilities requires a vast amount of investments which are sunk and the incurred capital costs are fixed (Barham, 2005; Correljé et al. 2011; Frankel, 1969; Kesicki, 2010). This is accompanied by the fact that facilities once built to a certain location cannot be relocated (Joskow, 1987). As the plants are immobile, the users and the suppliers are locked into bilateral relationships that are subject to potential hold-up problems. Additionally, facilities need to gain access to crude oil and other feedstock to process, and then they should have the ability to distribute their output in the marketplace. This makes oil and gas facilities highly site-specific for another reason, minding their locations are a high priority when considering accessibility to major transportation channels and open sea, as well as their logistic assets infrastructure, such as pipelines (Meijknecht et al. 2012; Kearney, 2012; Cuthbert, et al. 2011). Consequently, the institutional factors interacting with site asset specificity are of importance in explaining oil and gas MNEs’ inter-regional LoF.

Proposition 5: Oil and gas MNEs are expected to experience high inter-regional LoF as a result of site asset specificity of their investments.

Dedicated asset specificity

As noted earlier, dedicated assets are those that are put in place contingent upon particular supply agreements and, in cases of premature termination of these contracts, a supplier would be left with significant excess capacity (Williamson, 1983; Joskow, 1985). Investments for these assets are discrete and would not take place but for the prospect of selling a significant amount of product to a particular customer. For upstream segments, the difficulty of rearranging the infrastructure for other uses and the importance of scale economies imply that in ‘immature’ markets, the remuneration of the transport investment is frequently dependent on a small number of players (Ferraro, 2014). This means that upstream segments will have more difficulties to redefine a cooperative relationship once the original relationship concludes. Should the relationship expire, excess capacity will result.

Proposition 6: Oil and gas MNEs are expected to experience high inter-regional LoF as a result of dedicated asset specificity of their investments.

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3. Methodology

This chapter will focus on the research methodology and research design. The first section describes the ontological and epistemological foundations in this research design. The following section focuses on the multiple case study design in light of Yin (1981;2009) and Eisenhardt’s (1989) work. Subsequently, the quality criteria associated with multiple case study designs are presented, followed by the case selection. Ultimately, the proceeding section includes data collection methods and the analytical approach.

3.1 Research Philosophy

The foundation of this research is objectivist ontology and post-positivist epistemology. Epistemology fits with an objectivist world view. By adopting an objectivistic world view the author argues that the world is external and independent of the researcher and the effort at studying it will not influence the outcome of the study (Brannick and Coghlan, 2007; Saunders and Lewis, 2012). By adopting a post positivist epistemology, the external objective world is not affected by the researcher’s personal beliefs and values (Gephart, 2004). However, it is not claimed that social phenomenon like organizations can be known to the same degree that science may claim and as such the post positivist position argues that the world can only be partially known through an individual study (Gephart, 2004). By using a multiple case study design, each case study highlights a slightly different perspective. This creates an accumulation of knowledge which helps to interpret the external world in a more objective manner.

3.2 Qualitative multiple-case study design

This study will use a multiple-case study design, in the same vein as adopted by Rugman and Collison (2004) and Kolk, et al. (2013), framed around Eisenhardt’s (1989) and Yin’s (2009) approach to multiple-case study design, as it allows the questions what, why, and how to be answered with a relatively full understanding of the nature and complexity of the complete phenomenon (Yin, 2003). The advantage of this design is that it assures richness of context and can lead to novel and testable theories (Eisenhardt, 1989). This method lends itself to incremental development (Eisenhardt, 1989) of the regionalization theory and has the benefit of replication across cases (Saunders et al. 2009). Moreover, through developing propositions important to allow generalization to theory, a strong theoretical foundation is pursued (Yin, 2009). The approaches of Eisenhardt (1989) and Yin (1994) are

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aligned with the objectivist ontology and post-positivist epistemology foundation as mentioned in the previous section. Although this research is theoretically driven, it combines the inductive bottom-up techniques advocated by Eisenhardt (1989) with the more deductive approach of Yin (2009). Weick (1996) proposes that theorizing is enhanced by combining inductive with deductive approaches, or vice versa. The main strength of such deductive bottom-up theorizing (Shepherd and Sutcliffe, 2011) is that it allows openness to new insights for theory extension, while having predetermined set of constructs to guide a study through a large amount of data.In line with Hyde’s (2000) and Yin’s (2009) approach to multiple case studies, working propositions were thus developed prior to carrying out the case study research, but the research was conducted broad-minded, allowing the data to provide unexpected insights.

The strength of a multiple case study design is that strategic decisions or events of each firm can be addressed and explained in detail. Furthermore, the use of multiple methods makes the arguments and findings more convincing (Yin, 2009).On the other hand, case-study methodology is perceived as exhibiting a lack of statistical generalizability and this could result in a lack of rigor (Yin, 2009). In order to improve this, it is good practice to ensure research is done on the basis of certain specified criteria, which will be addressed in the next section.

3.3 Quality criteria

Yin (1998) recommends that researchers continually judge the quality of their case study design. Four principles are commonly used to certify the quality of a study, more specifically construct validity, internal validity, external validity, and reliability.

Construct validity is related to the accurate measurement of the objects in study. This is realized by using triangulation to extend and validate the data collection through the use of multiple sources of evidence (Eisenhardt, 1989; Yin, 2003) and through the use of proven measures (Yin, 2009). In the present study, the IBV and TCE are used as the overreaching theoretical foundations between the regionalization and location literature, hereby, the case study establishes a solid base for further analysis. This research uses both quantitative and qualitative data in order to triangulate results (Patton, 1990; Brannick and Roche, 1997). Annual reports are used for quantitative data about the dispersion of sales, assets, and proved reserves for establishing MNEs regional profiles and Financial Times newspaper articles for qualitative data about the recorded rationale for transactions.

The internal validity test will evaluate the evidence for pattern matching and establishing causality. This is secured through detailed explanations of relationships under examination, including

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contrasting explanations. All within-case analyses are conducted following the theoretical framework and the results are analyzed in the cross-case analysis (Yin, 2009). The test for external validity will ensure that the research findings are applicable outside the confines of the selected case study. This is achieved through the use of multiple cases and through the use of deductive and inductive principles (Eisenhardt, 1989). The case study sample is theoretically sampled, extending and excluding particular determinants in the constructs that are examined (Eisenhardt 1989). This allows an empirical context which is of theoretical interest, showing the applicability of using a more specific conceptualization of assets specificity and how this relates to concepts of inter-regional LoF. Subsequently, external validity will be enhanced through performing a cross-case analysis (Gibbert et al., 2008).

The test for reliability verifies that the research procedures and findings can be replicated by other parties (Yin, 2009). This is done by increasing replication and transparency (Yin, 2009). By following a rigorous data collection process in which all information is stored in a case study database and a case study protocol is followed which clarifies the taken steps (Gibbert et al. 2008; Hyde, 2000). Furthermore, transparency is created by a detailed description of each case.

3.4 Theoretical sampling strategy and case selection

The next section provides a brief overview of research designs adopted by TCE related research. Section 3.4.2 outlines the methodology employed in this research.

3.4.1 Cases and studies TCE asset specificity

Most of the theoretical and empirical studies within the TCE framework have traditionally been concerned with examining a single industry. Examples include studies that analyses of cable television franchising (Williamson, 1976); organizational arrangements in the aluminum industry (Stuckey, 1983), between rail operators and freight (Palay, 1984), between tuna harvesters and processors (Gallick, 1984), and between coal mines and electric utilities (Joskow, 1985); contracts in the shoe (Masten and Snyder, 1993) and petroleum coke (Goldberg and Erickson, 1987) industries. As can be seen from the empirical studies summarized in Table 2, TCE related research focuses primarily on single transactions, including studies examining specificity such as the development of automotive components for a vehicle assembler (Monteverde and Teece, 1982a; 1982b) and the wing producing facility investments made by a Boeing supplier (Milgrom and Roberts ,1992).

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29 TABLE 3:

Prior empirical work that draws on asset specificity

Studies Examination Unit of analysis

Lamminmaki,D. (2005) Appraising the nature of outsourcing activities in hotels. An examination using asset specificity.

11 large Southeast Queensland (Australia) hotels.

Walker and Weber (1984) Examining make-or-buy decisions for analyzing transaction costs.

US automobile company.

Stuckey (1983) Analysis of organizational arrangements in the aluminum industry.

Aluminum and Bauxite industry, focusing on 6 major firms.

Coase (2000) Klein (2000)

Analysis of the inter-firm relation between Fisher Body and General Motors. Fisher Body invested large amounts in presses used to stamp parts for General Motors. Once it had committed itself to such specialized equipment, GM was able to opportunistically renegotiate a better contract.

Fisher Body and General Motors.

Azarian (2012) Analysis of the impact of asset specificity on Inter-firm transaction structure.

Transaction between a plastic producer firm and its supplier of steel injection.

Milgrom and Roberts (1992) Analysis of supplier’s investments made to customize the wings of a specific Boeing plane.

Relationship between Boeing supplier and Boeing.

Williamson (1976) Analysis of governance mechanisms to allocating cable TV services rights. Once idiosyncratic investments were in place, a large number of bargaining situation during the bidding process transformed into a bilateral monopoly.

Oakland cable TV franchise.

According to Masten and Saussier (2000), TCE case studies examining these transactions are necessary and complement econometric analysis, as it often provides a richer description and perspective than statistical analysis offered (Macher, 2008). These case studies often represent the stimulus to refinements of TCE theory or future quantitative examinations. According to Masten (2000), a good case study will encompass a complete range of details, in addition to exploring variations which might exist over time and across transactions. In some cases, transactions are important enough in their own right to warrant intensive analysis (Masten, 2000). Following this argumentation, the methodology adopted in TCE-related research is reflected in the research design of this thesis, in which oil and gas projects are selected to reflect ´specific transactions´ that the sampled MNEs are doing. To date, studies in the regionalization framework have not considered the use of single transaction as the basic unit of analysis.

A reconceptualization of asset specificity in the regionalization literature : a perspective on the oil majors