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Choosing governance modes for external technology sourcing

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This study examines the effect of uncertainty on governance mode choice of interfirm relationships in new business development (NBD). We combine transaction cost economics and real options reasoning, arguing that in the early stages of NBD, where technological and market uncertainty are very high, companies are better off using governance modes that are reversible and involve a low level of commitment. When uncertainty has decreased as a result of prior R&D investments, transaction costs considerations become dominant and companies will shift towards governance modes that are less reversible and more hierarchical. We argue that technological distance leads to less hierarchical governance modes and prior cooperation between firms leads to subsequent choices for more hierarchical modes. Finally, we propose that higher exogenous uncertainty leads to less hierarchical governance modes.

Document Type: Research Article


Affiliations: 1: Eindhoven Centre for Innovation Studies, Eindhoven University of Technology, Faculty of Technology Management, PAV R. 0.22, PO Box 513, 5600 MB Eindhoven, The Netherlands , Email: 2: Philips International B.V., PO Box 77900, 1070 MX Amsterdam, The Netherlands , Email:

Publication date: June 1, 2006

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