Foss & Foss Paper on Opportunity Discovery and the RBV

27 May 2007 at 10:45 am Nicolai Foss 5 comments

| Nicolai Foss |

With my frequent co-author, Kirsten Foss, I have written “New Value Creation in the Resource-based View: How Knowledge and Transaction Costs Shape Opportunity Discovery.”

I am reluctant to post the paper on a working paper site, partly because we ultimately want to submit the paper to one of those journals that dislike having submitted papers appearing on the internet, and partly because the paper is still pretty rough. However, if you drop me a mail at njf.smg@cbs.dk I will be happy to send you a copy (in the hope of getting comments). Here is the Abstract:

Opportunity discovery, and therefore new value creation, should be integrated with strategic management theory. A resource-based starting point is that resources hold a number of valued attributes (i.e., functionalities, characteristics, uses, services), some of which may not yet have been discovered. Entrepreneurs engage in resource learning to discover valuable resource attributes. The discovery of such attributes is partly a function of prior knowledge, as stressed in the recent entrepreneurship literature. However, property rights and transaction costs also play a key role as determinants of opportunity discovery. Property rights can be held over resource attributes. The value of resource attributes is influenced by how well defined and enforced these rights are, which in turn depend on transaction costs. Because they impact expected rewards, transaction costs and property rights influence which resource attributes will be discovered and exploited by entrepreneurs. Moreover, some of the costs of combining and recombining resources and learning about the attributes of resources are transaction costs. Processes of resource learning are therefore influenced by transaction costs. Exploring the intersection of entrepreneurship, property rights, and knowledge in a resource-based context thus yields new insights into the nature of opportunities and opportunity discovery.

Entry filed under: - Foss -, Entrepreneurship, Strategic Management.

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5 Comments Add your own

1. Paolo Mariti | 28 May 2007 at 8:41 am

Opportunity-seeking is the driving force of entrepreneurship but it involves specific transaction costs. Am I interpreting correclty what you say?
2. Nicolai Foss | 28 May 2007 at 9:09 am

Yes, I guess so. But note that
1) reducing TC may be an opportunities itself.
2) Transaction costs may create opportunities — e.g., they close some forward markets, introducing the entrepreneurial function to undertake intertemporal coordination.
3) TC may influence which opportunities entrepreneurs discover. This is the main point of the Foss & Foss paper.
3. Paolo Mariti | 28 May 2007 at 11:25 am

I entirely agree with point 1). Quite frankly I do not understand point 2) – I probably need to check up your paper. As to ponit 3) I would only add at the very end ” …. discover and choose”.
4. Nicolai Foss | 28 May 2007 at 1:36 pm

OK. What I meant on pt. 2 was that if there costs of setting up markets (fixed transaction costs, if you like), some markets may not be set up, such as many (most) contingent forward markets. This means that intertemporal decisions are not coordinated flawlessly as in the Arrow-Debreu model. If the intertemporal price mechanism is largely “amputated” because of transaction costs, how then are resource commitments today aligned with consumption in the future? Through the speculative ventures of entrepreneurs. That is what I meant by saying, admittedly cryptically, that transaction costs may create opportunities.
5. Andrea Mangani | 5 June 2007 at 6:39 am

Well, I think you are presenting an interesting point. The TC theory partially neglected the endogeneous determination of transaction costs; TC costs may vary across economies, sectors, and firms, but they are usually presented as exogeneous. From another point of view, your argument may also apply to uncertainty: entrepreneurs are certainly characterized by the desire to “control” risky situations. In other terms, entrepreneurs are not simply “risk-lovers”, rather they attempt to “manipulate” uncertain conditions and to reduce the degree of uncertainty. This may fit your approach if you assume that the degree of uncertainty affect the overall transaction costs.