Industry-Level Learning-by-Doing Rates and Corporate Development Activities

Abstract

Information economics and transaction cost economics are two prominent theoretical perspectives used by scholars to understand firms’ corporate development choices. Our study highlights the interplay of these two theories by examining how industry-level learning-by-doing (LBD) rates affect firms’ choices related to acquisitions and alliances. An industry LBD rate reflects the extent to which performance is dependent on own production experience. We argue that this rate also reflects the nature of knowledge in an industry: the higher the LBD rate, the more knowledge is created by own production experience and deeply embedded within routines in the industry. We explain how this suggests that while higher LBD rates might aggravate the overpayment risks emphasized by information economics, they might mitigate the misappropriation risks highlighted by transaction cost economics. We examine how these opposing effects can lead to complementary or opposing predictions about the relationship of LBD rates to several transaction decisions, including the likelihood of any transaction regardless of form, whether transactions that occur are more or less likely to be structured as acquisitions or alliances, and whether alliances that occur are more or less likely to be structured as joint ventures and with limited functional scope.