Specificity of Investments and Ownership in Interorganizational Systems

INTRODUCTION Worldwide B2B e-commerce revenues are expected to reach $2.7 trillion by the end of 2004. At the center of this dramatic growth are interorganizational information systems (IOS), which are information systems (IS) that facilitate the exchange of products, services and information between firms. Examples of IOS include EDI systems in a supply chain, B2B electronic marketplaces, and systems for information sharing in financial services. According to the theory of incomplete contracts (Grossman and Hart, 1986; Hart and Moore, 1990), IOS ownership is important because it determines the value created from the IOS by affecting the participants’ investments. In this study, we define an IOS as a set of IT assets that support business relationships. IOS Ownership structure means which participant owns the IOS assets. We investigate how IOS participants should decide on the ownership structure of their IOS to maximize the value they can capture from the IOS in various situations. We have argued that relative importance of participants’ investments, defined as the relative magnitude of the contribution of participants’ incremental investments to the IOS relationship, is an increasingly significant determinant of optimal (i.e., value-maximizing) IOS ownership structures (Han, Kauffman, and Nault, 2004). In this study, using specific functional forms and comparative statics, we examine the mechanism by which relative importance of participants’ investments determines which IOS ownership structure is optimal for the IOS relationship. We also investigate the role of specificity of IOS investments, a loss in the value of the IOS investments outside the current relationship, in determining optimal ownership structures. We show that specificity of IOS investments mediate the relationship between relative importance of investment and optimal ownership structures. We also show that ownership may have a negative impact on the owner’s investment incentives when IOS investments reduce the value that the participants can receive outside the current relationship. Further, we analyze a case where positive externalities (i.e., complementarities) exist between participants’ investments.