* Academy of MaaagBmenl Review 1994, Vol. 19. No. I.90-Ua. DEVELOPMENTAL PROCESSES OF COOPERATIVE INTERORGANIZATIONAL RELATIONSHIPS PETER SMITH RING Loyola Marymount University ANDREW H. VAN DE VEN University of Minnesota This article examines the developmenial process of cooperative inter- organizational relationships (IORs) that entail transaction-speciiic in- vestments in deals that cannot be fully specified or controlled by the parties in advance of their execution. A process framework is intro- duced that focuses on formal, legal, and informal social- psychological processes by which organizational parties jointly ne- gotiate, commit to. and execute their relationship in ways that achieve efficient and equitable outcomes and internal solutions to conflicts when they arise. The framework is elaborated with a set of propositions that explain how and why cooperative IORs emerge, evolve, and dissolve. The propositions have academic implications for enriching interorganizational relationships, transaction cost eco- nomics, agency theories, and practical implications for managing the relationship journey. Recently, an unprecedented number of business firms in many indus- tries have been entering into a variety of interorganizational relation- ships (IORs) to conduct their business deals. Previously, these transac- tions often were concluded through either discrete market transactions or internal hierarchical arrangements (Friar & Horwitch, 1985 Powell, 1987 Teece, 1986). These IORs include strategic alliances, partnerships, coali- tions, joint ventures, franchises, research consortia, and various forms of network organizations.' How do these IORs emerge, grow, and dissoJve over time? This pro- cess question is focused on the sequence of events and interactions The authors are listed alphabetically, reflecting an equal contribution to the paper. We gratelully acknowledge useful comments from Joseph Galaskiewicz, Gordon Rands, Richard Saavedra, and Gerald Salancik. This research program has been supported (in part) by a grant to the Strategic Management Research Center at the University of Minnesota from the Program on Organization Effectiveness, Office of Naval Research, under Contract No. N00014-84-K-0016. by Grant No. 0350-3312-22 from the Graduate School of the University of Minnesota, and by a Summer Research Grant from Loyola Marymount University. ' A variety of motivations underlying these cooperative relationships have been iden- tified, including gaining access to new technologies, markets, scale economies, and com- plementary skills. Another motive has been risk sharing (see, e.g., Powell, 1987}. 90

1994 fling and Van de Ven 91 among organizational parties that unfold to shape and modify an IOR over time. Relatively little scholarly attention has been devoted to study- ing developmental processes of IORs. Instead, most of the research to date has been focused either on the antecedent conditions or the struc- tural properties of interorganizational relationships in comparison with other governance forms. For example, virorking within transactions cost or agency theory per- spectives, many scholars have focused their attention on comparing al- ternative transaction governance structures (e.g., markets, hierarchies, and mixed modes). These have been institutional economists (Armour & Teece, 1978 Coase, 1937 Fama & Jensen, 1983 Williamson, 1975, 1991), organizational sociologists (Coleman, 1986 Powell, 1990 Stinchcombe, 1990), lawyers (Goldberg, 1980 Macneil, 1980), and management scholars (Balakrishnam & Koza, 1993 Barney & Ouchi, 1986 Mosakowski, 1990). In a related vein, through an extensive stream of research, organizational sociologists have examined the environmental conditions and contingent factors that explain the formation and structure of cooperative interorga- nizational relationships (see reviews by Aldrich & Whetten, 1981 Gala- skiewicz, 1985 Oliver, 1990 Van de Ven, 1976). These research streams provide extremely useful insight about con- ditions leading to the formation of IORs, and they can help researchers when they make comparative static decisions regarding alternative or- ganizational designs and incentive schemes for different kinds of trans- actions. However, scholars from these research streams have ignored process. Although knowing the inputs, structure, and desired outputs of a relationship provides a useful context for studying process, these factors do not tell us how a relationship might unfold over time. Process, however, is central to managing iORs. As agents for their firms, managers need to know more than the input conditions, invest- ments, and types of governance structures required for a relationship. These process issues also have important temporal implications for per- formance. The ways in which agents negotiate, execute, and modify the terms of an IOR strongly influence the degree to which parties judge it to be equitable and efficient (Guth, Schmittberger, & Schwarze, 1982). These processes also influence motivations to continue in, or terminate, the relationship over time (Friedman, 1991). Interaction processes among co- operating parties may cast a positive, neutral, or negative overtone to the relationship, influencing the degree to which parties settle disputes aris- ing out of the IOR (Loewenstein, Thompson, & Bazerman, 1989 Pruitt 8E Rubin, 1986 Schmitt & Marwell, 1972). Our focus here is process. We introduce a conceptual framework for explaining how cooperative IORs emerge, grow, and dissolve over time. In the first part of our article, we present our starting assumptions, which bind the scope of the argument. In the second part, we introduce four concepts that are important for studying the developmental processes of cooperative IORs. We then use these concepts to develop a set of propo-

32 Academy of Management Review January sitions that explain how cooperative IORs emerge, evolve, and terminate over time. CONCEPTUAL BACKGROUND To keep the paper manageable, we will assume that business condi- tions and motivations exist, which are sufficient to cause (wo or more organizations to explore exchange using a cooperative IOR governed by a relational contract.^ We will also assume that the organizational parties desire to create a cooperative IOR that facilitates high commitment rela- tions (Helper & Levine, 1992) but produces efficient and equitable solu- tions to conflicts as they arise. Before examining the processes associated with the temporal development of this kind of cooperative IOR, we clarify the following four key concepts in these assumed starting conditions: (a) uncertainties inherent in a cooperative IOR, (b) efficiency and equity cri- teria for assessing a cooperative IOR, (c) the need for internal resolution of disputes, and (d) the importance of role relationships in cooperative IORs. I Uncertainties in a Cooperative IOR Cooperative IORs emerge when managers bargain over either the production or the transfer of property rights among legally equal and autonomous parties (Commons, 1950 Macneil, 1980).^ These property rights entail specific, long-term investments in a business deal or venture that cannot be fully specified or controlled by the parties in advance of their execution (see, e.g.. Helper & Levine, 1992).'' Consequently, in these cooperative IORs, managers encounter two types of uncertainties: (a) un- certainty regarding future states of nature (e.g.. Perry, 1989) and (b) un- ^ The issue of what distinguishes a cooperative IOR from any other form of IOR is a weighty one. Because we are focusing on process, we do not devote undue attention to static comparisons. Nonetheless, we believe that the developmental processes we explore are more likely to be required when two organizations cooperate over the use of tacit know-how assets (Teece, 1986) or invisible assets {Itami, 1987) compared to the use of tangible or codified know-how assets. We also believe that these kinds of assets are more easily em- ployed through relational rather than transactional exchange (see, e.g.. Helper & Levine, 1992 ZajQC & Olsen, 1993). ^ Macneil's work too rarely provides the basis for research on this topic. Important exceptions can be found in the work of Denise Rousseau {1990} and R.F. Dwyer and his colleagues (1987). Our approach differs from Dwyer et al., in that our framework can provide an explanation for processes that occur within each of their five stages of the evolution of buyer-seller relationships and can also explain transitions from one stage to another. * Macneil's (1974) distinction between transactional and relational exchanges helps clarify the scope of IORs examined in this paper. In transactional exchange current events will be "viewed separately from events preceding and following it, indeed from other events accompanying it temporally" (p. 694). If exchange leading to a cooperative IOR is "an on- going dynamic state, no segment of which���past, present, future���can sensibly be viewed independently from other segments" (p. 695, footnotes omitted), then the IOR involves rela- tional exchange.

1994 fling and Van de Ven 93 certainty whether the parties will be able to rely on trust as a counter to the problems of adverse selection and moral hazard (see, generally, Ack- erlof, 1970).^ Two views on trust can be found in the management and sociology literatures: (a) a business risk view based on confidence in the predict- ability of one's expectations (Luhmann, 1979 Zucker, 1986) and (b) a view based on confidence in another's goodwill (Dore, 1983 Ring & Van de Ven, 1992). In the risk-based view of trust, parties hedge against uncertain states of nature, adverse selection, and moral hazard through a variety of formal contractual means such as guarantees, insurance mechanisms, laws, and organizational hierarchy. We employ the second, more restric- tive, definition of trust. It emphasizes faith in the moral integrity or good- will of others, which is produced through interpersonal interactions that lead to social-psychological bonds of mutual norms, sentiments, and friendships (Homans, 1962) in dealing with uncertainty. We caution, however, that even though the parties may be confident of each other's trustworthiness, they also may be uncertain whether to rely exclusively upon it. Reliance on trust developed at the interpersonal level may be conditioned by legal systems or organizational role respon- sibilities, mitigating the ability of the parties to rely on trust as a matter of first preference.^ Accordingly, we propose that an understanding of the willingness of parties to rely on trust (confidence in the goodwill of others) to deal with uncertainty requires careful and systematic attention to the concrete processes by which personal relationships emerge between transacting parties in this way, personal relationships can serve to shape and modify the evolving structure of a cooperative IOR. Assessments Based on Efficiency and Equity Efficiency has been the major criterion underlying standard models of economic exchange (Plott, 1986). As reflected in transaction cost theory, researchers use efficiency to define the most expeditious and least costly governance structure for undertaking a transaction, given production cost constraints. We assume that an equally important cnteiion for assessing a cooperative IOR is equity, defined as "fair dealing" (which does not require that inputs or outcomes always be divided equally between the parties). The construct of equity has its recent roots in exchange theory, in ^ As Williamson (1985: 51) observed, the concept of opportunism clearly captures any uncertainty that stems from these two types of behavior. We prefer to use these terms because they deal directly with uncertainty that will be transaction specific and directly related to a willingness of the parties to rely on each other's trustworthiness in the face of the specific kinds of circumstances that give rise to the possible occurrence of either adverse selection or moral hazard problems. ^ My coauthor and I take a boat out for an afternoon sail on the Pacific. If I fall over- board, I trust that my coauthor will give his life in an effort to save mine. The sentiment is reciprocal. Nonetheless, the uncertainties (even the risks) of an ocean sail make it prudent for each of us to wear life jackets and not rely exclusively on our trust in each other.

94 Academy oi Management Review January which individuals seek to reconcile their self interests with the need to maintain social relationships (Blau, 1964 Homans, 1961). The historical roots of equity are found in the English Common Law. Our conceptual- ization of equity, though consistent with early views expressed by social exchange theorists, does not require that we deal with concepts of justice (especially distributive justice) in the rich detail provided in more recent social-psychological literature (see, e.g., Greenberg & Cohen, 1982). In fair dealing, reciprocity is sufficient (Gouldner, 1959), but equivalence in the quid pro quo is not necessary. Fair rates of exchange between costs and benefits are sufficient, but equality is not necessary for fair dealing (Blau, 1964). Fair dealing also implies that all parties receive benefits proportional to their investments (Homans, 1961). Kahneman, Knetsch, and Thaler (1986: S299) called for the need to modify standard microeconomic models to incorporate norms of fairness. A growing body of empirical evidence suggests that norms of fairness have a significant effect on economic exchange (e.g., Bazerman & Carroll, 1987 Loewenstein et al., 1989 Neale & Northcraft, 1991). These investiga- tions imply that perceptions of equity operate as a lower-bound constraint on efficiency (i.e., events increasing either risk or decreasing trust im- prove the likelihood that parties will rely more heavily on equity than efficiency in assessing their relationship). Thus, fair dealing as a criterion goes beyond the economic rational calculation of "equivalence of benefits" (Axelrod, 1984) among parties it includes the sociological meaning of indebtedness (i.e., disproportional initial exchanges between parties result in social norms of obligation among parties for future exchanges) (Knoke, 1990). Research about bar- gaining has indicated that fair dealing as a standard for assessing co- operative IORs can be influenced by the personalities and individual differences of transacting parties, particularly in ambiguous situations, as in the early stages of a cooperative relationship between relative strangers (Monson, Hesley, & Chernick, 1982 Neale & Northcraft, 1991). However, the ranges of these variations tend to be limited by cultural or institutionalized norms of acceptable behavior of organizations and soci- ety (Scott, 1987). Consequently, in our framework, we assume that the initial lowei hounds defining fail dealing typically will be based on norms and prec- edents established in public forums for conflict resolution {e.g., law, courts, and thiid-party aibitratlon). We also assume that the parties to a cooperative IOR are motivated to seek both equity and efficiency out- comes because of a desire to preserve a reputation for fair dealing that will enable them to continue to exchange transaction-specific invest- ments under conditions of high uncertainty (Helper & Levine, 1992). Internal Resolution ol Disputes Heavy reliance on trust, or a reputation for fair dealing, may, as we have noted, lead to a formal agreement defining a cooperative IOR that is