Time-Based Performance Increases Across Governance Modes

Abstract

Governance research highlights the performance benefit of using the same governance mode in successive transactions. We extend this work by examining whether the time that a firm spends running a given transaction has an influence on the focal transaction’s performance and whether the magnitude of this influence is the same in internal organization as it is in contractual governance. Drawing on arguments derived from organizational learning theory and transaction cost theory, we argue that time-based performance increases are primarily fueled by coordinated adaptation in internal organization, while they mostly result from high-powered incentives in contractual governance. We next develop a contingency approach to suggest that time-based performance increases are greater in internal organization than in contractual governance if the transaction is technologically complex and if it involves high levels of environmental uncertainty. Data on water supply performance in France during 1998–2008 largely support our arguments. Overall, we highlight that firms’ ability to increase transaction performance in the course of action differs more in nature than in magnitude between internal organization and contractual governance. We discuss the theoretical implications for research on the relative performance of alternative governance modes.