Abstract

Transaction cost economics (TCE) suggests that businesses continually compare the benefits and costs of hierarchies or internalization (the make decision) vs. the benefits and costs of markets or externalization (the buy decision) (Williamson, 1975; 1985). From the TCE perspective, alliances represent a hybrid of markets and hierarchies (Williamson, 1991). TCE is rarely applied to entrepreneurship (Zacharakis, 1997; Michaels, 2007). We propose that venture capitalist-entrepreneur alliances could fruitfully be examined from the TCE perspective as a specific type of hybrids. Specifically, we argue that venture CEOs’ assessment of the value of alliances with VCs will be influenced by the perceived benefits of externalization and internalization, separately and in combination, as well as the sum of transaction costs and administrative costs incurred by new venture.

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