Law, Economics and Organizationin

Proactive International Contracting

A presentation at the

Future Law, Lawyering, and Language -

Helping People and Business Succeed

May 13, 2003 Helsinki

by

Associate professor, dr.juris Petri Keskitalo

The faculty of Law, University of Tromsoe

Law, Economics and OrganizationKey features:

- human actors:> are boundedly rational

>> economize>>> contracts are always incomplete

> are sometimes opportunistic> are able to plan with foresight

>> ex ante design of contracts that create credible commitments is essential

- central economic problem for organizations is adaptation> the adaptive needs of transactions differ> the adaptive capacities of alternative mechanisms for the

governance of transactions differ> transaction costs matter

Firm: the black box

Firm

- Asset specificity - Frequency of transactions

- Uncertainty

- Markets- Hierarchies

- Hybrids

Transaction Cost Economics-analysis of transactions by Oliver E. Williamson:

Governance mechanism

Nature of business

Contract

Contract: a ”black box” full of legal provisions?

Contract provisions

Contract type

Contract provisions

Governance mechanism

Contract type

Contract provisions

Nature of business

Governance mechanism

Contract type

Contract provisions

Nature of business

Governance mechanism

Contract type

Contract provisions

HIERARCHYGOVERNANCE

GOVERNANCE MECHANISMS:

MARKETGOVERNANCE

Organization

Contracts

Firm A

Contractual hierarchies

Firm A

SYMBIOSISGOVERNANCE

Organization Contracts

HIERARCHYGOVERNANCE

MARKETGOVERNANCE

GOVERNANCE MECHANISMS:

POWER MARKETADAPTATION

COOPERATIVE ADAPTATION

FirmA

TRANSNATIONAL BUSINESS :

STRATEGIES

Direct export sales

FirmA

DIRECTSALES

STRATEGIES

TRANSNATIONAL BUSINESS :

Retailer

Direct export sales

INDIRECTSALES

FirmA

DIRECTSALES

Sales Agent

STRATEGIES

TRANSNATIONAL BUSINESS :

Direct export sales

FirmA

License agreement

Franchise

LICENSING

DIRECTSALES

Sales Agent

Retailer

INDIRECTSALES

STRATEGIES

TRANSNATIONAL BUSINESS :

Joint Venture

Direct export sales

FirmA

Sales office

Franchise

ESTABLIHMENTABROAD

DIRECTSALES

Sales Agent

LICENSING

License agreement

Retailer

INDIRECTSALES

SubsidiarySTRATEGIES

TRANSNATIONAL BUSINESS :

Sales office

Franchise

Direct export sales

Sales Agent

License agreement

Subsidiary

GOVERNANCE

MECHANISMS

TRANSNATIONAL BUSINESS :

FirmA

Joint Venture Retailer

FirmA

Sales office

Franchise

Direct export sales

Joint Venture

Sales Agent

License agreement

Retailer

Subsidiary

GOVERNANCE

MECHANISMS

TRANSNATIONAL BUSINESS :

MARKETGOVERNANCE

Joint Venture FirmA

Sales office

Franchise

SYMBIOSISGOVERNANCE

Direct export sales

Sales Agent

License agreement

Retailer

Subsidiary

GOVERNANCE

MECHANISMS

TRANSNATIONAL BUSINESS :

MARKETGOVERNANCE

Joint Venture FirmA

Sales office

Franchise

MARKETGOVERNANCE

Direct export sales

POWERGOVERNANCE

Sales Agent

SYMBIOSISGOVERNANCE

License agreement

Retailer

Subsidiary

GOVERNANCE

MECHANISMS

TRANSNATIONAL BUSINESS :

POWERGOVERNANCE

Subsidiary

Joint Venture FirmA

Sales office

Franchise

MARKETGOVERNANCE

Direct export sales

Sales Agent

SYMBIOSISGOVERNANCE

License agreement

Retailer

GOVERNANCE

MECHANISMS

TRANSNATIONAL BUSINESS :

- Predict eventual problems and choose governance mechanism for the transaction

- Fine-tune the chosen governance mechanism according to the ex post-adaptive needs of the transaction

+ incentive intensity+ contractual safeguards

- Remember cost effectiveness considering negotiating, designing, monitoring and enforcement of contracts

+ efficient use of default legal norms+ efficient use of legal standards

+ knowledge of empirical findings in the LE&O-literature

- Protect transaction-specific investments against opportunism

LE&O-lessons for Proactive International Contracting:

The Power Point-presentation is available at:www.jus.uit.no/ansatte/keskitalo/Proactive LE&O.pps

The end