Resource-Based View

The resource-based view of the firm dates back to the seminal work of Penrose (1959) who conceptualized the firm as a collection of productive resources and viewed firm growth as a process of using these resources to exploit the firm’s “productive opportunity” and also increasing the firm’s resource base. Penrose defined productive opportunity as “the collection of all possible productive possibilities entrepreneurs can identify and are willing and able to pursue”. Because productive opportunities are

unlimited, the firm's growth is limited by the existing resource base and the competence of management to exploit the resource base.

Penrose’s ideas did not receive much attention before Wernefelt (1984) introduced the term “resource-based” in his characterization of firms as collections of resources rather than sets of product-market positions. At the same time, Rumelt (1984:557-558) suggested that a competitive advantage is determined by the firm’s unique resources that are handled by the management: “… a firm’s competitive position is defined by a bundle of unique resources and relationships and that the task of general management is to adjust and renew these resources and relationships as time, competition, and change erode their value.” After the writings of Rumelt (1984) and Wernefelt (1984)

“the resource-based view” rapidly emerged. The key idea of the resource-based view is that firm-specific skills, competencies, and other tangible and intangible resources are viewed as the basis for the competitive advantage of a firm (Barney 1991, Peteraf 1993, Prahalad & Hamel 1990). Because of environmental uncertainty, the firm-specific resources and capabilities are considered as a more sustainable basis for competitive advantage than product-market positioning (Grant 1991). The essence of a firm’s strategy lies in the ways that the firm uses existing resources and in the means the firm acquires or develops internally additional unique resources (Wernefelt 1984). Barney’s (1991) conceptual paper has become the cornerstone of contemporary research on the resource-based view (Priem & Butler 2001). In this paper, Barney presents the two key axioms of the resource based view: (1) resources are distributed heterogeneously across firms, and (2) these productive resources cannot be transferred from firm to firm without cost (i.e. resources are “sticky”) (Barney 1991, Priem & Butler 2001).

According to Barney (1991), in order to sustain long-term competitive advantage, resources must be valuable, rare, imperfectly imitable, and without strategically equivalent substitutes.

Valuable resources. Not all resources are valuable. According to Barney and Arikan (2001) firm attributes, whether they are tangible or intangible, are strategically relevant only if they enable a firm to efficiently and effectively develop and implement a strategy that, in turn, generates superior performance. Barney and Arikan recognized that the value of resources could not be evaluated independently of the market context within which a firm is operating.

Rare resources. Barney and Arikan (2001) argued that resources are scarce to the extent that demand for them exceeds supply. As long as the number of firms that possess certain resources is less than the number of firms required to generate the perfect competition around the strategies whose choice and implementation is facilitated by the resources, then those resources can be considered as scarce.

Non-imitable resources. Dierickx and Cool (1989) identified five characteristics of the processes through which resources are accumulated and that influence their imitability: time compression diseconomies, asset mass efficiencies, interconnectedness of asset stocks, asset erosion, and causal ambiguity. Time compression diseconomies

mean that resource accumulation takes time and is not linearly related to the investments made in resource acquisition. Doubling the inputs does not halve the time it takes to accumulate the resources. Asset main efficiencies arise if an existing resource stock facilitates accumulation of additional resources stocks. Interconnectedness of asset stocks implies that additions to existing resource stocks are linked to the level of other resources stocks. Asset erosion occurs when resource stocks decay if not maintained.

Causal ambiguity arises when it is impossible to specify how resource stocks are accumulated (Dierickx & Cool 1989). Similarly, Barney (1991) argued that resources are inelastic in supply when they are path dependent, causally ambiguous, or socially complex. Reed & DeFilippi (1990) argued that tacitness, complexity and specificity create ambiguity and thus reduce imitability.

Non-substitutable resources. Barney and Arikan (2001) argued that resources are non-substitutable to the extent that they can be uniquely used to help conceive of and implement a strategy. To the extent that such a one-to-one correspondence exists between a resource and a strategy, the resource is non-substitutable. However, it is important to note that it may not be a single resource but instead a bundle of resources that enable a firm to implement a strategy. Further, some of the resources within such a bundle may be substitutable.

Although some of the earlier papers on the resource-based view have focused largely on the internal resources of the firm, in more recent research the resource-based view has later been extensively applied in the analysis of interorganizational relationships of firms (Dussauge & Garrette 1999, Eisenhardt & Schoonhoven 1996, Hitt et al. 2000).

The resource-based view has important implications for the formation and performance of interorganizational relationships of entrepreneurial firms. The resource-based view highlights the role of resource complementarities influencing the alliance formation and performance (Das & Teng 2000, Hitt et al. 2000, Eisenhardt &

Schoonhoven 1996, Hellmann 2001). Das and Teng (2000) applied the resource-based view in their framework of alliance formation and performance. They recognized resource complementarities as one of the key drivers of alliance formation and performance. Resource complementarities are also important for alliances between small and large firms. Focusing on relationships between small and large firms, Rothwell & Zegweld (1982) argued that small firms entered into alliances in order to capitalize on their innovative capabilities through leveraging the complementary resources of large firms. Similarly, Teece (1986) argued that innovating firms without the necessary manufacturing and related capacities might die, even though they are the best at innovation. He recommended that innovating firms should in some cases establish a prior position in certain complementary assets in order to be able to capitalize on the innovations. Alliances may give small firms access to complementary assets that are often necessary to commercialize innovations (Hobday 1994, Teece 1986) especially in technology intensive industries (Forrest & Martin 1994, Pisano 1989, 1991, Pisano & Mang 1993). Combination of complementary resources and

capabilities can be one potential source of superior value creation (Zajac & Olsen 1993).

Related Empirical Applications of the Resource Based View of the Firm

Since the emergence of the resource-based view, it has been widely applied in empirical research explaining the success of entrepreneurial ventures. In the following, some of the most relevant streams of research from the perspective of the present study are reviewed.

One stream of resource-based theory of the firm, which is particularly related to this study, is its application in interorganizational relationships. In this stream, interorganizational collaboration and alliances are usually viewed as a mechanism to share or acquire resources. In his research on the use of external resources, Jarillo (1989) found that entrepreneurial, fast growing firms used more external resources than their competitors. Eisenhardt and Schoonhoven (1996) extended the application of resource-based view to strategic alliances of young firms. In their analysis of a sample of 98 semiconductor firms, they found that firms entered into strategic alliances because of lack of internal resources in a vulnerable strategic position when pursuing innovative strategies in emerging competitive industries. Another reason why firms engaged in strategic alliances was because of the opportunity to take advantage of their own capabilities such as a large, experienced management team. Park et al. (2001) found in their analysis of 171 semiconductor start-ups that firms’ use of alliances as mechanisms to adapt to market uncertainties was contingent on internal resource conditions. In growing markets, resource-rich firms leveraged their resources by accessing external complementary resources and reduced uncertainty through alliances while resource-poor firms were less likely to do so. However, in relatively stable markets this relationship reversed and resource-poor firms became more active in alliance formation because of the need to enhance their short-term viability.

In the resource-based view of strategic management, the fundamental argument for alliance formation is that firms try create and appropriate value in inter-firm relationships by leveraging superior resources they posses with complementary resources (Stein 1997). There is a growing body of literature examining the role of resource complementarities influencing the formation and performance of various forms of interorganizational relationships. For instance, Hitt et al. (2000) analyzed 202 companies in developed and emerging market countries and found that firms in both considered complementary resources as a valuable determinant in partner selection.

Firms in emerging markets emphasized financial assets, technical capabilities, intangible assets, and willingness to share expertise in selection of partners more than developed market firms. Firms in developed markets tried to leverage their resources through partnering, and therefore emphasized unique competencies and local market knowledge and access to their partner selection more than emerging market firms.

Similarly, confirming the role of complementarities in alliance formation, Chung et al.

(2000) analyzed 6178 deals for new common stock issues by 308 investment banks and demonstrated that the likelihood of investment banks’ alliance formation was positively related to the complementarity of their capabilities. In his longitudinal case studies of five start-ups, De Meyer (1999) found that small high-tech ventures used partnerships to get access to complementary assets and to develop dominant designs.

In addition to the empirical research on alliance formation, the research has also tested the role of resource complementarities on alliance performance. For instance, Beamish (1987) found that partner firms' collective strengths, or the overall resources and competencies of the alliance, contributed to better alliance performance. In a case study of a highly successful alliance, Sankar et al. (1995) found that the main reason for the success had been a combination of complementary assets and compatible goals.

Deeds and Hill (1996) argued that strategic alliances often enable a faster access to complementary resources than building these resources internally. Testing this proposition, they found that alliances had a curvilinear (inverted U) shaped relationship to product development. This finding was later confirmed by Rothaermel and Deeds (2001), who analyzed 2,226 strategic alliances entered into by 325 new biotechnology firms, and demonstrated a similar curvilinear (inverted U) relationship between the number of alliances and new product development.

Besides the relatively large and rapidly growing literature applying the resource-based view to strategic alliances, there is little rigorous empirical research applying that perspective to venture capital or corporate venture capital. In their analysis of initial public offerings by 325 venture capital and corporate venture capital backed companies, Maula & Murray (2000a) found that investments from industry-leading corporations had a positive influence on the valuation of the high-technology start-ups.

Although arguing that acquisition of complementary resources was one potential mechanism of value creation, this study was not able to separate resource acquisition from other potential value creation mechanisms such as knowledge acquisition and endorsement.

Critique of the Resource Based View of the Firm

As in the case of other influential theories, the resource-based view has received some criticism. One of the criticisms of the resource-based view is the all-inclusive nature of the definitions of resources (Priem & Butler 2001). Further, it has been argued that the definitions of the key concepts of the resource-based view lead to tautological statements (Priem & Butler 2001). The all-encompassing notion of resources has lead to limited understanding of the boundaries of the theory. The resource-based view argues that resources may be valuable, but does not answer when, where, and how they can be useful (Miller & Shamsie 1996, Priem & Butler 2001). Only recently has research focused on the contingencies influencing the value of resources (Brush &

Artz 1999, Miller & Shamsie 1996, Priem & Butler 2001).

The resource-based view has also been criticized for being excessively focused on internal resources with the unit of analysis being a single firm and neglecting the role of resources available through interorganizational collaboration (Dyer & Singh 1998).

This criticism has lead to the development of the “relational view” extension to the resource-based view focusing on the sources of competitive advantage residing in dyads or networks of firms (Dyer & Singh 1998).

As with many other theoretical approaches, such as agency theory and transaction cost economics, the resource-based view has been criticized for being a static theory (D’Aveni 1994, Garud & Nayyar 1994, Priem & Butler 2001). This criticism has prompted the emergence of dynamic capabilities to extend the resource-based view to explain the sources of competitive advantage under volatile markets (Teece et al. 1997, Eisenhardt & Martin 2000). The resource-based view has also been criticized for neglecting the product market while focusing purely on resources (Priem & Butler 2001). Finally, some authors have argued that the resource-based view offers limited prescriptions for managers (Priem & Butler 2001). This is because resources, as defined in the resource-based view, are largely path-dependent and unique (Conner 1991).