Shaosong Ou
Construct: Asset Specificity
 
 
 

Definition:

By McGuinness (1994), asset specificity refers to the extent to which the investments made to support a particular transaction have a higher value to that transaction than they would have if they were redeployed for any other purpose.

By Williamson (1981, 1981b), an input used by a firm or individual consumer is highly asset specific, if it cannot readily be used by other firms because of the site specificity, physical asset specificity, or human asset specificity.

By Williamson (1985, 1986), transaction-specific assets are non-redeployable physical and human investments that are specialized and unique to a task. For example the production of a certain component may require investment in specialized equipment, the distribution of a certain product may necessitate unique physical facilities, or the delivery of a certain service may be predicted on the existence of an uncommon set of professional know-how and skills.

Related concept: Service Idiosyncrasy

By Erramilli and Rao (1993), an idiosyncratic service is defined as one that is characterized by "high" levels of professional skills, specialized know-how, and customization. And asset specificity is represented by the degree of idiosyncrasy that characterizes a service.

 

Scholars have acknowledged the multidimensional property of asset specificity. For example, Williamson (1983) identified three dimensions of asset specificity:

  • Site specificity, e.g. a natural resource available at a certain location and movable only at great cost;

  • Physical asset specificity, e.g. a specialized machine tool or complex computer system designed for a single purpose; and

  • Human asset specificity, i.e., highly specialized human skills - whether physical or mental - that cannot readily be put to work for other purposes.

Malone et al. (1987) made an important addition to the above list:

  • Time specificity, an asset is time specific if its value is highly dependent on its reaching the user within a specified, relatively limited period of time.

Similarly, Joskow (1988) identified four sources of asset specificity:

  • Site specificity, which pertains to the decision of the buyer and the seller to locate their operations within physical proximity of each other;

  • Physical asset specificity, which regards investment in equipment with low value outside of the transaction relationship;

  • Dedicated assets, which refer to general investments by the seller which are made with the expectation of a considerable amount of trade with one particular buyer; and

  • Human asset specificity, which addresses the specialization of skills which arises from learning-by-doing.

Joskow also pointed out that these different categories point to essentially the same phenomenon, but that it is instructive in empirical analyses to treat each category distinctly.

Zaheer and Venkatraman (1994) acknowledge four asset specificity dimensions: site, human, physical, and dedicated assets. In addition, they define two dimensions of asset specificity in their study: human asset specificity and the newly-developed "procedural asset specificity", where

  • Human asset specificity deals with the degree to which skills, knowledge and experience of the agency's personnel are specific to the IOS-mediated business process.

  • Procedural asset specificity incorporates notions of human and procedural asset specificities and refers to the degree of agency's workflows and processes of that are customized to exploit IOS capabilities in accordance with the principal's requirements.

Erramilli and Rao (1993) identified the following dimensions for service idiosyncrasy:

  • Professional skills: Professional expertise and skills are acquired only through several years of education and training. Accordingly, services requiring professional skills will be associated with significant physical and, especially, human investments.

  • Specialized know-how: Knowledge that is useful in only a narrow range of applications cannot be easily put to use elsewhere. Consequently, the greater the specialized know-how characterizing a service, the less likely is it that associated investments will be utilized outside the current context.

  • Customization: the degree to which the service is customized to one or a few users will also determine the nature and specificity of the investments. Generally speaking, the more customized the service, the greater the attendant transaction-specific assets.

 

Most theoretical work focus on the relationships between asset specificity and sunk cost effects, transaction costs, vertical integration, and uncertainties (e.g., see Joskow 1988, Anderson 1985, John and Weitz 1988, and Whyte 1994).