Opportunistic behavior in (international) business, and how to avoid it

Opportunistic behavior in (international) business, and how to avoid it
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Opportunistic behavior in business collaborations

In a business partnership or strategic collaboration you always have two ways of growing your income: making the partnership more successful in terms of revenue, or just increasing your share of the revenue. In most cases during the negotiations both parties find a way to overcome their differences in interests and the split of income, costs, investments and obligations is put down in an agreement. From that moment on parties can jointly work on making the partnership work, one should think...

Three different types of behavior

There are different types of opportunistic behavior: In their Master thesis for the Free University Amsterdam, Heuterman e.a. (2012) defined shirking, free-riding and hold-up.

Shirking

Shirking is a relatively active approach, comparable with hopping around groups of friends in a bar and avoiding that you have to buy a round of drinks. Avoiding contractual duties, focus on short-term revenue, imposing as much as possible costs on the joint venture are examples. Stricter monitoring, narrowing the scope of the collaboration or alternative payment structures could help.

Free-riding

Free-riding is more passive, actually nothing more than waiting for the other partners to make arrangements and then benefitting from it. This might easily be done if your contribution is relatively small or easy to make and the importance of the collaboration for the other partners is high. The best moment to avoid this is in the negotiation phase, either by better defining each party's obligations, or by making sure that the collaboration has a comparable importance for all partners. Eventually you should exclude free-riders as much as possible.

Hold-up

Hold-up is the most strategic approach and based on exploiting the partner's dependency on the alliance. Compare it with your plumber who comes up with extra costs at the moment that the water supply has already been shut down. Partners who use this approach already try in the contractual phase to leave things open, and only contribute with investments that have no or limited value outside the partnership. Bigger firms have the tendency to do this with (unprepared) smaller firms. Try to avoid these partners at all or find a good advisor for during the negotiations.

Complications in an international setting

If you work internationally and for example try to find business partners abroad, the likelihood of opportunistic behavior is much stronger. This has to do with the following aspects:

  • Cultural differences: how competitive is the economy? In a more competitive economy companies will be more inclined to show opportunistic behaviour
  • The length of the game: if you play a one-round game, you will do anything in the first round to win, even cheating. If the game has multiple rounds, you will play more tactically since the other player might not want to play with you any more. If you just entered a new market, chances may be high that you will leave soon: so the game will be short and the local party may try to get the most out of it in that short time.
  • The opportunity to hide opportunistic behavior behind miscommunications. 'Did we agree that I would deliver in fifteen days? No, I said fifty, five-zero!'
  • Barriers in law enforcement: if, being a US company, you will have to sue a Zimbabwe supplier for the amount of 5,000 USD, that will cost you easily twice as much, only in travel time and costs.

How to avoid this behavior?

First of all make sure that  both partners are of comparable size and have a similar interest in the business collaboration. This will avoid free-riding and hold-up

A good revenue sharing arrangement and strict control on the costs that each partner can impose on the partnership will help to avoid shirking. Make arrangements among each other just as you would do with your suppliers, specifying the results and using fixed prices.

An in an international setting: show that you will be there for the long term. Hire somebody to represent you locally who speaks good English and understands you: let him sort out the miscommunications and detect any suspicious behaviour. Having such a representative will also  show that you can litigate more easily, which may be a good warning.

Do you want to know all about the different types of partnerships?
Then download the free e-book Creating Profit Through Alliances.

 

This entry in exports was updated on May 4, 2017 by specialist.