14029: Alliances of Alliances: Tackling Geopolitical Risks in Cross-Border Energy Investments

To contain transaction costs, the property rights theory of firm posits that firms should own all assets that are strictly complementary, which are assets that have no value (or greatly diminished value) unless all are present in use - a principle that evolved into the “mirroring hypothesis” in organizational design scholarship. Yet, when complementary assets are physically located in more than one country, the ownership of these assets may need to be fragmented to tackle geopolitical risks – in agreement with literature in strategic alliances. This is exactly the case of cross-border energy pipelines, a capital-intensive setting where each national section is often controlled by a different legal entity. In advanced economies, regulation may prohibit foreign ownership of energy assets, whereas when a cross-border pipeline host countries are developing countries or there is a history of cross-border conflict, one or more equity sponsors often enter an alliance with a state-owned local firm in each nation that the pipeline crosses. Distributed ownership of strictly complementary assets creates risks of opportunistic behavior, a risk heightened by weak institutions in host countries and eventual history of cross-border conflict. Yet, these risks seem to be addressed through project finance. To mitigate geopolitical risks, equity sponsors involve institutional intermediaries such as development banks; further, even sponsors with the ability to finance a big project alone, rather than using corporate debt, generally rely on project finance, which involves an alliance of commercial lenders. This suggests a setting that offers us opportunities to reconcile literature on the organization of economic activity and strategic alliances. Using this setting as a backdrop - a setting central to sustainable development - this symposium will bring together industry and project finance experts with management scholars to explore links between the property rights theory of the firm, organizational design scholarship, and strategic alliance theory.