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investment firms would prescribe a very similar approach200.
Among others, the aforementioned economic and legislative factors would make finance (and especially bank finance) more difficult for inter-firm networks201.
What is puzzling about this regulatory approach is that financiers would be requested to take interdependence into consideration merely on the side of credit risk concentration, while apparently ignoring the possibly positive influence of interdependence on the debtor’s ability to accomplish his/her project. A defensive rather than pro-active approach towards networks would then be favored by the current bank legislation.
A different approach would require a higher attention to characteristics of network collaboration that could increase the efficiency and effectiveness of financed investments, possibly counter-balancing the negative impact of interdependence on risk concentration. This hypothesis will be examined infra in this paper.
3. DO CONTRACTUAL NETWORKS MAKE ENTERPRISES’ ACCESS TO FINANCE HARDER?
The previous analysis has shown that the impact of networks on an enterprise’s access to finance is not only sparsely examined by the current debate (more focused on group finance than on networks) but also hardly observable without taking into account the organizational and functional characteristics of networks. Indeed these elements could significantly influence a network’s capability to provide members with adequate incentives to (also financially) collaborate and to correctly signal a network or network member’s trustworthiness to potential external financiers.
In this perspective attention should be paid to a network’s structure and design, more drastically distinguishing the case of networks from the one of integrated firms and business groups.
Sociologists, economists and lawyers involved in the interdisciplinary debate on inter-firm networks have paid increasing attention to the hybrid connotation of these cooperative structures. In this perspective networks would stand in the middle between markets and integrated firms, between contracts (more precisely, bilateral exchange spot contracts) and organizations (more precisely, organizations qualifying as legal entities or legal persons)202.
In legal terms the hybrid connotation of networks raises an issue concerning the identification of applicable legislation. Indeed, legal systems often lack specific dispositions on hybrid forms. Moreover, legislation on contracts and organizations does not always reflect the intrinsic nature of networks203.
A parallel issue concerns the choice of legal instruments that govern network-type relations. Although, in practice, enterprises do use contracts and organizations to establish and develop network relations, these types of contracts and organizations do not totally reflect the concept of contracts and organizations as intended by traditional legal theory204. This consideration does not prevent the referral to contracts and organizations as a means for a network’s establishment and governance.
Here stems the distinction between contractual and organizational networks. According to a relatively recent perspective, contractual networks are those based on either a multilateral inter-firm collaboration contract (a contractual joint venture, a network contract, an enterprises grouping, etc.) or a set of (mainly bilateral) exchange contracts that are linked within a consistent collaborative setting, often under the coordination of a leading enterprise (e.g. subcontracting networks, franchising, distribution networks, intellectual property rights’ licensing networks, etc.). In comparison, organizational networks are based on the creation of an entity whose mission is to govern an inter-firm collaboration program among its participants. Their legal form may include non-profit organizations (e.g.: associations, foundations), “mutual interest” entities (e.g.: cooperative companies, corporate consortia), for-profit corporations (e.g.: corporate joint ventures, network companies, etc.)205.
The distinction between contractual and organizational models of network plays an important role from several angles206. One of these concerns network’s financing, both with regards to internal and external financing on the basis of the analysis developed above.
As regards internal financing, one major concern is related to the definition of rules concerning acquisition of resources through its member’s contributions, use of available assets within the networks, the possible shift in resource allocation from one project to another. As seen before with reference to the “internal capital market” debate, these processes face a trade-off between flexibility and agency costs, as generated by the delegation of powers concerning asset allocation to managers. Depending on the level of asset partitioning and legal autonomy among participant units (and their managers, consequently), transaction costs and collective actions problem may arise as well207.
Bearing this in mind, the distinction between contractual and organizational networks is important to consider. Indeed, both agency costs and collective action problems may be partially reduced by multilateral contracting among a network’s members. Of course, this type of contract will be incomplete and effective enforcement will depend on the observability of the conduct of network managers and participants208. However, incentives to cooperate will be higher given a mutual commitment and a form of explicit delegation for decision-making209.
Mutual commitment among participants and explicit delegation of decision-making powers are typical features of multilateral contracts and membership-based organizations (companies, associations and the like). By contrast, they are generally lacking in contractual networks based on the mere links among bilateral contracts, where de facto authority rather than consensus often forms the basis of control210. Among these forms, the analysis presented above would suggest that, as a single entity, organizational networks enable higher flexibility in asset allocation without entailing significant “tunneling” among participants’ assets211.
This setting is very different from the one of contractual networks based on the mere link between bilateral contracts (e.g. franchising), as is normally the case for contractual networks. Here, the multilateral commitment on asset allocation is more costly to achieve and in practice rarely existent. Indeed, and more commonly, bilateral negotiations are kept separated from interference by other linked contracts and negotiations212.
In contractual networks this approach facilitates the emergence of the unilateral imposition of financial conditions more than a multilateral and coordinated agreement among members participants. For example, franchise contracts often require financial contributions by franchisees for common interest investments and expenses (i.e. marketing and commercial expenses). A final producer often requires subcontractors to put industrial property rights, know-how, patents at network’s disposal without specific consideration or obtains payment term extensions without paying interests for the delay. Not only are bilateral relations often unbalanced, leaving space for opportunistic behavior, but horizontal communication among a network’s participants (franchisees, subcontractors, etc.) is also discouraged or prevented; furthermore, the extension of more favorable clauses is generally not allowed from one bilateral relation to another213.
Under such conditions internal financing within networks may take place. However, in the absence of a common financial plan as agreed among all involved parties, this easily entails re-distribution of financial burdens (for example, the subcontractor or the franchisee is forced to seek for bank credit) more than attaining a co-sharing of financial resources which would reduce the need for external credit in the interest of the whole network. Then, the inefficiencies described by the law and economics literature on internal capital markets and “tunneling practices” are more likely to emerge.
Other characteristics of organizational networks favor internal financing when compared to a contractual network setting. For example, given the contribution by single participants, the network is interested in “locking” such contribution within the network rather than allowing restitution to participants in case of individual withdrawal or exclusion214. Legal systems often enable parties to include “asset lock clauses” in both contractual and organizational settings. However, asset locks as default rules are more common within the law of organizations215 than within the law of contracts, where restitution upon contract termination is the general rule216.