Build-operate-transfer Outsourcing Contracts in Services – Boon or Bane to Emerging Market Vendor Firms? Peter D. Ørberg Jensen a, ⁎, Bent Petersen b,1 a Copenhagen Business School, Department of Strategic Management and Globalization, Kilevej 14, 2nd floor, office 2.61, DK-2000 Frederiksberg, Denmark b Copenhagen Business School, Department of Strategic Management and Globalization, Kilevej 14, 2nd floor, office 2.59, DK-2000 Frederiksberg, Denmark article info abstract Article history: Received 1 March 2013 Accepted 1 March 2013 Available online 28 March 2013 Build-operate-transfer (BOT) contracting has been widely used in the engineering and construction industry and has recently spread into the service industry domains. Notably, service provider firms from emerging markets, India in particular, are now offering BOT outsourcing contracts in which the client firms are allotted call options, i.e. the right, but not the obligation, to transfer pre-specified assets from the service provider. As such, BOT outsourcing contracts seems to be an interesting contractual novelty that combines the advantages of outsourced and captive offshoring operations. In this paper we investigate under which circumstances a BOT outsourcing contract (i.e. a contract where the client firm exercises its call option) is beneficial, or the opposite, to the emerging market vendor firm. Whether BOT outsourcing contracts are boon or bane to an emerging market vendor basically hinges, we submit, on its internal diffusion of client-specific knowledge and capabilities prior to the execution of the call option. © 2013 Elsevier Inc. All rights reserved. Keywords: Offshore outsourcing Build-operate-transfer Services Real options Inter-firm linkages 1. Introduction Emerging market firms (EMFs) are entering the global sourcing market as vendors of still more sophisticated and knowledge-intensive services (Bruche, 2009; Hill and Mudambi, 2010; UNCTAD, 2004, 2005). In order to further spur developed market firms (DMFs) to engage in business process outsourcing (BPO) and knowledge process outsourcing (KPO) and similar contractual alliances (Mudambi and Tallman, 2010) EMF vendors have started offering build-operate-transfer (BOT) outsourcing contracts. BOT contracting has been widely used in the engineering and construction industry, but has expanded into the service industry domains. Notably, service provider firms from emerging markets are now offering BOT outsourcing contracts in which the client firms are allotted call options, i.e. the right, but not the obligation, to transfer pre-specified assets from the service provider. As such, BOT outsourcing contracts seems to be an interesting contractual novelty that combines the advantages of outsourced and captive offshoring operations. In this paper we investigate under which circumstances a BOT outsourcing contract (i.e. a contract where the client firm exercises its call option) is beneficial, or the opposite, to the EMF vendor firm. In doing so, we draw on two research streams: real option studies and studies of EMFs’ catching-up with developed market firms (DMFs). It seems as the real option literature is rather sparse concerning the implications to (EMF) vendors that extend call options to clients on a non-reciprocal basis. With one notable exception, namely Jiang et al. (2008), real option studies apply the perspective of the party holding the call option – not the party extending it. Real option studies simply assume that a pre-fixed transfer fee indemnifies the party handing over the assets. However, one may question the realism of this assumption for various reasons: First, strong bargaining power may enable one of the (two) parties to negotiate a favorable transfer fee. Second, the parties may not possess the predicting and contractual design capabilities (Janney and Dess, 2004; Mayer and Argyres, 2004) needed for accurate transfer fee estimations. In particular, the valuation of human assets at a future Journal of International Management 19 (2013) 220–231 ⁎ Corresponding author. Tel.: +45 3815 2658. E-mail addresses: poe.smg@cbs.dk (P.D. Ørberg Jensen), bp.smg@cbs.dk (B. Petersen). 1 Tel.: +45 3815 2510. 1075-4253/$ – see front matter © 2013 Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.intman.2013.03.001 Contents lists available at ScienceDirect Journal of International Management