Virtual Enterprise Networks in Europe ­

Economic Opportunities and Legal Challenges

Juergen Noll

Department of Business Studies

University of Vienna

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Contents

Abstract 3

1 Introduction 4

2

Virtual Enterprise defined 5

3

Drivers of virtuality 7

3.1

Meeting global challenges 7

3.2

Changing market demand 7

4

Obstacles to virtual enterprising 8

4.1

The market entry point 8

4.2

The issue of trust 9

4.3

Accounting for opportunistic behaviour 10

4.4 Information

Infrastructure 11

4.5

Open legal questions 12

5

Models of liability 14

5.1 The

problem 14

5.2

The analytical model′s setup 15

5.3

Liability of the Virtual Enterprise only 17

5.4

Liability of the leading company only 17

5.5

Liability of all network companies 18

6

Proposal of a hybrid liability model 19

7 Conclusion 20

References 21

3

Abstract

Virtual enterprises (VEs) are a result of e-business which emerged as a reaction to fast

evolving market trends. We discuss organizational as well as legal implications. These

are of importance for a proper functioning of this new form of business partnership.

This paper will show the needs for virtual enterprising and obstacles to the future

development of which the issue of trust is one of the most important. Especially

consumers′ trust could be enhanced by a clear regulation of VE′s liability which has so

far not been covered in the literature. We will therefore present several models on

possible liability rules and a concept which meets the requirements of providing

adequate economic incentives for the participating companies and being easy to handle

by consumers as a policy recommendation for future harmonization of Member States′

National Law.

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1 Introduction

E-commerce has become an indispensable means of doing business. The most often

spoken about opportunities E-business offers are cost reductions as well as gains in

accuracy and speed. Therefore it is not astounding that not only the EU in its previous

conformation placed emphasis on building a functioning basis for the E-economy but

that also the new Member States have to catch up in this respect. As Vittet-Philippe

(2002) put it, the "e-business revolution is not merely about technology. [...] It is about

radical structural changes in the economy ­ changes within companies and in the

relationships between companies."

One of these new forms of inter-company relationship is the formation of virtual

enterprise networks. Virtual enterprises (VEs) are part of the offspring of doing e-

business (Lefebvre/Lefebvre 2002). The paradigm of VE emerged as a reaction to fast

evolving market trends, shaped by the globalization of the economy and the formation

of large economic blocks (Camarinha-Matos et.al. 1999).

In this contribution we deal with organizational as well as legal implications of this

form of networking. Interestingly it has already been noted that virtual enterprises

despite their ability to provide benefits for the collaborating firms and consumers as

well are hampered in Europe due to greater regulatory uncertainties (Vittet-Philippe

2002) whereas, for example, there existed some 250 000 cyberbusinesses in the USA as

early as 1997 (Lefebvre/Lefebvre 2002).

Addressing such issues that hinder the full potential of networking agile collaborations

is of importance not only for previous EU Member States but for the new Member

States in particular since virtual enterprising would offer many chances to get involved

in the Common Market faster. Although we cannot cover the full repertoire of open

questions going from rules of establishment over sharing of intellectual property rights

to dissolution of partnerships (cf. Mikhailov 2002, Mo/Zhou 2003, Ip et.al. 2004), we

will at least have a closer look at the question of the partner firms′ liabilities as clear cut

liability rules can deliver right incentives for the producing firms and strengthen

customers′ trust in this new form of business.

The paper is established as follows. Section 2 gives a definition of a VE. In section 3

and 4 the main driving factors and impediments to virtual enterprising are covered.

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Then we will comment on different models of VE liability towards the customer on an

economic basis providing policy implications as well.

2 Virtual

Enterprise

defined

The literature is quite unanimous on the definition of VEs. A VE can be described as an

opportunistic temporary alliance

of separate, independent pre-existing enterprises that

come together in a tight, integrated

ad hoc

network to share skills or core competencies

and resources in order to better respond to business opportunities, and whose

cooperation is supported by computer networks (Meade et.al. 1997, Camarinha-Matos

et.al. 1999, Pitt et.al. 2001). Such a VE is intended to be an organizational form which

gives the best of everything by a

synergetic combination of core competencies

of

single partners in order to perform a given project to a maximum degree of customer

satisfaction. Independent companies form a production network appearing as a single

unit to the customer (Tuma 1998, Kasper-Fuehrer/Ashkanasy 2001).

Of course, project oriented networking between firms is nothing completely new as it is

observed in the building or film-making industries, for example. Obviously the

possibility to achieve substantial outcomes using accessible resources of independent

partners has already been proven successful in the off-line world (Beckett 2003). So

there must be a special ingredient which differs a VE from such kinds of networks. We

can find the missing defining component in the necessary backing up of a VE with an

adequate

technical infrastructure

to facilitate communication and coordination

between members who might never see each other from face to face (Coronado et.al.

2002, Xu et.al. 2002).

The ideal type of VEs only exists for a certain project. For each project there will be

another combination of participating partner companies (Beckett 2003). And the most

interesting feature is the required lack of hierarchies. In an ideal VE none of the system

elements should dominate the other elements in order to maintain a maximum degree of

flexibility (Tuma 1998). Insofar as there is a leading company, it is a coordinating

partner in a network of peers (Fariselli et.al. 1999), a kind of "primus inter pares". The

VE itself possesses almost no employees or inventories. Only a small headquarter staff

is required to deal with the administrative and management details (Presley et.al. 2001).