Asset specificity can affect liquidity and business operations. Highly specialized assets can be difficult to transfer, sell, or substitute, making companies vulnerable to natural disasters or political turmoil. Companies must weigh the risks and benefits when considering the purchase or development of specialized assets.
Activity specificity is the extent to which an activity is specialized; the higher it is, the more difficult it is to transfer the resource to another application. High specialization can affect liquidity and business operations. Economists who study asset distribution, liquidity, and related topics have an interest in asset specificity, especially when a firm relies heavily on highly specialized assets and has fewer flexible and more liquid assets.
It is possible that resources are specialized on several axes. For example, a business in a remote area might own a factory to meet its needs. The location makes the asset specialized, as another company is unlikely to be able to make use of a facility in that location, due to the distance from other sources of commodity protection and connections to transportation hubs. The facility itself can also be highly specialized, with equipment and a layout suitable for the production of a single product.
One problem with asset specificity is that companies may find it difficult to get rid of those assets. If they have cash flow problems, they can’t sell it to raise money. In the event of a bankruptcy or merger, they will find it difficult to get rid of specialized businesses. This can also be an issue if a business changes processes, decides to refocus the nature of its work, or needs to adapt to a changing regulatory climate.
Another problem with resource specificity is that a business can find it difficult to substitute a specialized resource, especially for short-term and emergency situations. If a manufacturer has a specialized facility to produce components and a problem develops, they may not be able to move production to another facility. As a result, a crash may occur. More flexible companies without a high degree of asset specificity are not as vulnerable to problems such as natural disasters or political turmoil.
Companies can become dependent on specialized resources and can form locked relationships with them because they cannot get rid of them. They carry risks, although they can also bring benefits, such as a more efficient way to do a very specific process. Companies considering the purchase or development of specialized assets can weigh the risks and benefits to decide the best option for their needs. For a well-established business with ample sources of capital to draw on in the event of a contingency, the specificity of the assets may not be a major concern.
Protect your devices with Threat Protection by NordVPN
