What Is Asset Specificity?

Asset specificity is the degree to which an asset is specialized; the higher it is, the more difficult it is to transfer the asset to a different application. High specialization can impact liquidity as well as business operations. Economists who study asset distribution, liquidity, and related topics have an interest in asset specificity, especially when a company relies heavily on highly specialized assets and has fewer flexible and more liquid assets.

It is possible for assets to be specialized along multiple axes. For example, a company 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, because of the distance from other sources of raw materials protection, and connections to transportation hubs. The facility itself may also be highly specialized, with equipment and a layout suitable to the production of only one product.

One issue with asset specificity is that companies may have a hard time getting rid of such assets. If they experience cash flow problems, they cannot sell them to raise money. In the event of a bankruptcy or merger, they will also find it difficult to get rid of specialized assets. This can also be a problem in the event that a company changes processes, decides to refocus the nature of its work, or needs to adapt to a changing regulatory climate.

Another problem with asset specificity is that a company may have a hard time replacing a specialized asset, especially for short term and emergency situations. If a manufacturer has a specialized facility to make components and a problem develops, it might not be able to move production to another facility. As a result, it might experience a shutdown. More flexible companies without a high degree of asset specificity are not as vulnerable to issues like natural disasters or political unrest.

Companies may become dependent on specialized assets, and may enter locked relationships with them because they cannot get rid of them. They carry risks, although they may also carry benefits, such as a more efficient way of accomplishing a very specific process. Companies considering the purchase or development of specialized assets may weigh the risks and benefits to decide on the best option for their needs. For a well established company with ample sources of capital to draw upon in the event of an emergency, asset specificity may not be a major concern.