Academic journal article Management International Review

The Impact of Governance Mechanisms on Transaction-Specific Investments in Supplier-Manufacturer Relationships: A Comparison of Local and Foreign Manufacturers

Academic journal article Management International Review

The Impact of Governance Mechanisms on Transaction-Specific Investments in Supplier-Manufacturer Relationships: A Comparison of Local and Foreign Manufacturers

Article excerpt

Abstract and Key Results

* This study explores the impact that formal and relational governance mechanisms have in inducing local suppliers to make transaction-specific investments in foreign and local manufacturers, respectively.

* Analyses, in this regard, were based on a sample comprised of 77 local supplier/ foreign manufacturer relationships and 57 local supplier/local manufacturer relationships in China.

* The efficacy of different governance mechanisms, as shaped by local and foreign manufacturers, exerts varying degrees of impact on suppliers' transaction-specific investments.

Key Words

Formal Governance Mechanisms * Relational Governance Mechanisms * Transaction-Specific Investments * Calculative Trust * Benevolent Trust * Supplier-Manufacturer Relationships

Introduction

Interorganizational collaboration has become a key strategy by which firms are able to quickly respond to changing market demands (e.g., Dyer/Singh 1998). Indeed, through such corporate partnering, manufacturers are often able to gain access to important suppliers. Notably, in this regard, suppliers' transaction-specific investments in manufacturers (which arc characterized as non-redeployable to alternative firms) are crucial to successful completion of the complex tasks associated with the production of customized products for both foreign and local manufacturers.

Surprisingly, given the seemingly obvious value of transaction-specific investments, there have been few studies which take the supplier's perspective, investigating the ways in which suppliers might be motivated to make transaction-specific investments in manufacturers (exceptions are Claro/Hagelaar/Omta 2003, Ghani/Khan 2004, Rokkan/Heide/ Wathne 2003) (1). Most studies, in accordance with the Transaction Cost Economics (TCE) paradigm, examine how transaction characteristics (e.g., the transaction-specific investments in this study) align with governance modes or with related constructs (e.g., joint actions) from a principal's perspective (i.e., a manufacturer's perspective, in this study) (e.g., Joshi/Stump 1999, Klein/Frazier/Roth 1990). However, after a manufacturer chooses the aligned governance mechanisms, a supplier, in turn, can decide whether to make transaction-specific investments in its manufacturer or not. Further, the effectiveness of governance mechanisms made by a manufacturer to lower conflict resulting from transaction-specific investments is based on suppliers' expectations, rather than on the force of organizational authority (Walker/Poppo 1991). Therefore, it is worth examining the impact of governance mechanisms on transaction-specific investments from a supplier's perspective.

Making transaction-specific investments in manufacturers is not without costs. Because transaction-specific investments made by suppliers may not be converted with ease into different sets of transactions with alternative manufacturers, these suppliers may find themselves locked into a small number of exchange positions (Williamson 1985). Thus, suppliers should be granting protection against opportunistic hold-up attempts by manufacturers to maintain viable business relationships (Petersen/Pedersen/Benito 2006). It is suggested that theoretically formal governance mechanisms (such as contracts) are used to eliminate, or at least mitigate, the risk of such hold-ups (Bradach/Eccles 1989, Petersen/Pedersen/Benito 2006).

In addition to examining formal governance mechanisms, some studies have recently begun to postulate with regard to the valuable cooperation that relational governance mechanisms can foster among partners (e.g., Zaheer/Venkatraman 1995). The relational governance perspective offers a less explicit set of governance mechanisms (i.e., trust) for persuading suppliers to make transaction-specific investments (Zaheer/Venkatraman 1995). Recently, some scholars have started to examine the relationships between a manufacturer's trust in a supplier and transaction-specific investments made by the supplier (e. …

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