Adaptation problems in business relationships with substantial asset specificity and environmental uncertainty: the moderating effect of relationship duration

Abstract

Based on transaction costs analysis (TCA) and relational contract theory (RCT), this study examines the association between asset specificity, environmental uncertainty, relationship duration and inter-firm governance in business-to-business relationships. In particular, the authors elaborate the tension between the problem of safeguarding and adaptation in business-to-business relationships by comparing the interaction effect of specific investments and environmental uncertainty on inter-firm coordination across business-to-business relationships with different prior length. Data from a survey of 170 industrial buyer-seller relationships demonstrates that when buyer-seller relationships with substantial asset specificity and short prior history are exposed to substantial environmental uncertainty, inter-firm coordination arrangements are quite modest. This governance pattern is completely different in business-to-business relationships with long prior history where the combined presence of substantial assets specificity and high environmental uncertainty enforces the level of inter-firm coordination. These findings demonstrate that relational norms and trust enforces the ability to implement hybrid governance arrangement when strong inter-firm ties and substantial environmental volatility appear simultaneously.