Examining the impact of upstream and downstream relationship stability and concentration on firms’ financial performance

Abstract

Maintaining a healthy buyer–supplier relationship enhances the competence of the firm and the entire supply chain. This study examines the stability and concentration of both the upstream and downstream relationships in the focal firms in a supply chain. Using empirical evidence from 2,920 listed firms in China, we find that maintaining higher stability with major suppliers and customers enhances a firm’s financial performance, whereas a higher concentration of major suppliers and customers negatively affects the firm’s financial performance. The positive impact of stability is higher than the negative effect of concentration on firm’s performance. Additionally, geographical distance with the customer amplifies the positive impact of customer stability on a firm’s performance, and the geographical distance with suppliers and customers enlarges the concentration’s negative impact. Firms should build an open, long-term relationship that is stable but not exclusive with their major suppliers and customers to achieve better financial performance.