Manufacturer-Specific Asset Investments and Inter-Firm Governance Forms: An Empirical Test of the Contingent Effect of Exchange Frequency

Abstract

ABSTRACT Transaction cost analysis (TCA) keeps the frequency of exchange as a significant dimension of business-to-business transactions, and the transaction frequency is expected to influence how to align inter-firm organization efficiently. To date, transaction frequency has received little attention in empirical TCA-studies. This research focuses in particular on order frequency in industrial purchasing relationships and how it affects the alignment of purchase contracting and hierarchical governance in supplier-manufacturer relationships. Data from a survey of 160 industrial purchasing relationships supports the basic TCA prediction stating that increased transaction frequency will provide administrative economies of scale benefits under conditions with substantial hazards of trade. The empirical findings demonstrate that the association between manufacturer-specific assets and formalized purchase contracting is highly dependent on the present level of exchange frequency. In manufacturer-supplier relationships with modest exchange frequency, there is no significant association between asset specificity and contractual governance. On the other hand, the effect of manufacturer-specific assets on formalized purchase contracting was substantial in relationships with high order frequency. This governance pattern was replicated in the analysis of hierarchical governance. Substantial investments in manufacturer-specific assets enforced the manufacturer's decision control over the supplier under conditions with high exchange frequency. The research provides further insight into the economics of inter-firm organization and supports the TCA-based assumption asserting that the frequency of inter-firm exchange improves the utilization of specialized governance arrangements in business to business relationships.