The Paradox of Relation-Specific Investment: Customer-Supplier Relationships under Uncertainty Shock

Abstract

Strategy research has long highlighted relation-specific assets as a key source of relational rents. We instead reveal a potential dark side of relation-specific investment by examining how such investment by suppliers may turn into a source of adjustment costs for customer firms, thwarting customers’ responses to uncertainty shocks that afflict their suppliers. Using a matched sample of customer-supplier relationships, our difference-in-differences estimation shows that customer firms significantly reduce sourcing from a supplier that is exposed to a terrorist attack. However, such strategic responses are impeded, when the supplier has made greater investment specific to the customer, compared to other existing suppliers or potential suppliers. Our study provides new insights in linking together relation-specific assets and adjustment costs, two important topics of strategy research.