When Does Relational Governance Really Matter in Buyer-Supplier Relationships?

Abstract

Relational governance has been widely recognized as an effective way for firms to mitigate exchange hazards and improve relationship performance. However, it is a key challenge for firms to determine the degree to which relational governance drives relationship performance. Therefore, this study analyzes whether relational governance has an optimum level with regard to relationship performance and whether the optimum level is different in relationships with different characteristics. Survey data from 228 firms in China are used to test the hypotheses. The findings imply that relational governance is not always effective and it has an optimum level with regard to relationship performance, which varies according to the relationship’s characteristics. The optimum level of relational governance, with regard to relationship performance, is higher for relationships with high trust and transaction specific investments. Our finding reconciles previous debates, which in turn, deepens our understanding of relational governance. In addition, the study is an initial explorative attempt to reveal the moderating effects of relationship characteristics from different lens that has both dedication and constraint aspects. The findings answer the question of when relational governance is really good for performance, and contribute to the dedication-constraint framework seen in the marketing literature as well. Given the bright and dark side, managers should be prudent in the use of relational governance and develop relational governance according to the characteristics of their buyer-supplier relationships.