Relationship-specific Investments Research Articles

Stuck in the comfort zone? The influence of customer concentration on digital innovation in manufacturing firms

ABSTRACT Digital innovation has become an inexorable trend for manufacturing firms in the digital era. Though the motivations for digital innovation have been largely focused on in the literature, the barriers for manufacturing firms to implementing digital innovation remain underdeveloped. Actually, it is not that manufacturing firms are unaware of the benefits of digital technology, but the structural factors embedded in firms that hinder them from adopting digital innovation. In this context, this study aims to empirically investigate how and why customer concentration could be an obstacle to digital innovation in manufacturing firms, and thus provide insights for managers to break free from the trap of customer concentration and turn to embrace digital innovation. By conducting empirical analyses based on panel data of listed manufacturing firms in China between 2008 and 2019, we find that customer concentration has a significantly negative effect on the adoption of digital innovation in manufacturing firms. Moreover, the negative effect of customer concentration on the adoption of digital innovation is more pronounced when top executives have a relatively higher existing-oriented attention focus, and when the firm has spent more on relationship-specific investments. In addition, the presence of chief information officers (CIOs) can weaken the negative influence of customer concentration on the adoption of digital innovation.

Revenue concentration and capital structure

PurposeWe conducted this study to examine the relationship between revenue concentration and a firm's financial leverage. We aimed to analyze whether revenue concentration influences a firm's capital structure decisions and whether this relationship is driven by customer-specific investments or the direct effect of revenue concentration itself. Additionally, we investigated the role of asset redeployability in mediating or moderating the relationship between revenue concentration and financial leverage.Design/methodology/approachThe paper investigates the relationship between revenue concentration and a firm's financial leverage. The results indicate a negative association between revenue concentration and financial leverage. This finding holds across various regression models and is statistically significant. Furthermore, the paper explores the potential role of asset redeployability in explaining the relationship between revenue concentration and financial leverage. The results indicate that even after controlling for asset redeployability, the negative relationship between revenue concentration and leverage remains significant, suggesting that revenue concentration affects capital structure decisions independently of the risks associated with relationship-specific investments. Robustness tests are conducted using a three-stage least squares approach to account for the simultaneity between revenue concentration, asset redeployability and capital structure.FindingsOur findings demonstrate that revenue concentration is negatively associated with financial leverage, even after accounting for asset redeployability. This suggests that revenue concentration affects capital structure decisions independently of the risks associated with customer-specific investments. Furthermore, we performed robustness tests to address potential simultaneity issues between revenue concentration, asset redeployability and capital structure.Research limitations/implicationsThe study relies on available data sources, which may have inherent limitations in terms of accuracy, completeness or consistency. The quality of the data used in the analysis could impact the robustness of the findings. Time Period: The study focuses on more recent years, which might limit the ability to compare the findings with studies conducted over different time periods. Historical trends or structural changes that could impact the relationship between revenue concentration and financial leverage might not be fully captured.Practical implicationsFirms with higher revenue concentration tend to have lower financial leverage. Recent years show a negative relationship between profitability and market leverage compared to earlier periods. Revenue concentration has a distinct effect on financial leverage, not fully explained by risks from relationship-specific investments or asset redeployability. Insights for firms in managing capital structure decisions, considering revenue concentration and its implications for leverage.Originality/valueThis research is one of the first papers that investigates the impact of revenue concentration on the capital structure choices of firms. By exploring the relationship between revenue concentration and financial leverage, the study contributes to the existing literature by shedding light on an underexplored area. Thus, this study adds originality to the field by addressing a research gap and contributing to the understanding of the relationship between revenue concentration and capital structure choices.

Safeguarding proprietary information in the supply chain and relationship‐specific investments

AbstractWe examine whether the risk of losing proprietary information through the supply chain affects relationship‐specific investment (RSI) decisions by supply chain partners. Using state courts' staggered adoption of the Inevitable Disclosure Doctrine (IDD) as a shock to the firm's ability to protect proprietary information, we find that customers increase RSI when their supplier is headquartered in a state that adopts IDD. The effect is more substantial for customers who face a higher risk of losing proprietary information and with suppliers that are difficult to substitute. IDD also plays a more prominent role in the absence of alternate mechanisms that reduce contracting frictions, such as shared directors, common ownership, or joint ventures. Our results are robust to using cross‐citation measures of RSI and alternative estimations that mitigate potential biases arising from the staggered difference‐in‐difference approach. Our findings suggest that proprietary information protection enables firms to reduce contracting frictions arising in supply chain relations.

Trade credit provision and innovation: A strategic trade-off

Our study focuses on Chinese-listed firms, revealing a distinct substitution effect between trade credit provision and innovation, diverging from the complementary relationship found in prior U.S. research. We identify a negative correlation between trade credit provision and R&D intensity, particularly evident among supplier firms with reduced bargaining power. Surprisingly, no discernible link emerges between supplier financial distress risk and trade credit provision or R&D outcomes. Additionally, we find that trade credit provision hampers innovation, evidenced by a decline in patent applications and granted patents. These findings suggest that, especially in contexts marked by intense product market competition and incomplete financial markets, supplier firms strategically opt for trade credit provision as an alternative to innovation—a form of relationship-specific investment. Importantly, our results imply that the reduction in firm innovation activities is less likely a post hoc consequence of financial constraints resulting from trade credit provision.

Relationship-specific investments for up- and downstream firms and credit constraints

This paper argues that there exists a fundamental asymmetry between relationship-specific investments (RSI) made for downstream firms (customer-specific investments – CSI) and for upstream firms (supplier-specific investments – SSI). Both types of RSI can create a hold-up problem, but everything else equal, suppliers have higher bargaining power, rendering hold-ups by suppliers more dangerous than hold-ups by customers. Using unique data on Vietnamese SMEs that allow for a clean separation between CSI and SSI, we demonstrate that this leads to less frequent SSI and that the few firms making SSI will be more risky and financially constrained. We discuss the implications of this finding for supply chain management and public policy destined to foster RSI.

Words to use with care? CEO dispositional optimism vs overconfidence

CEO overconfidence and dispositional optimism are often used interchangeably. This paper addresses two key issues that result in this problem, (1) the conflation and confounding between CEO overconfidence and dispositional optimism; (2) the lack of consideration for the other parties’ individual traits. To expose the theoretical and empirical distinctions, we examine the interaction between supplier and customer, and its effects on supplier's relationship-specific investments. Theory indicates that both traits show a proclivity to overinvestments, but interestingly, results differ when accounting by the other parties’ optimism and overconfidence. Specifically, the customer CEOs optimism strengthens this relationship while overconfidence weakens it.

The Influence of Corporate Social Responsibility on Stakeholders in Different Business Contexts

The authors explore two important topics related to this special issue. One is how corporate social responsibility (CSR) activities impacts stakeholders, more specifically customers and shareholders/investors. Second is understanding customer recognition and demand for CSR activities. Insight into these topics is gained through the study of contextual differences in this value creation. Previous studies suggest that two important contextual differences have the potential to impact CSR-based value creation, the product versus service nature of the firm and whether the firm operates primarily in a business-to-business (B2B) versus business-to-consumer (B2C) channel. The lower innovative capabilities of service firms and the relative intangibility of services should hamper the impact of CSR activities in service versus product contexts. The impact should be higher, however, in a B2B versus B2C context based on the need for greater organizational alignment, adaptation, and relationship-specific investments. Results from a large-scale secondary dataset reinforce prior findings that CSR activities influence firm value through customer satisfaction. Moreover, the results reveal that this effect is weaker for service (vs. product) firms and stronger for B2B (vs. B2C) firms. The findings offer important implications for marketing theory and practice.

What specific investments are critical in fostering buyer‐supplier relationships: Evidence from MSMEs in emerging economies

AbstractMSMEs (Micro, Small and Medium enterprises) play a vital role in the development of emerging economies, and their interactions with state‐owned enterprises can generate significant economic value for both parties. However, the dependency asymmetry between MSMEs and state‐owned enterprises can hinder their growth and overall relationship performance. This research explores the impact of various dimensions of relationship‐specific investments (RSIs) on fostering trust and satisfaction in these relationships. Additionally, the study investigates the moderating role of bilateral communication in the relationship between RSIs and satisfaction through trust. The conceptual model was assessed using a sample of 157 MSMEs, employing partial least squares structural equation modelling and necessary conditions analysis. The findings suggest that communication is crucial in building trust and satisfaction within these relationships. The literature has not extensively explored the context of these relationships and the application of necessary condition analysis, making this study valuable for policymakers. By understanding the factors that contribute to successful relationships between MSMEs and state‐owned enterprises, policymakers can create targeted strategies to support and enhance these interactions, ultimately fostering the growth and development of emerging economies.

Completely relationship-specific investments, transaction costs, and the property rights theory

In the property rights approach to the theory of the firm, ownership matters if parties have to make partly relationship-specific investments, but ownership would be irrelevant if the investments were completely relationship-specific. We show that if negotiations after the investment stage require transaction costs to be paid, then ownership matters even when investments are completely relationship-specific. While in the standard model without transaction costs there are underinvestments compared to the first-best benchmark, in our setting a party may overinvest in order to induce the other party to incur the transaction costs that are necessary to enter the negotiation stage.

An analytical method for investigating multi-tier sustainable supply chains: simplifying the complex

Multi-tier sustainable supply chain relationships (MSSCR) are complex with involvement of multiple organisations, practices, objectives, and interconnectivities. These complexities make it difficult to effectively study MSSCR using traditional empirical statistical correlative research. In MSSCR the relationship between the focal firm and sub-supplier may be affected by the relationship between the focal firm and direct-supplier, and the relationship between the direct-supplier and the sub-supplier. This paper introduces a research methodology, based on K-Means clustering, rough set theory, and cluster membership to investigate complex relationships across multi-tier sustainable supply chain triads. Collaborative advantage variables including knowledge-sharing routines, relation-specific investments, complementary capabilities, effective governance mechanisms, and long-term commitment are conceptually presented to evaluate relationships among MSSCR practices and sustainability performance. Insights for practitioners and researchers are provided. Research insights can be gained by analytically providing alternative explanatory and equifinality relationships amongst variables and multi-pair organisations. The methodology can mitigate the endogeneity problem, such as omitted factors (variables), measurement error, even in small sample data situations. Directions for future research are discussed.

Evolution, Investment, and Bargaining

We present an evolutionary model which allows us to study the impact relationship-specific investment has on bargaining. Agents are matched to play an investment and bargaining game. During bargaining, agents have an outside option to form a new relationship, but in exercising this option loses their current investment. We find that the stochastically stable post-investment bargaining convention is dependent on the cost of investment. In particular, the larger the cost of investment, the lower is the share of gross surplus that is received. This stands in contrast with previous studies. In addition, we find that there is under-investment. We disentangle the forces which lead to these two results.

Myopic capital market concerns and investment incentives in business alliances

AbstractWe study a publicly traded firm that cares about its short-term stock market performance while collaborating with a privately owned firm in a business alliance. The firms each undertake a relation-specific investment and then bargain over the allocation of the joint surplus generated by the alliance. The public firm’s myopic market concerns affect both the total size of the surplus and how the firms divide the surplus. While the public firm always becomes more aggressive and obtains more of the surplus, the total size of the surplus may become larger or smaller, due to the effect of myopic market concerns on the firms’ investment incentives. We establish conditions under which the investment and the value of each firm increase or decrease with market concerns. The market concerns could mitigate or exacerbate the hold-up problem between the two firms and thus could either benefit or harm the whole business alliance. We also study two extensions with (i) the two investments being substitutes instead of complements and (ii) both firms being publicly listed. In both cases, the insights from our main model still hold.

Linking relation-specific investments and sustainability performance: the mediating role of supply chain learning

PurposeDespite the growing interest in the role of relation-specific investments (RSIs) in superior firm performance, their impact on sustainability performance remains unexplored, as do the underlying mechanisms of such effects. Drawing on the relational view and resource orchestration theory (ROT), the authors propose that supply chain learning (SCL) mediates the link between RSIs and sustainability performance.Design/methodology/approachA multi-method approach was adopted, combining a case study and survey. An exploratory case study of four Chinese manufacturing firms was first conducted to develop research hypotheses. A quantitative survey of data collected from 269 firms was then undertaken to test hypotheses.FindingsProperty-based, knowledge-based and personal-based RSIs positively impact firm sustainability performance and SCL. SCL fully mediates the relationship between knowledge-as well as personal-based RSIs and sustainability performance, and partially mediates the relationship between property-based RSIs and sustainability performance.Practical implicationsThe study unveils important practical insights and approaches for firms endeavouring to achieve sustainability performance through RSIs and SCL.Originality/valueThe study extends the RSIs literature by linking RSIs and sustainability performance and differentiating the effects of different types of RSIs on sustainability performance. The theorized underlying mechanism advances the understanding of SCL in the link between RSIs and sustainability performance.

Efficacy of supply chain relationships – differences in performance appraisals between buyers and suppliers

This paper examines the efficacy of three supply chain relationship factors: trust, commitment, and relationship specific investment (RSI) in affecting firms’ cooperation, innovation and financial performance, comparing buyers’ and suppliers’ perspectives. A questionnaire survey was conducted in mainland China. Two independent samples with 101 and 108 responses respectively from the Chinese business buyers and suppliers were collected by visiting nine large annual exhibitions. Both samples involved buyer–supplier business relationships across three business markets: textiles, food, and consumer electronics. The data was analysed using structural equation modelling and a two-groups invariance test. The results indicate that the efficacies of trust, commitment, and RSI influencing buyers’ and suppliers’ performance are different. The paths from the relationship factors leading to performance form patterns that differ between buyers and suppliers in the Chinese business context. While trust and RSI are the direct antecedents of buyers’ cooperation performance, commitment is the immediate precursor of suppliers’ cooperation performance. Trust and commitment lead to buyer’s innovation performance directly, while RSI is a direct driver of supplier’ innovation performance. In addition, RSI is not a significant factor for buyers’ financial performance, whereas it will generate financial return for suppliers. Based on these findings, we provide differentiated relationship management suggestions to managers of buying and supplying firms for helping them improve performance in the Chinese business market in particular. For example, trust and commitment are more important relationship factors than RSI for buying firms, while RSI is as significant as trust and commitment for supplying firms.

Clan culture and patterns of industrial specialization in China

The clan, an extant social organization formed 2000 years ago, bears a unique system of values still shaping fundamental institutions of modern society. In this research, we show how traditional clans affect the patterns of industrial specialization in China today. We find that industries dependent on relationship-specific investments tend to cluster in prefectures with strong clans. Our findings remain robust when considering alternative measures, including a set of historical and geographical correlates, and excluding cities in the southeast of China. Clans have a stronger effect on the specialization of the private sector than the state sector. In addition, the clan culture of immigrants matters for the industrial specialization of host regions. Our firm-level analysis further shows that the effects mainly originate from an overall improvement of the contracting environment by the clan culture.

Opportunism still remained alive: conditional limits of trust and contract in software projects

PurposeBased on a survey study of 138 software buyers in Turkey, this study examines conditional indirect effects of requirements uncertainty on supplier opportunism where buyer dependence, a proxy for relation-specific investments, undertakes a mediator role. The authors consider a two-level moderation effect of trust and contract in buyer–supplier relationships throughout the software project lifecycle.Design/methodology/approachA survey-based empirical study was conducted, and conditional process analyses were run using PROCESS macro in SPSS. The present study tests a two-stage moderated mediation model in which competence-based trust with a detailed contract setting moderates the mediational path from requirements uncertainty to buyer dependence.FindingsThe data obtained from the buyer side in the Turkish software industry showed that a relationship in which the buyer is structurally dependent begins at a high level of trust. On the other hand, the authors found that contractual rigidity fosters supplier opportunism ex-post in evolving process of the relationship.Originality/valueThis study contributes to project management literature by testing a two-level moderation effect of governance and the mediator role of buyer dependence in the relationship between requirements uncertainty and supplier opportunism. Moving differently from the previous studies, this study integrates contributions of both economic perspectives, such as resource dependence theory and transaction cost analysis, and relational perspectives into the information processing view.

Relation-specific investment: Theoretical axioms vs Evidence from Russia

Relation-specific investment: Theoretical axioms vs Evidence from Russia

The effect of social connections on capital structure in supplier-customer relationships

Suppliers socially connected to major customers with relation-specific investments have higher leverage ratios compared to unconnected suppliers. The presence of connections partially reduces supplier underleverage observed in supplier-customer relationships with relation-specific investments. Consistent with the role of connections in bonding trading parties' commitment, connections to major customers help to increase customer purchases, and supplier leverage increases are primarily observed in firms with high intensity of customer purchases. Additionally, connected suppliers are associated with higher leverage primarily when information asymmetry between parties is high. Overall, connections help strengthening implicit contracts through establishing trust between trading parties.

Safeguarding Proprietary Information in the Supply Chain and Relationship Specific Investments

Safeguarding Proprietary Information in the Supply Chain and Relationship Specific Investments

Relationship-Specific Investments and Firms’ Boundaries: Evidence from Textual Analysis of Patents

Relationship-Specific Investments and Firms’ Boundaries: Evidence from Textual Analysis of Patents