Supplier Relationship-specific Investments Research Articles

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.

Customer identification: The missing link between relationship quality and supplier performance

Maintaining good relationship quality (RQ) with customers is crucial for supplier firms to remain competitive. Yet, empirical evidence linking RQ with supplier-firm performance remains inexplicably vague. Drawing on social identity theory and the relationship marketing literature, this study therefore examines the role of customer identification—a customer firm's sense of shared connection with a supplier organization—in bridging the gap between RQ and outcomes beneficial to the supplier firm. A study involving 389 CEOs and directors of Australian firms finds that customer identification mediates the effects of affective RQ-dimensions (i.e., benevolent trust and affective commitment) on customers' willingness-to-pay premium price (WTP) and positive word-of-mouth (WOM) behaviors. Further, the mediating effect of customer identification is moderated by organizational distance and supplier's relationship-specific investments (RSI), such that the indirect effects are stronger when the organizational distance between the supplier and customer firm is low and supplier's RSIs are high. Moreover, while cognitive RQ has direct effects on WTP, its influence on WOM is mediated by customer identification. By identifying the role of customer identification in facilitating the link between RQ and supplier-firm performance, our findings provide valuable insights for supplier firms to optimize their relationship marketing efforts.

Working hard for long‐distance relationships: Geographic proximity and relationship‐specific investments

AbstractSuppliers that are farther away from their customers make more relationship‐specific investments (RSI). This association is more pronounced when it is less costly for the customer to switch to alternative suppliers and when the supplier operates in relatively opaque information environments. Using the introduction of new airline routes as an exogenous shock to the distance between supply chain partners, we show that the relation between supplier RSI and distance may be causal. We also provide evidence that suppliers with larger RSI are better able to maintain long‐distance business relationships and are associated with higher firm value. These findings suggest an important dimension of supplier commitment: Suppliers use RSI as a signal of their willingness to fulfill on‐going implicit claims.

Working Hard for Long-Distance Relationships: Geographic Proximity and Relationship-Specific Investments

Suppliers that are farther away from their customers make more relationship-specific investments (RSI). This association is more pronounced when it is less costly for the customer to switch to alternative suppliers and when the supplier operates in relatively opaque information environments. Using the introduction of new airline routes as an exogenous shock to the distance between supply chain partners, we show that the relation between supplier RSI and distance may be causal. We also provide evidence that suppliers with larger RSI are better able to maintain long-distance business relationships and are associated with higher firm value. These findings suggest an important dimension of supplier commitment: Suppliers use RSI as a signal of their willingness to fulfill on-going implicit claims.

The varying impact of buyer and supplier expected relationship-specific investments on relationship governance

PurposeThe purpose of this paper is to investigate the differential influence of buyer and supplier relationship-specific investments (RSI) on a buyer’s relationship governance decisions.Design/methodology/approachBased on transaction economics and social exchange theories (SET), the authors develop a framework to understand how and when buyer and supplier RSI influence governance decisions. This model was tested using a survey of 301 Information Technology (IT) procurement professionals across a multitude of industries.FindingsThis research shows that buyer and supplier RSI impact governance decisions differently. Supplier investments are positively associated with relationship formalization when goals between both parties are shared. Buyer investments are more strongly related to formalization in technologically uncertain environments.Originality/valueThis research adds to the literature by integrating arguments from both transaction cost and SET to hypothesize why buyer and supplier investments have a differential impact on relationship governance decisions. In line with these arguments, it ultimately demonstrates conditions that render such investments more/less influential.

Relationship-specificity and real activities manipulation

Purpose The purpose of this paper is to examine whether and how product market relationships are related to firms’ real activities manipulation (RAM), which refers to managers’ aggressive operating practices. Given the importance of suppliers’ relationship-specific investments to a firm’s competitiveness, the need for suppliers’ relationship-specific investments is expected to influence a firm’s RAM. Design/methodology/approach This paper adopts Nunn’s (2007) proxy for relationship-specificity and four proxies for RAM. It employs an ordinary least squares regression model to test whether a firm decreases RAM when it has greater need for supplier relationship-specific investments. It also uses an instrumental variable approach to address endogeneity and conducts cross-sectional analyses. Findings This study finds that, with the exception of RAM through sales manipulation, the importance of relationship-specific investments by suppliers is negatively associated with firms’ aggressive operating decisions. It also finds that the association between relationship-specificity and RAM is less pronounced for firms that have a greater market share but more pronounced for firms that are relatively young, consistent with the notion that a firm is more likely to be under pressure from its suppliers to reduce RAM when it has less competitive advantages. The results suggest that product market relationships play an important role in influencing managers’ aggressive operating decisions. Practical implications This study complements earlier work on earnings quality and has important implications for investors, regulators and other stakeholders who are concerned with corporate earnings quality. Originality/value This paper contributes to the literature on product market relationships and earnings quality and on financial reporting quality and investment efficiency.

The Effect of Supplier Relationships on Disclosures of Forward-Looking Information

This study investigates whether the need for supplier relationship-specific investments influences the disclosure of forward-looking information. Prior literature on relationship-specific investments argues that suppliers are reluctant to invest in relationship-specific assets, since the value to the supplier depends in part on the prospects of the customer. Since the customer is likely better informed about its own prospects, credible disclosures of forward-looking information are relevant to the supplier's investment decision. I examine whether managers use financial disclosures to convey this information to suppliers. Using firm-level data of customer-supplier relationships, I find that supplier relationship-specific investments are positively related to a customer's disclosure of forward-looking information in segments and management forecasts. More importantly, I show that the loss of a relationship-specific supplier, which creates a need for a new supplier, strongly increases the likelihood of initiating forward-looking disclosures in the following period. I find that proprietary costs reduce the association between supplier investments and disclosure, although this result is sensitive to the measure of proprietary costs used. Overall, the findings suggest that disclosures are important beyond capital markets and play a role in supply chain contexts.

What gets suppliers to play and who gets the pay? On the antecedents and outcomes of collaboration in retailer-supplier dyads

Purpose – The purpose of this paper is to adopt and contribute to the further development of the relational view by examining the drivers of retailer-supplier collaboration and its effect on the performance of both the retailer and the supplier. Design/methodology/approach – The paper draws its conclusions from a structural analysis of dyadic survey data collected from consumer packaged goods suppliers and retailers in Brazil. In addition, objective retailer performance measures (retailer in-stock performance) are included in the data set. Findings – The results indicate that a supplier's customer orientation is an important determinant of supplier relationship-specific investments and, ultimately, supply chain collaboration. The empirical results also indicate that retailers stand to benefit the most from a supplier's collaborative efforts. In addition, there is evidence that a supplier's customer orientation is positively related to its own performance. Research limitations/implications – The limited sample size – a result of the dyadic nature of the data – constitutes a limitation and, at the same time, presents opportunities for future, larger-scale studies. Nonetheless, this study highlights the value of customer orientation and collaboration in terms of driving performance outcomes for both suppliers and buyers, while invoking the notion that the benefits of supply chain collaboration accrue differentially over time from the retailers’ and suppliers’ perspectives. Originality/value – While many of the relationships set forth in this research have been implicitly assumed by proponents of the relational view, this study furthers the development of the relational view by explicitly modeling supplier relationship-specific investments and customer orientation as antecedents of collaboration. Moreover, the study contributes to the literature on buyer-supplier collaboration by simultaneously exploring to what extent both suppliers and retailers derive benefits from such collaboration.

Supplier Immobility, Operating Leverage, and Cost of Equity

In this paper we investigate how supplier immobility affects the customer firm’s cost of equity. We use relationship-specific investments (RSI) undertaken by supplier firms as a proxy for supplier immobility. We find that high supplier immobility is associated with both low operating leverage and low cost of equity. These results are robust to a variety of model specifications and alternative measures of supplier RSI and cost of equity. Our findings suggest that the decision of a firm’s input providers is an important determinant of its systematic risk.

Supplier relationship-specific investments and the role of safeguards for supplier innovation sharing

The vast majority of the supplier innovation literature has focused on how buying firms can effectively “pull” innovations from their suppliers. Yet, we know remarkably little about the factors that contribute to a supplier voluntarily “pushing” innovations to its customers. The present study addresses this research gap in the context of industrial buyer–supplier relationships and with a specific focus on relationship-specific investments. Drawing on theory from the relationship-marketing literature and on transaction cost theory, we devise and test a proposed theoretical model that links the level of a supplier's relationship-specific investments to its sharing of innovative ideas regarding products and processes with customers. The model also considers the role of contract length, relationship age, and buyer–supplier cooperation as possible safeguards. The empirical results suggest that a supplier's relationship-specific investments encourage a supplier to suggest ideas of process innovations but to refrain from suggestions about product innovations. The latter effect, however, can be attenuated by appropriate formal and informal safeguards.

Vertical Firm Boundaries: Supplier-Customer Contracts and Vertical Integration

I empirically examine the choice of a firm’s vertical boundaries — specifically, the decision to use supplier-customer contracts instead of either using markets or vertical integration. I examine the determinants of supplier-customer contracts using data on a customer’s contractual purchase obligations with its suppliers. Contracting propensity is positively related to supplier relationship-specific investments (RSI), the supplier’s relative bargaining power, and vertical integration costs, and negatively related to contracting costs, alternative sources of information about the customer, and the percentage of a customer’s input traded on financial markets. Additionally, I examine the choice between vertical integration versus supplier-customer contracts and find that the choice is predicted by the type of RSI. Consistent with theory, RSI measured using tangible (intangible) assets are positively related to integration (contracts). Further, industry-wide RSI shocks are related to subsequent changes in a firm’s contracting and integration activity. My results suggest that market frictions play an important role in shaping supplier-customer contracting activity and firm boundaries.

The effects of supplier-to-buyer identification on operational performance—An empirical investigation of inter-organizational identification in automotive relationships

Over the past decade conceptual and empirical research in operations management has embraced the idea that collaborative supplier–buyer relationships are a source of competitive advantage for manufacturing firms. Anecdotal evidence from the Japanese and U.S. automotive industry and emerging research suggests that inter-organizational identification of suppliers with their buyers, termed supplier-to-buyer identification, is an unexplored factor of relational advantage. This study presents a model and empirical test that supplier-to-buyer identification fosters superior operational performance by enhancing trust, supplier relation-specific investments, and information exchange. Through a survey of 346 automotive supplier–buyer relationships, the findings show that supplier-to-buyer identification directly impacts supplier relationship-specific investments and information exchange, although most of the latter effect is mediated by trust. The findings also indicate that supplier relation-specific investments and information exchange play different but complementary roles in influencing operational performance. The results suggest new directions for supplier–buyer relationship research in operations management and important managerial implications.

Influence of customer participation on creating and sharing of new product value

This research applies an institutional arrangement perspective to develop an end-to-end model for the interaction between customers and upstream suppliers to develop a new product to understand how new product value is created and shared. The model is empirically tested by collecting primary data from 188 manufacturers across different industries. The research demonstrates that customer participation affects new product value creation by improving the effectiveness of the new product development process by enhancing information sharing and customer–supplier coordination and by increasing the level of customer and supplier specific investments in the product development effort. In addition, increasing the formalization of the customer participation process enhances both customer and supplier relationship-specific investments in the new product development process. The impact of customer participation on the customer's share of the new product value pie is more complex then is first apparent. Based on the dependence and equity perspectives the results suggest that exchange partners' power (relative dependence) positively influences a partner's ability to capture new product value, but this power is offset by a desire of exchange partners to ensure the distribution of value is “fair” and reflects each party's contribution to the value creation.

Determinants of three facets of customer trust: A marketing model of Japanese buyer–supplier relationship

Interorganizational trust has attracted significant research attention as the determinant of the development of a cooperative long-term manufacturer–supplier relationship (CLMSR). It has been realized as a mechanism of organizational control in interfirm relationships. However, little is known about the critical business-marketing problem of how to build customer trust. This study proposes a CLMSR marketing model and tests it with data collected from 118 Japanese manufacturers from six manufacturing sectors. The model investigates roles of two CLMSR marketing variables (i.e., perceived supplier relationship-specific investments (RSIs) and perceived supplier relationship-specific interaction competence (RSIC)) in building three facets of customer trust (i.e., contractual, competence, and goodwill) via two mediating variables (i.e., customer relationship satisfaction and perceived supplier relationship commitment). While supporting distinctive psychological properties of the three trust components, our findings supported the critical role of the two CLMSR marketing variables and provided a new insight into supplier RSIs for the development of a CLMSR.

Technological Uncertainty, Buyer Preferences and Supplier Assurances: An Examination of Pacific Rim Purchasing Arrangements

We use the metaphor of the mutual assurance game to develop the notion that overseas suppliers may proactively manage uncertainty by making customized investments to serve their buyers. Using this game-theoretic conceptualization as a complement to the transactions cost analysis notion of credible commitments, we argue that such investments serve as assurances of commitment to the international buyer. The hypotheses are tested using data collected in a survey of U.S. purchasing managers regarding their relationships with their Pacific Rim suppliers. Consistent with our hypotheses, our primary results indicate that suppliers' relationship-specific investments are greater when technological uncertainty is high and buyers value supplier responsiveness. Further, our results suggest that relationship stability and buyer information sharing are greater when supplier relationship-specific investments are greater. These results provide some support for our argument that in the face of technological uncertainty, overseas suppliers may unilaterally commit to their buyers in attempts to obtain reciprocal benefits that help them manage external uncertainty.