Adaptation problems in business relationships with substantial asset specificity and environmental uncertainty: the moderating effect of relationship duration

TL;DR: In this article, the authors examine the relationship between asset specificity, environmental uncertainty, relationship duration and inter-firm governance in business-to-business relationships and demonstrate that relational norms and trust enforces the ability to implement hybrid governance arrangement when strong interfirm ties and substantial environmental volatility appear simultaneously.

Abstract: Based on transaction costs analysis (TCA) and relational contract theory (RCT), this study examines the association between asset specificity, environmental uncertainty, relationship duration and inter-firm governance in business-to-business relationships. In particular, the authors elaborate the tension between the problem of safeguarding and adaptation in business-to-business relationships by comparing the interaction effect of specific investments and environmental uncertainty on inter-firm coordination across business-to-business relationships with different prior length. Data from a survey of 170 industrial buyer-seller relationships demonstrates that when buyer-seller relationships with substantial asset specificity and short prior history are exposed to substantial environmental uncertainty, inter-firm coordination arrangements are quite modest. This governance pattern is completely different in business-to-business relationships with long prior history where the combined presence of substantial assets specificity and high environmental uncertainty enforces the level of inter-firm coordination. These findings demonstrate that relational norms and trust enforces the ability to implement hybrid governance arrangement when strong inter-firm ties and substantial environmental volatility appear simultaneously.