Relationship-specific Investments In Asymmetric Inter-organizational Transactions And Govenrance Mechanisms

In the era of global knowledge economy, the rapid progress ofhigh-end technology, new materials, micro-electronics technology,information technology, computer digitalization, biomedical technology,have been breaking up the traditional business models of companies. Itis critical for corporations to maintain long-term competitiveness in theuncertain but dynamic business environment to gain profits even if thereis fierce price competition between rival companies. The answer is tosuccessfully deal with its external relationships, especially customerpartnerships.The driving force of Taiwan’s fast-growing manufacturingbusinesses is are the principles derived from the OEM （“OriginalEquipment Manufacturing”） model of the professional division of labor.Bigger companies are outsourcing to smaller manufacturing companies in Asia to lower the cost of their products. Taiwan has many of these smallbut highly efficient manufacturing companies. Although this type ofoutsourcing strategy builds up many Taiwanese companies, it also resultsin their dependence to these purchasing companies （externalenvironment） thereby making the future of these companies andunstable. In practice, in a fiercely competitive market, because of therelative weakness in bargaining power, Taiwanese enterprises need toengage in certain unilateral commitments （such as relation-specificinvestments） in order to obtain procurement orders and to advancecooperative relationships. Some of Taiwan’s OEM companies stillinvest in relation-specific investments to get orders from customers evenin the absence of any protective governance mechanism.This study suggests that under asymmetric vertical organizationalrelationships, OEM companies with weak bargaining power can stillcreate non-market governance mechanisms to protect their relationship-specific investments. These mechanisms will make thecooperative relations between procurement enterprise and OEM businessmore stable, thereby facilitating the formation of strategic alliancepartnership.This research uses the Taiwan’s traditional manufacturing andhigh-tech industry of the OEM business as subjects. It seeks to discernthe importance of the governance mechanisms to safeguard thecompanies’ relationship-specific investments in asymmetric relationshiptransactions. Furthermore, it seeks to find out the factors that affect thegovernance mechanisms. It also studies the impact ofphysical-asset-specific investments, location-specific investments,program-specific investments and domain-knowledge-specificinvestments on quasi-integration, development of contracts and relationalcapital.This study integrates transaction cost theory, resource dependence theory, resource-based view, social network theory, etc, based on theresults of case studies and research questionnaire design, to infer therelationship between relationship-specific investment and protectiongovernance mechanisms. The study confirms that the determinants ofthe various dimensions of governance mechanisms are different.Knowledge-specific and procedure-specific investments have significanteffects on quasi-integration. Knowledge-specific investments andlocation-specific investments have significant impacts on relationalcapital. However, the impacts of physical-asset-specific,location-specific, program-specific, and knowledge-specific investmentson the development of contract are not significant. For Taiwansuppliers, knowledge-specific investments have the greatest impact ongovernance mechanism. The better the supplier performance （newproduct development, new product development speed, product qualityprice, and delivery performance） is, the higher the degree of involvement in the development of contracts and relational capital. Thedegree of reliance of the OEM suppliers（the buyer substitutability）willaffect the degree of quasi-integration. The contract is the last safeguard ofthe OEM enterprises against the speculative behavior of the procurementcustomers. Taiwan’s OEM companies need to be encouraged to use thecontract as an important choice of protective governance mechanismsand to determine the relationship capital for their OEM businesses.