Pan-Pacific Conference XXXIV. Designing New Business Models in Developing Economies

Applications of Supplier Governance Mechanisms:
An International Study
Chenlung Yang, clyang@chu.edu.tw
Shuping Lin, splin@chu.edu.tw
Department of Technology Management,
Chung-Hua University, Hsinchu, Taiwan
Chwen Sheu*
Department of Management
Kansas State University
Manhattan, KS, 66506, USA
csheu@ksu.edu
ABSTRACT
This study extends the discussion by investigating
the contingency effects of economic development
on the usage of governance mechanism. The
findings suggest that relational governance is a
multi-dimensional construct, consisting of two
conceptually and pragmatically different
mechanisms: information sharing and cooperation.
Furthermore, the statistical results reveal significant
differences in applying governance mechanisms
between developed and emerging economies,
especially when considering the origin of supplier
and source of opportunism..
INTRODUCTION
Supplier governance is a critical strategic issue for
the success of supply chain management
(Williamson, 1999; 2008). Transaction Cost
Economics (TCE) suggests that the major goal of
governance is to reduce opportunism that arises
from execution of a contract’s uncertain conditions.
The literature suggests two primary governance
mechanisms, contractual governance and relational
governance, to mitigate the opportunistic behavior.
Contractual governance refers to the use of formal
contracts to control the overall performance of
suppliers. The contract is the foundation for the
overall business transaction, and it provides formal
governance of the interactions between the buyer
and the supplier with regard to their responsibilities
and behaviors. Nonetheless, neither buyers nor
suppliers have complete information about all the
conditions under which the contract will be
executed, which is called bounded rationality [4].
Bounded rationality forces the contract to be
modified or adjusted after signing, and such
modification is called relational adaptation. Since
not all aspects of an inter-organizational transaction
can be completely detailed by the contract,
additional relational adaptation or relational
governance becomes necessary for settling contract
disputes and safeguarding completion of
transactions [7]. Relational governance defines the
degree to which the two exchange partners
cooperate as a team to solve problems, share
information to establish joint strategic directions,
and produce mutually beneficial outcomes.
When these two governance mechanisms, contract
and relational, are collectively used, it is known as
hybrid governance [6]. Managers must be able to
employ hybrid governance to effectively manage
opportunism, arising from two transaction
attributes: supplier asset specificity and
environmental uncertainty [3][4]. Supplier
specificity refers to the level of supplier resources
spent on the contract that cannot be transferred to
other buyers. Asset specificity could potentially
cause opportunism, as both supplier and buyer could
engage in “hold up” behavior if a supplier made a
specialized investment. On the other hand,
Environmental uncertainty is defined as the degree
of uncertainty with market, behavior and
technology. Environmental uncertainty affects
almost all aspects of business transactions, causing
difficulties in the execution of contractual and
relational governance. Several studies have
confirmed the efficacy of contract and relational
governance mechanisms. Nonetheless, the
alignment of transaction attributes and governance
mechanisms and the relative effectiveness of the
contractual governance, and different social control
mechanisms have not been fully examined [5].
This study proposes that the concept of relational
governance consists of two separate components:
cooperation of problem solving and information
sharing. Cooperation refers to establishment of
problem-solving procedures and implicit
agreements for exchange contingencies not covered
by formal written agreements. Thus, neither party
would exploit the other party’s vulnerabilities in the
exchange relationship. Information sharing refers to
sharing of important information, such as forecasts,
production, and schedules, and would facilitate a
high level of interfirm cooperation. These two
components represent the engagement of two
different buyer-supplier interaction activities during
contract implementation and fulfillment. Even
though previous studies combine them as a single
construct, they are likely to have different effects on
reducing opportunism. Furthermore, from the aspect
of contingency theory, the adoption of alternative
governance methods could very well depend on
some contextual factors, such as stage of economic
development, as suggested in the literature [3][6].
For instance, operations in developing countries
face the challenges of less reliable legal frameworks
117