Buyer-Supplier Relations in Industrial Markets: When Do Buyers Risk Making Idiosyncratic Investments?

Abstract

It is well established that the existence of investments specific to a relationship influences the choice of governance structure, including the use of contractual safeguards. What is less well understood are the circumstances leading to the creation of those specific assets to begin with. This paper explores the industrial buyer's motives to put itself at risk by making investments, tangible and intangible, which cannot be readily redeployed from one supplier to another. Using original data from a sample of 388 supply relationships involving all automakers in the U.S. and Japan, we examine features of the supply task, the supplier, and the supply environment which serve as motives to make supplier-specific investments. We also examine potential factors which facilitate the posting of specific assets as “credible commitments” to attenuate supplier opportunism. We find that specific investments by buyers serve as a mechanism to 1) increase coordination when the manufacturing task is complex, 2) buffer the buyer against technological uncertainty, and 3) build close relationships when the requisite production skills are scarce (the supply market is thin). We find more specific investments in supply arrangements that are embedded in a broader business relationship. We find fewer supplier-specific investments in the Japanese context. Finally, we find that buyers focus their investments on lesser-known, low-share component makers, perhaps to capitalize on a unique, focused supplier capability.