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EJM
48,3/4

Buyer control in domestic and

international supplier-buyer
relationships

722
Received 31 March 2011
Revised 5 March 2012
19 June 2012
Accepted 22 June 2012

Arnt Buvik
Faculty of Informatics, Economics and Social Science, Molde University College,
Molde, Norway

Otto Andersen
Institute of Economics, Agder University College, Kristiansand, Norway, and

Kjell Gronhaug
Department of Strategy and Management,
Norwegian School of Economics and Business Administration, Bergen, Norway
Abstract
Purpose The aim of this paper is to investigate the effect of the prior relationship length and
employments of supplier specific investments on buyers control, and compare this effect across
international and domestic business-to-business relationships.
Design/methodology/approach The sampling frame consisted of members of a National
Association Purchasing and Logistics, and the respondents were asked to select one major supplier
that would serve as a referent in answering the questions. In total, 156 purchasing firms responded to
the questionnaire, and multiple regression analysis was used to test the hypotheses.
Findings Under condition with substantial supplier specific investments, buyers control relaxes
significantly as the length of the relationship increases in international supplier-buyer relationships,
while such change in governance pattern is completely absent in domestic relationships.
Research limitations/implications This study is based on a cross-sectional design and does not
fully capture the dynamics of business-to-business relationships. Future research should use different
methodologies such as longitudinal studies to examine dynamic relationships among the constructs in
the study.
Practical implications When strong inter-firm dependency is present, the level of buyer control in
relationships with foreign suppliers is typically high in the early stage of the relationships in order to
handle the problems of information asymmetry and prospective opportunistic behavior, and decline as the
buyers experiential knowledge with the foreign supplier increases with successive lower performance
ambiguity. This governance pattern is less evident in domestic business-to-business relationships due to
the potential effect of stronger reputation effects and stronger familiarity with current standards of trade.
Originality/value The paper contributes to the understanding that the changes in governance
form over time will be highly contingent on the level of information asymmetry and inter-firm
dependency in the early stage of the exchange relationship.
Keywords Transaction cost analysis, Relational contracting theory, Buyer control, Relationship length,
Specific investments
Paper type Research paper
European Journal of Marketing
Vol. 48 No. 3/4, 2014
pp. 722-741
q Emerald Group Publishing Limited
0309-0566
DOI 10.1108/EJM-03-2011-0181

1. Introduction
The present study combines transaction cost analysis (TCA), the relational contracting
perspectives and elements from the internationalization process to explain how certain

characteristics of business relationships will affect change of governance mode as

relationships develop over time.
Transaction cost analysis (TCA) has mainly focused on how individual
relationships or inter-firm exchanges should be organized at a given point in time,
based on certain dimensions (notably, asset specificity, behavioral uncertainty and
environmental uncertainty) of the relationship (Nooteboom, 1992). Within the TCA
framework less attention has been devoted to the process of keeping the relationship
viable over time (Rindfleisch and Heide, 1997).
TCA has for a long time been extended by arguments from relational contracting
theory (e.g. Heide and John, 1992). Relational contracting theory (RCT) states that the
history of the relationship creates certain relational features (including commitment
and reputation) and development of trust and norms, which will influence on how
business transactions in ongoing buyer-seller relationships will be organized. Based on
RCT arguments, it has been suggested that as relationships develop over time, the need
for a hierarchical governance structure should be reduced due to the emergence of
relational norms and trust (Bradach and Eccles, 1989; Granovetter, 1985).
The empirical results of the association between relationship length and governance
form have, however, been mixed (e.g. Gencturk and Aulakh, 2007; Jap and Ganesan, 2000;
Yu et al., 2006). Some research contributions on relationship dark sides have suggested
that the effect of time on a relationship governance is more complex than previously
anticipated (e.g. Grayson and Ambler, 1999; Pillai and Sharma, 2003). Factors that are
believed to have impact on long-term relationships, such as new alternative exchange
partners, decreasing innovative ability of existing exchange partner, detection of
misconduct/opportunism, may at least indirectly have an impact on changes in
governance form. The first mission of this paper is to elaborate and provide new empirical
knowledge about the dynamic of inter-firm governance and will in particular examine the
development of bilateral governance as business relationships develop over time.
Second, our research will examine the complexity of inter-firm governance further
by comparing buyer-seller relationships with different levels of information
asymmetry. We will argue that the changes in governance pattern over time will be
highly contingent on certain characteristics at the initial stage of the exchange
relationship. Contributions from internationalization research have demonstrated
significant differences between domestic and international relationships with respect
to knowledge about the exchange partner, and in particular in the early stage of the
relationship. The level of information asymmetry in the early stage of the relationship
is expected to be higher in international relationships than in domestic ones (Anderson
and Gatignon, 1986; Gencturk and Aulakh, 2007).
Information asymmetry exists when one party say, the seller has information
that the other party (the buyer) desires but does not possess and this is illustrated in
the following example. Consider the following industrial sourcing situation: A buyer
(manufacturer) needs to acquire different types of components from two suppliers, S1
and S2 and the specific investments deployed by S1 and S2 are of equivalent sizes.
Assume that the buying firm has considerable knowledge about the behavior of
supplier S1 and the performance problems that may arise, but limited access to such
information about supplier S2. As will be argued for later on, S1 could be a domestic
supplier while S2 could be a foreign supplier. The level of information asymmetry in
the supplier relationship will be higher with the (foreign) supplier S2 than with the

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(domestic) supplier S1. Such information asymmetry enables supplier S2 to act more
opportunistically than supplier S1. In the early stages of the relationship with S2 where
neither experience nor established relational norms should come into play, we expect
that the buyer would insist on keeping a higher degree of decision control than in the
relationship with supplier S1 (see also Hansen et al., 2008).
The present study investigates how the prior length of business relationships
affects the buyers degree of control where suppliers have employed substantial
specific investments. In particular, we focus on how this buyer control varies between
types of relationships where the level of information asymmetry at the early stage of
the relationship is supposed to be high and low respectively. Our main concern is
post-contractual problems, that is, problems that may emerge after the buyer and the
seller have engaged in a relationship and these problems are referred to as problems of
moral hazard or hidden action in the agency theory (Kreps, 1990).
The reminding parts of this article are organized as follows: First we present the
theoretical background and the inherent basic assumptions of our study before we
outline the conceptual framework and hypotheses. Next, we describe the empirical
study including the choice of empirical setting and present the empirical finding of our
research. We close by discussing the findings and implications of our study.
2. Theoretical background
2.1 Transaction cost analysis (TCA)
TCA is one of the most prominent frameworks for studying governance mechanisms
(Rindfleisch et al., 2010). The first basic assumption of TCA is bounded rationality
which means that human behavior is intended rational, but only so to a limited extent
due to constraints on cognitive capabilities. As noted by Rindfleisch and Heide (1997),
these constraints become problematic when circumstances surrounding an exchange
cannot be specified ex ante (i.e. due to high environmental uncertainty) and when
performance cannot be easily verified ex post.
The second basic assumption of TCA is that at least some economic agents may act
opportunistically in the sense that they will follow their self-interest if this suits their
purposes. Bounded rationality is a prerequisite for information asymmetry, which
means that one party is better informed about the basic aspects of the exchange than
the other. Such information asymmetry enables the best informed party to act
opportunistically without being detected.
According to the TCA reasoning, the establishment of governance mode in
inter-firm relationship is dependent on three key factors; asset specificity,
environmental uncertainty, and behavioral uncertainty (Rindfleisch and Heide, 1997).
Asset specificity refers to the non-redeployable investments made by one (or both) of
the exchange partners and have little or no value outside the exchange relationship.
Environmental uncertainty refers to unanticipated changes in circumstances
surrounding an exchange (Noordewier et al., 1990, p. 82), which creates an
adaptation problem (Rindfleisch and Heide, 1997) when previous agreements between
a seller and a buyer have to be renegotiated. Behavioral uncertainty arises from the
difficulties associated with the monitoring of the contractual performance of an
exchange partner (Williamson, 1985).
The composition of asset specificity, environmental uncertainty and behavioral
uncertainty has substantial impact on how the governance modes should be designed

in order to economize on transaction costs (Williamson, 1991). For instance, combined

presence of high asset specificity and behavioral uncertainty is assumed to create a
greater need for hierarchical control than when only high asset specificity is present.
2.2 Relational contracting theory (RCT)
RCT states that the behavior within a relationship is based on a set of norms or
principles of right action binding upon the members of a group and serving to guide,
control, or regulate proper and acceptable behavior . . . which may enable the
exchange parties to project their exchange into the future (Macneil, 1980, p. 38).
Accordingly, the norms are supposed to prescribe and proscribe certain behaviors
in exchange relationships (cf. Joshi and Stump, 1999) and such behavior is regulated
through a system of mutual adaptation and self-regulation (Gundlach et al., 1995) and
enforced as relational norms are built up over time (Dwyer et al., 1987; Joshi and Stump,
1999).
2.3 Relationship duration, opportunism and information asymmetry in domestic and
foreign business-to-business relationships
The degree of opportunism is likely to depend on the probability to detect and correctly
interpret such behavior. While opportunistic actions in some cases easily can be
discovered due to low level of information asymmetry, it can be very difficult to detect
and interpret when information asymmetry becomes substantial (Dixit and Nalebuff,
1991).
Information asymmetry restricts the opportunities of the less informed business
actor to evaluate both the substantial performance, quality and possible strategic
pricing behavior of his/her trading party with successive possibilities for exercising
opportunistic by the most informed actor (Williamson, 1985, 1991). As business
relationships over time, the exchange partners gain experience, and develop business
practices, which is likely to reduce the level of information asymmetry and the threat of
moral hazards (e.g. deterioration of product performance, selection of inferior
sub-suppliers or strategic pricing), because relationship learning increases over time
(Selnes and Sallis, 2003) and should reduce the prospects of opportunistic behavior.
In order to explore possible effects of information asymmetry on governance form
as the length of the relationship increases, two different sets of relationships will be
compared. The international business literature argues that international inter-firm
trade is surrounded by a higher level of information asymmetry than is the case in
domestic business relationships (Anderson and Gatignon, 1986; Gencturk and Aulakh,
2007; Rugman, 1982). This has been explained by the lack of international experience
or experiential knowledge (Johanson and Vahlne, 1977, 1991, 2006) and socio-cultural
differences between the home and the host cultures (Erramilli and Rao, 1993; Kogut
and Singh, 1988) which in turn creates impediments to information flows between a
foreign and domestic exchange partner (Brewer, 2007; Prime et al., 2009).
The transacting parties in domestic buyer-seller relationships are expected to be
more familiar with current standards of trade which provide a better evaluation of the
performance of inter-firm transactions (Ouchi, 1977). The specification and evaluation
of trade performance and fulfillment of contract terms are expected to be far more
difficult in international settings (Harrigan, 1985; Stinchcombe, 1985; Vernon, 1983).
Accordingly, we expect that the information asymmetry problems surrounding

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inter-firm trade will be higher in international buyer-seller relationships than in the

domestic ones, in particular in the early stage of the relationship (Hosseini, 2008).
3. Conceptual framework and hypotheses
3.1 Buyer specific investments, buyer dependency and buyer control
A buying firm can use multiple governance mechanisms which either could be
substitutes for one another (Stump and Heide, 1996) or used in combination (Nevin,
1995; Heide, 2003) in order to limit the sellers opportunistic behavior. For the purpose
of reducing the moral hazard problem, the buying firm may insist that the supplier
firm makes relation-specific investments or "hostages" (Williamson, 1993). According
to Williamson (1975), ex ante efforts to reduce opportunism should be supplemented
with ex post monitoring that implies that specific governance devices are introduced in
the relationship to control activities and reduce the information asymmetry between
the two parties (Lal, 1990).
Buyer control is conceptualized as the extent of the buyers authority and control
over the suppliers decision making in a specific relationship (Heide, 1994). This
corresponds to centralization, which refers to the concentration of decision making
authority or the degree of vertical control in the relationship on the buyer side (Heide,
2003). This governance mode represents a unilateral authority structure that describes
the buying firms ability to specify rules, instructions and monitoring procedures in a
specific supplier relationship. Such governance arrangements may stabilize terms of
trade and overcome the performance measurement difficulties associated to bilateral
dependence (Williamson, 1985, 1991). From the buyers point-of-view, it is important to
exercise influence in the establishment of an administrative infrastructure, such as
quality assurance systems, standards and methods for product control, and specific
guidelines prescribing how to select tools and design production facilities at the
suppliers plant.
The employment of specific assets does first of all create a motive for exercising
control in business-to-business relationships, but does not on its own provide that the
investing party possesses sufficient ability to exercise such control. Substantial buyer
specific investments make the buying firm more dependent on the supplier firm
because the substantial value of such assets is strongly reduced if the relationship with
the focal supplier is terminated (Williamson, 1985, 1991). Such a dependence structure
provides stronger control to the supplier firm and limits the buying firms to exercise
control over the supplying firm unilaterally (Heide and John, 1992). Based on this
reasoning, we propose the following hypothesis:
H1. There is a negative association between the levels of buyer specific
investments and buyer control in industrial buyer-seller relationships.
3.2 Supplier specific investments, buyer control and relationship duration
We will argue that the alignment of formalized governance is highly contingent on
inter-firm dependence and the level of behavioral uncertainty surrounding
business-to-business relationships as illustrated below. First, lets consider a
domestic buyer-seller relationship where the suppliers relation-specific investments
are substantial. For such types of relationships, psychic distance (Chelariu et al., 2006;
Prime et al., 2009) that impede the flow of information between the exchange partners
(Simonin, 1999) should be of less importance than in international relationships.

The level of information asymmetry in domestic relationships is expected to be

rather low, even in the early stage of the relationships. The seller will now face a
potential economic loss in the case of relationship termination, and will thereby have a
disincentive for opportunism. Even if the buying firm in this situation keeps the ability
to formulate rules and instructions and hence impose decision control (Heide, 1994),
his/her motivation to exercise such control is restricted because the level of information
asymmetry should be rather low and allows the buyer to evaluate the sellers behavior
and performance episodically (cf. Narayandas and Rangan, 2004).
Now, lets consider an international buyer-seller relationship where the supplier has
made substantial relation-specific investments. In this case, it will be more difficult for
the buyer to interpret the sellers behavior and performance due to differences in
language, way of communicating, business practices, norms and values, and habits
and customs (Drogendijk and Slangen, 2006). The seller is now likely to know that the
buyer, in particular in the early stage of the relationship, will have difficulties in
evaluating trade performance and fulfillment of contract terms due to such differences.
High level of asymmetric information may lead the seller at least occasionally to act
opportunistically, such as various forms of shirking or evasion of obligations (Wathne
and Heide, 2004), which is difficult to detect. Under such circumstances, the buyer is
strongly motivated to insist on a high degree of decision control in the early stage of
the relationship in order to delimit the sellers opportunity to act opportunistically.
As the relationship develops over time, the buyers experiential knowledge
(Johanson and Vahlne, 1977, 2006) about the seller and the foreign culture will increase,
which makes the buyer more confident that she/he will be able to detect and correctly
interpret possible opportunistic behavior (Katsikeas et al., 2009). This should, in turn,
reduce the buyers requirements for control (Dow and Larimo, 2009). Compared to a
domestic buyer-seller relationship, where the level of information asymmetry in the
early stage is supposed to be of minor concern, the reduction of buyer control is likely
to be higher in international relationships where the level of information asymmetry is
substantial (Leonidou et al., 2011). Based on this reasoning, we propose the following
refutable hypothesis:
H2. When the prior length of buyer-seller relationships increases, the association
between supplier-specific assets and buyer control will be more negatively
shaped in international supplier-buyer relationships than in domestic ones.
Statistically, we posit a negative interaction effect of supplier-specific assets,
relationships duration and information asymmetry on buyer control. This means that
in international supplier-buyer relationships, the interaction effect of supplier-specific
assets and relationship duration is expected to more evident and more negatively
shaped than in domestic supplier-buyer relationships.
4. Empirical setting and research methodology
4.1 Research design and empirical setting
Information asymmetry (domestic and international supplier-buyer relationships).
Because buyer-seller relationships develop episodically, deeper insights into the
evolution of buyer control should rely on a longitudinal design. Except for some recent
case-studies (Narayandas and Rangan, 2004; Ness and Haugland, 2005), empirical
studies describing the evolution of governance mechanism are rather scarce. As noted

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by several authors (e.g. Anderson, 1995), researchers are normally obliged to use
cross-sectional designs which also is the case in the present study.
In order to contrast relationships where the information asymmetry in the early
stage was "high" and "low" respectively, this study compared international and
domestic buyer-seller relationships. A large number of studies within international
marketing have suggested that information asymmetry is higher in international
settings than in domestic ones (Anderson and Gatignon, 1986; Cavusgil et al., 2004;
Gulati, 1995; Klein et al., 1990; Li and Ng, 2003; Roath et al., 2002), and in particular in
the early stage of business relationships ( Johanson and Vahlne, 2006).
Similar arguments have been forwarded within other inter-firm relationship studies
than marketing (Petersen and Rajan, 2002; Das and Sengupta, 2001). Particularly in the
early stage of a relationship, the buying firm needs to learn about social, cultural,
political, and other environmental factors in the foreign country (Henisz and
Williamson, 1999; Samiee and Walters, 2003) since these factors are likely to have a
great impact on the foreign sellers attitude, behavior and performance (Daniels et al.,
2002). A considerable part of this knowledge is believed to be experiential or
experience-based (Autio et al., 2000; Eriksson et al., 1997; Johanson and Vahlne, 2006;
Takeuchi et al., 2005). That is, knowledge that can be acquired only by learning by
doing, for instance, by repeated interactions with a foreign partner (Gulati, 1995).
Instrumental screening and signaling are hence more difficult to administer in
international buyer-seller relationships for the purpose of reducing information
asymmetry.
4.2 Sampling strategy
The relevant unit of analysis in this study is the relationship between independent
manufacturing firms. The sampling frame consisted of Norwegian members of the
National Association of Purchasing and Logistics, and questionnaires were mailed to a
census of the 684 members. Feedback from the informants revealed that 114 of the
firms were no longer engaged in manufacturing, thus representing a sample-frame
error. Among the remaining, a total of 156 (28 percent) responded to the questionnaire
after two call-backs. The extent and direction of non-response bias was estimated by
comparing early responders (64 percent) with late responders (36 percent), using a
cut-off period of three weeks (cf. Armstrong and Overton, 1977). No significant
differences between those two groups were detected with respect to the variables
included in our conceptual framework. A new survey among 160 non-responders was
then carried out and revealed that 12 percent did not response due to confidentiality
reasons, 67 percent of this group reported busy work situation as the reason for not
responding, and the residual of this group (21 percent) reported negative attitude to
mail survey as the main reason for not responding to the survey. Finally, we compared
the size of the firms (production value) between the responding firms and the new
sample of 160 non-responders, but we found no significant differences.
The annual sales volume of the responding purchasing firm was 670 million, and
the annual purchasing volume from their selected focal suppliers represented on
average 12.5 percent of total annual purchasing volume. The average prior length of
the relationships in our sample was 12.9 years and our key informants perception of
their involvement with the selected suppliers had an average rating of 6.1 on a sevenpoint Likert scale.

From the final sample, 45 firms reported about their focal relationship with an
international supplier while 111 reported about a focal domestic supplier. A significant
share (87 percent) of the final sample was engaged in international relationships and
there was no significant difference across domestic and international relationships
with respect to the international engagement of the buying firms (export share and
experience with international trade).

Buyer control in
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729

4.3 Measures
The subsequent section describes the measures used for the dependent, independent,
and control variables, respectively. The actual measures with fit indexes and
Cronbachs alpha are shown in Table I.

Scales:

Description of items. Response format: Seven-point Likert-type scale

with end points inaccurate description and accurate description

Buyer control:
BUYCON: three items
CFI 1.00, GFI 1.00
Trivial fit for three-item scale
a 0.70

BUYCON1: Our firm determines all aspects of the implementation of

quality assurance at our suppliers plant
BUCON2: Our firm determines in detail the methods and standards to
be used for control of the products we purchase from this supplier
BUYCON3: Our firm determines completely which sub-contractors to
employ for the production of products delivered to our firm by this
supplier

Supplier specific investments:

SUPPLSPEC: four items
x2(2) 1.24, p 0.54
CFI 1.00
GFI 1.00
a 0.73

SUPPLSPEC1: This supplier has committed a lot of time and

resources to meet our requirements for specific routines and
equipment for product control
SUPPLSPEC2: This supplier has made comprehensive product
adjustments in order to meet our requirements
SUPPLSPEC3: This supplier has to a great extent adapted the
execution and follow-up orders to the existing ordering routines in our
firm
SUPPLSPEC4: Our supplier has carried out extensive investments in
storage and transportation equipment in order to deal with deliveries
to our company

Buyer specific investments:

BUYSPEC: five items
x2(5) 4.18, p 0.53
CFI 1.00 GFI 0.99
a 0.71

BUYSPEC1: Our firm has completely adjusted our product

specifications in accordance with this suppliers production
technology and product range
BUYSPEC2: our firm has committed a lot of time and resources to
achieving insight and adaptation to the technical standards of this
supplier
BUYSPEC3: Our firm has completely restructured our production in
order to improve the efficiency of the further processing of the
products that we buy from this supplier
BUYSPEC4: Our firm has to a great extent adapted our ordering
routines to this suppliers expediting routines
BUYSPEC5: Our firm has made substantial investments in
information technology dedicated to the transactions with this
supplier

UNCERT: 1 item

UNCERT1: The demand for the product we buy from this supplier is
very unpredictable

Table I.
Measures of constructs
and validity statistics

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Buyer control (BUYCON) describes to which extent key decisions in the relationship
are concentrated with the buyer (Heide, 2003), and represents the buyers degree of
vertical control. Based on Heide and John (1992), we define buyer control as the buying
firms overall influence on supplier decisions concerning quality assurance, product
control, and selection of sub-suppliers.
Supplier specific assets (SUPPLSPEC) refers to which specific investments and
adaptations made by the supplier that are tailored to the specific purchasing
relationship. Previous research (Heide and John, 1990) provided relevant items for our
study and asset specificity was measured by the suppliers investments in product
control procedures, customization of products, inventory and transport solutions,
ordering and expediting routines.
Buyer specific investments (BUYSPEC) refers to the magnitude of the
investments and/or adaptations made by the buyer in physical assets, production
facilities, tools and knowledge tailored to the relationship. Based on
power-dependence considerations, several empirical studies (e.g. Heide and John,
1992) have demonstrated that employment of buyer specific investments will
attenuate the buying firms ability to exercise influence on terms of trade and
business performance in purchasing relationships. In this study we applied five
items derived from Heide and John (1990, 1992) and Anderson and Weitz (1992) to
describe the buyers adaptation to the supplier firm with respect to product design,
technological standards, organization of production, information technology and
ordering routines.
Information asymmetry (ASYM). Based on our discussion above, we assume that
high and low degree of information asymmetry is reflected by international
buyer-seller relationship respectively domestic buyer-seller relationship. We used a
dummy variable, where 1 indicates high degree of information asymmetry
(international relationships) and the value 0 is associated with low degree of
information asymmetry (domestic relationships).
Prior length of the relationship (TIME) represents a key independent variable in our
study. We suggest that the decrease of buyer control over time will be more
pronounced in relationship associated with high information asymmetry compared to
low information asymmetry. The effect of the prior length of business relationship is
not expected to be linear (e.g. Heide and John, 1992), and we used the natural logarithm
of the elapsed length in years as a measure of this variable.
Control variables. In order to account for additional determinants of buyer control,
we included two control variables that according to the TCA literature are regarded to
represent significant antecedents to inter-firm governance, buyer specific investments,
annual purchasing volume, and environmental uncertainty (cf. Rindfleisch and Heide,
1997). Environmental Uncertainty (UNCERT) is expected to be a significant antecedent
to inter-firm governance. In particular, changing demand conditions call for
comprehensive adjustments, communication of new information, realignment of
resources and the re-negotiation of terms of trade (Williamson, 1985). To account for
this effect, a single item measure focusing on the degree of marked demand
unpredictability of the product bought from the focal supplier was incorporated in our
research model. Annual purchasing volume ($PURCHASE). The TCA framework
assumes that parties to a high stakes exchange will face higher exposure to
opportunism and higher transaction costs when terms of trade are to be realigned.

Further, the purchasing volume might reflect the frequency of inter-firm exchange and
hence be associated with the efficacy of specialized inter-firm coordination
arrangements (Rindfleisch and Heide, 1997; Williamson, 1985). The natural
logarithm of the buyers annual dollar purchases from the focal supplier was used
to control for these effects.

Buyer control in
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relationships

4.4 Validation of constructs

First, each of the three multi-item measures (buyer control, supplier specific
investments and buyer specific investments) was analyzed by inspecting item-to-total
correlations. Then, each of the constructs was examined by a confirmatory factor
analysis to verify unidimensionality and assessment of internal consistency. A
single-factor representation was used for each of the item-sets representing these
constructs and the estimates and the fit statistics for these three models showed an
adequate fit to the data set (confer Table I). Discriminant validity of the three basic
TCA-constructs was then assessed by estimating a three-factor measurement model
based on EQS (Bentler, 1989). The overall Chi-square statistics indicate a reasonable fit
to a three factor solution x2 51 60:72; p 0:17; and several indexes confirmed
satisfactory fit of the three factor model, Bentlers CFI 0:99; the goodness-of-fit
index, GFI 0:95 and the root mean square measures, RMSEA 0:03: Table II
presents the correlation matrix, descriptive statistics and collinearity diagnostic.

731

5. Hypotheses tests and empirical findings

5.1 Empirical analysis
In order to test our research hypotheses, the following OLS-regression model was
estimated in order to assess the main effect of specific buyer investments (BUYSPEC)
and the interaction effects of relationship duration (TIME), asymmetric information
(ASYM) and supplier specific investments (SUPPLSPEC) on buyer control (BUYCON):
BUYCON b0 b1 SUPPLSPEC b2 ASYM b3 TIME b4 SUPPLSPEC TIME
b5 SUPPLSPEC ASYM b6 ASYM TIME b7 SUPPSPEC
ASYM TIME b8 BUYSPEC b9 UNCERT b10 $PURCHASE 1

Table III presents the estimated coefficients and levels of significance. The overall
goodness of fit for the basic model is reasonable good with F10; 145 6:84
( p , 0.01) and R 2Adj 0:27 which indicates that the model provides an adequate
description of the data set.
When a large number of interaction terms are included in one model, the likelihood
of serious multicollinearity problems exists. Except for the dummy variable
(information asymmetry), the scales of the variables entering the interaction terms
were mean centered to cope with possible collinearity problems and the collinearity
diagnostics revealed acceptable tolerance measures (VIF) for all variables (confer
Table II). Residuals were then inspected for heteroscedasticy and no particular pattern
appeared.

Adj

1.60

2 0.08
0.14
2 0.13
1.0

1.51

0.04
0.08
0.03
20.01
1.0

1.75

0.30
0.60
20.36
0.10
20.12
1.0

2.11

2 0.09
0.11
2 0.19
0.51
2 0.33
0.16
1.0

2.23

20.09
20.16
0.16
20.33
0.52
20.26
20.64
1.0

1.37

0.07
0.47
20.14
0.20
0.09
0.31
0.07
20.06
1.0

1.03

0.23
0.04
0.07
2 0.13
2 0.02
0.04
2 0.02
2 0.01
0.06
1.0

10

1.25

0.15
0.23
0.10
0.29
0.03
0.05
0.12
20.01
0.28
20.02
1.0

11

3.23
0.00a
0.29
0.00a
0.17
20.18
20.06
0.07
3.17
3.38
1.46

Mean

1.54
1.36
0.45
0.92
1.24
0.77
0.46
0.66
1.29
1.87
1.49

SD

0.27; r . 0.16 and r , 20.16 is significant at p , 0.05 for n 155. Mean centered variables

1.23

1.94
2

20.02
20.29
1.0

0.43
1.0

Notes: Model fit: F(10,145)=7.84; ( p , 0.01) and R

1.0

1. BUYCON
2. SUPPLSPEC
3. ASYM
4. TIME
5. SUPPLSPEC TIME
6. SUPPLSPEC ASYM
7. ASYM TIME
8. SUPPLSPEC TIME ASYM
9. BUYSPEC
10. UNCERT
11. $PURCHASE
Collinearity (VIF)

Table II.
Correlation matrix,
descriptive statistics, and
collinearity diagnostics
1

732

Variables

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Independent variables
CONSTANT (b0)
SUPPLSPEC (b1)
ASYM (b2)
TIME (b3)
SUPPLSPEC TIME (b4)
SUPPLSPEC ASYM (b5)
ASYM TIME (b6)
SUPPINV TIME ASYM (b7)
BUYSPEC (b8)
Controls:
UNCERT (b9)
$PURCHASE (b10)

Hypotheses

Unstandardized
coefficients

Standardized
coefficients

t-value

H2
H1

3.16
0.50
0.23
20.14
0.10
0.20
20.68
20.50
20.24

0.44
0.07
2 0.08
0.08
0.10
0.21
2 0.21
2 0.20

8.57 * *
4.61 * *
0.88 ns
2 0.93 ns
0.98 ns
1.09 ns
2.06 * *
2 2.09 * *
2 2.53 * *

0.17
0.15

0.21
0.14

2.96 * *
1.83 *

Notes: *Indicates p # 0.05 (one tail); * *Indicates p # 0.01 (one tail). Model fit:
F(10,145) 7.92, p , 0.01

R 2adj

0.31;

5.2 Empirical findings

As suggested by H1, we observe in Table III a strong and negative effect of buyer
specific assets on buyer control b8 20:24; t 22:53; p , 0.01) which provides
support for H1.
H2 is related to the three-way interaction term SUPPLSPEC x TIME x ASYM which
actually compares the combined effect of asset specificity and relationship duration
(SUPPLSPEC TIME) across domestic and international supplier-buyer relationships.
The outcome of the regression analysis demonstrates that the three-way interaction
effect is significant and less than zero b7 20:50; t 22:09; p , 0.05). In accordance
with H2, this finding indicates that the effect of asset specificity on buyer control is
attenuated significantly more in international buyer-seller relationships than in domestic
ones when the prior history of the relationship increases.
5.3 Interpretation of interaction effects
When an interaction effect is present, the main effect of a variable entering the interaction
term expresses its effect when the variable with which it interacts is zero. Recall that the
scales of supplier specific investments and relationship duration were mean-centered.
Accordingly, the estimated main effect of supplier specific investments on buyer control is
estimated when relationship duration equals its mean value and when information
asymmetry equals zero (domestic supplier-buyer relationships). The partial derivates of
buyer control with respect to supplier specific investments can be expressed as:

BUCON=SUPPLSPEC 0:50 0:10 TIME 0:20 ASYM 2 0:50 TIME ASYM

This equation can be estimated for domestic and international relationships by
assigning the values 0 domestic relationships and 1.00 to the international ones in
order to figure out these interaction effects in more details. When ASYM equals 0
(domestic relationships), BUCON=SUPPLSPEC 0:50 0:10* TIME; and when
ASYM equals 1.00 (international relationships), BUCON=SUPPLSPEC 0:70
2 0.40 * TIME. Figure 1 depicts this in more details.

Buyer control in
supplier-buyer
relationships
733

Table III.
Regression analysis:
dependent variable,
buyer control (BUYCON)

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734

Figure 1.
The effect of supplier
specific assets on buyer
control for different levels
of relational duration in
domestic (Line A) and
international (Line B)
relationships

Figure 1 illustrates quite evidently how the prior length of business-to-business

relationships affects the way buyers exercise control in domestic relationships (Line A
in Figure 1). Our empirical findings demonstrate that in the case of low or moderate
information asymmetry (domestic relationships), the time dimension does not at all
effect the association between asset specificity and buyer control, and this governance
pattern is materialized by a relatively strong, positive and stable association between
asset specificity and high buyer control.
This governance pattern is completely different in international relationships (line B
in Figure 1). In relationships with relatively short prior history, the buying firms seem
to respond to high asset specificity and small number conditions by crafting strong
influence and control over the supplying firm. This governance pattern is completely
changed as the prior history of business-to-business relationships increases with a
successive attenuation of hierarchical governance.
5.4 The effects of the control variables
Environmental uncertainty seems to foster higher hierarchical governance to cope with
unpredictable terms of trade and the prospects of frequent renegotiations b9 0:17;
p , 0.01). Finally, stakes and leverage considerations seem to act as a significant
antecedent to hierarchical governance, and the annual purchasing volume absorbed by
the buying firm is positively associated to buyer control b10 0:15; p , 0.10). Taken
together, the analysis demonstrates that the TCA based predictor variables maintain
explanatory power when relevant control variables are implemented in the model, and
indicates a satisfactory robustness of the model.

6. Discussion and implications

6.1 Theoretical implications
Recently, the TCA literature has extended governance mechanism issues towards
relational aspects suggesting that we need to adopt an integrated theoretical
perspective, and one important aspect is to analyze how business relationships and
governance patterns evolves over time. As the length of the relationship increases, the
exchange partners gain experience, and informal business practices will develop which
is likely to reduce the level of information asymmetry and the threat of moral hazards
(e.g. deterioration of product performance, selection of inferior sub-suppliers or
strategic pricing), because relationship learning increases over time (Selnes and Sallis,
2003) and should reduce the need for more formal governance mechanisms in
subsequent transactions (Gulati, 1995).
Furthermore, the reduction in formal control over time should be more evident when
the level of information asymmetry in the initial stage of the relationship is high,
compared to situations with low information asymmetry, and extensive research in
international marketing has demonstrated that information asymmetry, in particular
in the early stage of the relationship, is far more prominent in international buyer-seller
relationships than in domestic ones (e.g. Leonidou et al., 2011; Samiee and Walters,
2003). The present study illustrates that the governance pattern actually develop
differently in domestic and international relationships. In their revised model of
internationalization, Johanson and Vahlne (2003, p. 93) note that experiential learning
about a foreign exchange partners abilities and skills, the partners way of reacting to
certain kinds of action and so on, is a time and resource demanding process. In the
early stage of the internationalization process, lack of experiential knowledge about the
foreign partner gives rise to high uncertainty which dampen scale-increasing relational
commitment ( Johanson and Vahlne, 1977, p. 30).
The tacit character of experiential knowledge makes learning by doing more
important (Gao and Pan, 2010). Opposed to domestic relationships, the ability to
perceive and understand the foreign exchange partners behavior is supposed to be low
or modest in the early stage of the relationship (Johanson and Vahlne, 2006).
Furthermore, foreign exchange partners have more opportunities to withhold and/or to
control how much tacit knowledge that should be released compared to domestic
exchange partners (Katsikeas et al., 2009). Accordingly, the level of information
asymmetry is likely to be significantly higher in an international relationship than in a
domestic one. As the relationship develops over time, the buyer will increase his/her
knowledge about the foreign exchange partner, which in turn will lead to lower
perceived uncertainty (Forsgren, 2002) and the need for monitoring and formal control.
Our results demonstrate that as the prior length of the relationship increases,
hierarchical buyer control is relaxed more strongly in cross-border relationships than
in the domestic relationships.
6.2 Managerial implications
As specific investments in assets are carried out, the functional interdependence
between the actors in business relationships is enforced. It is therefore urgent to specify
appropriate authority relations and hierarchical control procedures in the early stage of
business-to-business relationships (Heide and John, 1990).

Buyer control in
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735

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736

When specific investments are employed by the supplier, this will normally lead to a
situation where the buyer has the leverage to formulate specification of routines,
procedures and requirements regulating the relationship. The main issue with such
governance devices is to be proactive and reduce on-going exchange problems in the
initial stage of business-to-business relationships. Planning and adjustments activities
are usually based on formalized contingency plans specifying environmental events
(e.g. volume irregularities and quality deterioration) and corresponding procedures and
contractual obligations (e.g. procedures for change order, escalation contracts and
procedures for the handling of complaints).
As buyer-supplier relationships evolve from the initiation stage into the
establishment stage, mutual experience, learning and development of relational
norms open the gate for a stronger supplier involvement in the relationship. The
establishment of relational norms and trust should be effective for the purpose of
mitigating trading hazards, and provide a supportive safeguard on its own.
This study has shown that the buyer is likely to insist on a high degree of decision
control in the early stage of the relationship with an international seller in order to
reduce the likelihood of opportunism. As the relationship develops over time, the
buyers experiential knowledge about the seller will increase and relational norms and
trust may be developed which in turn should reduce the buyers need for control. This
reduction of buyer control will be far more extensive in an international relationship,
than for a domestic relationship.
Relational norms tend to develop when business partners expect to cooperate in the
future and by introducing mutual standards of conduct, exchange partners establish
the general ground rules for future cooperation. When trust and standards of conduct
are put in place, the prospects of moral hazards should be replaced by goal congruence,
and provide self-enforcement of obligations based on a win-win perspective.
The establishment of relational ties affects the organization of business-to-business
relationships in several ways. It makes it easier to intertwine the roles of the buyer and
the seller and create inter-firm alliances based on explicit coordination of inter-firm
activities. Under such circumstances, planning and adjustment processes are by its
nature decentralized and based on mutual exchange of information and resources. This
implies a stronger integration of the supplier into the buying firms planning by
providing access to the buyers customer data, employee and production processes in
order to create a link between the buying firms end use customers and the suppliers
production planning (Wathne and Heide, 2004).
7. Limitations and further research
Much remains to be done to further elaborate the issue of hierarchical governance in
business-to-business relationships. Implicitly, the limitations of this research generate
some options for further research. First of all, this study is based on a cross-sectional
design, and does not fully capture the dynamics of the inter-firm trading. One problem
associated to our cross-sectional design is that the sequencing of specific investments
may inherently be reflected in the length of the relationship. Long-time relationships
may be associated with a gradual build-up of specific assets, which bring about an
institutionalization of governance patterns over time. Such routinization of inter-firm
interactions may give some explanation to the relaxation of hierarchical governance
(buyer control) in cases where specific investments are incrementally built up over

time. Another problem with employing cross-sectional sample is that long-lived

relationships are typically more successful ties, which make it difficult to disentangle
whether control is relaxed over time because of the cumulated success of the
relationship, or the cumulated time on its own. Further research is desirable to explore
this issue further.
Second, the length of the relationship may inherently reflect some substantial
depreciation of specific investments, which our measurement method does not capture.
It is always the current and substantial value of specific assets which create the basis
for small number conditions and successive safeguarding problems.
Future studies should progress toward more detailed investigations of how the
governance mechanisms in international and domestic buyer-seller relationships
develop over time. An important research question concerns whether there exist a
higher degree of hierarchical governance at the time of establishing an international
business relationship than what is the case in a domestic relationships. Our
understanding of cross-border business relationships is still incomplete, and it has
been concluded elsewhere that insufficient attention has been paid to exploring and
theorizing business relationships in international contexts (Saimee and Walters, 2003).

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741

Corresponding author
Arnt Buvik is the corresponding author and can be contacted at: arnt.buvik@himolde.no

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