Effect of Social Capital and Transaction Cost on Supplier’s Opportunism in Manufacturer-Supplier Relationship

Abstract

To develop and maintain a successful partner relationship is not sufficient to focus on relationship building factors but also to recognize and manage factors that destroy the relationship (Abosag et al., 2016; Oliveira & Lumineau, 2019). Successful exchange partner relationships is a precious asset for manufacturers and is an unmatched source of competitive advantage (Day and Wensley 1983; Dwyer et al., 1987; Palmatier et al., 2006; Watson et al., 2015). Partners' opportunistic behavior is one of the key destroying factors in an exchange partner relationship, as it can degrade overall performance and increase the governance cost in the relationship (Wang et al., 2013). Therefore, it is important to understand, how partner's opportunism arises and mitigate for governing long-term partner relationship. Transaction cost economics (TCE) suggest that transaction-specific investments (TSIs), environmental uncertainty (EU) and behavioral uncertainty (BU) are the primary drivers of opportunistic behaviour in inter-organizational relationships (Crosno & Dahlstrom, 2008). TCE fails to recognize the importance of the social aspects in explaining suppliers' opportunistic behavior in inter-organizational relationships (Heide, 1994). Research on inter-organizational relationship suggests that social capital is one of the most effective ways to develop and sustain a relationship (Nahapiet & Ghoshal, 1998). Social capital can clarify the misunderstanding, resolve the dispute, and enhance the relationships between exchange partners (Tsai & Ghoshal, 1998). Research in an inter-organization relationship suggests that social and economic forces are complementary in developing and maintaining economic transactions in long-term(Poppo & Zenger, 2002). While economic forces provide the institutional framework, social forces nurture the continuity of an inter-organizational exchange (Luo, 2007a). Current research provides a strong linkage between dimensions of TCE and social capital on the strong and weak form of partners' opportunism in an exchange partner relationship. Based on these insights, the current study theorizes and develops the research model by integrating the TCE theory and social capital theory perspective. The proposed research model attempts to address the following research questions: (1) How transaction cost and social capital dimension affect different forms of opportunism? (2) Does the firm's social capital moderate the relationship between the firm's TCE dimensions and supplier's forms of opportunism in the manufacturersupplier relationship? (3) How different forms of opportunism affect relational outcomes? The research setting for this study is the manufacturer-supplier relationships of the Indian chemical industry. A sample of 389 responses was collected from chemical manufacturers across Gujarat based using Gujarat industrial directory sampling frame and retained 372 responses after removing multivariate outliers from the dataset. The findings of this study provide empirical support for the research hypotheses and uncover the four important impacts on supplier's strong and weak form of opportunism: (1) enhance the impact of TCE dimensions on strong and weak of opportunism, but the amplifying effect is more of the strong form of opportunism in the relationship. (2) Curtail the impact of social capital dimensions on both the forms of opportunism but attenuating power of social capital dimensions are more on a weak form of opportunism in the relationship. (3) Social capital weakens the positive effect of TCE dimensions on both the forms of opportunism in the relationship. (4) A strong and weak form of supplier's opportunism has a different impact on performance and governance cost in the relationship. Finally, the current study concludes with theoretical and managerial insights based on empirical findings. These insights provide clarity and recommendations to managers for governing the long-term manufacturer-supplier relationship.