Hybrid governance and governance performance in industrial purchasing relationships

Hybrid governance arrangements (e.g. joint action, long-term contracting and vertical coordination) feature regularly as an effective response to inter-firm dependence in the literature of business-to-business relationships. However, current empirical work has paid little attention to whether such governance arrangements really do improve governance efficacy and reduce transaction costs. The present study focuses on the governance efficacy of vertical coordination in industrial business-to-business relationships. Building on transaction costs arguments, the author examines whether vertical coordination is an effective means for adapting to inter-firm dependence, realized as the substantial employment of specific assets. Empirical findings from a survey of 170 industrial supplier-buyer relationships demonstrate that when asset specificity reaches a certain level, greater vertical coordination reduces ex post transaction costs significantly. On the other hand, this efficacy pattern is modest or non-existent in relationships with low asset specificity. The research findings support the basic TCA assumption that the performance of hybrid governance arrangements is highly dependent on a situation of substantial inter-firm dependence with subsequent small-number conditions.