Business Continuity and Relationship-specific Investment : Potential Alternatives and Negotiation Tolerance in Supply Chain Transaction

Firms increasingly seek alternative suppliers to enhance supply-chain flexibility and resilience, yet maintaining such outside options may weaken incumbent suppliers’ incentives to undertake relationship-specific investments. This creates a governance challenge: how can firms preserve the adaptive benefits of alternative suppliers while sustaining the investments required for joint value creation? We develop a theoretical model that integrates buyers’ outside options, suppliers’ relationship-specific investment, and relational safeguards expressed through buyers’ bargaining behavior. We focus on warmth-oriented communication, defined as a negotiation style characterized by attentive listening, friendliness, politeness, and tolerance. The model predicts that stronger outside options reduce incumbent suppliers’ investment incentives when buyers are less tolerant in negotiation, whereas warmth-oriented communication attenuates this adverse effect by softening the exercise of bargaining power. We test these predictions using survey data on 360 procurement transactions involving engineered components from Japanese manufacturing firms. The empirical results are consistent with the model: potential suppliers reduce relationship-specific investment when warmth-oriented communication is low, while this negative effect is mitigated as communication becomes warmer. Our findings identify negotiation conduct as a behavioral governance mechanism that helps firms reconcile supply-chain flexibility with relationship-specific investment. More broadly, the study contributes to research on interfirm governance by showing that the consequences of outside options depend on how bargaining power is exercised, thereby revealing an important boundary condition in the relationship between alternative partners and relationship-specific investment.