Holding Distribution Channel Relationships Together: The Role of Transaction-Specific Assets and Length of Prior Relationship

The authors investigate the effect of managers' perceptions of two types of transaction-specific investments on their intention to terminate a current interorganizational relationship: (1) the specific knowledge necessary for a manufacturer's representative (rep) to carry out the selling function for a given manufacturer and (2) the specific knowledge reps acquire about their own customer accounts. The extent to which the length of prior relationship strengthens or weakens the hypothesized linkages is also examined. The authors test the hypotheses within the context of distribution channels (i.e., between a manufacturer and its selling agent), which are characteristic of many vertical organizational relationships. The results replicate in an additional setting some prior findings on the influence of transaction-specific investments between two parties directly involved in a relationship. The authors also find that specialized investments by a downstream partner (i.e., a manufacturer's rep) in relationships that are even farther downstream (i.e., customer accounts) can influence a manufacturer's intention to terminate the manufacturer-rep relationship. Moreover, the length of prior relationship between a manufacturer and its rep is shown to moderate this effect. (Transaction Cost Theory; Interorganizational Relationships; Trust) One of the interesting phenomena in the domain of organizational activity is interorganizational relationships (Oliver 1990). An important question for firms that enter into such relationships is whether to continue or terminate them. Why some firms continue and others terminate interorganizational relationships has been a subject of both theoretical and empirical research (e.g., Heide and John 1990, Levinthal and Fichman 1988). Underlying much of this work is transaction cost theory (Williamson 1985), which holds that relationships are maintained because the parties invest in relationship-specific capital. By this view, relationship-specific investments make the exchange partners costly to replace, which in turn cements the interorganizational relationship (Williamson 1983) and makes it less likely to be terminated. However, current research using transaction cost theory posits that voluntary adoption of standards of behavior (e.g., Noreen 1988), mutual cooperation (e.g., Hill 1990, 1995), and enlightened self-interest and trust (e.g., Jones 1995) may mitigate this effect. Previous research on the continuity of interorganizational relationships has concentrated only on the transaction-specific investments between the two parties 612 ORGANIZATION SCIENCE NO^. 8, No. 6, November-December 1997 1047-7039/97/0806/0612/$05.00 Copyright