Investment in Transaction - Specific Assets and Opportunistic Behavior in a Chinese Supply Chain

This chapter addresses the relationship between a supplier and the manufacturers that it serves, from the perspective of transaction cost economics theory (TCE). TCE deals with relationships between organizations, such as customers, manufacturers and suppliers. It states that investment in transaction-specific assets opens the door for opportunistic behavior by an organization’s partners. Interpreted from the perspective of a supplier, the supplier’s investments in transaction-specific assets, such as dedicated plant and equipment, workforce with transaction-specific skills and the development of transaction-specific relationships, will lead to opportunistic behavior on the part of the manufacturers that they serve, providing an environment where behaviors intentionally designed to take advantage of the supplier will flourish. Because the supplier will not be able to redeploy those investments to a different manufacturer if the relationship is discontinued, manufacturers will be motivated to capitalize on this vulnerability by employing behaviors such as seeking unfair price concessions, sharing proprietary information with competitors or other unethical behaviors. This study advances the application of TCE to the context of supply chain management by breaking investments in transaction-specific assets into investments in transaction-specific tangible assets, such as plant and equipment, and transaction-specific intangible assets, such as relationships and the development of human resources, and examining their impact on opportunistic behavior separately. These relationships are examined using a survey of 230 suppliers in the household appliances industry in China. Hierarchical regression analysis revealed that there was a positive relationship between suppliers’ investment in transaction-specific tangible assets and opportunistic behavior by the manufacturers that they serve, but that there was a negative relationship between suppliers’ investments in transaction specific intangible assets and opportunistic behavior by their manufacturers. The moderating role of contracts and relational norms was also examined. Xiande Zhao Chinese University of Hong Kong, Hong Kong Yi Liu Xi’an Jiaotong University, China Liping Qian Chongqing University, China Barbara B. Flynn Indiana University, USA