Safeguarding Investments in Asymmetric Interorganizational Relationships: Theory and Evidence

and managers at the retailer organization for their support and assistance at different stages of this project. We also thank George John and Akbar Zaheer for insightful comments on earlier versions of the paper. Further, the comments of the Guest Editor – Rita McGrath and three anonymous AMJ reviewers were extremely useful in developing the ideas presented here. Abstract We model the governance strategies adopted by suppliers to safeguard relationship-specific investments in asymmetric interorganizational relationships using two dimensions— quasi integration and joint decision making. Data from a field study of 211 supplier relationships in a distribution channel support the research model. Domain knowledge specificity arising from relationship-specific intellectual capital investments emerges as the most influential determinant of governance. The results provide preliminary but powerful evidence of the value of intangible assets in interorganizational relationships. 3 Vertical interorganizational relationships in organizational networks are often characterized by considerable power asymmetries, and supplier firms are vulnerable to the exercise of power by the more powerful firm. Achieving a greater understanding of the linkage between relationship-specific supplier investments and the nature of safeguards established to protect them is therefore an important issue for supplier firms and their more powerful partners, both of whom seek benefits from their cooperative vertical relationships. In this paper, we examine how vulnerable suppliers, who typically do not have the bargaining power to extract safeguards for their investments in the relationship ex ante, craft governance mechanisms that have the effect of safeguarding them ex post. From the theoretical perspective of transaction cost economics, cooperative relationships between firms reflect the increased use of nonmarket governance. Parties in such relationships have overlapping roles, engage in considerable coordinated action, make bilaterally negotiated changes to the terms of the exchange on an ongoing basis, and rely on internal enforcement by establishing a mutuality of interest between parties. Interfirm roles can become so closely intertwined that the firms' boundaries approach complete interpenetration (Rindfleisch & Heide, 1997). Governance mechanisms are means to provide safeguards for asset specificity arising from relationship-specific investments that are only partially redeployable and therefore are valuable only in the context of the exchange (Stump & Heide, 1996). Prior research has identified a variety of governance mechanisms that provide safeguards for such specialized assets, to protect the firm making relationship-specific investments from opportunistic behavior by its partner (Rindfleisch & Heide, 1997). Despite the important insights into vertical interoganizational relationships provided by incomplete in …