Inter-firm dependence, environmental uncertainty and vertical co-ordination in industrial buyer–seller relationships

Abstract

Effective co-ordination of business-to-business relationships is an important determinant of firms' competitiveness under changing market conditions. Drawing on transaction cost analysis (TCA) and resource-dependence theory (RDT), the authors analyse the effects of inter-firm dependence and environmental uncertainty on vertical co-ordination in industrial purchasing relationships. Analysis of data from a survey of 157 industrial buyers of items repetitively used in production shows that the RDT-predicted association between environmental uncertainty and vertical co-ordination is highly contingent on the magnitude of the present safeguarding problem in supplier relationships. When asset specificity is modest, the safeguarding problem is trivial and substantial environmental uncertainty induces higher inter-firm co-ordination in order to handle the need for environmental adaptation. This pattern of inter-firm organisation is significantly modified as asset specificity increases and imposes trading hazards. Under conditions with substantial asset specificity, increased environmental uncertainty actually undermines inter-firm co-ordination. Implications for theory and practice in business-to-business relationships are highlighted.