The reason why restrain opportunism is a critical issue is that opportunism could erode the long-term gains potentially accruing to both parties in a dyadic channel relationship. Governance mechanisms are tools that are used to establish and structure exchange relationships (Heide, 1994).
There are already many scholars discuss how to control supplier opportunism in industrial relationship. For instance, Stump and Heide (1996) issue eight factors that could control opportunism; Brown, Dev, and Lee (2000) examine the mechanisms of ownership, transaction-specific assets, and relationships to mitigate opportunism. In lately research on this topic, Heide, Wathne, and Rokkan (2007) add the point of microlevel social contracts as the context in which monitoring takes place and distinguish monitoring as output monitoring and behavior monitoring.
In Chinese business markets, guanxi lies at the heart of China’s social order and is among the most important, talk about, and studied phenomena in China today (Lee
& Dawes, 2005). And in high–technology markets specific asset investment could be a mechanism to guarantee and stabilize the quality of products. On the other way, specific asset investment could be a safeguard mechanism in forbidding opportunism.
Therefore, this article comprises the characteristic of Chinese culture and technology-driven markets to investigate the efficacy of governance in managing marketing channel opportunism.
2.4.1 Specific asset investment
Transaction specific assets are those assets that have little or no value outside the focal exchange relationships (Williamson, 1985). According to transaction cost theory, such investment could give rise to transaction costs and combine to create “market failure”, in the sense that the market mechanism becomes an inefficient means of
mediating exchange (Williamson, 1975). The idiosyncratic investments include specific physical assets (e.g., furnishing, storage, promotional material) as well as idiosyncratic intangible assets (e.g., management procedures, specialized training, partner’s brand name capital) (Vazquez, Iglesias, & Rodriguez-del-Bosque, 2007).
Suppliers and buyers often consider making specific asset investments in their channel relationships as to enhance the efficiency of their buyer channels (Vazquez, Iglesias, & Rodriguez-del-Bosque, 2007). There are three reasons for organizations to invest in transaction specific assets (Brown, Dev, & Lee, 2000): (1) transaction specific assets are more effective than generalized assets; (2) firms can also serve transaction specific asstes as a signal of honorable intentions with respect to their trading relationship, by investing their own resources to ensure their continued participation in the relationship; (3) transaction specific assets are indications of commitment which can boost confidence and obviate the need for investment to monitor or control the partner, thereby cutting channel costs. However, Williamson (1985) mentions that although such idiosyncratic investments often are deployed deliberately because of their productive nature, their limited value outside a given relationship exposes the investing party to the risk of opportunism. But on the contrary, specific asset investment could be a safeguarding mechanism against opportunism.
The aim of this article is to observer whether specific asset investments made by the partner act as a governance mechanism to eradicate or at least minimize opportunism in China high-technology markets. In technology-driven markets, sometimes suppliers have to invest idiosyncratic investments in order to achieve the specific orders, especially for the different specifications for different products. As a result, specific asset investments have already been an unspoken consensus in the channel relationship. Further, supplier investments also could act as a hostage to
discourage opportunism. Therefore, extend Brown, Dev, and Lee’s (2000) research, the risk of forfeiting these idiosyncratic investments could restrain supplier malfeasance, regardless of supplier motives for investing in transaction specific assets (Brown, Dev, & Lee, 2000). In the point of view, the hypothesis is:
H3: The supplier’s opportunism which the buyer perceives will be reduced the more the supplier has invested in transaction specific assets of its own.
H4: The transaction specific asset is a mediator between purchasing situation and supplier’s opportunism.
2.4.2 Relationship Governance
Building on relational contracting theory (Macneil, 1980), Heide (1994) mentions relational norm is an alternative safeguard to specific asset investment against opportunism. The spirit of relational norm captures from relational exchange which accounts for the historical and social context in which transactions take place and views enforcement of obligations as following from the mutuality of interest that exists between a set of parties (Heide, 1994). Further, the relational norms emphasize the positive motivations that follow from mutually oriented behavior, and the core idea is to create a social environment, which discourage self-interested behavior in favor of mutual interest seeking (Vazquez, Iglesias, & Rodriguez-del-Bosque, 2007).
Within Chinese society, it is organized by concentrical guanxi circles, extending from the family to relatives, friends, and so on (Lee & Dawes, 2005). Literally, gunaxi is based implicitly on mutual interests and benefits (Yang, 1994) and gunaxi is a social connection and a synonym for special favors and obligations to the guanxi circle (Lee & Dawes, 2005). In China marketing relationship, guanxi is a major influential concept in managing marketing channel. Davies (1995) defined guanxi as
“the social interactions within the network place and its members in the equivalent of
an infinitely repeated game with a set of people they know.” In China, unlike Western, the contracts between inter-organizations are described as “marriage” which means try to match the mutual “interest” domains (Wong & Chan, 1999). Most guanxi ties are developed through dining and gift-giving rather than the more formal means of employing lawyers to protect the enforcement of a written contract (Wong & Chan, 1999).
In the lately research, Gao, Sirgy, and Bird (2005) suggest while buyers perceive supplier to be trusting of the buyers and while buyers perceive the supplier to be highly committed to the relationship, it could reduce buyer decision-making in organization purchasing, in other words, reduce the supplier uncertainty could minimize supplier opportunism. Although the characters of these two governance mechanisms are so different, in the real world, transaction specific asset investment and relational exchange could be used simultaneously in take advantage of their different impacts (Brown, Dev, & Lee, 2000). In Brown, Dev, and Lee’s (2000) research, they already found the hotel managers should emphasize relational exchange along with ownership and hotel idiosyncratic investment. As a result of the characteristic of China market, based on the heart of China’s social phenomena, mutual interests and benefits, relational norms would be more efficient than specific asset investment in minimizing the impact of opportunism. Consequently, the hypothesis is:
H5: The supplier’s opportunism which the buyer perceives will be reduced the more the buyer perceives a relational exchange with its supplier.
H6: The efficacy of a relational exchange will be better than transaction specific asset investment in minimizing the supplier’s opportunism.
H7: The relational exchange is a mediator between purchasing situation and supplier’s opportunism.
2.4.3 Purchasing processes in China
Due to the characteristics of Chinese culture, high power distance is evident in China’s pervasive centralized authority and hierarchical structures (Zhou & Chuah, 2002). In business organization, power distance is consistent with the focus on guanxi relationships with upper-level authorities, particularly in state-owned enterprises, and the strong hierarchical ordering (Zhao, Flynn, & Roth, 2006).
The environment, including culture and uncertainty, could influence organizational characteristics and further organization behavior (Daft, 2004). Extent to the research of purchasing behavior, Cardozo (1980) suggests that increasing level of uncertainty results in larger purchasing units and greater involvement from higher level personnel. McCabe (1987) also find a positive relationship between the level of uncertainty and centralization of purchasing decision-making and a negative relationship between uncertainty and participation. In practice, McCabe (1987) suggests that high uncertainty may find more individual involved in the same time during the decision process, but that the actual number of people exercising real decision-marking authority decreases, reflecting more hierarchical control.
Furthermore, Morris, Hansen, and Pitt (1995) also claim the structure of purchasing center is a mediator between environmental turbulence and decision-making process which means the organization behavior could be influenced by the structure of purchasing center.
Therefore, referring to the feature of China business markets, the structure of purchasing center should be an influential variable in the research of purchasing behavior. This article includes two concepts of purchasing center structure, centralization and complexity, in observing the relationship between purchasing situation and opportunism. As to complexity, it refers to the degree of differentiation
between groups based on the orientation of members and the nature of tasks performed (Lau, Goh, & Phua, 1999). With regard to centralization, it’s the distribution of formal control and power within an organization (Lau, Goh, & Phua, 1999). Consequently, the hypothesis is:
H8: The structure of purchasing center in China is a mediator between purchasing situation and supplier’s opportunism.
H9: The higher uncertainty, the more complexity during the decision-making process.
H10:The higher uncertainty, the more centralization during the decision-marking process.