Formal and relational governance in supply networks: The case of Turkish automotive industry

In this study which was conducted in the supply chain of the Turkish automotive industry it is argued that by applying a cooperative governance strategy in supply chain management, operational and strategic benefits jointly generated by network partners may strengthen the competitive position of suppliers and hence enhance the competitive performance of the supply network. This study utilizes the behavior of joint action as a cooperative adaptation strategy by combining the advantages of both formal governance and relational governance and it is based on the argument of complementarity of the prescriptions of transaction cost theory, resource based view and relational view of governance. Bilateral governance as a form of joint action not only safeguards specialized assets against the risk of opportunism by the economizing motive to save transaction costs but also manages transaction uncertainty through a cooperative response from interdependent members in a supply network by the strategizing motive to realize inter-organizational rents. In other words joint action is a governance strategy that facilitates adaptations to uncertain conditions and effective action in task planning and execution. The use of joint action strategy provides operational benefits derived from reduced transaction and production costs as well as strategic benefits which increase the ability to recognize and respond to changes in transaction environment. For instance, the capacity in developing new products is considered as a long-term strategic benefit to enhance the competitive performance of the supply network.This study examines the complementary elements of formal control and trust in the Turkish automotive supply network by incorporating joint action behavior as a cooperative adaptation strategy with the governance mechanisms of formal control and trust. To develop a more in-depth theoretical framework on the relationship between governance mechanisms, this study was conducted through both an interview-based qualitative method and a questionnaire-based survey. The empirical data to test the theoretical model and hypotheses was collected through an e-mail survey targeting the first tier suppliers operating in the Turkish automotive industry. A total of 104 completed questionnaires were received. The theoretical model was estimated using structural equation modeling (SEM) with LISREL. The results from the Turkish automotive industry support the complementarity view of governance when formal control and trust relate positively with a level of joint action behavior.Starting from a gap in the literature, this study makes the following contributions: First, the study extends the relevant literature by developing an integrative model based on transaction cost theory, resource-based view and relational view of governance. Formal control and trust have not only incentive intensity and adaptation functions (based on transaction cost theory) but also a knowledge sharing and knowledge creation function (based on resource-based view and relational view of governance). Second, by applying resource-based reasoning, relationship-specific investments are not an exogenous variable as the transaction cost theory assumes, but function as mediator between uncertainty and formal control.Relationship-specific investments increase the costs of switching suppliers for the focal firms and thus facilitate the development of a fair allocation policy regarding the sharing of the value jointly created by investments in strategic assets. This understanding reflects that the interaction between network partners involves a complex interplay of ex ante cooperation to jointly create value and ex post self-interested bargaining derived from the problem of joint value allocation (Ghosh and John, 1999; Subramani, 2004). Information processing requirements in the environments characterized by high uncertainty and task complexity entail a cooperative governance of routinized business processes and efficient actions to facilitate adjustments in environmental changes. Joint action strategy incorporated by a collective recourse to structure and process mechanisms of the relationship between network partners attenuates ex post opportunistic behavior by manufacturing firms.In conclusion this study supports the research suggestion that higher environmental uncertainty and task complexity require a cooperative strategy inducing higher investments in co-specialized assets and inter-organizational routines to generate inter-organizational rents (Asanuma, 1989; Rangan et al., 1993; Mahapatra et al., 2010). Therefore, consistent with Vivek et al. (2008), this study explains the shift in the primary identity of relationship-specific investments from transaction costs to value creation implying a shift from transaction cost theory to resource-based view. In addition compared to the main research results in the literature the empirical research in this study is based on the automotive industry in Turkey with a different institutional environment which may influence the use of formal and relational governance mechanisms.