Control variables

It is necessary to account for the potentially spurious effects of potential extraneous variables, so these effects can be ruled out statistically. Data on variables that seem correlated with the dependent variables must be collected. Variables from other perspectives that offer competing explanations to varying degrees of governance mode and firm performance must be considered.

Once explanations from such perspectives are ruled out statistically, the confidence in the theoretical model will increase (Jøreskog & Sørbom, 1993; Meehl, 1990).

Environmental uncertainty

Although uncertainty is a transaction dimension, itreceives ample support in the organizational and institutional economics literature as a key environmental dimension that influences mode of governance (Achrol, Reve, & Stern, 1983).

As specific investments increase to a non-slight degree, the continuity of relationship is relevant. High degrees of environmental uncertaintycreate problems of adaptation, as partner firms find it hard to specify contractual agreements ex ante. Exchange partners will have to make sequential adaptations (Williamson, 1985). Moreover, change in environment offers opportunities for agents to shirk and to renegotiate to their advantage (Anderson & Gatignon, 1986).

When experiencing environmental change, the firm is likely to increase the degree of control by increasing the complexity of contract to cover all possible contingencies, i.e., the problem of adaptation problem can be addressed through hierarchical governance. However, several researchers (e.g. Afuah, 2001; Balakrishnan & Wernerfelf, 1986; Folta, 1998; Kogut, 1991) argue that high degrees of environmental uncertainty should also encourage firms to maintain flexibility by lowering the degree of specific investments; this position argues against hierarchical governance (Geyskens et al., 2006). As a result, environmental uncertainty must be included as a control variable.

Environmental uncertainty refers to the degree to which the relevant contingencies surrounding an exchange cannot be anticipated and accurately predicted (Geyskens et al., 2006; Pfeffer &

Salancik, 1978). Rindfleisch and Heide (1997) suggest that among transaction dimensions, environmental uncertainty seems to be the most problematic construct. Two decisions must be made when operationalizing this construct. First, it must be decided whether this construct is

treated as an objective or perceptual measure. In this study, the decision is to treat environmental uncertainty as a perceptual measure, because decision makers make their decisions based on their perceptions, not on objective numbers (Heide & John, 1995). Degree of environmental uncertainty is in the eye of the beholder (Wathne, 2001).

Other issues are the source for the study and the type of uncertainty (Wathne, 2001). In this study, the sources for the study of the environmental uncertainty construct will be the buyer market. Therefore, the type of uncertainty to be studied is buyer-market unpredictability.

The following items are based on empirical studies (Anderson, 1985; Buvik & Grønhaug, 2000;

Celly & Frazier, 1996; Haugland & Reve, 1994; Heide & John, 1990; John & Weitz, 1988, 1989; Wathne, 2001) (three items, seven-point scale, anchored by “strongly disagree” to

“strongly agree”):

1. Market demand is hard to predict’

2. The sales for this market are hard to predict’

3. The competition in this market is hard to predict’

Opportunism

Opportunism refers to “taking advantage of opportunities with little regard for principles or consequences” (Macneil, 1981) or self-seeking behaviours with guile (Williamson, 1975).

Opportunism is likely to degrade the cooperative climate of the relationship, and be negatively related to relational governance. The followed items are based on empirical studies (Rokkan et al., 2003; Wathne & Heide, 2000) (six items, seven-point scale, anchored by “strongly disagree”

to “strongly agree”):

1. On occasion, this customer lies about certain things to protect its interests.

2. This customer sometimes promises to do things without actually doing them later.

3. This customer does not always act in accordance with contract or agreement.

4. This customer sometimes tries to breach informal agreements between our companies to maximize its benefit.

5. This customer will try to take advantage of “holes” in the contract to further its own interests.

6. This customer sometimes uses unexpected events to extract concessions from my company.

Market governance

Market governance is presumed to have an impact on exchange performance (Haugland &

Reve, 2004). In this mode of governance, the buying firm can enjoy benefits from market competition by having many alternatives of supplying firms. Market governance is characterized by market incentives or a pricing system that specifies all relevant information needed to complete and evaluate the product or service delivered by the supplier firm. The following items are based on the study by Haugland and Reve (2004) (three items, seven-point scale, anchored by “strongly disagree” to “stronglyagree”):

1. This customer draws/drew our attention to competing offerings, so that we work/worked more effectively.

2. This customer monitors/monitored the market to ensure that our offer prices are not substantially higher than other suppliers in the market.

3. This customer will/would change to another supplierif another supplier can deliver this product/service at cheaper price than our company can.

Importance

The complexity of an exchange is presumed to influence the mode of governance (Williamson, 1979; Cannon et al., 2000; Sunde, 2007). In particular, the economic scope of an exchange is presumed to influence how firms organize the transaction. Partners pay more attention to the crafting of a control structure when the exchange is more important. Therefore, the importance of exchange may create spurious effects between independent and dependent variables.

The importance of an exchange is operationalized by measuring the size of an exchange in terms of number of people involved and the financial value.

1. How many people are involved in an exchange?

2. How much is an exchange value?

Past experience

The past experience of exchange partners is presumed to influence mode of governance, because past experience is likely to affect the development of relational governance (Lambe, Spekman, & Hunt, 2000; Sunde, 2007). Therefore, past experience may be the source of spurious effects between independent and dependent variables. The following items are based on Sunde (2007) (two items, seven-point scale, anchored by “strongly disagree” to “strongly agree”):

1. Our company has many years of experience with this customer before this exchange.

2. Our company has had a very good relationship with this customer before this exchange.

Future expectations

Expectation about future business is presumed to influence the mode of governance (Sunde, 2007). Based on the “shadow of the future” effect, a firm is likely to perform better if the performance of the present exchange will affect future decisions and future business with its partner. A high expectation of future business will affect the degree of cooperative norms.

Therefore, future expectation may be the source of spurious effects between independent and dependent variables. The following items based on Sunde (2007) (two items, seven-point scale, anchored by “strongly disagree” to “strongly agree”):

1. Our company expects to have future business with this customer.

2. Our company has a binding agreement to work with this customer in the future.

Product/service characteristics

The characteristics of the product or service may have an impact on transaction costs, which affects the mode of governance (Pilling, Crosby & Jackson, 1994). If an exchanged product or service is a standard one, transaction costs shouldbe low. If it is highly specialized, transaction costs should be high; and partner firms are more likely to adopt a more coordinated mode of governance to reduce such transaction costs. Therefore, product or service characteristics may be the source of spurious effects between independent and dependent variables. The following items are developed (two items, seven-point scale, anchored by “strongly disagree” to “strongly agree”):

1. The product/service exchanged is a highly specialized one.

2. Our company invests a lot to facilitate this product/service exchange.

3. This customer invests a lot to facilitate this product/service exchange.

Contract design capability

According to Argyres and Mayer (2007) and Mayer and Argyres (2004), contract design capability is presumed to have a positive impact on performance. The difference between firms’ contract capabilities determines the difference between their contract efficiencies. The following measures for this construct have been developed five items, seven-point scale, anchored by “strongly disagree” to “strongly agree”):

1. Contract terms are aligned with contractual risks.

2. The contract has been developed based on previous contracts.

3. Our company and this customer have made efforts to make effective contracts.

4. Different types of employees or outsiders have helped on contract design depending on their expertise.

5. Personnel involved in contract design have learned the trade-offs for different types of contractual provisions.