Discussion of the results

There are two main contributions of this study. First, by presenting a thorough examination of the impact of power structure on association between specific investments and governance modes, it argues that TCE is not equally applicable to all types of firms. Second, it expands TCE by integrating governance modes with negotiation strategies.

7.1.1. Discussion on the impact of power structure power on TCE

This study begins its investigation with the test for the core prediction of TCE, i.e., specific investments leads to hierarchical governance. The results from the empirical testing in the Norwegian O & G industry showed that the prediction of TCE is partially supported. TCE prediction works well when supplying firms make specific investments. Supplier-held specific investments are positively related to both formalization and centralization. But TCE prediction does not work with the investments of buying firms. Buyer-held specific investments are negatively related to both formalization and centralization.

Why is the TCE prediction “partially” supported? This study proposes that asymmetric-power relationship may be a potential unobserved variable moderating the effect of specific investments on hierarchical governance. The furtherinvestigation in this study hypothesized that an asymmetric-power relationship between buyerand supplier could be a reason why TCE prediction does not work with buyer-held specific investments.

Buying firms in this study are oil firms that generally have more power than their suppliers do, rendering them as having asymmetric-power relationships. Further investigation in this study (i.e., hypothesis 13) empirically found that TCE prediction works well with weaker-held specific investments. Further, the test for structure invariance shows that TCE provides a better explanation of supplier firms in asymmetric-power relationships than it does of firms in symmetric-power relationships, when hierarchical governance is considered. The findings show that supplier-held specific investments are more positively related to hierarchical

governance in asymmetric-power relationships than in symmetric-power relationships, according to hypothesis 14.

These findings are consistent with the findings of Shervani et al. (2007), that firms with lower power need to rely on highly integrated forward channel to lower transaction costs. But firms with higher power have the ability to monitor and exercise legitimate authority to reduce transaction costs rather than using an integrated forward channel. Bucklin and Sengupta’s (1993) findings explains why weaker firms need a more integrated governance structure. They find that contractual governance (analogous to formalization) helps to reduce the damaging perceptions of power asymmetry. Nevertheless, thesefindings are inconsistent with Heide and John’s (1988) and Buvik and Reve’s (2002) findings. Heide and John (1988) show that weaker firm do have the ability to conduct more integratedgovernance, while Buvik and Reve (2002) argue that as buyer’s power increases, the buyer uses its power to protect its specific investments with comprehensive contracts. Thus, buyer-held specific investments are strongly associated with formalized purchased contracts.

With regard to relational governance, this study also began with the test for incorporation relational governance into TCE when it is considered a governance mechanism that safeguards specific investments (Poppo & Zenger, 2002; Heide & John, 1992). Many previous research studies empirically support the positive association between specific investments and relational governance (e.g., Anderson & Buvik, 2001; Bello & Gilliand, 1997; Poppo & Zenger, 2002).

The empirical results in this study showed that relational governance is well incorporated into the TCE framework only when buying firms make specific investments, according to hypothesis 2. Buyer-held specific investments are positively related to all four dimensions of relational governance, while supplier-held specific investments are negatively related to flexibility, solidarity, and restraint to the use of power; they have no effect on information exchange. In other words, when considering relational governance, TCE better explains buying firms than supplying firms.

Why is the incorporation of relational governance only “partially” supported? Similar to the case of hierarchical governance, it was also expected that an asymmetric-power relationship might moderate the effect of supplier-held specific investments on relational governance.

As previously mentioned, most buying firms in this study are firms with high power and most supplying firms are firm with low power. The results seems to suggest that when considering relational governance, TCE better explains firms with high power than firms with low power.

This opposes the expectation and is incongruent with the findings of Geyskens et al. (1996), that when interdependence asymmetry increases, calculative commitment (or the need to maintain the relationship) decreases for the stronger party, and increases for the weaker party.

Further investigation was conducted by checking the moderating effect of asymmetric power on the association between specific investments and relational governance, according to hypothesis 13. The hypothesis proposed that TCE better explains weaker firms than stronger firms, because weaker firms may need relational governance to counter balance the power of their stronger partner, while stronger firms may not need relational governance as it may hinder them from using their power. Nevertheless, the findings show that hypothesis 13 was rejected.

TCE better explains high-power firms than low-powerfirms when flexibility is considered. In other words, relational governance can be well incorporated into TCE when stronger firms make specific investments and only when flexibilityis considered.

Further findings show the type of relationship—asymmetric power or symmetric power—that TCE better explains when relational governance is considered, according to hypothesis 15. The findings show that (a) TCE better explains buying firms in symmetric-power relationships than buying firms in asymmetric-power relationship when considering solidarity and restraint to the use of power, and (b) TCE better explains buying firms in asymmetric-power relationships than symmetric-power relationships, when flexibility is considered.

With regard to related previous empirical findings, there do not appear to be any studies that empirically investigate the extent to which specific investments made by stronger firms or weaker firms are related to relational governance. All previous research focuses on the relationships between power architecture (i.e., asymmetric power, mutual dependence) and relational governance (or similar concepts). However, there are studies that have a similar implication. For example, Kumar et al. (1995) findsthat asymmetric power reduces trust, while mutual dependence increases trust. This is similar to the findings of hypothesis 15, that TCE better explains buying firms in symmetric-power relationships than buying firms in asymmetric-power relationships, when solidarity and restraint to the use of power are considered.

Nevertheless, it can be argued that the findings inthis study are inconsistent with this previous research, according to the findings of hypothesis 15, that TCE better explains buying firms in asymmetric-power relationships than symmetric-power relationships, when flexibility is considered.

7.1.2. Discussion on the integration of governance structure and negotiation strategy Previous research suggests an association between governance modes and negotiation strategies (Lumineau & Henderson, 2009; Ness & Haugland, 2005; Ness, 2009; Schurr &

Ozanne, 1985). This study, therefore, proposes that the use of governance modes and negotiation strategies together may enhance understanding of the relationship performance.

Previous research suggests that inter-firm performance increases when firms adopt governance structure to reduce transaction costs, mitigate opportunistic behaviour, and facilitate cooperation (Cannon, Achrol, & Gundlach, 2000; Dahlstrom & Nygaard, 1999; Ghosh & John, 2005; Heide & John, 2002; Poppo & Zenger, 2002), and when firms use problem-solving negotiation strategy to interact to reach successful agreements (e.g., Clopton, 1984; Ganesan, 1993; Graham, 1986; Pruitt, 1981). Empirical results of this study confirm and advance this literature and extend previous research by demonstrating that the centralization and problem-solving negotiation strategies strengthen each other’s effect on end-product enhancement outcomes. However, in the same model (see sub-model3 in Table 5.8), although centralization and problem-solving negotiation strategies individually have no effects on end-product enhancement outcomes; their interaction has a significant effect on this outcome.

The most surprising findings are that the interaction between information exchange and problem-solving negotiation strategy is negatively related to end-product enhancement outcomes, while problem solving alone is positively related to this outcome and information exchange has no effect on this outcome. These findings suggest that information exchange reduces the positive effect of problem-solving negotiation strategy on end-product enhancement outcomes. This negative interaction effect seems somewhat curious. There does not appear to be any previous literature or empirical research that suggests the negative effect of information exchange on relationship performance. Moreover, the negotiation strategy of problem solving per se requires information exchange. However, this finding may be evidence that information exchange can play a negative role in promoting the successful end products for supplying firms. Further research is needed to examine the extent to which the use of information exchange and various types of information has a negative effect on end-production enhancement outcomes.