The exclusion of firm-specific considerations in the standard (economizing calculus) approach to buyer-supplier ties makes the large variations in the types of contracts used within the same industry unexplainable. This article tests Ghosh and John's (1999) strategizing calculus model that purports to close this gap. The core organizing principle of this model is a three-way fit among firm resources, investments, and governance that yields the highest net receipts. From this principle, the authors derive predictions and test them using data from 193 original equipment manufacturers that engage independent component suppliers. The data show that investments must be aligned with more complete contract terms (e.g., fixed prices, "hard" designs) to yield cost reduction outcomes for all firms. However, investments must be aligned with more incomplete contracts (e.g., cost-plus prices, "soft" designs) to yield endproduct enhancement outcomes, but only for firms with relatively small downstream market margins. Firms with larger downstream market margins find that the previous alignment reduces end-product enhancements. These results are robust to checks for common method bias and alternative estimation procedures. The authors discuss practical guide-lines for the desired tightness of supplier contract terms from the three-way fit principle.
ASJC Scopus subject areas
- Business and International Management
- Economics and Econometrics