v
University of Groningen Faculty of Economics and Business
MSc Organizational & Management Control (O&MC)
A Path to Thick Trust in Interfirm Transactional
Relationships
The Role of Explicit Formal Contracts & Relational Signalling
Name: Louelle van Bergen Henegouw
Student ID: S2758679
Supervisor: A. Rehman Abbasi
Co-assessor: prof. dr. ir. P.M.G. Van Veen-Dirks Date: 25th of June 2018
1 Abstract
This paper develops and examines a new perspective with respect to control and trust in interfirm relationships. It is argued that explicit formal contracts, functioning as controlling device, play a crucial role in the creation of trust in interfirm transactional relationships (ITRs). Accordingly, the study adds to the discussion of the Transaction Cost Logic. Besides the use of explicit formal contracts, the study considers relational signalling as second vehicle in the creation of trust. Furthermore, the mediating role of relational signalling between thin- and thick trust is investigated. Using survey data on 111 ITRs the study develops four hypotheses to investigate the existence of a linear, causal path between the establishment of an explicit formal contract and the creation of thin- and thick trust between partner firms. The analysis reveals a positive association of thin trust with both relational signalling and thick trust, whereas the mediation role of relational signalling is not confirmed. Surprisingly, the findings suggest that explicit formal contracts do not contribute to the creation of trust in interfirm relationships. On the whole, this study offers important theoretical and managerial insights for the creation of trust in ITRs.
2 Contents
Abstract ...1
1. Introduction ...3
2.Literature Review...5
Trust in Interfirm Transactional Relationships...6
Thin Trust in Interfirm Transactional Relationships ...6
Thick Trust in Interfirm Transactional Relationships ...7
Transaction Cost Economics ...7
Hypotheses Development ...9
Explicit Formal Contracts and the creation of Thin Trust ...9
Thin Trust and the creation of Thick Trust ... 11
Explicit Formal Contracts, Thin Trust and the creation of Thick Trust ... 14
3. Conceptual Model ... 16 4.Methodology ... 17 Data Collection ... 17 Measurements ... 17 Control Variables ... 18 Data Analysis... 19 5. Results ... 23
Additional Robustness Analysis ... 25
6.Discussion ... 26
7.Conclusion ... 29
Research Implications ... 29
Managerial Implications ... 30
Limitations & Further Research ... 31
Bibliography ... 33
Appendix A. Estimated Covariance Matrix... 40
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1. Introduction
The stimuli for firms to cooperate nowadays are a globalizing world, increased competitiveness, customers voicing their opinion, and the strengthening of knowledge requirements (Van der Meer-Kooistra and Vosselman, 2006). In this study, the term Interfirm Transactional Relationship (ITR) denotes the collaboration between two or more firms. For safeguarding purposes, the partners in the relationship tend to draw up a formal contract as a first step (Minnaar et al., 2017). Moreover, Free (2008) argues that simultaneously with the advent of interfirm relationships a growing interest in the concept of ‘trust’ arose. Especially in interfirm relationships, the existence of trust seems essential because of the investments made by the partners and the subsequent uncertainty and dependency that are involved in the relationship (Van der Meer-Kooistra and Vosselman, 2000).
However, in studying ITRs many studies draw upon Transaction Cost Economics (TCE). This theory tries to predict the institutional form chosen to govern a transaction (Dekker, 2004). According to Caglio and Ditillo (2008), TCE argues that partners in interfirm relationships need to safeguard themselves against the others’ opportunistic behavior whose risk increases with growing asset specificity, uncertainty and frequency of exchanges. As a consequence, there is an urgent need for mechanisms that help partners to overcome cooperation problems in interfirm relationships. From a transaction cost logic, formal contracts are seen as the excellent means to provide the solution (Arranz and Arroyabe, 2012).
A formal contract established between partner firms has a controlling function to mitigate the relational risks in the relationship (Mellewigt et al., 2007). Whereas in practice, partner firms seem to rely on both a formal contract as well as interfirm trust to regulate the relationship (Lui and Ngo, 2004). What is remarkable, TCE does not consider trust as an important concept (Van der Meer-Kooistra and Vosselman, 2006). Furthermore, Van der Meer-Kooistra and Vosselman (2000) argue ‘The transaction cost theory does not regard trust, or in general a social mechanism, as an instrument which can be deployed’. Yet we know little about the role of formal contracts in the creation of trust in ITRs. Accordingly, TCE seems to forget to reserve a role for trust in interfirm relationships.
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contemporary research in the field yields ambiguous results about the relationship between formal contracts and trust. Likewise, a lack of consensus prevails about both the definitions used for the concepts and the empirical relationships between trust and formal contracts (Klein Woolthuis et al., 2005). Furthermore, it seems to be crucial to study how different stages of trust have a differential influence on control in an alliance (Caglio and Ditillo, 2008). On top of this, this study answers the call to examine relational signalling as a mechanism that might build (thick) trust between the partners in interfirm relationships (Lindenberg, 2000; Chaserant, 2003; Vosselman and Van der Meer-Kooistra, 2009).
More specifically, this paper adopts a dynamic perspective with respect to control and trust. It adopts the view that explicit formal contracts functioning as controlling device, imported from TCE, play a crucial role as the first step in creating trust in interfirm relationships. In particular, the paper investigates the question whether both explicit formal contracts and relational signalling are vehicles in the creation of trust in ITRs.
The identified literature gap highlights the importance of conducting research that pays attention to trust in relation to formal contracts in the cooperative endeavors of interfirm relationships. As a consequence, the emerged research question central to this study is:
'Which steps should partners in an interfirm transactional relationship take to create trust, what is the role of explicit formal contracts on the creation of thin trust and does relational signalling
function as mediator in the subsequent building of thick trust?'
The examination of the existence of a linear path between an explicit formal contract and thick trust between partner firms is the theoretical and empirical contribution of this paper. First, it is argued that explicit formal contracts lay the foundation for thin trust between the partners. Subsequently, it is proposed that relational signalling as outcome of thin trust paves the way for thick trust. In addition, the study examines the direct association between both explicit formal contracts and thin trust with thick trust. Structural Equation Modelling (SEM) is used to translate the empirical data of 111 ITRs into findings about the antecedents of trust in ITRs.
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the other hand, the empirical understandings into the dynamics between trust, explicit formal contracts and relational signalling could provide new insights for managers on how to set-up an alliance. Furthermore, the study can encourage partner firms to be aware of the explicitness of formal contracts and relational signalling in establishing trust.
The paper is structured in seven chapters. In chapter 2, the literature review starts exploring trust in ITRs and moves on to a more in-depth review on thin- and thick trust, which play a central role in this study, followed by a review of TCE. Chapter 3 presents the hypotheses development along with the conceptual model of the study. In chapter 4 the methodology is discussed; the chapter includes a justification for the used methodology, the data collection, the measurements used for the variables in this study and the data analysis. Chapter 5 presents the results, whereas a reflection and discussion of the results is displayed in chapter 6. Chapter 7 concludes the study and provides research- and managerial implications, moreover the limitations of the study and some fruitful directions for future research are considered.
2. Literature Review
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Trust in Interfirm Transactional Relationships
First of all, a general overview is given on the contemporary literature on trust in ITRs before introducing thin- and thick trust. Since the ITR is the focus of the study, the choice was made to examine trust at the level of the organization within an ITR. Trust between organizations has been defined as ‘the extent to which organizational members have a collectively-held trust orientation toward the partner firm’ (Zaheer et al., 1998). Moreover, Jiang et al. (2013) defined this collectively-held trust orientation in alliances as ‘a firm expecting its partner-firm to behave positively, and it is thus willing to accept vulnerability’. In addition, Squire et al. (2009) make a case for the confidence one organization has in the partner’s reliability and integrity. In case of examining ITRs, one of the organizations is seen as the trustor and can hold expectations about the partner firm in the collaboration. Whereas the trustee is the organization that will be evaluated on the trustworthiness by this trustor. The importance of trust seems clear for the formation and management of interfirm relationships since partners perceive interfirm relationships as areas for opportunistic behavior (Das and Teng, 1998). However, Schilke and Cook (2013) argue that little effort has been devoted to the degree of which trust develops itself throughout the length of interfirm relationships. Moreover, Das and Teng (1998) state that ‘not enough thought has been given to the question of trust building in alliances.’ In spite of the fact that literature in this field hints upon a need of building trust in ITRs, empirical research is yet to gain attention. ‘Despite the prominent role of trust in interfirm exchanges, its alternative bases are rarely empirically examined’ (Poppo et al., 2016). Moreover, this paper’s aim is to provide the empirical analysis to give an answer to the call of Vosselman and Van der Meer-Kooistra (2009) ‘to understand the way trust building is interrelated with control in interfirm transactional relationships’. This study tries to establish a profound understanding on how explicit formal contracts, functioning as controlling device, and relational signalling relate to the creation of trust in ITRs.
Thin Trust in Interfirm Transactional Relationships
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with this study, Mayer et al. (1995) point to the creation of what is called thin trust. Furthermore, the control structure used in ITRs requires a specific institutional framework for the production of thin trust (Vosselman and Van der Meer-Kooistra, 2009). Accordingly, Vosselman and Van der Meer-Kooistra (2009) state that ‘in interfirm transactional relationships, this institutional framework essentially takes the form of a contract’. On the other hand, the parties in interfirm relationships import trust from the institutional environment to negotiate these contracts. As a consequence, the presence of thin trust is a prerequisite for transactions between firms in a relationship assuming that the contract is institutionally embedded and negotiated between the partners in the interfirm relationship. On the whole, this chapter argues that an explicit contract initiates thin trust between partner firms.
Thick Trust in Interfirm Transactional Relationships
Although the importance of trust is widely recognized, it appears that researchers give little attention to the evolution of trust in a conscious and gradual manner (Das and Teng, 1998). However, this study wants to look ahead and is thus concerned about the creation of trust in ITRs. Thin trust is established in the initial stage, but how does trust in partnerships continue from there? Mayer et al. (1995) argue that thick trust that may follow on thin trust relies on benevolence, which they define as ‘the extent to which a party is believed to want to do good for the trusting party, aside from an egocentric profit motive.’ Thick trust can be seen as a metaphor for relational trust used in organizational studies. When thick trust is present positive behavioral expectations regarding the behavior of other parties are produced (Vosselman and Van der Meer-Kooistra, 2009). This type of trust concerns caring, concern and emotional attachment between the partners in the relationship (Lewicki et al., 2006). Thick trust thus differs from thin trust in that it complements thin trust with positive expectations about partner firms. This study examines the role of relational signalling, functioning as mediator between thin- and thick trust, in the creation of thick trust in ITRs.
Transaction Cost Economics
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In ITRs asset investments are needed to let the partnership flourish. However, this will lead to vulnerability to opportunistic behavior between the partner firms. In particular for ITRs, TCE is an approach that considers explicit contracting as a beacon to overcome the potential hazards related to opportunistic behavior of the partner (Lindenberg, 2000). According to TCE (Williamson, 1985) partners must optimally safeguard an ITR to achieve the desired outcomes because partner firms are not able to judge the limits of opportunism.
Although TCE has provided academics new insights, a lot of critique is displayed over the years. In the context of this study, aimed at trust in ITRs, Larson (1992) stated that to understand ITRs the transaction cost theory has not been very useful. Furthermore, Dekker (2004) argues that TCE forgets about the rich and influential social context in which decisions are to be made within ITRs. Correspondingly, this explains to a certain extent the lack of dynamism when TCE tries to differentiate between the governance forms. Moreover, Zaheer and Venkatraman (1995) call for the incorporation of sociological factors; pointing to the inclusion of the role of trust in transaction cost explanations of ITRs. This, however, is in sharp contrast with TCE since trust does not yield a reliable safeguard (Klein Woolthuis et al., 2005). Whereas Chaserant (2003) argues that trust coexists within a same contractual relationship.
9 Hypotheses Development
Explicit Formal Contracts and the creation of Thin Trust
Trust and control are interlinked processes commonly seen as the key to reach effectiveness in ITRs (Costa and Bijlsma-Frankema, 2007), however contradictory interpretations exist in this area. This study focuses on explicit formal contracts as controlling devices and their relation to the creation of trust in ITRs. First of all, in the point of view of the contract theory it clearly emerges that this theory perceives a formal contract as a prerequisite for trust (Klein Woolthuis et al., 2005). A contract will sanction opportunistic behavior and thus creates an incentive to trust the partner firm. Therefore, credible commitments in the form of contractual relations are of mutual interest of the parties in interfirm relationships (Williamson, 1983). This corresponds with Das and Teng (1998) who perceive contracts and trust as parallel concepts which both contribute to the generation of confidence in ITRs. In their study contracts and trust are thus positively related. Secondly, sociologists share a different opinion since they argue that contracts can be deconstructive for the creation of trust. As a result, this attenuates the creation of trust between the partners in the ITR. Poppo and Zenger (2002) discuss that ‘formal contracts may signal distrust of your exchange partner and by undermining trust, encourage, rather than discourage, opportunistic behavior’. Furthermore, Schilke and Cook (2013) draw on this literature stream by stating that explicit formal contracts will leave little room for further trust development. On the other hand, a third stream argues that trust precedes contracts. Ring and Van de Ven (1994) argue that explicit contracts are no longer needed to avoid opportunism when the organizations already have a trust relationship. Subsequently, eliminating the strict need for explicit formal contracts in interfirm relationships (Klein Woolthuis et al., 2005). According to Bradach and Eccles (1989) if economic transactions are already embedded in a trusting relationship, an explicit formal contract is not necessary because the hazards of opportunistic behavior are diminished. On the whole, in contemporary literature it seems that the question of how formal contracts and trust are related has not yet been resolved. Nevertheless, this study contributes to this debate by arguing that explicit formal contracts in interfirm relationships only contribute to the foundation of trust up to the point of what is called thin trust.
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framework (Vosselman and Van der Meer-Kooistra, 2009). According to Bachmann and Inkpen (2011) the partners in the ITR do not need to have prior experience in dealing with one another, because the institutional framework, which the partners can refer to, develops their trust. In ITRs, legitimate negative expectations about the behavior of partners in a relationship induce the creation of an institution in the form of formal contracts (Vosselman and Van der Meer-Kooistra, 2009). Therefore, explicit formal contracts are in place to mitigate opportunistic behavior and place stronger incentives for the parties involved (Blumberg, 2001). An explicit formal contract is thus a first step to limit behavioral uncertainty between the partners in the relationship. Accordingly, the establishment of an explicit formal contract can be interpreted as signal of thin trust in an ITR. Generally, an explicit contract signed between the partners acts as a tool assuring cooperative behavior since it refers to rules and laws applicable for this particular transactional relationship (Arrighetti et al., 1997). The explicitness of the contract thus provides no room for breaching the agreements which in turn creates thin trust. On top of this, signing an explicit contract can be interpreted both as a sign of commitment and a tool for coordination (Klein Woolthuis et al., 2005). Therefore, resulting in thin trust between the partner firms in the relationship. Institutionally embedded, explicit formal contracts can thus help partners in an interfirm transactional relationship create trust (Bachmann and Inkpen, 2011), however this phenomenon only refers to the extent of creating thin trust between the partners.
Pilbeam et al. (2012) insist in their literature review on empirically investigating how different forms of trust serve to facilitate the agreed objectives of a formal contract because this area is still uncovered, whereas the majority of prior research states that trust either complements or substitutes contracts (Klein Woolthuis et al., 2005). Explicit formal contracts between the partners are able to balance the different interests of the partners. A legitimate power-base is created (Minnaar, 2014) which in turn creates an initial trust base in interfirm relationships labelled as thin trust. As a consequence, the first hypothesis examines the creation of thin trust that results from the establishment of an explicit formal contract in ITRs.
H. Establishing explicit formal contracts in interfirm transactional relationships
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Thin Trust and the creation of Thick Trust
Contractual Incompleteness
Thin trust is established in the initial stage when the partners agreed upon an explicit formal contract, but what will happen with this type of trust when the partnership continues? Only trust to the extent of thin trust does not help to overcome the problem of fundamental uncertainty between partner firms. This fundamental uncertainty can be explained by the fact that the future of the ITR is not predictable at the point of establishing the contract. Resulting in an explicit formal contract that will always be incomplete. As a consequence of the bounded rationality of the partners and the high costs for the design of the contracts, contracts are not able to cover every possible future scenario and thus cause an incomplete governance structure (Blumberg, 2001). Therefore, while explicit contracts may lay the foundation for thin trust, they appear insufficient for the elevation of trust in the collaboration. When governing the interfirm relationship with an incomplete contract, the parties in the contractual relationship may find themselves in a situation where some other, less efficient, actions have to be taken to anticipate their future relationship (Ai-Najjar, 1995). Implying that the existence of an explicit formal contract is not sufficient for developing strong mutual trust between the parties. Moreover, social mechanisms are not in place to sanction for distrustful behavior (Neergaard and Ulhøi, 2006). Accordingly, this results in the need to thicken the inter-organizational trust to ensure the fair continuation of the ITR by limiting the will of partners to opportunistically exploit the others, even if they think they can get away with it (Larsson et al., 1998). In other words, the enabling of the production of positive expectations is necessary despite the explicitness of the contract since it cannot cover all negative expectations. Building on the established initial trust, called thin trust, is therefore a requirement to reduce fundamental uncertainty between the partner firms (Vosselman and Van der Meer-Kooistra, 2009).
Relational Signalling
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2017). In the same context, Vosselman and Van der Meer-Kooistra (2009) focus on the ‘focal goal’ as a stimulant behind co-operative behavior. This again refers to RST which outlines that human behavior is goal-directed. As a result, partners will each select a focal goal that is most important for them while other goals are put aside. Lindenberg (2000) defined this phenomenon as framing. Apart from the fact that each partner has a focal goal, the specific choice for the focal goal depends on the context. Based on these two assumptions, Lindenberg (2000) makes a distinction between three frames; a gain frame, a loss frame and a normative frame. The choice between these frames is thus a product of the focal goal and the context of the transactional relationship (Six, 2007).
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trustworthiness of the partners in the collaboration. Although this does not imply overall goal alignment (Etienne, 2013), these relational signals will help to achieve consensus over the nature of the ITR. Whereas TCE states that incomplete contracts would impede partnerships, the contrary seems to be the case here (Chaserant, 2003). In first instance, explicit formal contracts are needed to lay a foundation for thin trust. However, the incompleteness of contracts leave room to be filled in by relational signalling, which is used by the partners to ‘thicken’ the established thin trust. Ultimately, this results in the need of partner firms to strengthen the trust that has been cultivated in the first stage through sending signals about the continuity of the relationship. On the whole, relational signalling appears to be a result of the existence of thin trust because this form of trust does not cover all fundamental uncertainty between partners since contracts cannot possibly be complete from the first moment that partners decide to work together. As a consequence, there is a causal relationship between the existence of thin trust and the subsequent use of relational signalling between the partners in ITRs.
Thick Trust
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the partners send positive and constructive messages back and forth which indicate the desire to continue the ITR.
On the whole, the second hypothesis thus examines the mediating effect of relational signalling. Schilke and Cook (2013) argue that research devoted little effort on the specific stages of trust development in ITRs. Moreover, the paper of Lindenberg (2000) repeatedly asks for future research on relational signals as a precondition for the creation of trust in contractual relationships. It is assumed that thin trust compensates for opportunistic future behavior of partners, however there is a need for thickening this trust because of the existence of appropriation concerns between the partners in ITRs. As tried to explain step by step in the aforementioned clarification, this thickening of trust needs relational signalling between the
partner firms. Reinald Minnaar (2014) provided the underlying thought of using relational signalling as mediator in this study’s linear path model as displayed in Figure 1. Subsequently, Minnaar (2014) summarized the main argument of Vosselman and Van der Meer-Kooistra’s paper (2009) in a figure; in which the creation of trust is shown as a causal, linear movement from thin trust as a result of a governance structure in a relationship, whereafter relational signals provide the input for the creation of thick trust. Through the use of relational signals, the partners show that they want to be trusted since they attach value to the interfirm relationship. Therefore, this study provides an empirical foundation for this linear movement using relational signalling as mediator between thin- and thick trust in ITRs. This situation is represented with the blue, dotted line in Figure 1. Hypothesis 2 reads as follows;
H2. Relational signalling positively mediates the relationship between thin trust and thick
trust in interfirm transactional relationships.
Explicit Formal Contracts, Thin Trust and the creation of Thick Trust
Path Model
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The partners in an ITR pursue a shared goal, in order to achieve these goals the partners can enter into an explicit formal contract (Jinyeong, 2018). Those formal contracts can be seen as ‘information-processing systems’, in the sense that contracts support the communication and the exchange of information between the partners in the relationship (Lumineau, 2017). Subsequently, the act of establishing explicit contracts support trust because of the increased identification among the partners as a result of the social interaction in the interfirm relationship. In other words, the social interaction between the parties signals long-term commitment to the collaboration (Frankel and Whipple, 1996). It is important to highlight the information processing perspective since the contract specification between the partners accelerates trust building. The basic structure explicit formal contracts provide in an ITR support the adherence to agreed-upon principles, whereas the interaction that follows is a sign of commitment. These explicit contracts are, according to Liff and Wahlström (2017), the prerequisites for thick trust between the organizations. Moreover, Li et al. (2010) state that ‘Formal contracts establish a formal basis of assurance for mutual trust and provide an institutional basis for future cooperation’. In line with Van der Meer-Kooistra and Vosselman (2000) who argue that contracts can create the right atmosphere for the creation of thick trust because formal contracts are able to create open commitment and signal trustworthiness. Altogether, contemporary literature indicates that it is worthwhile to examine the direct link between explicit formal contracting and thick trust besides the previously highlighted paths. Therefore, the following is hypothesized;
H3. The establishment of explicit formal contracts create thick trust throughout the
interfirm transactional relationship.
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ability and intentions because of their close cooperation. Information asymmetry between the partners disappears while shared values and norms increase (Gulati, 1995). In this situation the partners have established thick trust. As hypothesized hereafter, it is expected that the established thin trust between the partners is the forerunner of thick trust throughout the interfirm relationship.
H4. Thin trust is positively related to thick trust throughout the interfirm transactional
relationship. 3. Conceptual Model H1+ H3+ v Inter-organizational Thin Trust
Figure 1. Conceptual Model
Explicit Formal Contract
Linear Path to Trust
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4. Methodology
The main purpose of this research is to empirically investigate the linear path between control and trust. As a response to the quantitative nature of the formulated hypotheses, this study uses a theory-testing approach. As a result, this study adheres to the guidelines provided by Van Aken et al. (2012) for writing a theory-testing study to test the hypotheses prepared to answer the research question. This section introduces the details of the data collection, the measurements and the data analysis.
Data Collection
According to Dillman (2000) the use of a survey method for the proposed theory-testing hypotheses is most appropriate. The primary, quantitative data are collected in the form of paper-surveys which are approved and provided by the supervisor. Sax et al. (2003) state that in comparison to different modes of administration a paper-survey generally yields the highest response rate. The survey is conducted at Dutch organizations that maintain interfirm transactional relationships. The initial step was to approach organizations in order to find organizations willing to participate in this research by filling out the survey. However, organizations had to meet the following criteria: an annual turnover of two million euros, a minimum of ten employees and a written formal contract between the partners in the ITR was required. The organizations were approached by means of different channels either via the researcher’s personal network, by telephone, e-mail, LinkedIn or other media. Subsequently, contact was made with the appropriate persons within those organizations to make an on-site appointment. The CEO and the sales manager turned out to be the employees having the greatest familiarity with the organization’s partnerships. On the whole, 21 companies have been personally visited in this period as a consequence the researcher’s personal response rate was 19.82%. In the end, the final sample of the research group consisted of 111 companies who provided data about their organization’s interfirm relationships. The study focuses on ITRs from the viewpoint of only one of the partners involved in the relationship. As a result, the unit of analysis can be depicted as the firm-level.
Measurements
18 Independent Variable:
The Explicitness of Formal Contracts is measured based on three items which are used in the study of Li et al. (2010). The items describe the extent to which the partners in the interfirm relationship have ‘specific, customized and detailed contractual agreements’.
Mediator Variables:
Thin Trust is measured using the existing items which Poppo et al. (2016) use to measure calculative trust. The first two items assess the degree to which the partners reward each other for cooperative behavior or are able to punish each other. Whereas the third item takes into account the continuance of the interfirm transactional relationship.
To measure Relational Signalling the items used for signaling behavior in the study of Kingshott (2006) are adopted. These concern the following four items: partners would try to cover up if they had a setback, partner firms tend to be secretive about the politics in their companies, partners tend to sidestep any talk about weaknesses and partners give each other a clear picture of what goes on behind the scenes. These items should give a clear view about the extent that both partners are willing to build-up the interfirm relationship.
Dependent variable:
Thick Trust is measured by means of three different items acquired from Poppo et al. (2016). The three items; shared identification, shared understanding and thinking like one another jointly examine the existence of a shared identity between the partners in the ITR.
Control Variables
In an attempt to better systematically investigate the proposed hypotheses, this study controls for some extraneous variables. According to Berneth et al. (2017) ‘the notion behind control variable usage is that a researcher can statistically remove any distortions, legitimate or otherwise, associated with extraneous variables, thereby purifying results and exposing true relationships’. Consequently, there is a need to control for the following two extraneous factors;
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In line with prior studies examining trust in ITRs, the control variable Relationship Length has been incorporated. Relationship length reflects the number of years the ITR existed at the time of measurement (Krishnan et al., 2006). As with personal relationships, the duration of ITRs strengthens the bond between the partners, reducing the chance of opportunistic behavior of the partner as time elapses (Judge and Dooley, 2006). The reduction of opportunism and the increase in cooperative behavior can be expected to build trust because of increased mutual understanding (Krishnan et al., 2006). Hammervoll and Toften (2013) argue that ‘it takes time for partners to develop relations necessary to generate inter-organizational trust’. As a result, controlling for this variable is expected to assess the incremental validity for the hypothesized relationships.
The second control variable used in this study is called Relationship Type. According to Das and Teng (2001) ‘The roles of trust have significant implications on the particular type of the relationship’. The type of interfirm relationship may affect the findings and should be taken into consideration. The survey asked the respondents if they were involved in a buyer-supplier relationship, outsourcing relationship, R&D relationship, joint venture or to indicate a different type in the blank space provided. The study made use of dummy variables to control for relationship type in the path analysis since Holgersson et al. (2014) argued that dummy variables can be of help when studies try to capture the influence of categorical variables.
Data Analysis
The quantitative data collected in the field is analyzed using Structural Equation Modeling (SEM). According to Jacobucci and McAardle (2015) the use of SEM provides researchers with the ability to constrain the parameters of the model by thoroughly basing it on the theory that is found. Moreover, Okpych (2015) states that ‘SEM provides a single, seamless, and flexible framework for modeling rich social processes that other statistical approaches often do in a piecewise or unwieldy fashion, if at all.’ In this study, LISREL 8.80 has been consulted to carry out the structural equation models.
Construct Validity
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these items suffered from loading on the wrong item or from cross-loadings. As a consequence, the constructs for explicit formal contract and thin trust are measured with a single-item. Nevertheless, the remaining items are unambiguous and suffice for what is to be tested in this study. Table 1 presents the descriptive statistics and the correlation matrix of the study’s constructs. All 111 observations have been retained, despite 4 missing values on ‘Relationship Length’. These missing values are replaced in order to take advantage of the retention of all 111 observations and the statistical power in the analyses (Raaijmakers, 1999). The used method is known as (total) mean substitution; the missing values are replaced by the mean of the observed values for relationship length. The average length of an interfirm relationship in the sampled population, reported in the second column of Table 1, is 9.47 years. Apart from the study’s control variables, the means and standard deviations of the constructs are influenced by the use of a Likert-scale ranging from 1 to 7 in the survey. Accordingly, the means of thin- and thick trust are respectively 5.71 and 4.11. From the data of the 111 interfirm relationships, 63.1% of the relationships are defined as buyer-supplier relationships. Whereas, 5.4% of the sample involved R&D relationships. Moreover, the highest correlation found is between thick trust and thin trust (r = 0.41, p<.01). Which is closely followed by the correlation between relational signalling and thin trust (r = 0.29, p<.01). Noticeable is the correlation between the constructs explicit formal contract and thin trust (r = -0.08, p =0.40). From the literature review these two were expected to reinforce each other, which should have resulted in a higher correlation.
The outcome of the measurement model from CFA is displayed in Table 2. Furthermore, the table reveals the Cronbach’s alpha (α) of the constructs used in the study. The measurement model, as presented in Table 2 indicates a good fit: χ2/df of 1.36. Root Mean Square Error of Approximation
Table 1.
Descriptive Statistics and Correlation Matrix of the Constructs.
Construct Mean S.D. 1. 2. 3. 4.
1.Explicit Formal Contract 5.13 1.54
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(RMSEA) is 0.057, Goodness of Fit Index (GFI) is 0.95, Comparative Fit Index (CFI) is 0.96 and the Normed Fit Index (NFI) has a value of 0.90 (Hair et al., 2009).
Moreover, the Cronbach’s alpha of all measures but one surpasses the threshold of 0.70 (Nunnally, 1978). Not taken into consideration RT1 and RT2, the factor loadings of the items exceeded the arbitrary .5 standard and were statistically significant at a level of p<0.01 or p<0.001. Hence, except for the two aforementioned items all measures demonstrate adequate convergent validity. Discriminant validity was assessed using the estimated covariance matrix (Appendix A). All results were found to be significantly smaller than 1. Therefore, all constructs possess satisfactory discriminant validity.
Common Method Assessment
In the survey, a single respondent provided both an answer on the independent variable as well as the dependent variable. As a consequence, this constitutes a risk of common method bias in the data and results of the study. To test for common method bias, a one-factor CFA, called the Harman’s One Factor Test, is executed in LISREL 8.80 (a single construct representing all items of Table 2). On the basis of the chi-square difference test (∆χ2 = 34.11, ∆df = 4) the original CFA, as
displayed in Table 2, shows a significant better fit (p < 0.001). Therefore, common method bias is unlikely to be a concern in the data.
On the whole, the measurement model of CFA reflected in Table 2 fits the data and therefore testing the proposed relationships seems adequate. In order to test the hypotheses, the individual items as displayed in CFA were simply added and divided by the number of items in the scale to create constructs. An overview of the content of the constructs can be found in Appendix B. In the subsequent process of analyzing the data to retrieve results, insignificant control variables have been omitted to resolve an error message from LISREL 8.80 since the program warned that the sample size was smaller than the number of parameters.
Table 2.
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Construct Item Item Wording Factor Loadings and
Cronbach’s α
T value
Explicit Formal Contract α = N.A.
FC1 We have specific, well-detailed agreements
with this firm.
1.00 14.83
Thin Trust α = N.A.
CT3 We expect the relationship with this partner to
continue for a long time.
1.00 14.83
Relational Signalling α = 0.79
SB1 The partner firm would try to cover up if they
had a setback.
0.64 6.80
SB2 The partner firm tends to be secretive about
the politics in their company.
0.77 8.47
SB3 The partner firm tends to sidestep any talk
about the weaknesses in their company.
0.86 9.52
Thick Trust α = 0.491
RT1 Both parties would let the other make
decisions because we both think like one another.
0.37 3.17
RT2 Both parties can effectively act for the other because both share the same understanding of what matters.
0.47 4.04
RT3 Both parties are confident that their interests will be fully protected because both share a common identity.
0.64 5.12
χ2 = 21.73, df = 16; RMSEA = 0.057, GFI = 0.95, CFI = 0.96, NFI = 0.90
1 In consultation with the supervisor is decided to continue with this construct, despite the value of the
23 5. Results
According to Poppo et al. (2008) SEM is able to provide researchers with accurate results ‘because it estimates structural relations and measurements errors simultaneously’. The causal relations among the constructs as proposed in the conceptual path model are tested with a path analysis by means of maximum likelihood procedure in LISREL 8.80. Since Figure 1 is used as the base model for the path analysis, the construct ‘Explicit Formal Contract’ constitutes the exogenous variable, whereas ‘Thin Trust’ and ‘Relational Signalling’ are the intermediate variables and ‘Thick Trust’ is the outcome variable of the study. An illustration of the results of the path analysis is given in Figure 2. Furthermore, the fit indices reveal that the model has a good fit. The chi-square is 7.25 (df = 7); the RMSEA is 0.018, GFI is 0.98, CFI is 0.99 and the NFI is 0.88. The majority of the tested paths are significant, however in some cases the sign is different than initially hypothesized.
Overall, Figure 2 demonstrates that hypothesis 1 is not supported as the coefficient was not significant at p=0.10. This finding, an explicit formal contract between the partners has no effect on thin trust at all, is unexpected. In the discussion section an interpretation is offered, trying to explain the outcome.
The second hypothesis expects relational signalling to function as mediator between thin- and thick trust. In other words, thin trust will lead to relational signalling between the partner firms which in turn positively influences the creation of thick trust. First expecting a positive relationship between the existence of thin trust and relational signalling between the partners. These constructs are indeed positively related as shown in the results (coefficientH2 = 0.37,
p<0.01). Furthermore, it is likely that relational signalling is positively related to the creation of thick trust. However, the direct association between these constructs does not appear to be significant at p=0.10. The acceptance of the second hypothesis would have meant that both causal relationships were supported by the path analysis. Since no relationship is found between relational signalling and thick trust, hypothesis 2 must be rejected. Specifically, relational signalling does not function as mediator between thin trust and thick trust.
Furthermore, the third hypothesis examines the positive direct relationship between explicit formal contracts and thick trust. The results of the path analysis indicate that hypothesis 3 cannot be confirmed (coefficientH3 = -0.12, p<0.10). Despite the existence of a significant relationship
24
Hypothesis 4 examines whether thin trust is positively related to thick trust in the path model. By means of the path analysis, hypothesis 4 was accepted (coefficientH4 = 0.47, p<0.001).
With respect to the control variables, the results show that both relationship length (coefficient = -0.02, p<0.05) and buyer-supplier relationship (coefficient = -0.42, p<0.10) have a negative relationship with thick trust. The negative sign of relationship length is remarkable and unexpected. In accordance with Holtgrave et al. (2017), the expectation was that thick trust would become stronger as the relationship grew older.
On the whole, the results section reveals that in this study’s journey to explore the causal relationships between explicit formal contracts and trust in ITRs one out of the four hypotheses is supported.
H1
H3
Inter-organizational Thin Trust
Figure 2. Outcome Path Analysis
Explicit Formal Contract
Linear Path to Trust
Relationship Length Buyer-Supplier Relationship Relational Signalling Inter-organizational Thick Trust H4 H2 Mediation R&D Relationship 0.37*** (3.19) 0.47**** (4.37) -0.12* (-1.70) -0.02** (-2.00) -0.42* (-1.86) -0.61 (-1.27) -0.05 (-0.88) 0.02 (0.28)
25 Additional Robustness Analysis
Besides performing a path analysis for Figure 1 there appeared to be an option (as shown in the modification indices of LISREL) which could further increase the robustness of this study’s model. Different options taken into consideration, an additional relationship between the constructs explicit formal contract and relational signalling yielded the greatest gain compared to the main model tested in this study. The outcome of the measurement model demonstrates a chi-square of 4.65 (df = 6); the RMSEA is 0.00, GFI is 0.99, CFI is 1.00 and the NFI is 0.92. Figure 3 displays the situation when this extra relationship is taken into consideration (red arrow). The outcome of the analysis shows that the existence of an explicit formal contract is negatively associated with relational signalling (coefficient = -0.12, p<0.10). It is seen as remarkable in this study since it was assumed that the creation of trust would follow a linear path starting from explicit formal contract to the creation of thick trust in the end. However, as shown by the results in Figure 3, relational signalling may not only be the outcome of the establishment of thin trust between the partners. As the current path analysis reveals, relational signals are also produced when an explicit formal contract ITR exists in the relationship. Therefore, explicit formal contracts might not only act as safeguard but may also impede the creation of trust by sending negative relational signals between the partners. Furthermore, the analysis of Figure 1 already showed that explicit formal contracts do not serve the creation of both thin- and thick trust.
0.47**** (4.38) 0.35*** (3.08) -012* (-1.68) -0.02** (-2.00) -0.42* (-1.86) H1 H3 Inter-organizational Thin Trust
Figure 3. Updated Conceptual Model
Explicit Formal Contract
Linear Path to Trust
Relationship Length Relational Signalling Inter-organizational Thick Trust H4 H2 Mediation
26
6. Discussion
In this study the existence of a linear, causal path between explicit formal contracts and thick trust is examined. The outcomes as shown in the path analysis (Figure 2) met the expectations of the existence of positive associations of thin trust with both relational signalling and thick trust. Nevertheless, contrary to the expectations, explicit formal contracts do not contribute to the creation of thin trust. The same applies to relational signalling which did not have a significant relation with thick trust. Furthermore, explicit formal contracts did not have a positive impact on thick trust whereas the opposite, a negative relationship, seems true. In particular, this section sets out how the empirical results of the hypotheses contribute to the literature in this field of research.
27
The positive association of thin trust on relational signalling is consistent with the current literature (Vosselman and Van der Meer-Kooistra, 2009; Lindenberg, 2000). The outcome indicates that it is necessary to confirm and strengthen the so-called thin trust with relational signals between partner firms. Nonetheless, this study seems to be one of the first studies to empirically investigate the function of relational signalling as mediator between thin- and thick trust in ITRs. It was expected that thin trust would provide the structure for transmitting relational signals, which subsequently would have helped to create thick trust. Despite the theoretically justified causal link, the direct positive association between relational signalling and the creation of thick trust is nonsignificant. On the other hand, various reasons could underpin this outcome. Lindenberg (2000) argues that relational signals do not always function properly. In this case, thin trust that is established between the partners can hardly be elevated to thick trust by means of transmitting those dysfunctional relational signals. However, this study did not make a distinction between proper relational signalling and non-functioning relational signals. Furthermore, Khalid and Ali (2017) demonstrate in their study that research in this field should keep in mind the Social Exchange Theory (SET) as possible mechanisms functioning as antecedents of trust. The outcome of their research shows that it might be worthwhile to consider partner reputation, communication, cultural sensitivity and expected longevity. As a consequence, in order to arrive at thick trust different social factors can play a role and thus may not be constrained by proper relational signalling only. Poppo et al. (2008) give a pause of thought when they highlight the ‘learning logic’. The creation of strong trust is encouraged when the partners believe in the continuance of the ITR. However, this expectation of continuity must be fed by the partners’ learning about each other’s competencies and abilities. Taken together, the outcome of the analysis in which relational signalling did not function as mediator between thin- and thick trust could have been improved when SET and the learning logic were incorporated.
Unexpectedly, this study finds that explicit formal contracts have a (significant) negative effect on thick trust instead of the hypothesized positive sign. When rejecting H1, explicit formal contracts
28
relationship that exists between those two forms of motivation (Frey, 1997). In this sense, explicit formal contracts as controlling device between the partners impairs the intrinsic motivation to trust. As a result, the intrinsic trustworthiness of the partners is crowded out which indeed results in a negative relationship between the existence of explicit formal contracts and trust in ITRs.
As anticipated, the study further finds that thin trust is positively related to the creation of thick trust. Thin trust compensating for negative behavioral expectations is seen as necessary condition for thick trust since thick trust will reduce the partners’ uncertainty even further based on the creation of positive behavioral expectations (Lindenberg, 2000).
The effects of the control variables on thick trust were in some cases surprising. While most relationship types had no significant bearing on thick trust, a buyer-supplier relationship was significantly, negatively related to thick trust. Remarkably, much has been written about this particular relationship type in the alliance literature (Burkert et al., 2012). To establish a thick basis of trust in a buyer-supplier relationship, the context and specific control practices of the relationship have to interact smoothly (Holtgrave et al., 2017). Furthermore, the link between relationship length and thick trust was completely unexpected. The outcome, a negative significant association with thick trust, is inconsistent with relevant previous literature (Krishnan et al., 2006; Hammervoll and Toften, 2013). The idea is that interaction over the years would have further deepened the relationship between the partners resulting in the creation of thick trust. Yet trust also has a downside which has not been illustrated in this study, but which might have played a role in the outcome of the analysis. As the findings seem to support that trust between partners in an interfirm relationship can diminish over the years. For example, Ekici (2013) suggests that when interfirm relationships mature, partners may take relationships for granted and become less objective. Moreover, partners become more vulnerable when relationships evolve. As a result, the self-interest of the partners will shift to the foreground, which will inevitably have detrimental effects on the thick trust between the partners.
29
7. Conclusion
In this study, an examination of trust in interfirm relationships has been at the center point. Therefore, the study empirically investigates the existence of a linear path on the basis of causal relationships between explicit formal contracts and thick trust between partner firms. On the whole, the findings enrich our understanding of the creation of trust in ITRs. To conclude, it seems that organizations in an ITR cannot exactly follow the causal path as displayed in Figure 1 to finally arrive at thick trust between the partners. In accordance with Minnaar (2014), the boundaries between the different forms of trust might be blurred and not as clear cut as they were expected to be. Moreover, the influence of explicit formal contracts and relational signals between the partners in an interfirm relationship on thin- and thick trust cannot be explained by means of the analyzed path model. On the whole, the transition from thin- to thick trust in an interfirm relationship cannot be described as straightforward. To generate a clear picture, the empirical analysis might need the incorporation of variables from other organizational theories of which some are already highlighted.
Research Implications
30
between partner firms. In the fourth place, another empirical contribution is made since the analysis reveals that the initial basis of trust in an interfirm relationship, thin trust, can be strengthened into thick trust. The results seem to prove that the metaphors used for trust, borrowed from Nooteboom (2002), indeed follow upon each other whether or not in a causal relationship (Vosselman and Van der Meer-Kooistra, 2009).
In the end, explicit formal contracts and relational signalling did not appear as the main building blocks of creating trust in ITRs. The results, however, could indicate that trust fluidly circulates, as it turns out to be neither programmable nor predictable in a linear path (Minnaar et al., 2017). As a consequence, the examination of both forms of trust as objects in relation to other constructs in Figure 1 might have been wrong. Perhaps, trust should have been examined as quasi-objects in this study. Schiermer (2011) argues: ‘Paramount to the idea of the quasi-object is the thought that its ontology cannot be separated from its social function’ Hence, the quasi-object of thin trust is linked to explicit formal contracts for example. Accordingly, thin trust is not a direct result of explicit formal contracts between partner firms. Those two have to be seen as one which are interlinked, instead of proposing a causal relationship between those two variables (Figure 1). On the whole, the results of this research might serve as evidence for the use of trust as quasi-objects.
Managerial Implications
31 Limitations & Further Research
Several limitations should be recognized in this study which in turn provide opportunities for future research.
First, the sample size of the study is relatively small which can cause generalizability issues. A larger sample size increases the statistical power of the analyses and thus ought to be more representative. A future study could replicate this study by expanding the time for data collection to be able to conduct more on-site surveys.
Second, not all antecedents that could have an influence on the linear path resulting in thick trust have been examined. In particular, the context in which explicit formal contracts are concluded in interfirm relationships is not included in this study. The role of other transaction characteristics (TCE) which in turn could influence the creation of thin trust remains unanswered. Future research may provide a more thorough analysis by including these missing antecedents. Moreover, it could be fruitful to re-examine the present study’s counterintuitive outcomes.
Third, the mean substitution-method used for replacing the missing values in the dataset can lead to an underestimation (Raaijmakers, 1999). Using this method resulted in lower estimates of variances and covariances that have influenced all the analyses conducted after replacing the missing values.
Fourth, two constructs are analyzed using a single-item. Inherent to single-item measures is the problem of the construct’s reliability. As a consequence, the use of multiple-item measures is preferred. The original items capture more information than a single-item does (Rossiter, 2007). Additionally, the Cronbach’s alpha of the construct thick trust did not surpass the threshold of 0.7. In general, the reliability of this construct is seen as unacceptable because the reliability of what is measured in the test is questionable. Notwithstanding the above, the usefulness of Cronbach’s alpha itself is not without problems (Sijtsma, 2009).
32
Moreover, this research could have benefitted from longitudinal data. The research method constricted this study to only test for causality. However, longitudinal data would shed light on the process of trust building between partners in ITRs. For a richer understanding of the process of trust building, qualitative studies (case studies) are appropriate. Hence, the study’s rather static perspective on trust and relational signalling can become more dynamic in future research.
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