In Time We Trust?: The Effects of Duration on the Dynamics of Trust-Building Processes in Inter-Organizational Relationships

Inter-organizational relationships (IORs) have become pervasive in the last quarter of the 20th century. This study is based on the notion that trust serves as a viable means for better comprehension of the underlying dynamics of IORs as it reinforces the positive outcomes and abates the complications due to opportunism and uncertainty. A growing interest of research on trust notwithstanding, studies on the co-evolution of trust, its antecedents, and effects on commitment over time are rather scarce. This study addresses this gap with a new conceptual model of trust incorporating the concept of duration into the process of building trust and commitment within an IOR. INTRODUCTION Developments in the last quarter of the 20th century have dramatically shifted the paradigm of strategic management. With the improvements in data processing technology, business practitioners, and academics witnessed the inauguration of the post-Fordist era, which involved a paradigm shift from mass production, reliance on economies of scale and vastly integrated firms to customization, economies of scope, and firms focused on core competence. A pervasive phenomenon of this era has been the increase in inter-firm collaborations. Firms engage in these collaborations with their suppliers, channel partners, customers, and even with their competitors (Turk and Ybarra, 2011). Since the early 1980s, the number of such collaborations has been growing as they help firms better adapt to the co-evolutionary dynamics of market competition, increased global rivalry, erosion of trade barriers, and revolutionary advances in transportation, communication and information technologies (Costa e Silva, Bradley, & Sousa, 2012). Inter-organizational relationships (IORs) improve the abilities of partner firms to (1) achieve economies of scale through combination of otherwise separate activities under one entity, (2) access to complementary assets of each other, (3) share cost and risk of uncertain demand and/or shortened product life cycles, and (4) shape the scope and basis of competition (Koh & Venkatraman, 1991). As such, research shows that firms involved in alliances had 11% higher revenue and 20% higher growth rate than companies not engaged in alliance activity (Ybarra & Turk, 2009). On the other hand, firms also have to bear the potential risks of forming IORs such as the abrasion of competitive advantages via transfer of knowledge or granting access to the strategic resources, the rise of coordination and safeguarding costs, and the creation of an adverse bargaining position through highly specific investments (Seppapen, Blomqvist, & Sundqvist 2007; Talay & Akdeniz 2009). M. Berk Talay et al. In Time We Trust? Strategic Management Review, 8(1), 2014 78 Adopting a transaction cost analysis (TCA) perspective, it can be argued that a firm will engage in an IOR as long as it foresees that the potential benefits surmount the setup and operational costs. However, based on TCS, it may also be put forward that it is not possible for firms to precisely envision the aftermath of an IOR during the inception stage as the decision-makers are “intendedly rational, but only limitedly so” (Simon, 1979). This study posits that trust can improve our understanding of the dynamics of IORs, since it is a valuable means stimulating the benefits of IORs while abating the complications of opportunism. It has been shown to improve the quality of the relationship, increase alliance flexibility, decrease governance costs, avoid conflict, and facilitate learning (Ybarra & Turk 2009). Specific to TCA, trust between IOR partners is found to decrease transaction costs due to uncertainty (Noordewier, John, & Nevin, 1990), encourage long-term orientation (Ganesan, 1994), and facilitate communication (Morgan & Hunt, 1994). Commitment, on the other hand, is another consequence of trust, which indicates a willingness to maintain an IOR (Anderson & Weitz, 1989), and hence has a significant impact on its durability. A growing interest of research on trust notwithstanding, studies on the co-evolution of trust, its antecedents, and effects on commitment over time are rather scarce. Following the works of Seppänen, Risto, Blomqvist, and Sundqvist (2007), Ybarra and Turk (2009), and Brinkhoff, Özer, and Sargut (2012), this study proposes a new conceptual model to close a gap in the “trustcommitment” literature. Primarily, it aims to contribute to the literature via incorporating the concept of “duration” into the process of building trust and commitment within an IOR. In the next section, we present a brief literature review on trust in IORs. Then, the conceptual model and propositions are presented. Last section is devoted to the discussion, limitations, and future research avenues of the study. LITERATURE REVIEW While there exists a plethora of definitions of the IOR phenomenon, in this study an IOR is defined as a “long-term institutional arrangement among distinct but related organizations, ... [which] emerge either due to a quasi-externalization or due to a quasi-internalization of business functions” (Sydow, 1992). Firms engage in IORs to improve the efficacies of their internal and external activities (Faems, Janssens, Madhok, & Looy, 2008). Despite firms agree to keep the tasks out of their “borders” in an IOR, they still want to monitor, if not control, the execution of these tasks, which necessitates a “loose connection” between IOR partners. IORs usually involve relationships-specific investments, which render all parties involved in them vulnerable to uncertainty about future exigencies (Patzelt & Shepherd, 2008). In order to manage the uncertainty, resolve future conflicts, and mitigate their detrimental effects in an IOR, firms utilize both formal and informal mechanisms. However, the former mechanisms can (e.g., elaborate contracts) rarely address all possible contingencies, but also they signal distrust and encourage opportunistic behavior (Gaur, Mukherjee, Gaur, & Schmid, 2011). Therefore, informal mechanisms such as trust are consequential for efficient functioning of an IOR (Gulati & Nickerson, 2008). Trust, a popular research topic in psychology, has also drawn the attention of management and marketing scholars. Especially after the 1990s, there have been numerous studies which M. Berk Talay et al. In Time We Trust? Strategic Management Review, 8(1), 2014 79 emphasize the importance of trust in joint ventures and strategic alliances (e.g., Ekanayake 2007, Mohr & Puck, 2012; Krishnan, Martin, & Noorderhaven, 2006), and in developing theories of marketing (Morgan & Hunt, 1994). In this study, following Zaheer, McEvily, and Perrone (1998), trust is defined as the expectation that a party (i.e., trustee) can be relied to meet the requirements of a set of predetermined criteria by the other (i.e., the trustor). Trustor also assumes that the trustee will behave in a predictable and fair way, even when there is a possibility for opportunism, hence the close relationship between trust and risk. That said, vulnerability to the risk of opportunism in an IOR is a raison d’être of trust. Scholars frequently address the significance of trust for successful IORs. Aulakh, Kotabe and Sahay (1996) suggest that trust in IORs (1) hinders opportunistic behavior, (2) serves as a substitute for hierarchical governance, and (3) provides a competitive advantage (Barney & Hansen 1994). Moreover trust is reported to help reduce the monitoring costs (Bensaou & Venkatraman, 1996), to stimulate knowledge-sharing within in an IOR (Bakos and Brynjolfsson, 1993), to encourage risk taking (Beccerra and Gupta, 1999), and to increase performance (Aulakh, Kotabe, & Sahay, 1996). Moreover, Williamson (1985), argues that trust is crucial in long-term relationships, since there exist short-term inequities in all IORs, which, through an increase in trust, can be corrected to long-term orientation (Dwyer, Schurr, & Oh, 1987). In sum, existing theoretical and empirical research on trust in IORs suggest that “[..] all else being equal, trust improves alliance performance” Krishnan et al. (2006, p. 895). While the extant literature has demonstrated how trust improves an IOR’s performance and improves the competitiveness of the participating firms, research examining the antecedents of trust has been scarce (Ybarra & Turk, 2009). In their conceptual study, Inkpen and Currall (2004) argue that unambiguous collaborative objectives and performance guidelines (e.g., market share, return on equity, etc.,) will improve trust in an IOR and decrease the need for monitoring mechanisms. In a similar vein, Costa e Silva, Bradley, & Sousa, (2012) demonstrate that shared values and efficient communication lead to higher levels of inter-firm trust while the perceived behavioral uncertainty and vulnerability to opportunistic behavior one partner perceives in the other will decrease the trust placed in that partner. Cooperation, network embeddedness, reputation, asset specificity, and expected lifespan of the IOR are also among the highly cited antecedents of trust (Ekanayake 2007). We posit that while trust is a significant driver of IOR performance and subsequent partnerfirm competitive advantage; a longitudinal examination of the inter-firm trust in an IOR is warranted since the level of trust is likely to change with the duration of an IOR (Ybarra & Turk 2009; Inkpen and Curall 2004). CONCEPTUAL FRAMEWORK FOR THE EVOLUTION OF TRUST AND COMMITMENT Figure 1 demonstrates the conceptual framework of this study. Continuity Intention Continuity intention refers to the mutual congruity of the parties to uphold the relationship in the future (Heide & John, 1990). It serves as a critical factor to trigger the “shadow of the future” M. Berk Talay et al. In Time We Trust? Strategic Management Review, 8(1), 2014 80 aspect of trust in IORs (Heide & Miner, 1992). In other words, given expectations of future interaction, parties are more likely to collaborate to recoup benefits in the long term rather than behave opportunistically for self-gain in the short term (Poppo, Zhu, & Ryu, 2008). The expectation that relationship will continue for the foreseeable future is also an important determinant of IOR performance. More specifically, as the duration of an IOR increases, it is expected to become more beneficial for parties involved (Bstieler, 2006; Gulati, 1995). However, along with continuity intention, partners need to engage in necessary investments or develop certain behavioral patterns for the sustainability of an IOR. Stated differently, a party’s intention to prolong an IOR will increase that party’s need to reduce uncertainty and opportunistic behavior of its partner. As monitoring mechanisms reduce information asymmetry between parties and coordinate and motivate their activities, they are expected to play a critical role for the continuity of the IOR in a mutually beneficial way. Furthermore, monitoring serves to reduce opportunistic tendencies that can deter the expected continuity and benefits from a long-term relationship. Thus, we propose that: P1: As the continuity intention of IOR partners increases, they implement more formalized monitoring mechanisms. Information Exchange Information exchange refers to the formal or informal sharing of meaningful and timely information between firms (Anderson & Narus, 1990). In the literature, it is regarded as the most important factor for the success of an IOR as the exchange of information that is timely and valuable between partners contributes to the maintenance of the relationship over time (Jonsson and Lindbergh, 2010). In fact, continuous sharing of information improves firms’ ability to cope better with internal processes and environmental conditions; and hence contributes to the growth of close ties between parties (Carson, Madhok, Varman, & John, 2003). Continuity