Partner Selection and Network Performance - an Empirical Analysis of Impact and Mediating

Paper to be presented at the EMNet-Conference on ” Economics and Management of Networks” Budapest, Hungary, September 15-17, 2005 www.univie.ac.at/EMNET

Partner Selection and Network Performance An Empirical Analysis of Impact and Mediating Factors in German Business Networks

Dr. Klaus Moeller Nils Gamm Chair of Management Accounting/Control IPRI - International Performance Research University of Stuttgart Institute

Keplerstraße 17 Rotebühlstraße 121 D-70174 Stuttgart D-70178 Stuttgart Germany Germany Phone +49-711-121-3170 Phone +49-711-6203268-0 [email protected] [email protected] Abstract

The impact of business network designs on their synergistic rent potential (network performance) is still an issue in research and management. In this context, partner selection is seen to be an essential strategic aspect because it determines the business network configuration. Thereby, future behavior of partners can also be affected. Trust, opportunism and commitment are regarded as key behavioral constructs in business network research. This paper aims to examine effects of a well-executed partner selection on the performance of business networks. We also analyse the mediating role of trust within, commitment to as well as opportunistic behavior in business networks. Hypotheses are founded on New-Institutionalism, Game Theory, Organization Theory, Relationship Marketing and Strategic Management approaches. A structural equation model has been tested within the first large scaled empirical study on German business networks. Based on results of this study we draw conclusions and give suggestions for future research. Table of Contents

1 INTRODUCTION...... 1 2 TERMS AND DEFINITIONS...... 2 2.1 Partner Selection...... 4 2.2 Trust...... 7 2.3 Network Commitment...... 9 2.4 Opportunism...... 10 2.5 Performance...... 11 3 MODEL DEVELOPMENT AND HYPOTHESES...... 12 3.1 Effects of Partner Selection...... 12 3.2 Effects of Trust...... 15 3.3 Effects of Network Commitment...... 17 3.4 Effects of Opportunism...... 19 4 EMPIRICAL ANALYSIS...... 19 4.1 Data Collection and Sample...... 19 4.2 Construct Measurement...... 21 4.3 Hypotheses Testing and Results...... 22 5 DISCUSSION, LIMITATIONS AND IMPLICATIONS...... 23 REFERENCES...... III APPENDIX...... X 1 Introduction Numerous influencing factors like the growing dynamics and turbulences in business environment lead to a decomposition of organization’s boundaries and to a loss of the unique character of these boundaries. Thus, alternative organizational forms, especially business networks become increasingly important for acting in such an environment.1 A basic assumption in the business network context is, that they can be more than a „zero- sum-game“ implicating one network partner’s benefit results from the other’s costs. In fact, business networks’ underlying hypothesis is providing the chance to link the individual profit “over additive” in the sense of a synergy realisation:2 „relational rent as a supernormal profit jointly generated in an exchange relationship that cannot be generated by either firm in isolation and can only be created through the joint idiosyncratic contributions of the specific alliance partners.”3 A basic problem business networks are confronted with, is the coordination of each partners’ goals and expectations. Missing partner compatibility and goal incongruence can lead to conflicts accompanied by opportunistic behavior. This highlights the relevance of partner selection as possibility for minimizing the risk of opportunistic behavior by building up trust and commitment to a network influencing network performance. Partner selection is of relevance to network performance as it constitutes the uniqueness of a business network and the partners` position within a network. It also determines network strategy and structure. For example, supplier selection is one of the key decisions in supply management as supplier’s performance has great impact on productivity, quality and competitiveness of the purchasing firm.4 As New-Institutionalism argues, acting in business environment is accompanied by behavioral and environmental uncertainty, bounded rationality and information asymmetries, opportunistic behavior is an inherent problem of business networks. Critics of this approach argue, the focus on opportunistic behavior is not sufficiently discussed. Therefore, the aspect of trust has been identified as an important issue in interorganizational business relationships. In general, it can be assumed that a certain amount of trust is needed as threshold condition for successful interorganizational cooperation. Commitment is seen to be another important aspect that affects the relationship between network partners implying the renunciation of short-term opportunism and the alignment with long-term value creation. Furthermore, it can be assumed, that absence of commitment may encourage opportunistic behavior.

1 Cf. Ashkenas et al. (1995); Picot/Reichwald/Wigand (2003); Ortmann/Sydow (2003); Reichwald (2004), pp. 998 2 The underlying assumption is based on the system theoretic hypothesis, that the sum is more than the parts of its elements. By avoiding local optima, a whole system optimum can be achieved; for the discussion of the underlying term of synergy, cf. Kräkel (2002), p. 1910; Biberacher (2003), pp. 8; for a similar argumentation on competencies, cf. Mildenberger (2001), p. 706 3 Dyer/Singh (1998), p. 662 4 Cf. Leenders/Fearon (1993), pp. 233; Ellram (1990); Pearson/Ellram (1995)

1 Thus, partner selection determines behavior of network partners and network performance. This study aims at two goals: On the one hand it examines effects of a well-executed partner selection on the performance of business networks. On the other hand mediating effects of the behavioral constructs trust, commitment and opportunism on network performance will be examined. This study tests such correlations by a conceptualization and examination of a structural equation model. Due to underlying conditions of this study explained later, the results have more an explanatory than a confirmatory character. This study contains five parts: After this introduction some theoretical pre-considerations for the following study are made as well as the study’s underlying terms and definitions are discussed in part 2. Afterwards, the research framework and hypotheses are derived from underlying theories in part 3. The description of the empirical study and its results are pointed out in part 4. Based on these results conclusions and future research implications are given in part 5.

2 Terms and Definitions Numerous theoretically deduced and/or empirically verified criteria are discussed having an impact on success of a cooperation.5 This study is based on the assumption that the behavioral aspects trust, commitment und opportunism are determined significantly by partner selection. As shown in Figure 1, the research framework is based on contingency approach and examines the effects of a well executed partner selection on the behavior al constructs trust, commitment and opportunism as well as the effects of partner selection and the mentioned behavioral constructs on network performance. Initially, before we give a short description of the empirical study’s underlying constructs, theoretical pre-considerations are made.

5 Cf. Das/Teng (2002a), pp. 6; Das/Teng (2002b), pp. 731. A meta study analyzing 158 contributions on network research in US- journals identifies 23 outcome variables; cf. Oliver/Ebers (1998), p. 556

2 Trust

H 4 (+) H 1 (+) H 6 (+) H 5 (-) H 7 (+)

H 3 (-) H 10 (-) Partner Selection Risk of Opportunism Network Performance

H 2 (+) H 8 (-) H 9 (+)

Network Commitment

Figure 1: Research Framework

Within the scope of (theoretical) cooperation research, a variety of explanations and configuration approaches for business networks exist. Especially, proposals like

 New Institutionalism (in particular Transaction Cost Economics and Agency Theo- ry),  approaches of Strategy Research (in particular Market-based View and Re- source-based View),  Relationship Marketing approaches (e.g. Commitment-Trust Theory) and  approaches of Organization Theory (e.g. cooperative/non cooperative Game Theory, Systems Theory, Contingency Theory, Evolution Theory ) are often used in cooperation research. This study aims to develop and survey a theory-based causal model. A holistic and comparative evaluation of each of these approaches appears not to be appropriate in this case. Such an approach would either restrict the perspective to an already known theoretical perspective or it would lead to a new “network theory”. Due to the enormous research activity in this research field both approaches seem to be less adequate. Instead, hypotheses should be developed based on postulated coherences of different theories and should be tested by empirical data. On that account, the intention of this study is the selective application of particular (necessarily competing) “theory components” and not a concept of an integrative network theory. However, it is necessary to have a precise explanation of the examination object. Due to a huge amount of literature on cooperation in almost every scientific managerial and

3 economic domain, the use of different network terms and definitions is extremely high.6 In this study, business networks are distinguished as a special form of cooperation, whereas cooperation represents a generic term for different forms of interorganizational cooperation.7 The voluntary character of the business network formation seems to be an especially relevant associated mechanism.8 Another attribute to business networks is the limited autonomy of decision. On the one hand cooperating with partners under full autonomy does not fit with the network idea, on the other hand the voluntary network formation is foiled at total dependency.9 A further essential attribute is that at least three companies have to be involved in a business network.10 Thus, a business network is a voluntarily-based interorganizational cooperation with at least three companies, which are constricted partially in their entrepreneurial autonomy by cooperation.11

2.1 Partner Selection

Partner selection aims at identifying the network partners’ potentials for a joint value creation. Therefore, partner selection is tightly connected to the business network formation and regards primarily to strategy, structure, and partner decisions.12 Only if value-adding potentials (in the sense of processes, competencies, resources or similar) leading to advantages (in the sense of better output-input-relations) at the process of cooperative providing goods and services are identified, business networks will be formed. Hence, depending on the specific context a partner selection includes a large number of interrelated negotiations and decisions concerning (objective and subjective measurable) criteria like finance, contracts, information exchange and organizational structures (e.g. supply management, production). In the supply management context, Dickson identifies 23 commonly used selection criteria (see Figure 2).13 Ellram emphasizes financial issues (e.g. financial stability an economic performance) and managerial, organizational and cultural issues (e.g. strategic fit and top management compatibility) as well as techno- logical/technology issues (e.g. design and manufacturing capabilities).14 Selecting po-

6 For an actual literature review cf. Sydow (2003), pp. 315; Zentes/Swoboda/Morschett (2003b), pp. 5. For a comparison of definition criteria on networks cf. Becker (1999), p. 101; Peitz (2002), p. 95 7 Cf. Zentes/Swoboda/Morschett (2003b), p. 6; Staber (2004), p. 932 8 Cf. Tomkins (2001), p. 164 9 The combination of firms and voluntarity implies managerial autonomy of partners as a central attribute of cooperation; cf. Wöhe (2002), p. 303. This autonomy is (partially) restricted by a business networks participation. Therefore, the circumstance of voluntarity and managerial autonomy concerns primarily the beginning of a cooperation; cf. Hess (2002), p. 8; Wildemann (1997), p. 427 10 For a similar point of view cf. Reiß (1998), p. 226; Beck (1998), p. 12; Hess (2002), p. 11. Other authors argue two firms already form a network; for example cf. Jarillo (1988), p. 38 11 Cf. Horváth et al. (2004), p. 14. For a similar pragmatic proposal cf. Kasperzak (2003), p. 55 12 Cf. Galbraith (1998), p. 86; Easton (1997), p. 119 13 Cf. Dickson (1966). Weber/Current/Benton reviewed the published papers about supplier selection since 1966 according to the studied criteria. The result, based on 74 publications, shows that price, delivery, quality, facilities and capacity, geographic location and technical capability are the criteria most often discussed in the literature. Overall, the 23 criteria presented by Dickson still cover the majority of the criteria presented in the literature until today, but criteria like performance history lost relevance. Cf. Weber/Cur- rent/Benton (1991), for another checklist cf. Mitsuhashi (2002), p. 122 14 Cf. Ellram (1990); Ellram (1991), pp. 13

4 tential network partners is based on an analysis and evaluation regarding such criteria and the overall fit.

Selection Criteria 1. Delivery 9. Communication System 17. Packaging Ability 2. Performance History 10. Reputation and Position 18. Labor Relations Record 3. Warranties and Claims 11. Desire of Business 19. Geographical Location 4. Production Facilities 12. Management and Organization 20. Amount of past business 5. Price/Cost 13. Operating Controls 21. Customer Service 6. Technical Capability 14. Repair Service 22. Training Aids 7. Financial Position 15. Attitude 23. Reciprocal Arrangements 8. Procedural Compliance 16. Impression

Figure 2: Dickson’s Supplier Selection Criteria

As mentioned above, partner compatibility is a pivotal factor determining behavior, strategy and structure in business networks.15 Misfits in strategy, structure and culture represent potential conflict areas and imply a permanent risk of opportunistic behavior. Therefore, a permanent evaluation of potential and existing partners analyzing the partner fit is a necessary condition for successful business networks. In principle, several dimensions of fit have to be considered such as the strategic fit, the financial fit, the cultural fit, the organizational fit, the communication fit or the IT fit. The risk of potential conflicts can be reduced by a strategic fit as partners have the same size and/or power, as they have mutual requirements for resources and capabilities and as they have complementary goals (at least not contrary goals). Crucial about the strategic compatibility is the partners’ contribution in a way that cooperative competitive advantages will result. Thus, partner selection has to provide the identification of these (compatible) potentials as well as an adequate implementation, whereas a corresponding perception is a necessity.16 The essential issue in reaching the network goals are partners being suitable concerning their competences and intentions as this influences future resource allocation and network regulation. If partners’ goals are not compatible, network coordination is very expensive, at risk or even impossible.17 This implies an assessment of each partner giving access to resources and capabilities. Heterogeneity and comple- mentarities of resources and capabilities as well as the possibility of combining them synergistically have to be assessed as well. As Dyer/Singh formulate, relational rents ac-

15 Cf. Child/Faulkner (1998), p. 92; Bronder/Pritzl (1992), p.36 16 Cf. Sydow (2003), p. 302. If partners do not possess similar values, beliefs and practices, they will be less likely to take advantage of the synergies. 17 Cf. Sydow (2003), p.312

5 crue from the capability of finding partners with complementary resources and relational capital (e.g. the willingness and ability to act cooperatively).18 Closely connected with this, goal congruence is another aspect that has to be mentioned.19 Various publications identify goal congruence between partners as an important factor for development of competences and network goal achievement.20 Goal congruence means a combination of the partners’ current strategic goal systems to a higher level network goal system under the consideration of each partners strength and competencies.21 Thereby, both the individual partner goals and the network goals should be reached. To a certain extent, this implies a subordination of individual partner goals under the collective network goals as well as a constraint of the company-owned freedom of action.22 According to Das/Teng the joint goal-setting process is a pivotal formal and social coordination mechanism within cooperation. By collaborative decision-making and goal-setting within the scope of partner selection, partners develop a better mutual understanding of each other.23 Besides the business network goals resulting from a “network strategy”, that are required for formal control, a network culture is essential for informal control/coordination. In an ideal case, common values and norms or even a network culture can evolve towards such a goal-setting process. A result of such a joint network goal system should be harmonized interests minimizing incentives for opportunistic behavior.24 Relational rents can only be realized, when organizations have compatible (formal) systems as well as a compatible culture fostering cooperative actions.25 At this, the cultural fit has to be considered especially against the background of friction between the network partners. However, partner selection should not necessarily aim on similarities between each partner’s culture. Furthermore, selection should concentrate on mutually fertilizing cultures that enable (inter-) organizational learning.26 According to Child/Faulkner, partner selection has to identify possible cultural barriers counteracting a smooth cooperation.27

18 Cf. Dyer/Singh (1998) p. 672 19 Anderson/Weitz (1989), p. 319 find in their empirical study of distributive relationships, that long-term goal congruence mini- mizes the probability of conflicts; cf. Anderson/Weitz (1989), p. 319 20 Cf. Das/Teng (1998) p. 506; Sydow (2003), p. 312; Child/Faulkner (1998), p. 94; Porter/Fuller (1989), p. 376; Siebert (2003), p. 9; Bronder/Pritzl (1991), p. 50 21 Cf. Das/Teng (1998), p. 506; Siebert (2003), p. 9; similar cf. Hippe (1996), pp. 25 22 Cf. Hippe (1996), p. 26 23 Cf. Das/Teng (1998), p. 506 24 Cf. Ouchi (1980), p. 138. In fact, clear network goals cannot prevent from dysfunctional behavior, but they can help to identify opportunistic behavior; cf. Das/Teng (1998), p. 506 25 Cf. Dyer/Singh (1998), p. 671 26 Interorganizational learning might also be leading to opportunistic behavior in sense of loosing an learning race. As the primary purpose of an alliance is not the consolidation of the partners’ complementary assets but the acquisition of the partners’ knowledge and know how, competition may be inherent to the cooperation. Cf. Powell/Koput/Smith-Doerr (1996); Gulati (1995). Khanna/Gu- lati/ Nohria “...show how asymmetric incentives to allocate resources to learning may arise, even when there are no ex ante asymmetries between firms”. Cf. Khanna/Gulati/ Nohria (1998), p. 193. 27 Cf. Child/Faulkner (1998), p. 95

6 Thus, cultural compatibility not only includes management control systems and management decision behavior, but also attitudes, values and norms.28 However, partner selection is not a one-time job. A permanent positive and negative selection has to take place evaluating partners with regard to a maintaining cooperation or an exclusion of the cooperation. Thereby, permanently securing a network from opportunistic behavior of partners as well as providing the adaptability and responsiveness have to be considered as substantial conditions for successful business networks.

2.2 Trust

Trust is regarded as precondition and pivotal part for a working relationship within business networks.29 In principle, two views on trust can be identified in the accordant literature: “(a) a business risk view based on confidence in the predictability of one’s expectations […] and (b) a view based on confidence in another’s goodwill.”30 As Arrow for- mulates, “virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time.”31 Following Deutsch and Zand, trust may be defined “as consisting of actions that (a) increase one’s vulnerability (b) to another who is not under one’s control, (c) in a situation in which the penalty (disutility) one suffers if the other that abuses that vulnerability is greater than the benefit (utility) one gains if the other does not abuse that vulnerability.” 32 This definition underlines the importance of confidence in another’s goodwill comprising the belief in other partners’ positive actions as well as a negation of unexpected actions of partners resulting in negative network outcomes.33 Trust might be interpreted as a qualitative code that is integrated in structural codes of communication in a parasitic manner acting as „lubricant“ in business relationships.34 Following Luhmann, trust is a highly effective possibility to reduce social complexity by bridging over gaps of incomplete or non-existing information about future partner behavior.35 Trust transforms uncertainty into risk and thus allows to coordinate interac- tions.36 Contrary to opportunism, trust contains a positive assumption about the motives

28 Cf. Medcof (1997), p. 723 29 Cf. Anderson/Narus (1986), p. 333. Trust is considered as a resource to shape relations in an appropriate way; cf. Child/Faulkner (1998), pp. 45; Das/Teng (1998), pp. 494; Zaheer/Venkatraman (1995), pp. 388 30 Ring/Van de Van (1994), p. 93 31 Arrow (1972), p. 357 32 Zand (1972), p. 230. This goodwill-based view of trust goes beyond a calculative view of trust, which considers only expectations of extended self-interest behavior; cf. Carson/Madhok/Varman/John (2003), p. 46. According to this point of view, a network partner has the willingness to rely on the non-opportunistic behavior of the other network partners; cf. Ring/Van de Van (1992), p. 489; Anderson/Weitz (1989), p. 312; Moorman/Zaltman/Deshpandé (1993), p. 82 33 Cf. Anderson/Narus (1990), p. 45 34 Cf. Bachmann (2003), p. 11 35 Cf. Bachmann (2003), p. 11, Luhmann (2000)

7 and intentions of other partners. Trust also means, that a partner relies on the non-opportunistic behavior of the others.37 According to Giddens, trust is crucial with an absence of knowledge and information in system processes.38 From this Structuration Theory perspective, trust is a reflexive form of acting with confidence of reliability towards the other partners or organizations. Thereby, trust is considered on personnel and institutional level, whereas institutional trust plays a decisive role in the business network context as organizations trust organizations. Believing in abstract principles, like perceived processes or rules at the partner(s), are more relevant in business network context like trust in individuals.39 But Giddens also emphasises, that these abstract principles are not sufficiently building up institutional trust. Therefore, trust must be stabilized by individuals acting at interfaces between organizations by outcomes and events of their acting.40 This means that trust always bases on experience and belief towards the acting reliability and integrity of the partners and oneself. This implicates trust is always condition and result of cooperative acting.41 As this discussion points out, trust can be considered as another major determinant of relationships within business networks that are determined among other things by partner selection.

2.3 Network Commitment

Similar like trust, commitment is considered to be an essential ingredient for successful long-term business relationships.42 Commitment can be defined as “an implicit or explicit pledge of relational continuity between exchange partners.”43 This point of view comprises an acceptance of short-term sacrifices in order to realize long-term benefits. It is associated with the partners’ willingness to invest (tangibly and intangibly) in network specific assets demonstrating reliability regarding the future.44 According to

36 Cf. Bachmann (2003), p. 11. A trusting partner selects desirable possibilities regarding the future behaviour ignoring a number of other opinions. This leads in turn to a risky investment. Thereby, a trusting partner has to consider two possibilities: trust investment will pay off or not. The advantage of risk over uncertainty manifests in simplifying decision-making and creating situations in which partners can easier coordinate their mutual expectations and engage accordingly in a business network; cf. Bachmann (2003), p. 11 37 Cf. Ring/Van de Van (1992), p. 489, Anderson/Weitz (1989), p. 312 38 Cf. Giddens (1990), p. 33 39 Cf. Giddens (1990), pp. 26 40 Cf. Loose/Sydow (1994), p. 170 41 Cf. Loose/Sydow (1994) p. 170 42 Cf. Morgan/Hunt (1994), Grundlach/Achrol/Mentzer (1995), p. 78; Dwyer/Schurr/Oh (1987), pp. 19, Moorman/Zaltman/Desphandé (1992), p. 316. Dwyer/Schurr/Oh observe that „commitment represents the highest stage of relational bonding“ Dwyer/Schur/Oh (1987), p. 23. 43 Cf. Dwyer/Schurr/Oh (1987), p. 19. Similar cf. Moorman/Zaltman/Deshpandé (1992), p. 316; Morgan/Hunt (1994), p. 23; Funda- mentally on commitment, cf. Pedell (2000). It has be mentioned, that commitment refers to valued relationships. Continuity within a business network corresponds with the willingness and indefinitely endurance of partners to maintain such a partnership; cf. Mor- gan/Hunt (1994), p. 23 44 Cf. Anderson/Weitz (1992)

8 Grundlach/Achrol/Mentzer´s conceptualization, an instrumental, an attitudinal and a temporal component of commitment can be identified:45

 Commitment as calculative act: Commitment as an input or instrumental component is an affirmative action taken by a partner, that creates a self-interest stake in a business network demonstrating something more than a mere promise.

 Commitment as attitudinal component: Commitment can be also described as attitude signifying an enduring intention by the network partners to develop and maintain a long-term relationship. Attitudinal commitment shares common domains of meaning with other behavioral constructs such as motivation, identification, loyalty, involvement and behavioral intention.

 Commitment embraces a temporal dimension: Commitment involves the desire or intention to maintain a valued relationship into the future implying commitment embraces a temporal dimension.46 In this context, partner selection in its function as ex-ante and ex-post controlling instrument determines commitment as only partners with appropriate strategies, structures and cultures will be affiliated to the network.

2.4 Opportunism

Interaction and exchange relationships between network partners are a key point in regarding business networks as they influence the network structure and performance. Ac- cording to Giddens every relationship is taking risks.47 For example, such a risk results from not having enough information about the input and future behavior of a (potential) partner available. Often, relationship quality cannot be anticipated as well as its development over time. Another important aspect in this context seems to be the fact that benefits and liabilities are not generated simultaneously. Hence, network formation always includes the risk of opportunistic behavior as partners have to take a risky input.

Opportunistic behavior is a central construct in New Institutionalism.48 Williamson de- fines opportunism as “self-seeking interest with guile”49 and subsumes problems of adverse selection, moral hazard and hold-up as well as other malpractice violating promises due to self-interested maximization of benefits.50 Thereby, Williamson`s definition

45 Cf. Grundlach/Achrol/Mentzer (1995), p. 79 46 Cf. Moorman/Zaltman/Deshpandé (1992) 47 Cf. Giddens (1990), p. 54 48 For an overview on Transaction Cost Economics cf. Rindfleisch/Heide (1997) and Ghoshal/Moran (1996). For an overview on Agency Theory cf. Eisenhardt (1989) 49 Cf. Williamson (1975), p. 6. Opportunism is a yet unexplained phenomenon, which Williamson turns into a behavorial assumption, that has been described as an “extreme caricature; cf. Ghosal/Moran (1996), p. 18 50 Cf. Wathane/Heide (2000), p. 38

9 of opportunism contains both opportunism as an attitude and as a type of behavior al- lowing to treat opportunism as inherent human assumption as well as a behavioral outcome of (organizational) environment.51 The rationale of Williamson`s view of opportunistic behavior (see Figure 3) is, that it is positively related with benefits from opportunistic behavior and that it is negatively related with (formal) safeguards and associated costs resulting from such behavior. Governance mechanisms like a suitable partner selection are considered to be capable of reducing the risk of opportunistic behavior.52 But an a priori evaluation and selection of partners is complicated because of the underlying assumption, that given the opportunity, decision makers may unscrupulously seek to serve their self-interest.53 This dues to the fact, that opportunism describes a situation in which someone negates an agreement or understanding (defined at the partner selection) to take advantage of a given new opportunity. As such, “the essence of opportunistic behavior is deceit-oriented violation of implicit or explicit promises about one’s appropriate or required role behavior.”54

Opportunism + Opportunistic Behavior (Proclivity to behave opportunistically) (Specific acts of self-interest seeking while guile)

Benefits From Cost of Opportunistic Behavior Opportunistic Behavior (Sanctions) (Transaction characteristics)

Figure 3: Williamson's Model of Opportunistic Behavior 55

But consolidated findings in psychology and organization theory point out that attitude and behavior should be considered separately because both are affected by individual dispositions and the current situation.56 In consequence, other aspects like partner selection determining formal and informal contracts, trust and commitment influence opportunistic behavior within business networks, too. Wathne/Heide highlight, that the most

51 Cf. Ghosal/Moran (1996), p. 18 52 Cf. Wathane/Heide (2000), p. 48 53 Cf. Rindfleisch/Heide (1997), p. 31 54 Cf. John (1994), p. 279 55 Cf. Ghoshal/Moran (1996a), p. 19 56 For an detailed discussion see cf. Ghoshal/Moran (1996); Moran/Ghoshal (1996)

10 straightforward way of managing opportunism is an a priori partner selection, whereas the effectiveness depends on the relevance of the selection criteria.57

2.5 Performance

In cooperation research, lots of performance measures and criteria exist:58 One approach is to use intangible, rather subjective measurement dimensions such as “perceived satisfaction” or “achievement of objectives” of the business partners. Others use objective measurement dimensions like profitability or growth.59 For confidentiality reasons and the difficulty of an objective data collection and comparability, no measurement of the absolute profit amount was conducted. Instead, it has been resorted to a subjective profit evaluation by the interviewees.

3 Model Development and Hypotheses

3.1 Effects of Partner Selection

A crucial step in business network formation is the selection of the appropriate partners. This initial phase in the business network evolution begins with the recognition and evaluation of benefits resulting from synergistically engaging with partners. In principle, potential partners are “unknown entities” and partners try to evaluate value potentials related to the network. Thereby, trust only emerges in situations “where the “trust- worthy” party in the exchange relationship: (1) is known to reliably make good-faith ef- forts to behave in accordance with the prior commitments, (2) makes adjustments (e.g., as market condition change) in ways perceived as “fair” by the exchange partners, and (3) does not take excessive advantage of an exchange partner even when the opportunity is available”.60 Assuming trust as an expectation, the distinction between trustworthiness and trust is based on the actual and perceived intentions, motives and actions of the (potential) partner.61 Thus, within the selection phase, network partners are evaluated in terms of strategic, cultural, organizational fit etc. reducing information asymmetry via signaling and screening mechanisms. Essentially, by reducing information asymmetry via a well-executed partner selection, costs emerging from adverse selection, moral hazard and hold-up problems can be reduced. Possible synergistic rent potentials of the cooperation are evaluated as well. Also, as result of the partner selection, formal and informal contracts are specified. By setting up these contracts, a mutual positive perception

57 Cf. Wathane/Heide (2000), p. 45 58 For a synopsis of performance measures and criterions cf. Diedrich (2002), pp. 403 59 For example cf. Mohr/Spekman (1994). For a synopsis of empirical studies on alliance performance and the underlying concepts of success; cf. Das/Teng (2002a), p. 5 60 Cf. Dyer/Chu (2003), p. 58 61 Cf. McEviliy/Perrone/Zaheer (2003), p. 93

11 is developed increasing trustworthiness. By that, the persuasiveness and efficiency of trust is positively influenced.62 In their empirical study on business relationships Mor- gan/Hunt find a positive effect of shared values to trust.63 Cultural sensitivity (from U.S and Japanese firm perspective), similarity (from U.S firm perspective) and com- plemetarity (from U.S firm perspective) have positive impact on the partners’ trust within Japanese-U.S cooperative alliances.64 Thus, a well-executed partner selection has positive effects on trust within business networks: H1: The better the partner selection for a network is carried out, the more trust will develop between network partners.

As discussed above, task of partner selection is to ensure a mutual understanding during the selection process. Defining a joint network strategy and building up a joint network goal system, a better understanding of the implicit and/or explicit contract may develop. Moreover, the larger and more idiosyncratic the resources by each partner and the more significant the self-interest stake concerning the business network created for each partner is, the stronger is the normative climate, in turn leading to greater long-term commitment.65 Partners, having such a mutual understanding concerning how to coordinate their exchange activities in order to generate synergistic rents, are rather more prepared to invest (tangible and intangible) in the network and to extend cooperation by including other activities as well. Shared values evaluated within the partner selection phase contribute to the development of commitment, too.66 Relationship commitment is strongly influenced by understanding the relationship as Blankenburg Holm/Eriksson/Johansson find in their empirical study of international business relationships.67 Closely connected to this, Morgan/Hunt find a positive effect from shared values on relational commitment.68 Thus, network commitment can be expected to be positively affected by partner selection: H2: The better the partner selection for a network is carried out, the stronger the commitment to the network will develop.

A basic problem associated with business networks is the behavioral uncertainty about the future acting of partners. Opportunism arises when a partner behaves differently to the other partners’ implicit and/or explicit understanding of their contract. This fact un-

62 Cf. McEviliy/Perrone/Zaheer (2003), p. 93 63 Cf. Morgan/Hunt (1994), p. 30 64 Cf. Johnson/Cullen/Sakano/Takenouchi (1996), pp. 995 65 Cf. Grundlach/Achrol/Mentzer (1995), p. 80 66 Cf. Dywer/Schurr/Oh (1987), p. 21 67 Cf. Blankenburg Holm/Eriksson/Johansson (1996), p. 1045 68 Cf. Morgan/Hunt (1994), p. 30

12 derlines the importance of a well-executed partner selection identifying partners who (might) act opportunistically at (positive and negative) selection. Because of the limited view at partners from outside, partner selection has to take intensively strategic, cultural, financial aspects etc. into consideration. Thus, information asymmetries can be reduced and communication between the partners fostered. By this, partner selection increases the likelihood of identifying fitting and non-fitting partners in terms of intentions, norms, values, strategy and structure at positive selection restricting the risk of future opportunistic behavior. According to New Institutionalism, by reducing uncertainty and information asymmetry the ability for opportunistic behavior is limited. This results in: H3: The better the partner selection for a network is carried out, the smaller the risk of opportunism that is perceived.

Recapitulating, partner selection taking the idea of fit into account is relevant for network performance, in terms of an input-effect. It also constitutes the uniqueness of a business network and the partners’ position within the network as well as the network strategy and structure. A partner selection aims at setting up the scope of alliance and to identify value creating potentials of each partner. A combined network goal system and the development of a combined network strategy have to be considered as a necessary condition for network performance. Thereby, a well-executed and suitable selection can ensure or even fosters network performance. Partner compatibility concerning strategy, specific resources und competences are essential for partner performance as they influence the synergistic rent potential and the ability to realize them.69 Geringer summarizes in his literature review, that complementarity is critical for partner selection as a lack of complementarity undermines effectiveness.70 Furthermore, partner selection can be considered as precondition for the formal and social controllability of a business network and affects a business network’s organizational design. Results of an empirical study on marketing alliances by Bucklin/Sengupta identify organizational compatibility71 as key performance indicator.72 As selection is a permanent task to ensure the adaptability and responsiveness of a business network as well as safeguarding it from opportunistic behavior of network partners agency costs and transaction costs may be reduced. Particu- larly, an effective selection can increase the transaction value, because the partner fit is considered as a precondition for suitable network structure enabling mutual learning. This implies the high performance relevance of partner selection. Schrader finds empiri-

69 Cf. Madhok/Tallman (1998), p. 332 70 Cf. Geringer (1991), p. 46 71 Cf. Porter/Fuller (1986), p. 341; Porter/Fuller point out, that organizational compatibility means strategic and cultural compatibility, cf. Porter/Fuller (1986), p. 341 72 Cf. Bucklin/Sengupta (1993), pp. 35

13 cal evidence for the performance relevance of compatible cultures in cooperation.73 Hence, business network composition determines performance. Following the argumentation of the contingency approach, partner selection has substantial effects on the achievement potential of a business network and for this reason determinates the network performance.74 This leads to the following hypothesis:

H4: The better the selection for a network is carried out, the higher the network performance will be.

3.2 Effects of Trust

From numerous theory statements the impact of trust can be deduced. In order to reduce the costs and to reduce the risk of opportunism associated with business networks, organizations tend to create stable, preferential relationships characterized by trust and rich exchange of information.75 Chiles/McMackin identify three dimensions of trust con- straining opportunistic behavior: 76

 Social norms perspective: From this point of view, trust is generated as a result of social norms. Social norms generate shared expectations among people at various social levels. For example, inherent moral obligations generate trust, which, in turn, constrains opportunistic behavior.  Social embeddedness perspective: Trust is generated as a result of personal relations that arise in the course of economic transactions. Inherent personal obligations generate trust, which, in turn, also constrain opportunistic behavior.  Rational economics perspective: According to this observation level, trust is generated in a multi-period prisoners’ dilemma. Rational individuals, characterized as self-interest-seeking and utility-maximizing individuals, make net-present-value cal- culations. If results indicate positive long-term benefits by cooperation short-term opportunistic behavior will be minimized. Then, cooperative behavior is based on trust by the mechanism „shadow of the future“.77 Under these conditions, engaging in opportunistic behavior is contrary to the interest of each partner. So, purely economic calculus generates trust, which, in turn, constrains opportunistic behavior, too.

73 Cf. Schrader (1993), p. 277 74 Cf. Galbraith (1998), p. 86 75 Cf. Gulati/Gargiulo (1999), p. 1440 76 Cf. Chiles/McMackin (1996), p. 86 77 Cf. for „shadow of the future“ Parkhe (1993), p. 799; Nooteboom/Berger/Noorderhaven (1997), p. 321, Heide/Miner (1997)

14 This leads to the following hypothesis: H5: The more trust is developed between network partners, the smaller the risk of opportunism that is perceived.

As distrust decreases commitment to a business network and its possible over-additive success switching relationships to a more short-term exchange, trust increases long-term exchange relationships. McEvilly/Perrone/Zaheer argue, trust strengthens the network identity fostering commitment by shaping expectations about the behavior and intentions of partners.78 A shared identity also increases the perception of interdependence and common fate with the network which are key components of commitment and cooperation. According to the empirical study of Morgan/Hunt trust positively effects relational commitment.79 Tellefsen/Thomas find a positive relationship between (personal and organizational) trust and (personal and organizational) commitment in their study on business-to-business relationships.80 In their research on commitment in distributor- manufacturer relationships Goodman/Dion find positive correlations between manufac- turers’ trustworthiness (which is a precondition for trust) and the distributor commitment level.81 This results in: H6: The more trust is developed between network partners, the stronger the network commitment will develop.

As discussed above, trust makes decision-making more efficient by simplifying the acquisition and interpretation of information. By a better appraisal of partner behavior and routines, trust guides actions, that are more beneficial for the network under the assumption that the trusted partners will not exploit the trustee’s vulnerability.82 McEvilly/Per- rone/Zaheer identify two major categories capturing many of the key causal chains through which trust affects organizing:83 On the one hand “structuring” via trust means the development, maintenance and modification of a system of relative positions as well as links among actors situated in a social space and results in a network of stable and ongoing formal and informal interaction patterns. On the other hand “mobilizing” means the process of converting (tangible and intangible) resources into activities by interdependent actors. “Mobilizing” involves actors to contribute their resources, to com- bine and coordinate and use them in joint activities and direct them towards the achievement of organisational goals. For example, knowledge sharing, flexibility and adaptabil-

78 Cf. McEvilly/Perrone/Zaheer (2003), p. 98 79 Cf. Morgan/Hunt (1994), p. 30 80 Cf. Tellefsen/Thomas (2005), p. 33 81 Cf. Goodman/Dion (2001), p. 296 82 Cf. McEvilly/Perrone/Zaheer (2003), p. 93 83 Cf. McEvilly/Perrone/Zaheer (2003), p. 94

15 ity is affected positively by trust enabling partners to generate transaction value.84 But competitive advantage and synergistic rents are only maximized when partners cooperate as cooperation is restricted by opportunism. New Institutionalism (in particular within the framework of Agency and Transaction Theory) deduces the possibility of opportunistic behavior by behavioral uncertainty and information asymmetry in cooperative relationships. Behavioral uncertainty can be reduced by the development of reciprocal trust and thus by declining transaction and agency-costs cooperative relationships become profitable.85 Trust reduces the necessity to guard against opportunistic behavior (via monitoring and safeguarding). Thus, due to trust a cheaper, more acceptable, less time-consuming and more flexible design of (network-) relationships is possible.86 Dyer/Chu find empirical evidence that trust not only reduces transaction costs and im- proves mutual information sharing, but also creates economic value in exchange relationships.87 Carson/Madhok/Varman/John find positive effects of trust-based governance on task performance in interfirm R&D collaboration.88 Morgan/Hunt find a positive effect of trust on cooperation.89 But results on the trust-performance relationship also show different results: In their empirical study Zaheer/McEviliy/Perrone only find a direct effect from interorganizational trust on performance.90 This results in the following hypothesis: H7: The more trust is developed between network partners, the higher the network performance will be.

However, it has to be pointed out that the development of trust is a long-term process and causes costs.91 Furthermore, „blind trust“ is associated with risks like an unintended outflow of know-how or the danger of losing a “learning race”.92 Despite the risks, the positive statements are outweighed in the literature, so that successful networks, due to the above mentioned perceptions, should be distinguished by a high trust level.

84 Cf. Zajac/Olsen (1993), pp. 137 85 Cf. Jarillo (1988), p. 37; Woratschek/Roth (2003), p. 153; Trust reduces complexity and uncertainty enabling positive mutual expectations of partners; cf. Das/Teng (1998), p. 494 86 Cf. Sydow (1991), p. 299; Nooteboom (2000) p. 925. Especially, cost reduction may result from a decreasing accuracy of formal contracts and lower costs of contract specification and monitoring; cf. Larson (1992), pp. 76; McEvilly/Perrone/Zaheer (2003), p. 98, Zahher/Venkatraman (1995), p. 379 87 Cf. Dyer/Chu (2003), p. 66 88 Cf. Carson/Madhok/Varman/John (2003), p. 46 89 Cf. Morgan/Hunt (1994), p. 30 90 Cf. Zaheer/McEviliy/Perrone (1998), p. 152 91 Cf. Parkhe (1993), p. 803 92 Cf. Gulati/Nohria/Zaheer (2000), pp. 211

16 3.3 Effects of Network Commitment

Network commitment implies a long-term orientation, based on the desire of a maintaining successful relationship and the willingness to make short-term sacrifices to maintain this relationship.93 The underlying rationale is, that long-term benefits resulting from solidarity, mutual interests, harmonious conflict management may outweigh any short-term surplus from opportunism.94 At a more general level, there may be reputa- tional consequences to opportunistic behavior as an image of a selfish, exploitative and unreliable partner can restrict acting in a business network.95 Committed network partners solve conflicts functionally, and concentrate on positive behavior. Jap/Ganesan find empirical support that higher levels of commitment are associated with lower levels of conflict.96 Hunt/Morgan find direct relationships between global organizational commitment and organizational outcomes, like altruism, conscientiousness and nonidle- ness.97 Thus, we examine following hypothesis: H8: The stronger a commitment to the network is developed, the smaller the risk of opportunism that is perceived.

Like trust, commitment is a threshold condition for business networks, but may also contribute to network performance. According to Morgan/Hunt relative competitive advantages result from the development of commitment and trust within a network by (1) providing superior resources, opportunities and benefits, (2) maintaining high standards of shared values and allying themselves with partner having similar values, (3) commu- nicating valuable information (4) and avoiding opportunistic behavior.98 In principle, firms are more committed to develop a business network the longer the shadow of the future. Organizational researchers found organizational commitment to be associated with e.g. job performance, prosocial behavior or innovativeness leading to effectiveness and organisational productivity.99 Locke/Latham/Erez show that there is a relationship between goal commitment and performance in their review of theoretical and empirical literature.100 Jap/Ganesan find empirical support that higher level of commitment are associated with a higher level of relationship satisfaction including financial returns.101

93 Cf. e.g. Hunt/Morgan (1994); Anderson/Weitz (1992) 94 Cf. Grundlach/Achrol/Mentzer (1995), p. 82 95 Cf. Grundlach/Achrol/Mentzer (1995), p. 82 96 Cf. Jap/Ganesan (2000), p. 239 97 Cf. Hunt/Morgan (1994), p. 1576 98 Cf. Morgan/Hunt (1994), p. 34 99 Cf. Hunt/Morgan (1994), p. 1570 100 Cf. Locke/Latham/Erez (1988), p. 27 101 Cf. Jap/Ganesan (2000), p. 239

17 Blankenburg Holm/Eriksson/Johansson find empirical evidence for a strong impact of commitment on profitability.102 This leads to following hypothesis: H9: The stronger a commitment to the network is developed, the higher the network performance will be.

3.4 Effects of Opportunism

Under conditions of ex-ante and ex-post risk of opportunism (and of low trust) problems antagonizing efficiency and effectiveness are likely to take place in an exchange relationship between network partners. If the perceived risk of opportunism within a business network is sufficiently high, performance relevant resources and competencies may not be combined in an over-additive sense. Competition relevant resources staying under control and monitoring of the accordant partners could not be deployed for network purposes. In addition, opportunism may produce opportunism costs in the form of lost chances.103 Hill argues concerning opportunism, that “the safeguards needed to check opportunism, and internalisation as a response to opportunism dissipate the composite quasi rent”104 This underlines networks characterised by high risk of opportunism are neither efficient nor effective. Gierl finds in his study on long-term business relationships that in relationships characterised by low risk of opportunism the perceived success is higher than in high opportunism relationships.105 H10: The higher the risk of opportunism in a network, the lower network performance will be.

4 Empirical Analysis

4.1 Data Collection and Sample

The research framework has been tested within a large empirical study. The data collection has been carried out using an entirely standardized, written questionnaire. This questionnaire has been carefully tested by two pre-tests, in which the design of the questionnaire and the content as well as design of the questions have been optimized concerning comprehensibility, difficulty, alignment etc. Apart from professional experts and individuals of the targeted survey group, the questionnaire was also provided for examination to the German Federal Statistical Office and the ZUMA - “Zentrum für Umfragen, Methoden und Analysen” (Centre for Surveys, Methods and Analysis). Due

102 Cf. Blankenburg Holm/Eriksson/Johansson (1996), p. 1045 103 Cf. Wathne/Heide (2000), p. 36 104 Cf. Hill (1990), p. 511 105 Cf. Gierl (2000), p.126

18 to the very different ways of understanding networks, the underlying definition (see chapter 2) of the study was prefixed. For defining the survey unit, we have referred to results of an evaluation carried out by the German Federal Statistical Office in the year 2003, in which 8,555 German companies made statements about business cooperation. Aside from other cooperation forms, this study analyses also the spread of business-networks (networking), which cover obviously the dominating form (15.6%) compared with Franchising (9.7%) and Joint Ven- tures (6.7%).106 Two results have been of relevance for the survey unit definition: On the one hand no significant accumulation in a particular industry could be found.107 Accord- ing to this, the study should be carried out intersectionally. On the other hand the survey of the German Federal Statistical Office has noticed that the occurrence of business cooperation significantly correlates with the size of the company. In the category of companies with 250 and more employees, at least 60% are cooperating, whereas the average amount of cooperating businesses in the lower categories was explicitly lower.108 Re- garding this, large companies were identified as a target group of this study and every non-small-or-middle-enterprise located in Germany has been defined as part of popula- tion. The basic conditions admitted a complete inventory count, which corresponds to total amount of 5,717 companies. Due to their expert role for evaluation in partner selection, heads of the management accounting department have been defined as the key- informers. They were addressed by name. If these were unknown, the executives were addressed. Altogether 120 questionnaires have been sent back. Eleven questionnaires had to be sorted out because of the high rate of missing values. This study is based on 109 utilizable questionnaires. This comes to an actual rate of return of 1.9%. If we as- sume the value of 10.6% for the spread of networks within businesses with more than 250 employees being acquired in a survey of the German Federal Statistical Office,109 an adjusted rate of return of 17.9% is reached. This matches an acceptable value.110 For this reason, the representativeness of the following analysis can only be seen under limitations. However, considering the role of a precursor as first large scaled empirical study for business-networks in Germany we regard this is acceptable.

106 Cf. DESTATIS (2004), p. 13 107 Cf. DESTATIS (2004), p. 12 108 Cf. DESTATIS (2004), p. 16 109 The value is calculated by the multiplying conjunction of two values: (a) the spreading of cooperation forms (68.8%) characterized by businesses with more than 250 employees and (b) how often businesses participate in networks (as a special form of cooperation) with 15.4%. Cf. DESTATIS (2004), p. 13 and p. 15 110 The value is calculated as follows: Only 10,6% of all 5717 businesses participate in networks. The result is a corrected theoretical basic entirety of 606 businesses which cooperate within this basic entirety. The theoretical reflux rate is being calculated by 109/ 606 = 17.9%. There is a possible bias resulting from the fact that within the study it could not have been made sure if/that more than one answers were not referring to the same network.

19 4.2 Construct Measurement

For the construct operationalization discussed above we developed according measurement tools (cf. Figure 10 to Figure 14 in appendix).111 At short summary of the measurement results is given in Figure 4. All indicators are measured by closed questions via five-point Likert-scales.

Average Cronbach´s Variance Factor-Re- Construct Variance Alpha Explained liability Extracted Partner Selection (3 Items) 0.73 0.62 0.72 0.46 Trust (3 Items) 0.73 0.64 0.75 0.51 Network Commitment (3 Items) 0.74 0.82 0.77 0.55 Risk of Opportunism (3 Items) 0.53 0.54 0.71 0.45 Network Performance (4 Items) 0.74 0.77 0.77 0.54 Figure 4: Construct Measurement

The factor reliability clearly exceeds the required minimum value of >0.6. Constructs’ reliability also mostly fulfills the required minimum occurrence of Cronbach’s Alpha of >0.7 for all constructs except the construct of opportunism. The same applies to the recorded average variance extracted mostly being around the required value >0.5. The necessary minimum of >0.5 in regard to the variance explained is achieved, too. Despite of the partial shortfall of one required fit index, the measurement quality of all constructs is being considered altogether as acceptable.112 The discriminant validity has been tested by the Fornell-Larcker-Ratio (cf. Figure 5). All construct pairs, except the construct pair “trust and opportunism” fulfill the Fornell-Larcker-Ratio<1. Instead, the discriminant validity for the construct pair “trust and opportunism” can be accounted textually: With regard to the discussion in chapter 3, there is a high negative correlation between trust and opportunism as in spite of a higher vulnerability high levels of trust lead to lower levels of opportunistic behavior in business relationships. A closer examination of the items for trust and opportunism points out a clear distinction in terms of the content (cf. Figure 11 and Figure 12 appendix). The discriminant validity is not being fulfilled qualitatively, but can be considered as sufficient regarding it textually.

111 Since there is no comprehensive theory within the field of networks and thus only partial aspect are touched and each measure - ment will be incomplete and contain mistakes, we have only carried out reflective measurements within this study. Taking regard of mistakes in measurements in this case reflective measurements are preferred to formative ones; cf. Homburg/Giering (1998), pp. 115; Götz/Liehr-Gobbers (2004), pp. 714.; Ringle (2004), pp. 312 for a comparison between the two approaches. 112 As Homburg emphasizes not all criteria have to be achieved at the same time. Minor deviations of several criteria are acceptable as the overall view argues for a high measurement quality; cf. Homburg (2000), p. 93

20 Partner Se- Network Risk of Network Trust lection Commitment Opportunism Performance AVE 0.39 0.51 0.58 0.29 0.44 Partner Selection 0.39 Trust 0.51 0.45 Network Commitment 0.58 0.12 0.10 Risk of Opportunism 0.29 0.33 1.88 0.00 Network Performance 0.44 0.05 0.10 0.10 0.08

Figure 5: Fornell-Larcker-Ratios for the model (AVE= Average Variance Exctracted)

4.3 Hypotheses Testing and Results

The model was tested with AMOS 5.0. Altogether, the global fit indices resulted in a satisfying model fit. The quotient of 2 and degrees of freedom is 1.132, the RMSEA is 0.035, the AGFI is 0.848 and the CFI is 0.972. All the fit indices, except the AGFI, point out a good global model-fit. In order to test the hypotheses, we have calculated direct and total effects. The total effect is being calculated as the sum of direct and indirect effects. The direct effect is defined as the standardized path coefficient for the direct relation between two variables. The indirect effects is defined as a relation between two variables over one or more in- termediate variables. The value of indirect effects is acquired by multiplying standardized path coefficients followed by an addition of all path results between two variables. Eight of ten formulated hypotheses could be confirmed within the empirical study. The study had a confirmatory character. Due to the low rate of return the study’s representativeness and the low variances explained of the constructs commitment and performance in the model (see discussion in chapter 5), implications can only display a ten- dency. Recapitulating, the direct, indirect and total effects are displayed in Figure 6.

21 Direct Indirect Total Hypothesis Mapping Effect* Effect* Effect* H 1 (+)  Partner Selection  Trust 0.48 - 0.48 H 2 (+)  Partner Selection  Network Commitment 0.18 0.07 0.26 H 3 (-) () Partner Selection  Risk of Opportunism 0.04 -0.42 -0.39 H 4 (+) () Partner Selection  Network Performance 0.04 0.13 0.17 H 5 (-)  Trust  Risk of Opportunism -0.99 0.03 -0.96 H 6 (+)  Trust  Network Commitment 0.15 - 0.15 H 7 (+) () Trust  Network Performance 0.10 0.12 0.22 H 8 (-) Network Commitment  Risk of Opportunism 0.22 - 0.22 H 9 (+)  Network Commitment  Network Performance 0.19 -0.02 0.18 H 10 (-) Risk of Opportunism  Network Performance -0.09 - -0.09

* The specified effects are based on standardized mapping coefficients.  Hypothesis confirmed () Hypothesis confirmed via total effects

Figure 6: Model effects

5 Discussion, Limitations and Implications This study aims at finding an explanation for the relationship between partner selection, partners’ behavior in terms of trust, opportunism and commitment as well as performance of business networks. Therefore, a research framework was developed and tested within the first large empirical study on business networks in Germany. Based on statements of New Institutionalism, Strategic Management approaches, Relationship Market- ing approaches, Organization Theory approaches, Social Theory approaches and Game Theory a structural equation model containing theoretically derived cause-and-effects relationships was developed. Five of ten hypotheses could be confirmed via direct effects. Moreover, other three hypotheses could be confirmed via total effects. The effects are displayed in Figure 7.

22 Trust

0.04 0.48 0.15 -0.99 0.10

0.04 -0.09 Partner Selection Risk of Opportunism Network Performance

0.18 0.22 0.19

Network Commitment

Figure 7: Effects of the examined model

Regarding this analysis, we conclude that a partner’s behavior can be explained by substantial amount by partner selection. Partner selection especially has strong positive effects on trust (H 1) and commitment (H 2), as well as strong negative (indirect) effects on Opportunism (H 3). However, no direct impact of partner selection on network performance could be confirmed. Hence, partner selection determines the partner’s behavior and affects the network performance indirectly (see total effects of H 4). Obviously, behavior is crucial for the effect of selection on performance. According to the theoretical implications, a strong negative direct effect of trust on opportunism could be found (H 5). The indirect effect of trust on performance is primarily caused by avoid- ance of opportunistic behavior (-0,96*(-0,09)  +0,1) and shows approximately the same size like the direct effect (0,1) of trust on performance. As postulated, trust has also a positive effect on the development of network commitment (H 6) and thereby positively influences network performance. Results show, that trust has direct and indirect effects on network performance (H 7). Network commitment has a positive direct impact on network performance (H 9). Contrary to the postulated negative effect, a positive effect from network commitment on opportunism was found (H 8). This leads to a small negative effect on network performance (0,22*(-0,09)  -0,02) that can be ne- glected in comparison with the direct effect of network commitment on network performance (0,19). Partner’s perception of asymmetric commitments may lead to conflict, dissatisfaction, opportunistic tendencies, and in turn erode the network governing prop- erties. For this reason, asymmetric commitments may have contrary effects on relationship quality and performance.113 As the items describing the construct of commitment

113 Cf. Anderson/Weitz (1992), p. 20; Grundlach/Achrol/Mentzer (1995), p. 80; Achrol/Grundlach (1999), p. 116

23 comprise questions about long-term engagement like tying up individual strategies to the network or rearranging the processes towards the business network requirements, there are two possible explanations of this positive effect (c.f. Figure 8): a) On the one hand some partners may act more opportunistically, because they want to protect their material and non-material investments (network specific investments) in the business network or they want to gain an adequate return for this investments. b) On the other hand opportunistic behavior may also exist, if partners perceive another partner’s commitment in terms of specific investments. Because of this high commitment, the opportunity of acting opportunistically without a consequence arises.

(a) Opportunistic behaviour of commited partners (b) Opportunistic behavior against commited partners

Opportunistic Opportunistic Behavior Behavior

Commited partner(s) Zone of opportunistic behavior

Figure 8: Possible explanations of the commitment-opportunism relationship

Having also tested items containing questions on top management involvement and ad- vancement, very small negative effects from commitment on opportunism could be identified, with the limitation of a lower significance. Although the construct of network commitment shows good local fit indices, more research is necessary for describing the complexity connected with commitment. How- ever, the positive direct commitment-opportunism effect may allude to the conclusion that asymmetric commitments are an inherent part of German Business Networks.

24 The size of the negative direct effect of opportunism on network performance could not be confirmed without a doubt (H 10) as well as the size of the positive direct effect of trust on performance. Although no verifiable direct effect of partner selection on network performance could be found, the empirical results lead to the conclusion that a well-executed partner selection increases trust and network commitment of the partners, lowers the risk of opportunism, and thus affects indirectly the network performance via high levels of trust and commitment. The effects of the relationships “partner selection on opportunism” and “partner selection on performance” cannot be verified without a doubt. Due to the low variances explained in the overall model of the constructs commitment (0,08) and network performance (0,09) the significance of these effects is limited and results show only suggestions. These limitations imply, that future research on partner selection is necessary, especially concentrating on other constructs determining the network commitment, such as goal congruence, strategic relevance or participation. This could lead to a higher variance explained for the network commitment construct in the overall model. In the same way, the variance explained of the construct network performance in the overall model is determined by many other influencing factors, especially like regulation, allocation, and evaluation within business networks and external factors like market environment etc.114 This explains the relatively low variance explained for the overall model and gives implications for future research. As the empirical results show partner selection is of relevance for network performance by affecting the partners behavior. Consequently, future research and managerial implications need starting points for a well-executed partner selection concerning the partners’ behavior. As discussed above lots of partner selection criteria exist. Some of these criteria may be categorized into seven interdependent activity levels (c.f. Figure 9). De- cisions concerning each of these activity levels will have an direct impact on the partners’ behavior as well as an indirect effect on network performance. Between partner selection and evaluation (in the sense of management accounting) close connections exist, whereas normally a temporally consecutive coherence exists: The partner selection in a limited sense (assignment, provision of information, pre-selection) is a necessary condition to the evaluation enabling (future) decision making.115 Concerning the (management accounting) research more attention on behavioral constructs is necessary. Taking this into account, this categorization of partner selection activity levels are a proposal framework for future research.

114 Such a model may just explain a high rate of the variance explained in the overall model by integrating as much as possible factors influencing performance. 115 Cf. Child/Faulkner (1998), p. 150; Ellram (1995), p. 55, Hess (2002), p. 271

25 Products/Services

Finance

Social

Information

Organization

Infrastructur

Contract

Figure 9: Partner Selection Activity Levels

Despite of the limitations of this study, it gives empirical insights in the cause-and-effect relationship between partner selection, the partner’s behavior and network performance via a structural equation model. As there are significant effects from partner selection on trust, opportunism and commitment, partner selection is a very important managerial task within business networks. By determining the partners’ behavior an ac- curate partner selection is a threshold condition for successful business networks.

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IX Appendix

Item-to- Indicator Partner Selection total-cor- Reliabili- relation ty t-Value  How pivotal were the potential partners’ competencies for partner selection 0.58 0.59

 How pivotal were the potential partners’ resources for partner selection 0.42 0.42 4.92 ***  How do you judge the importance of the partner selection for your special business network 0.50 0.39 4.72 ***

 How pivotal were the potential partners’ similarities for partner selection Eliminated  How pivotal were the potential partners’ synergy effects for partner selection Eliminated

 How do you judge the contentedness with partner selection for your special business network Eliminated

 How do you judge the effort regarding partner selection for your special business network Eliminated

Cronbach´s Alpha 0.73 Variance Explained 0.63 Factor-Reliability 0.72 Average Variance Extracted 0.46 *** Significance level 0.001

Figure 10: Construct Measurement "Selection"

Item-to- Indicator Trust total-cor- Reliabili- relation ty t-Value  Knowledge is exchanged openly and freely over organizational boundaries 0.46 0.36

 Emerging problems and conflicts are addressed openly 0.57 0.50 5.26 ***

 The partners fulfill their duties, even if they are not controlled 0.56 0.58 5.29 ***

 Would you form a network with the same partners again Eliminated

 The necessity of partnership control is extremely high (rev.) Eliminated

 The fairness and honesty of network partners is extremely high Eliminated Cronbach´s Alpha 0.72 Variance Explained 0.64 Factor-Reliability 0.75 Average Variance Extracted 0.51 *** Significance level 0.001

Figure 11: Construct Measurement "Trust"

Commitment Item-to- Indicator t-Value

X total-cor- Reliabili- relation ty  The network evolution is pivotal for the long-term evolution of each partner 0.69 0.90

 The partners’ strategies are aligned to the business network 0.63 0.56 5.90 ***  Each partner has adjusted widely his processes to the business network’s specialties 0.41 0.16 4.53 ***

 The top management participates in the business network Eliminated

 The business network is encouraged by the top management Eliminated

 The top management initiated the business network participation Eliminated Cronbach´s Alpha 0.74 Variance Explained 0.87 Factor-Reliability 0.77 Average Variance Extracted 0.55 *** Significance level 0.001 Figure 12: Construct Measurement "Commitment"

Item-to- Indicator Opportunism total-cor- Reliabili- relation ty t-Value  Self-interest seeking dominates within our business network 0.43 0.29  The partners have an agreement about the network contracts’ interpretation (rev.) 0.25 0.38 3.84 ***

 The risk of exploitation in the business network is extremely high 0.34 0.11 2.74 0.006

 The individual relationships between the partners are very well (rev.) Eliminated  All Partners do all in their power to ensure the business network’s success (rev.) Eliminated

 The reliability of the partners (e.g. in terms of complying with conditions) (rev.) Eliminated

 Firm and personnel policy dominate the relationship Eliminated Cronbach´s Alpha 0.53 Variance Explained 0.52 Factor-Reliability 0.71 Average Variance Extracted 0.45 *** Significance level 0.001 Figure 13: Construct Measurement "Opportunism"

Item-to- Indicator Performance total-cor- Reliabili- relation ty t-Value  Do you achieve the objectives regarding the value creation (degree of objectives’ achievement) 0.59 0.48

XI  Do you achieve the objectives regarding the increase in profit (degree of objectives’ achievement) 0.71 0.75 7.01 ***

 Do you achieve the objectives regarding the sales growth (degree of objectives’ achievement) 0.66 0.52 6.40 ***

 Do you achieve the objectives regarding the reduction of production costs (degree of objectives’ achievement) 0.51 0.32 5.10 ***

 Do you achieve the objectives regarding the reduction of overheads (degree of objectives’ achievement) Eliminated

 Do you achieve the objectives regarding the reduction of procurement costs (degree of objectives’ achievement) Eliminated

Cronbach´s Alpha 0.80 Variance Explained 0.63 Factor-Reliability 0.77 Average Variance Extracted 0.54 *** Significance level 0.001 Figure 14: Construct Measurement "Performance”