Mutual commitment to support exchange: relation-specific IT system as a substitute for managerial hierarchy

Authors

  • Sung Min Kim,

    1. James J. Nance College of Business Administration, Cleveland State University, Cleveland, Ohio, U.S.A.
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  • Joseph T. Mahoney

    Corresponding author
    1. College of Business, University of Illinois at Urbana-Champaign, Champaign, Illinois, U.S.A.
    • College of Business, University of Illinois at Urbana-Champaign, 140C Wohlers Hall, 1206 South Sixth Street, Champaign, IL 61820, U.S.A.
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Abstract

This paper examines the effects of information technology (IT) on the governance of vertically related firms. We propose that a highly relation-specific IT system in inter-firm transactions plays a key role in the resulting inter-firm governance as a mutual sunk-cost commitment, in terms of leading to both less vertical integration (i.e., a change in governance mode as a first-order effect) and a smaller number of suppliers (i.e., a change within a governance mode as a second-order effect). As a result, this highly relation-specific IT system (bilateral investment) can be an alternative governance mode of electronic integration that acts as a substitute for managerial hierarchy and vertical financial ownership. From a strategic management perspective, this paper provides transaction costs and resource-based explanations on IT systems' impact on the organizational boundary decision and its impact on the likelihood of the firm achieving sustainable competitive advantage. Copyright © 2006 John Wiley & Sons, Ltd.

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