Asset specificity roles in interfirm cooperation: Reducing opportunistic behavior or increasing cooperative behavior?

Extant research offers two alternative mechanisms for relating the asset specificity of a cooperative relationship to partnership performance. Transaction cost economics argues that the specific assets invested in a partnership increase the hazards of opportunism. As firms select appropriate governance structures to reduce opportunistic behavior, performance increases. On the other hand, relational exchange theory suggests that asset specificity enhances the trust between partners, which in turn leads to more cooperative behavior and higher partnership performance. This paper tests both mechanisms simultaneously on a sample of procurement relationships between Hong Kong trading firms and their Chinese suppliers using SEM methods. Our results support the predictions of relational exchange theory more than those of transaction cost economics. The paper also discusses the role of the Chinese context on theory application.