Explicit and normative contracting in collaborations of varying magnitudes: Differing perspectives of component suppliers and original equipment manufacturers

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Explicit and normative contracting in collaborations of varying magnitudes: Differing perspectives of component suppliers and original equipment manufacturers Steven H. Dahlquista,⁎, David A. Griffithb a Department of Marketing and Hospitality Services Administration, College of Business Administration, Central Michigan University, 105 Smith Hall, Mt. Pleasant, MI 48859, United States b Department of Marketing, College of Business and Economics, Rauch Business Center 365, Lehigh University, 621 Taylor Street, Bethlehem, PA 18015-3117, United States

A R T I C L E I N F O

A B S T R A C T

Keywords: Collaboration Component supplier OEM Governance Explicit contracting Normative contracting Joint profits

Industrial component suppliers and original equipment manufacturers utilize explicit and normative contracting to facilitate effective collaboration so as to garner joint profits. However, although collaborations vary in magnitude, research have yet to examine how these governance mechanisms may vary across collaborations of differing magnitudes, especially when considering the effects given differences in the longevity of firms' relationships. The results of a two study, empirical analysis employing structural equation modeling indicates that (1) component suppliers and original equipment manufacturers regard explicit and normative contracting as full and distinctive mediators of the relationship between collaborative magnitude and joint profits, and (2) that the longevity of the relationship between the firms moderates the effects of collaborative magnitude on explicit and normative contracting. Furthermore, between-group analyses indicate that component suppliers and original equipment manufacturers regard the effects of collaborative magnitude on explicit and normative contracting differently, and their perceptions of the effects of each contracting form on joint profits also differs.

Industrial channels consist of component suppliers (CSs) that collaborate to varying degrees with original equipment manufacturers (OEMs) to produce products that are integrated into OEM products that the OEM then markets to industrial customers. For example, Rockwell International, the CS, and Cisco Systems, the OEM, collaborate to produce heavy-duty wireless routers for the “internet of things.” Alternatively, Intel, the CS, and General Electric, the OEM, collaborate to develop “industrial predictivity technologies” for industries such as aviation, oil & gas, and power generation. While these collaborations may appear similar, they can vary greatly in relation to the collaboration's requirement for a breadth of commitments, complementary actions, management time and resources, and specific investments (termed collaborative magnitude). Variations in collaboration magnitude create differences in a party's exposure to exploitation (with collaborations of greater magnitude creating greater exposure to the firms than collaborations of lesser magnitude). Given the variations in collaboration magnitude, CSs and OEMs are challenged to vary their use of two prominent governance mechanisms to safeguard investments while facilitating joint profits: explicit contracting (i.e., the precision of the collaboration's formal contract in articulating the expectations of each

⁎

party's role, responsibilities, performance, and handling of unexpected events and failure to perform) and normative contracting (i.e., the level of mutual understanding between firms as to each party's role, responsibilities, performance, and handling of unexpected events and failure to perform). Unfortunately, researchers have yet to address this issue. Further complicating the nature of CS-OEM governance is the history of collaboration between firms (i.e., the shadow of the past), as this may also influence the effectiveness of explicit and normative governance mechanisms differently, necessitating that firms incorporate the influence of the longevity (i.e., the number of years where the subject firm has been a supplier or customer) when working to understand the effective implementation of explicit and normative contracting. Although the importance of interfirm marketing collaborations has stimulated significant research (e.g., Anderson & Jap, 2005; Dahlquist & Griffith, 2014; Duffy, 2008; Ghosh & John, 1999; Heide, 1994; Homburg, Wilczek, & Hahn, 2014; Jap, 1999; Luzzini, Amann, Caniato, Essig, & Ronchi, 2015; Sun & Lee, 2013; Whipple, Lynch, & Nyaga, 2010), building most often from transaction cost economics (TCE) or its extensions (e.g., Anderson & Jap, 2005;

Corresponding author. E-mail addresses: [email protected] (S.H. Dahlquist), david.a.griffi[email protected] (D.A. Griffith).

http://dx.doi.org/10.1016/j.indmarman.2017.05.010 Received 19 March 2017; Received in revised form 17 May 2017; Accepted 20 May 2017 0019-8501/ © 2017 Elsevier Inc. All rights reserved.

Please cite this article as: Dahlquist, S.H., Industrial Marketing Management (2017), http://dx.doi.org/10.1016/j.indmarman.2017.05.010

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Whipple, & Lynch, 2010; Spekman & Carraway, 2006), this work compares collaboration and governance through the perspectives of two important roles in industrial supply chains. As such, this work advances our understanding of how perspectives pertaining to the effectiveness of collaboration and the employment of governance mechanisms are influenced by a firm's positioning in the buyer/seller dyad. In addition, it provides managerial guidance to component suppliers and OEMs considering collaborations. For example, a CS that anticipates a collaborative OEM partner's concern for explicit contract utilization can more effectively negotiate the contract's contents, and at the same time seek ways to enhance normative contracting initiatives. Thus, this work presents new insights into the governance perspectives of the industrial OEM and component supplier.

Ghosh & John, 1999; Heide & John, 1992), these works, do not account for variations in collaboration magnitude nor its effect on governance mechanisms. Specifically, the extant literature (e.g., Dean, Griffith, & Calantone, 2016; Ghosh & John, 1999; Heide, 1994; Heide & John, 1988; Jap, 1999), treats collaborations' magnitudes as invariant or uniform, neglecting magnitude variance. Similarly, although a great deal of interfirm research has been engaged regarding contracting, only recently have researchers focused efforts to understand how explicit and normative contracts act in a complementary fashion (e.g., Cao & Lumineau, 2015; Dean et al., 2016; Lusch & Brown, 1996; Poppo & Zenger, 2002; Seshadri & Mishra, 2004). These limitations inhibit our understanding of an array of interfirm collaborations and how variances in collaborations are effectively governed for the enhancement of joint profits and constrain the utility of the extant research in aiding managerial decision-making. This study works to overcome these limitations, contributing to the literature in three ways. First, the work introduces the collaborative magnitude construct, and empirically investigates its effects on explicit and normative contracting. The introduction of the collaborative magnitude construct advances the interfirm collaboration literature (e.g., Duffy, 2008; Ghosh & John, 1999; Heide, 1994; Heide & John, 1988; Jap, 1999; Spekman & Carraway, 2006; Whipple et al., 2010), providing a parsimonious means of assessing and distinguishing collaborations by their relative breadth of commitments, complementary actions, and specific investments. The construct also possesses managerial relevance as it can serve as a mechanism for practitioners (e.g., OEMs and component suppliers) to more succinctly and consistently characterize current and potential collaborations. Firms engage in collaborations with an anticipation of achieving strategic and/or profit objectives and therefore assess the investments and potential returns of alternative collaborative opportunities. The collaborative magnitude construct serves as an effective and informative means of differentiating collaborations and allows for more informed decision making. Further, we build on previous works investigating the influence of relational longevity (e.g., Dwyer, Schurr, & Oh, 1987; Hoppner & Griffith, 2011; Zheng, Roehrich, & Lewis, 2008), specifically we analyze its influence on the effects of collaborative magnitude on explicit and normative contracting. This approach enhances academics' and practitioners' abilities to understand how collaborations differ from each other, and how these differences can influence their participants' perceptions of governance mechanisms. Second, the work empirically investigates the indirect effects of collaboration magnitude on the collaboration's joint profits (i.e., the potential or actual profits resulting from the collaboration, generated by the firms); wherein explicit and normative contracting act as separate but co-existing mediators. This approach not only incorporates explicit and normative contracting as coexisting but separate mechanisms in the same model, thereby advancing this stream of inquiry (e.g., Cao & Lumineau, 2015; Dean et al., 2016; Lusch & Brown, 1996; Poppo & Zenger, 2002; Roehrich & Lewis, 2014), it also captures the participants' perceptions of the effects of collaborative magnitude on “precision” versus “mutual understanding,” and subsequent effects on collaboration performance. By contrasting precision and mutual understanding in the same collaboration, we illuminate the importance of these unique mechanisms, advancing the study of governance mechanisms. Mooi and Ghosh (2010) determined that increasing contract specificity increases ex ante costs and lowers ex post costs (i.e., transaction problems). This finding and others (e.g., Dean et al., 2016; Lusch & Brown, 1996; Poppo & Zenger, 2002; Roehrich & Lewis, 2014) illuminates the practical decision facing managers, i.e., what type of governance mechanisms are relevant and call for investment in advance, and what others should be developed over time? Third, the investigation enhances our understanding of differences in the perspectives of industrial CSs and industrial OEMs. Extending the literature demonstrating variations in the perspectives of buyers and suppliers (e.g., Anderson & Narus, 1990; Bello & Zhu, 2006; Nyaga,

1. Theoretical development While there are rich research streams in a variety of important collaborative initiatives such as strategic channel development (e.g., Heide, 1994), industrial joint ventures (e.g., Deitz, Tokman, Richey, & Morgan, 2010), and public-private partnerships (e.g., Roehrich, Lewis, & George, 2014; Zheng et al., 2008), our focus is on collaborative relationships between industrial OEMs and their suppliers due to their unique qualities and abundance in supply chains. Collaborative relationships and the associated governance mechanisms between OEMs and CSs have been examined in a variety of contexts and across a number of activities; e.g., collaborative cost reduction initiatives (Cannon & Homburg, 2001), forces influencing the institutional designs that safeguard exchanges between international OEMs and CSs (Bello & Zhu, 2006), the effects of environmental dynamism (Joshi & Campbell, 2003), the influence of strategic fit between suppliers and OEMs (Ghosh & John, 2005), the use of branded component contracts by OEMs (Ghosh & John, 2009), and the responses of OEMs to CSs' investments in brand equity (Dahlquist & Griffith, 2014). These works, and others, illustrate that the CS-OEM relationship is a complex economic structure comprised of varying levels and types of both resource commitments and governance mechanisms. Further, these works argue that the performance of a collaboration is a function of the effective use of governance mechanisms to both facilitate success and safeguard the parties' interests. As mentioned, extant works tend to treat collaborations' magnitudes as invariant or uniform, neglecting magnitude variance and thus only partially characterizing or capturing the possible effects of multi-dimensional differences; while collaborations may appear similar, they can vary greatly in relation to the collaboration's requirement for a breadth of commitments, complementary actions, management time and resources, and specific investments. For example works often focus on one or two collaborative dimensions such as idiosyncratic investments and coordination efforts (e.g., Jap, 1999), but do not consider other dimensions such as the breadth of financial and managerial commitments called for by the collaboration. In practice, we argue that managers consider a broad range of collaborative dimensions in their assessment of the potential for profitable or strategic returns, and pursue those that maximize their investments (Williamson, 1991). As such we offer the collaborative magnitude construct as an effective and efficient means of characterizing collaborations. Extant work in typologies of industrial buyer-seller relationships (BSRs) (e.g., Cannon & Perreault, 1999; Duffy, 2008; Vesalainen & Kohtamäki, 2015; Whipple et al., 2010), denote that BSRs are distinguishable by the discreet factors that include economic, transactional, and relational dimensions. Duffy (2008) provides a theoretical framework of buyer-supplier relationships wherein the structure of economy, structure of polity, relationship climate, and relationship performance prove useful in differentiating between levels of coordination and partnership on a continuum between market transactions and vertical integration. Vesalainen and Kohtamäki (2015) use three dimensions, economic, structural, and social, to differentiate relationships, 2

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dimension (i.e., the existence of interfirm structures, system and process integration), economic dimension (i.e., the existence of relationship specific investments), and social dimension (i.e., the existence of interpersonal capital such as problem-solving and effective interaction) may be characterized as “the most integrated type of dyadic business relationship.” We work to bring these works together, arguing that the magnitude of interfirm collaborations, which we term collaborative magnitude, can be assessed in terms of the breadth of commitments, complementary actions, management time and resources, and specific investments associated with deliberate collaboration between two firms. We contend that collaborative magnitude is an effective means of differentiating BSRs and capturing the nature of the collaboration as perceived by the participants. For example, the collaboration between Rockwell International, the CS, and Cisco Systems, the OEM, requires extensive collaboration in terms of sharing of technical specifications, jointly developing materials, etc. necessary to produce heavy-duty wireless routers for the “internet of things”, whereas the collaboration between Toyota, the OEM and KEIPER, the CS of rear seat assembly locks, while requiring collaboration in terms coordination and flexibility, is a less extensive collaboration. Further, we argue that given the variations in collaborative magnitude (i.e., relative position on the continuum of BSR interactions), and inherent risks and opportunities, firms will work to align their governance mechanisms (i.e., explicit and normative contracting) accordingly.

Fig. 1. Conceptual model.

and consider these three dimensions to be the “main elements of relationship integration in BSRs.” Combined, these works inform our conceptual model (see Fig. 1) in which the collaborative magnitude construct serves as a means for differentiating collaborations, and when combined with explicit contracting, normative contracting, and joint profits, allows for a better understanding of the interrelationships between the type of collaboration, governance mechanisms employed by the collaboration, and the performance of the collaboration. Thus, we use this model to investigate how collaborative magnitude, a differentiating factor and descriptive of the collaboration's typology, influences the use of explicit and normative contracting (i.e., governance), subject to the relationship's longevity, to enhance joint profits (i.e., relationship performance). Next, we briefly address each of the elements of our model.

1.2. Explicit and normative contracting As suggested, interfirm collaborations can lead to a level of “closeness” that increases the potential for opportunism by the partner, thus challenging each firm to adopt governance mechanisms that safeguard investments and facilitate success (Jap & Anderson, 2003). Firms most often adapt explicit and implicit governance mechanisms to the exchange's conditions so as to achieve an appropriate balance between safeguarding and adaptation (Cao & Lumineau, 2015; Dean et al., 2016; Heide & John, 1992; Hoppner & Griffith, 2011; Lusch & Brown, 1996; Macneil, 1980; Wathne & Heide, 2004; Williamson, 1991). This work focuses on two important and widely found mechanisms used in industrial vertical collaborations between CSs and OEMs, i.e., explicit and normative contracting. Ghosh and John (2009) demonstrate that industrial OEMs and suppliers employ both of these governance mechanisms, suggesting that they are crafted by the participants in response to a number of factors such as the anticipated duration of the collaboration, the number of component suppliers, anticipated technological advancements, intellectual property ownership, or the marketing strategy associated with the OEM's product. In this work we focus on the participants' perceived overall magnitude of the collaboration. The relationship (i.e., interplay) between explicit and relational governance has been the focus of considerable research. In their meta-analysis of over 33,000 interorganizational relationships across 149 empirical studies Cao and Lumineau (2015) point out that research on the relationship between contractual and relational governance tends to treat them as either substitutes (i.e., one replaces the other) or complementary (i.e., one enhances the use of other). Our study follows the latter approach, in that explicit contracting and normative contracting act as complementary full moderators in the relationship between collaborative magnitude and joint profits (i.e., performance). Broadly, explicit contracts in interfirm relationships attempt to communicate mutual expectations, anticipate adaptation to uncertainty, and articulate conditions and methods for resolving disputes and termination, serving firms' needs to anticipate the future (Lusch & Brown, 1996; Macneil, 1980; Williamson, 1996). Indeed, CSs and OEMs are particularly compelled to expend substantial effort in “crafting” explicit contracts because, as Ghosh and John (2009) point out, these collaborations are often multiyear, and involve intensive “research, design, and development activities.” The examples of

1.1. Collaborative magnitude Magnitude of collaboration is strategically assessed by the CS and OEM for its potential to generate profits. Surprisingly, there is not a unifying measure for the “magnitude” of collaboration of a relationship. Collaborative behavior between firms, particularly at high levels, has been stated to represent a form of hybrid or specialized governance (Ghosh & John, 1999; Heide, 1994; Williamson, 1991). These relationships are a “departure from market-based exchange,” and require a high degree of closeness in order to be effective (Ghosh & John, 2009; Heide & John, 1990; Jap, 1999). Further, the literature finds that an interfirm collaboration's breadth of commitments (e.g., fiscal, intellectual, and physical resources) represents both risk and opportunity, because it exposes each firm to potential exploitation, but is necessary to achieve objectives (Luzzini et al., 2015). In addition, research suggests that the level of coordination and specific investments required by the collaboration is both important and distinguishing. For example, Heide and John (1990) examined the effects of buyer and supplier “specific investments” (i.e., investments made in physical assets, procedures, and people that are tailored to the relationship) on “joint action” (i.e., the extent to which parties undertake activities jointly rather than unilaterally). Similarly, Jap (1999) studied the effects of “coordination effort” (i.e., the regular pattern of complementary actions and activities) and “idiosyncratic investments” (i.e., investments that uniquely support the buyer-seller relationship). Building upon these works, a number of typology approaches have been offered in the literature. Duffy (2008) determined variance in attributes across BSR types on a continuum of BSR interactions, wherein BSRs characterized as “highly coordinated” or “partnerships” possessed higher levels of coordination and integration (i.e., internal economy of the relationship) and higher levels of interdependence (i.e., internal polity of the relationship), in addition to higher levels of cooperation and performance. Vesalainen and Kohtamäki's (2015) threedimensional typology suggests that BSRs high in the structural 3

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1.4. Joint profits

Rockwell International and Cisco Systems as well as Intel and General Electric, illustrate highly collaborative relationships, characterized by extensive technology commitments and marketing investments, as well as long-term agreements (Cisco Systems, 2017; General Electric, 2017; Intel, 2017; Rockwell International, 2017). Interestingly, it is important to note that contracts are always incomplete because of bounded rationality and uncertainty (Grossman & Hart, 1986), regardless of the parties' efforts in crafting. In fact, the more complex the relationship, the greater is the potential for “incompleteness” of the contract (Williamson, 1996), suggesting as collaborative magnitude increases between CSs and OEMs, contract incompleteness increases. However, as demonstrated by Ghosh and John (2005, 2009), it is not the detail of an explicit contract that is important to achieving collaborative objectives, as much its precision in articulating the mutual expectations of the participants. Similarly, Zheng et al. (2008) point out that contract refinement (i.e., increasing precision) may be seen as a means of capturing and retaining collaboration related knowledge between the parties over time. We advance this approach by theorizing that precision plays a role in the use of explicit contracting between OEMs and CSs involved in joint profit generation. As noted previously, we define explicit contracting as the precision of the collaboration's formal contract in articulating the expectations of each party's role, responsibilities, performance, and handling of unexpected events and failure to perform. Implicit or relational mechanisms rely on acceptable behavior (i.e., norms) between the partners (Dean et al., 2016; Ghosh & John, 2009; Lusch & Brown, 1996) and can also exist in a variety of forms. Ghosh and John (2009, pg. 600) refer to relational contracts as agreements “in which cooperative behavior is sustained by social norms and bilateral punishment rather than courts of law.” Similarly, Lusch and Brown (1996, pg. 20) theorize that normative contracts exist “when a mutual understanding exists between parties as to how they will interact and deal with each other, including the handling of future contingences.” Many researchers note that explicit and normative contracts are not “opposite ends of a continuum,” but coexist in interfirm relationships (e.g., Cao & Lumineau, 2015; Dean et al., 2016; Lusch & Brown, 1996; Poppo & Zenger, 2002; Roehrich & Lewis, 2014). It is also informative to consider that norms or expectations are generally not formally stated and may exist at multiple levels within a collaborative relationship, such as between individuals, departments, senior management, etc. As such we approach normative contracting (i.e., the level of mutual understanding between firms as to each party's role, responsibilities, performance, and handling of unexpected events and failure to perform) consistent with this work; norms can act as a normative contract and exist in concert with an explicit contract in an industrial vertical collaboration.

Interfirm collaborative relationships provide a means for firms to leverage other firms' capabilities and resources (Dwyer et al., 1987; Ghosh & John, 2009; Jap & Anderson, 2003; Ploetner & Ehret, 2006). Previous research (e.g., Dyer & Singh, 1998) refers to firms creating an idiosyncratic linkage that may lead to competitive advantage and ‘supernormal returns’ on their investment. Jap and Anderson (2003) point out that there are a number of potential beneficial outcomes from exchanges between buyers and sellers including joint profits; not merely the summation of profits, but rather financial results from joint effort and investments residing in the dyad. Similarly, Jap (1999) refers to collaborative processes between firms aimed at creating mutually beneficial outcomes; Ghosh and John (2005) described joint net gains between OEMs and suppliers in the form of cost reduction and end product enhancement. Duffy (2008) determined that firms involved in partnerships and highly coordinated relationships perceived higher levels of performance to exist as a result of the relationship. Thus, the mutual objective of achieving a financial outcome for each firm in the collaboration, among other possible objectives, that would not be achievable without the collaboration, is the focus of this work, and that joint profits are the potential or actual profits resulting from the collaboration, generated by the firms.

2. Hypotheses development 2.1. Indirect joint profits effects of collaborative magnitude Collaborations necessitate a breadth of commitments (e.g., fiscal, intellectual, and physical resources), motivating participants to safeguard their investments, allowing parties to stake a credible claim to the value generated. Thus, stronger governance mechanisms are aligned with larger specific investments to minimize unrealized opportunities (Jap, 1999; Macneil, 1980; Williamson, 1996). Consistent with this argumentation, Ghosh and John (2005, 2009) argue that OEMs and CSs are particularly compelled to use explicit contracts because of the time, and intense research and design activities associated with collaborations. Similarly, Duffy (2008) determined BSRs characterized as “highly coordinated” or “partnerships” possessed higher levels of coordination and integration, suggesting increased need for explicit contracting, and Vesalainen and Kohtamäki (2015) point to the structural dimension, again suggesting explicit contracting, as an important element of highly integrated BSRs. Consistent with the aforementioned research, we assert that collaborative magnitude (i.e., an indicator of a more integrated relationship) has a positive influence on firms' employment of explicit contracting. Further, explicit contracts can be extensive and detailed (Dean et al., 2016), but not necessarily precise. In their investigations of contract employment between OEMs and industrial suppliers, i.e., CSs, Ghosh and John (2005, 2009) illustrate the importance of contract precision; adverse outcomes can result from the employment of the wrong contract form (e.g., white box versus branded, fixed versus cost-plus pricing). Similarly, increasing contract specificity (i.e., precision) has been found to increase ex ante costs, but lower ex post costs (i.e., transaction problems) (Mooi & Ghosh, 2010). These findings suggest that the extent of the relationship's collaborative magnitude can motivate the parties to focus attention on the precision of the contract. Increased precision in the contract enhances the relationships efficiency as each party's responsibilities are more clearly defined, which in turn directly enhances joint profits; explicit contracting has a positive effect on the resulting joint profits of the collaboration. More formally, the previous argumentation suggests two related hypotheses:

1.3. Longevity Our focus on contracting between the parties suggests that it is important to account for the longevity of the relationship between the CS and the OEM as longevity (i.e., shadow of the past) can influence the way firms regard the use of both forms of contracting. First, research on the dynamic nature of relationships (e.g., Argyres, Bercovitz, & Mayer, 2007; Weber, Mayer, & Macher, 2011) demonstrates that over time partners tend to include more contingency planning (i.e., precision) in their contracts (i.e., firms learn to use contracts to help govern complex transactions). Second, normative contracting takes time to evolve between firms (Dwyer et al., 1987; Hoppner & Griffith, 2011; Spekman & Carraway, 2006) and are employed by the parties in future collaboration. We suggest that the relationship between longevity and either form of contracting is not direct, but rather sets the context for exchange. As such, contracts are employed for the purpose of facilitating and providing governance in collaborations and it is the magnitude of collaboration that directly influences the employment of governance mechanisms.

H1a. Collaborative magnitude positively influences explicit contracting. H1b. Explicit contracting positively influences joint profits. 4

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the magnitude of interfirm collaboration is highly relevant, it does not directly influence the outcomes of collaboration. Rather, collaborative magnitude defines the nature and “mix” of governance mechanisms necessary to manage the magnitude of collaboration; interfirm collaborations do not exist without some levels of explicit and normative contracting, and these governance mechanisms are inherent to such a degree that the nature of collaboration (i.e., collaborative magnitude) does not directly influence the outcome of collaboration. Instead, interfirm collaborations of a sufficient magnitude to generate “supernormal returns” (i.e., not achievable without the collaboration) inherently incorporate both explicit and normative contracting to facilitate the generation of joint profits from collaboration. More formally:

We also propose that collaborative magnitude influences the normative contracting employed in the collaboration. Dahlquist and Griffith (2014) point out that in a new collaboration between industrial firms there is no history or mutual experience, therefore no basis for the existence of normative contracting (i.e., the level of mutual understanding between firms as to each party's role, responsibilities, performance, and handling of unexpected events and failure to perform). This is consistent with the literature denoting that interfirm norms form over time (e.g., Dwyer et al., 1987; Hoppner & Griffith, 2011). Alternatively, an interfirm relationship between firms with a history of collaboration is likely to possess some level of normative contracting. Recognizing the temporal character of its formation, we argue that in industrial collaborations between CSs and OEMs, normative contracting is distinctive from explicit contracting and necessarily forms (or exists) to facilitate and safeguard. This is consistent with Duffy (2008), finding highly coordinated BSRs possessed higher levels of interdependence (i.e., internal polity of the relationship), suggesting normative contracting, and Vesalainen and Kohtamäki (2015) who contend that the social dimension (i.e., the existence of interpersonal capital such as problem-solving and effective interaction) is a key component of integrated dyadic business relationships. Prior research thus informs our assertion that collaborative magnitude (i.e., an indicator of an increasingly more integrated relationship) motivates firms to pursue the use of normative contracting. Further, normative contracting is an important mechanism in industrial collaborations as it increases the effectiveness of the relationship and therefore the potential for favorable outcomes, which we measure as joint profits. Whipple et al. (2010) determined that collaborative BSRs incorporating trust and commitment (i.e., relational norms) produced higher levels of performance than transactional relationships. Similarly, Ghosh and John (2005, 2009) described joint net gains between OEMs and suppliers in the form of cost reduction and end product enhancement as the result of collaborative behavior and determined that relational contracts sustained by social norms positively impact the performance of OEM/CS relationships. Consistent with these and other previous works (e.g., Jap, 1999; Spekman & Carraway, 2006), we contend that the formation of normative contracting is a collaborative process aimed at improving the likelihood of positive outcomes or performance of an interfirm collaboration (e.g., joint profits). Further, performance is positively influenced by normative contracting between the firms. More formally, the previous argumentation suggests two related hypotheses: H2a. Collaborative contracting.

magnitude

positively

influences

H3. Explicit contracting and normative contracting fully mediate the relationship between collaborative magnitude and joint profits. 2.2. Effects of longevity In H1a we hypothesized that collaborative magnitude positively influences explicit contracting. Building on this, we contend that as all collaborations have an associated longevity (i.e., the number of years wherein the firm has been a supplier or customer), the collaboration's longevity between the CS and OEM moderates the effect stated in H1a. Specifically, we argue that collaborative magnitude and longevity interact positively to influence explicit contracting. Increased longevity suggests greater familiarity between the parties and therefore greater understanding of the aspects of the contract that require precision (Ghosh & John, 2009); two firms with little or no longevity necessitate broader and more sweeping (less precise) explicit contracting as collaborative magnitude increases than two with greater longevity. While it can be argued that greater longevity increases familiarity and reduces the need for explicit contracting as collaborative magnitude increases, our focus here is not on the need for explicit contracting, rather the precision of the resulting explicit contracting. More formally: H4. The positive effect of collaborative magnitude on explicit contracting is increasingly higher as longevity between the firms increases. Similarly, in H2a we argued that collaborative magnitude positively influences normative contracting. Building on this, we theorize that collaborative magnitude and longevity interact positively to influence normative contracting. As increasing longevity suggests greater familiarity between exchange partners and the formation of normative contracting, the relationship's ability to deal with unforeseen events and adapt to changing market conditions during the course of the collaboration (Dean et al., 2016; Ghosh & John, 2009; Heide & John, 1992; Lusch & Brown, 1996) is enhanced, and more broadly, the level of mutual understanding increases, with higher levels of collaborative magnitude. Again, an argument could be made that longevity and the resulting familiarity results in a reduced need for normative contracting as collaborative magnitude increases; however our focus here is on the level of mutual understanding that exists between the parties, an aspect of a relationship that can only develop over time. More formally:

normative

H2b. Normative contracting positively influences joint profits. The abundant use of explicit and normative contracts in practice suggests that the collaborative magnitude of an interfirm collaboration may not directly influence outcomes (e.g., joint profits). Extant research (e.g., Spekman & Carraway, 2006; Whipple et al., 2010) argues that many BSRs possess transactional governance mechanisms (e.g., explicit contracts such as supply quotations and purchase orders) and relational dimensions (e.g., trust and communication), integrating both forms of governance prominently in the relationship as a necessary means of managing the relationship. As previously mentioned, researchers (e.g., Dean et al., 2016; Lusch & Brown, 1996; Poppo & Zenger, 2002) note that explicit and normative contracts are not opposite ends of a continuum wherein one replaces the other, but coexist in interfirm relationships. Seshadri and Mishra (2004) extend that premise, arguing that contracts and relationships are complementary and that contracts provide an evolving governance structure for relationships to emerge and be nurtured. While it is clear that certain interfirm relationships are highly transactional lacking any normative contracting, we argue that collaborative interfirm relationships necessarily possess dimensions of both explicit and normative contracting. Further, we suggest that while

H5. The positive effect of collaborative magnitude on normative contracting is increasingly higher as longevity between the firms increases. 2.3. Differing buyer/seller role-defined perceptions of contracting and profits We contend the CS and OEM may share similar, but not necessarily the same, perceptions (e.g., collaborative magnitude, explicit and normative contracting, and joint profits). Specifically, we argue the CSs and OEMs are likely to agree on the valence of the relationships 5

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potential or actual profits and the other party's potential or actual profits (i.e. joint profits) is a function of how profitable the relationship has been or will be for their respective firm and how well the relationship has functioned. Further, the most fundamental measure for the CS's profits is determined by its selling price to the OEM and the cost of its product. Similarly, the OEM's profits are determined by its selling price to its industrial customer and the cost of its product; however the OEM's product cost includes the cost of the CS's product. An enhancement in the CS's profits through higher selling prices to the OEM necessarily reduces the OEM's profits. As previously argued, OEMs rely more on explicit contracting than normative contracting, whereas CSs rely more on normative contracting. Thus, we assert that each party's perception of how explicit and normative contracting influences joint profits, and the achievement of objectives, may be similar in valence, but not in effect. Each party is likely to attribute joint profits and achievement of objectives to their preferred form of contracting, explicit for OEMs and normative for CSs. More formally:

theorized in our model (e.g., collaborative magnitude positively influences explicit contracting) but that these relationships may not be viewed equally (i.e., effect size differences). Industrial OEMs integrate the products of numerous CSs into the design of their final product. The literature (e.g., Ghosh & John, 2009; Wuyts, Stremersch, Van den Bulte, & Franses, 2004) demonstrates that an OEM's product success relies heavily on its ability to identify and integrate suitable CSs, and that explicit contracts are a key component of that integration. As such, the OEM typically initiates the explicit contracting process with potential CSs, negotiating and crafting precision into the contracts necessary to achieve its objectives. It is through this process of contract refinement and negotiation that the OEM is able to effectively integrate products from multiple CSs (of varying importance) in their product, and articulate its role as the buyer. It is also important to acknowledge that the buyer/seller relationship inherently empowers the OEM, in that it can often select from a number of potential CSs for a particular component; barring a condition where the CS is specified by the OEM's customer (cf., Dahlquist & Griffith, 2014). Once selected, however, each CS can potentially behave or perform (knowingly or unknowingly) in a way that could negatively influence the performance and success of the OEM's product. Thus, each CS presents a level of performance risk to the OEM, necessitating the need for precision in explicit contracting. While we do not suggest that CSs regard explicit contracting as unimportant, as the seller, the CS possesses less ability to influence the contract and its risk in the collaboration is primarily focused on one firm, the OEM. As such, the CS perceives a positive, but lesser relationship between collaborative magnitude and the need for precision in the contract than the OEM. The CS is less concerned about precision as it is focused on minimizing risk with the OEM. Finally, we suggest that this condition exists across the range of collaborative magnitude. More formally:

H8. The relationship between explicit contracting and joint profits is stronger as perceived by OEMs than it is by CSs. H9. The relationship between normative contracting and joint profits is weaker as perceived by OEMs than it is by CSs.

3. Methodology To test our hypotheses, we employ a two study cross-sectional survey research design (i.e., Study 1 with CS respondents and Study 2 with OEM respondents). We begin by testing the effects of collaborative magnitude on joint profits subject to the use of explicit contracting (H1a and H1b) and normative contracting (H2a and H2b), first using the data from Study 1 and then using data from Study 2. We then conduct full mediation tests for explicit and normative contracting (H3). Next, we test the moderating effects of longevity on the relationship between collaborative magnitude and explicit contracting (H4) and between collaborative magnitude and normative contracting (H5), using data from each study. We compare the analyses of the two studies to assess how CSs and OEMs differ in their perspectives of the relationships between collaborative magnitude and explicit contracting (H6), collaborative magnitude and normative contracting (H7), explicit contracting and joint profits (H8), and normative contracting and joint profits (H9).

H6. The relationship between collaborative magnitude and explicit contracting is stronger as perceived by OEMs than it is by CSs. Conversely, the CS's focus is to establish itself as the component supplier, ideally the exclusive supplier, and retain the OEM's business through the life of the OEM's product. This motivation is not necessarily shared with the OEM. Further, in the course of an OEM-CS collaboration, CSs are often called upon to adapt to changing needs from the OEM in terms of product designs and performance specifications (Dahlquist & Griffith, 2014; Ghosh & John, 2009). Adaptations can be costly for the CS as well as present an increased risk to the CS. Both the OEM's and CS's ability to adapt to changing circumstances is enhanced by normative contracting. However, it is particularly important for the CS because of its desire to obtain and retain the OEM's business in the face of increasing magnitude and risk. Alternatively, the fact that the OEM has limited resources and ability to develop and manage multiple normative contracts for each of its products, it is compelled to place less emphasis on normative contracting. Thus, we argue that both parties perceive normative contracting as a positive governance mechanism, but CSs regard it as more important than OEMs. Finally, we suggest that this condition exists across the range of collaborative magnitude. More formally:

3.1. Questionnaire development and measures Before survey administration, we conducted field interviews to establish the relevance of the constructs. From these interviews and previous research we generated two surveys (Appendix A). Each survey was pretested with 40 industry managers (identified through the authors' professional networks) to verify wording, response formats, and understandability. The managers varied in seniority in their respective company, ranging from engineering managers and purchasing managers to CEOs, and represented 40 different firms (25 component suppliers and 15 OEMs), located in the United States, Germany, Sweden, Italy, and England. The firms typically possessed substantial international operations, focusing on multiple industries such as general manufacturing, industrial machinery manufacturing, and motor vehicle parts manufacturing. After pretesting, the survey items were finalized and formatted for implementation. We operationalized constructs using multi-item reflective scales based on existing scales when available, and employed Likert-type scales ranging from 1 (“strongly disagree”) to 7 (“strongly agree”).

H7. The relationship between collaborative magnitude and normative contracting is weaker as perceived by OEMs than it is by CSs. The CSs' and OEMs' perspectives of the influences of explicit and normative contracting on joint profits will also differ. Joint profits represent the exchange partner's assessment of a relationship's record of generating or potential to generate profits for each of the participating firms. Kang, Mahoney, and Tan (2009) demonstrate that OEM suppliers often make unilateral specific commitments to achieve goals not directly related to the specific collaboration, suggesting that both parties are unlikely to disclose all of their current and future profit objectives. As relationship parties would not know the extent of the other party's profits or other profit objectives, a manager's perception of its firm's

3.1.1. Collaborative magnitude We followed previous work characterizing interfirm collaborative behavior such as “joint action” (Heide & John, 1990) and “coordination 6

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and a range of technologies. We administered two independent separate cross-sectional surveys, one with CS managers (Study 1) and one with OEM managers (Study 2). The potential respondents were identified as a CS or OEM based on their answers to the following questions. An affirmative “yes” answer to either (but not both) assigned them to either the CS survey or the OEM survey. Question 1: “I am currently employed at a firm that may be characterized as a manufacturer of components or materials that are sold to OEMs or industrial equipment manufacturers.” Question 2: “I am currently employed at a firm that may be characterized as an original equipment manufacturer of products that are sold to industrial users and manufacturers.” Respondents replying “yes” to both questions were eliminated. Once identified as a CS or OEM, respondents were asked to indicate (seven-point Likert-type scale; 1 = “strongly disagree,” 7 = “strongly agree”) the extent to which they agreed with the statements: “I am knowledgeable of the firm's marketing activities with other firms,” and “I am knowledgeable of the firm's financial results.” Only respondents indicating a 4 or higher on both questions were allowed to complete the survey. All respondents were identified and incentivized by the market research firm Research Now. Overall, usable surveys included responses from 156 CSs (37% response rate) and 153 OEMs (29% response rate). Table 1 lists respondent and respondent firm characteristics. Respondents anchored their responses on an existing (CS-OEM) relationship. We intentionally did not ask the respondents to anchor their answers to a “collaborative” relationship. This approach avoided biasing the respondents to collaborative relationships; important relationships are not necessarily highly collaborative (i.e., high collaborative magnitude). Table 2 provides the correlation matrix for each study.

effort” (Jap, 1999) to develop a measure that captures collaborative magnitude in terms of breadth of commitments, complementary actions, and specific investments. Respondents' reported on the relationship with a four-item, seven-point Likert-type scale that assessed respondents' relative agreement with statements describing the relationship as requiring (1) a wide breadth of commitments, (2) numerous complementary actions, (3) management time and resources, and (4) significant specific investments. 3.1.2. Joint profits We modified Jap and Anderson's (2003) “joint profit performance” to assess the respondent's perception of the collaboration's joint profits. A four-item, seven-point Likert-type scale was used to assess respondents' relative agreement with statements describing the relationship as (1) having the potential to generate profits for the respondent's firm, (2) generating profits for the respondent's firm, (3) having the potential to generate profits for the collaboration partner, and (4) generating profits for the collaboration partner. 3.1.3. Explicit contracting We captured explicit contracting drawing on Lusch and Brown's (1996) measure for explicit contracting over roles and handling unexpected events. Respondents reported on the contract with a five-item, seven-point Likert-type scale that assessed the respondents' relative agreement with statements describing the contract as precise in terms of (1) defining roles, (2) defining responsibilities, (3) performance expectations, (4) handling unexpected events, and (5) remedies for a failure to perform. 3.1.4. Normative contracting We captured normative contracting drawing on Lusch and Brown's (1996) measure for normative contracting over roles and handling unexpected events. Respondents reported on the relationship with a five-item, seven-point Likert-type scale that assessed respondents' relative agreement with statements describing the existence of a mutual understanding in terms of (1) defining roles, (2) defining responsibilities, (3) performance expectations, (4) handling unexpected events, and (5) remedies for a failure to perform.

3.2.2. Nonresponse bias and common method variance testing We examined nonresponse bias two ways. First, we compared early and late respondents for all variables under study (Armstrong & Overton, 1977). t-Tests resulted in no significant differences (p < 0.05), in either survey. Second, we employed a marker variable (i.e., “I am responsible for the firm's marketing budget”) to serve as a proxy for method variance (Lindell & Whitney, 2001). We identified the lowest positive correlation between the marker variable and one of the criterion variables (ρ = 0.03 for the CS survey, ρ = 0.04 for the OEM survey). To remove the effect of CMV, this correlation was partialled out of all other bivariate correlations. The zero-order correlations of the other variables remained significant, suggesting CMV is minimal under this testing approach.

3.1.5. Longevity Consistent with Ghosh and John (2005) and Heide and John (1990), we employ a single-item measure of the length of the relationship, for which respondents estimated the length (in years) of their firms' relationship with the OEM (CS).

Table 1 Survey data.

3.1.6. Control variable Collaboration perspectives may vary in regard to the strategic importance that each party represents. Arguably the strategic importance of one party to the other, regardless of mutuality, may influence the level of explicit and normative contracting; greater strategic importance may influence one or both party's perception of both contracting and profit generation. Strategic importance was captured with a single-item measure.

CS Study 1

3.2. Data collection 3.2.1. Sampling procedure We selected the following subcategories of the general manufacturing category (NAIC 33): Industrial Machinery Manufacturing (NAIC 3332), Semiconductor and Other Electronic Component Manufacturing (NAIC 3344), and Motor Vehicle Parts Manufacturing (3363), from the U.S. Census Bureau's North American Industry Classification System (NAICS). These subcategories were selected because they possess a large population of CSs and OEMs, helping to ensure a broad range of CS types, and their end products consist of engineered systems that require the integration of specialty components

Potential respondents Qualified respondents Completed surveys Usable surveys

1096 424 170 156

Firm size (annual sales in US$) < 1 Million 1 Million to 10 Million 10 Million to 50 Million 50 Million to 250 Million 250 Million to 1 Billion > 1 Billion

10.9% 14.7% 23.7% 25.0% 12.2% 13.5%

Respondent years in firm Knowledge of marketing Knowledge of financials

7

OEM Study 2

39% 40% 37%

1173 525 190 153

45% 36% 29%

11.0% 14.0% 14.0% 24.0% 22.0% 15.0%

M

SD

M

SD

12.8 5.3 5.6

10.6 1.3 1.2

13.0 5.4 5.5

11.2 1.4 1.3

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Table 2 Measure statistics and correlations (Studies 1 and 2). M

SD

Study 1: CS 1. Collaborative magnitude 2. Explicit contracting 3. Normative contracting 4. Joint profits 5. Longevity 6. Strategic importance

4.37 3.78 4.06 4.61 12.69 3.92

1.16 1.21 1.14 1.22 6.39 1.19

Study 2: OEM 1. Collaborative magnitude 2. Explicit contracting 3. Normative contracting 4. Joint profits 5. Longevity 6. Strategic importance

4.02 4.25 3.26 3.88 11.66 3.44

1.52 1.52 1.58 1.33 7.65 1.17

1

Table 3 Measurement model. 2

3

4

5

Construct

SL

AVE

CR

0.61

0.81

0.58

0.76

0.59

0.82

0.58

0.77

0.69

0.82

0.50

0.75

0.52

0.83

0.59

0.78

Study 1 (Component Supplier) 0.38 0.40 0.19 0.17 0.26

0.42 0.16 0.40 0.24 0.15

0.09 0.07 0.06 0.08

0.05 0.38 0.12 0.18

0.38 0.12 0.22

0.08 0.10 0.12

0.09 0.07

0.15 0.16

0.10

0.19

Numbers below the diagonal are the squared correlations.

4. Estimation and results Our hypotheses were tested employing the covariance-based structural equation modeling software AMOS 20, using the maximum likelihood (ML) procedure. We assessed the reliability and validity of each multi-item construct using confirmatory factor analysis. 4.1. Measure assessment We used confirmatory factor analysis (AMOS 20) to estimate a measurement model (see Table 3). The overall chi-square goodness-offit indexes for the models were 348.635 (d.f. = 143; p < 0.05) for study one and 351.338 (d.f. = 143; p < 0.05) for study two. The comparative fit indexes (CFIs) ranged from 0.916 to 0.928, the root mean square error of approximations (RMSEAs) ranged from 0.071 to 0.072, and the standardized root mean square residuals (SRMRs) ranged from 0.045 to 0.047, meeting the critical values for a model of good fit (Bollen, 1990). All factor loadings provided evidence of convergent validity, ranging from 0.73 to 0.91 with t-values exceeding 2.00. All constructs have good reliability, with alpha coefficients exceeding 0.85 (Churchill, 1979) and composite reliabilities ranging from 0.75 to 0.82 (Fornell & Larcker, 1981).

Collaborative magnitude CM1 CM2 CM3 CM4 (α = 0.88)

0.87 0.77 0.85 0.74

Explicit contracting EC1 EC2 EC3 EC4 EC5 (α = 0.85)

0.76 0.82 0.74 0.76 0.73

Normative contracting NC1 NC2 NC3 NC4 NC5 (α = 0.90)

0.82 0.91 0.83 0.80 0.73

Joint profits JP1 JP2 JP3 JP4 (α = 0.94)

0.86 0.80 0.78 0.76

Study 2 (OEM)

4.2. Structural models We estimated each model using structural equation modeling (see Table 4) with survey data from 156 CSs (Study 1) and 153 OEMs (Study 2). All models have acceptable indicators for goodness of fit (Study 1: χ2 = 330.821, d.f. = 136, p < 0.05; CFI = 0.925; RMSEA = 0.070; and SRMR = 0.050 and Study 2: χ2 = 354.432, d.f. = 136, p < 0.05; CFI = 0.918; RMSEA = 0.068; and SRMR = 0.048). 4.2.1. Indirect relationships The results indicate a positive relationship between collaborative magnitude and explicit contracting (Study 1: β = 0.268, t = 2.309, p < 0.05 and Study 2: β = 0.408, t = 4.303, p < 0.01), and a positive relationship between explicit contracting and joint profits (Study 1: β = 0.255, t = 2.104, p < 0.05 and Study 2: β = 0.381, t = 3.327, p < 0.01) in support of H1a and H1b. The results also indicate support for H2a and H2b, in that there is a positive relationship between collaborative magnitude and normative contracting (Study 1: β = 0.421, t = 4.659, p < 0.01 and Study 2: β = 0.201, t = 2.240, p < 0.05), and a positive relationship between normative contracting and joint profits (Study 1: β = 0.354, t = 4.201, p < 0.01 and Study 2: β = 0.193, t = 2.010, p < 0.05). A supplementary test for mediation was conducted to assess the indirect effects in the model, collaborative magnitude → explicit contracting → joint profits and collaborative

Collaborative magnitude CM1 CM2 CM3 CM4 (α = 0.91)

0.83 0.77 0.84 0.74

Explicit contracting EC1 EC2 EC3 EC4 EC5 (α = 0.86)

0.76 0.81 0.74 0.76 0.75

Normative contracting NC1 NC2 NC3 NC4 NC5 (α = 0.93)

0.86 0.75 0.85 0.77 0.80

Joint profits JP1 JP2 JP3 JP4 (α = 0.87)

0.83 0.81 0.79 0.80

Study 1: χ2 = 348.635, d.f. = 143, p < 0.05; CFI = 0.916; RMSEA = 0.072; and SRMR = 0.045. Study 2: χ2 = 351.338, d.f. = 143, p < 0.05; CFI = 0.928; RMSEA = 0.071; and SRMR = 0.047. Notes: SL = standardized loading, AVE = average variance extracted, and CR = composite reliability.

magnitude → normative contracting → joint profits (MacKinnon, Lockwood, Hoffman, West, & Sheets, 2002). Estimating a single model that included both the hypothesized indirect paths and the direct path (collaborative magnitude → joint profits), we find that the indirect relationships are significant via explicit contracting (Study 1: β = 0.235; p < 0.05 and Study 2: β = 0.351; p < 0.01), and via normative

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A. Collaborative Magnitude × Longevity on Explicit Contracting (CSs)

Table 4 SEM results. Path effects

Component Suppliera H1a: Collaborative magnitude → Explicit contracting H1b: Explicit contracting → Joint profits H2a: Collaborative magnitude → Normative contracting H2b: Normative contracting → Joint profits H3: Collaborative magnitude → Joint profits H4: Collaborative magnitude × Longevity → Explicit contracting H5: Collaborative magnitude × Longevity → Normative contracting Strategic importance → Joint profits OEMb H1a: Collaborative magnitude → Explicit contracting H1b: Explicit contracting → Joint profits H2a: Collaborative magnitude → Normative contracting H2b: Normative contracting → Joint profits H3: Collaborative magnitude → Joint profits H4: Collaborative magnitude × Longevity → Explicit contracting H5: Collaborative magnitude × Longevity → Normative contracting Strategic importance → Joint profits

Standardized coefficient

t-Value

0.268⁎

2.309

⁎

0.255 0.421⁎⁎

2.104 4.659

0.354⁎⁎ 0.104 −0.161⁎

4.201 0.920 − 1.980

0.195⁎

2.014

0.159

1.203

0.408⁎⁎

4.303

⁎⁎

B. Collaborative Magnitude × Longevity on Explicit Contracting (OEMs)

0.381 0.201⁎

3.327 2.240

0.193⁎ 0.127 0.202⁎

2.010 1.047 2.040

−0.197⁎

− 1.996

0.133

1.059

Path effect comparative analysis

Model fit

H6: Collaborative magnitude → Explicit contracting is Greater for OEMs H7: Collaborative magnitude → Normative contracting is Greater for CSs H8: Explicit contracting → Joint profits is Greater for OEMs H9: Normative contracting → Joint profits is Greater for CSs

Δχ2 = 4.01⁎

a χ2 = 330.821, SRMR = 0.050. b χ2 = 354.432, SRMR = 0.048. ⁎ p < 0.05. ⁎⁎ p < 0.01.

Δχ2 = 4.55⁎ Δχ = 4.77 Δχ2 = 0.07 2

Fig. 2. Interpretation of interaction effects.

⁎

d.f. = 136;

p < 0.05,

CFI = 0.925;

RMSEA = 0.070;

and

d.f. = 136;

p < 0.05,

CFI = 0.918;

RMSEA = 0.068;

and

(1981) procedure, Fig. 2C and D, shows that the effect of longevity for both CSs and OEMs is monotonic, in that the effect of collaborative magnitude on normative contracting remains positive throughout the range of longevity. Again, they differ, however, in that the interaction effects are opposite in valence for CSs versus OEMs.

4.2.3. Comparison of CS and OEM perspectives Covariance-based between group structural equation modeling analysis (Qureshi & Compeau, 2009) was employed to test hypotheses H6, H7, H8, and H9; Studies 1 and 2 were compared to determine if the path effects were significantly different between CSs and OEMs. Given the differences in samples, we first tested for measurement invariance by equating the factor loadings in the two groups (Steenkamp & Baumgartner, 1998). Our analysis did not result in a significant change in model fit (Δχ2 = 7.40; Δd.f. = 5; p > 0.05), supporting measurement equivalence. The structural path estimates for Studies 1 and 2 were then assessed. Consistent with H6, collaborative magnitude's influence on explicit contracting was higher for OEMs (β = 0.408, p < 0.01) than with CSs (β = 0.268, p < 0.05); equating this path in the two models resulted in a significant decrease in model fit (Δχ2 = 4.01; Δd.f. = 1; p < 0.05), supporting H6. Consistent with H7, collaborative magnitude's influence on normative contracting was lower for OEMs (β = 0.201, p < 0.05) than with CSs (β = 0.421, p < 0.01); equating this path in the two models resulted in a significant decrease in model fit (Δχ2 = 4.55; Δd.f. = 1; p < 0.05), supporting H7. Testing for H8 and H9 required that the test be conducted for each form of contracting. In support of H8, explicit contracting's influence on joint profits was higher for OEMs (β = 0.381, p < 0.01) than with CSs (β = 0.255, p < 0.05); equating these paths in the two models resulted in a significant decrease in model fit

contracting (Study 1: β = 0.332; p < 0.01 and Study 2: β = 0.189; p < 0.05). However, the direct association is insignificant (Study 1: β = 0.104; p > 0.1 and Study 2: β = 0.127; p > 0.1), indicative of a fully mediated model, supporting H3. 4.2.2. Interaction We estimated the latent variable interactions following Ping's (1995) single-product indicant approach. The results provide partial support for H4, in that the interaction effect of collaborative magnitude and longevity on explicit contracting is positive for OEMs (β = 0.202, t = 2.040, p < 0.05), but it is negative for CSs (β = −0.161, t = − 1.980, p < 0.05). Our hypothesis involves the effects of collaborative magnitude on explicit contracting over a range of longevity. As such, it is informative to examine the effect by following Schoonhoven's (1981) procedure. Fig. 2A and B show that the effect of longevity for both CSs and OEMs is monotonic; the effect of collaborative magnitude on explicit contracting remains positive throughout the range of longevity. They differ, however, in that the interaction effects are opposite in valence. We had similar findings regarding H5. The results indicate partial support for H5, as the interaction effect of collaborative magnitude and longevity on normative contracting is positive for CSs (β = 0.195, t = 2.014, p < 0.05), but it is negative for OEMs (β = − 0.197, t = − 1.996, p < 0.05). Applying Schoonhoven's 9

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C. Collaborative Magnitude × Longevity on Normative Contracting (CSs)

and resources, and specific investments. Through the development of a broad, inclusive conceptualization of collaborative magnitude, this work was able to demonstrate not only the importance of this construct, but more of note, that an increased understanding of how CSs and OEMs respond to variations in the relationships collaborative magnitude via modifications to governance mechanisms could be gained. Specifically, our findings indicate that increases in collaborative magnitude increase the utilization of both explicit and normative contracting (although different in magnitude based upon whether the firm is a CS or OEM, as will be discussed later within this section), thereby providing for a more robust model of the potential determinants of interorganizational governance mechanisms. 5.2. Governance mechanisms as full mediators Second, our results demonstrate that the collaborative magnitude of the relationship does not directly influence the relationship's joint profits. Rather, the findings, consistent with the theoretical arguments put forth by Ghosh and John's (1999) governance value analysis model, indicate that firms consider implicit and explicit contracting as a safeguarding mechanism and the inherent components of the collaboration as a means to garner returns (i.e., a fully mediated relationship). In effect, this work indicates that firms do not regard the potential benefits of a collaboration (of varying magnitudes) without considering the necessary governance to achieve the desired outcomes (i.e., joint profits). It is noteworthy that Ghosh and John (1999) argue that there are interactive relationships and trade-offs between the attributes of an exchange and the governance form, two of four key factors, that determine the value creation of the exchange. Our findings provide empirical evidence for the arguments of Ploetner and Ehret (2006) who theorize joint profit maximization as a result of common norms (which are evidenced within this work via normative contracting) as well as Ghosh and John's (2009) theoretical arguments as to how explicit and normative contracting plays a key mediating role within the firm's search for joint profits through collaborations (although once again, different in magnitude based upon whether the firm is a CS or OEM, as will be discussed next).

D. Collaborative Magnitude × Longevity on Normative Contracting (OEMs)

Fig. 2. (continued)

(Δχ2 = 4.77; Δd.f. = 1; p < 0.05). Normative contracting's influence on joint profits was lower for OEMs (β = 0.193, p < 0.05) than with CSs (β = 0.354, p < 0.01); however, equating these paths in the two models did not result in a significant decrease in each model fit (Δχ2 = 0.07; Δd.f. = 1), not supportive of H9.

5.3. Longevity and differing perspectives of OEMs and component suppliers Third, our findings indicate that CSs and OEMs differentiate between the two forms of contracting and regard both as positive and coexisting mediators to outcomes. Extending the current understanding of the complementary nature of explicit and normative contracting in interorganizational relationships (e.g., Cao & Lumineau, 2015; Dean et al., 2016; Ghosh & John, 2009; Poppo & Zenger, 2002; Seshadri & Mishra, 2004), this work demonstrates the coexistence of the two forms in each model, coupled with the mediating role of each form, highlighting the need for firms to overcome the inherent incompleteness of explicit contracting with normative contracting. The results demonstrate that in spite of the shortcomings of each contracting form (e.g., incompleteness contracts, lack of symmetric investments to support relational contracts) firms pursue higher levels of each as the collaboration magnitude of the relationship becomes more expansive. This is important as prior works (e.g., Dean et al., 2016; Poppo & Zenger, 2002) have not varied collaboration magnitude and therefore did not differentiate across types of collaborative relationships. While these findings are noteworthy and extend the literature, possibly more theoretically substantive are the differential findings related to the type of contracting by CSs and OEMS, both in terms of the effects of longevity of the relationship as well as governance mechanism preference. Specifically, the results of interaction analyses of collaboration magnitude and longevity are theoretically informative. We theorized that longevity would increase the positive effect of collaborative magnitude on explicit contracting, as it would enhance each party's ability

5. Discussion As noted previously, given the variations in collaboration magnitude, CSs and OEMs are challenged in deciding how to vary their use of two prominent governance mechanisms (explicit and normative contracting) to safeguard investments and facilitate the generation of joint profits. This work is aimed to address this issue and as such presents a number of important theoretical and managerial implications to aid academics and practitioners in understanding governance issues in industrial interfirm collaborations between component suppliers and OEMs. 5.1. Collaborative magnitude effects on governance First, extant work on interorganizational collaborations has taken a narrow conceptual perspective (e.g., Anderson & Jap, 2005; Dahlquist & Griffith, 2014; Ghosh & John, 1999; Heide, 1994; Jap, 1999; Homburg et al., 2014). This work extends this literature by broadening the conceptualization of collaborations so as to account for variations in collaborative magnitude. Building on and incorporating the central elements of prior work in the collaborations (e.g., Duffy, 2008; Heide & John, 1990; Jap, 1999; Vesalainen & Kohtamäki), the conceptualization brought forth here encompasses a relationship's breadth of commitments, complementary actions, management time 10

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at the same level as the OEM does, it may be beneficial for CSs to take this aspect into account when negotiating contracts so as to ensure adequate protections. Interestingly, it is a fact that OEMs and CSs do not regard that normative contracting's level of influence on joint profits differently illuminates the less tangible aspects of normative contracts in comparison to explicit contracting; mutual understanding and expectations exist only as a perceived form of governance rather than written contracts. Thus, the role of buyer and seller does not significantly regard normative contracting's effect differently, necessitating managerial adjustments across actors to the collaboration.

to apply greater levels of precision. The results indicate that this is true for OEMs, but not for CSs. The negative interaction effect seen with CSs demonstrates that greater precision is not necessarily desirable. In fact, it may imply that it is perceived as more onerous, rather than more efficient. CSs may consider greater precision as increased monitoring, which has been shown in prior BSR research to have conflicting effects on performance and opportunism (Griffith & Zhao, 2015; Heide, 1994; Heide, Wathne, & Rokkan, 2007). The opposing valence of the interaction effect of collaborative magnitude and longevity would also appear to support the arguments made for hypotheses H6 through H9, wherein the buyer/seller relationship between OEMs and CSs transcends the collaboration and the parties' perspectives of explicit contracting. An opposing valence was also observed in the effect of the interaction on normative contracting; H5 was partially supported with a positive effect for CSs but a negative effect for OEMs. The underlying argument was that greater longevity would enhance and build on the parties' abilities to use mutual expectations as an effective form of governance. The results, however, indicate that CSs seek to use mutual expectations increasingly with longevity, but OEMs do not. While OEMs may regard mutual expectations as a positive vehicle for managing CSs, greater experience with CSs does not necessarily enhance the use of mutual expectations for governance. In practice it appears to support the argument that OEMs seek efficiencies in order to manage multiple CSs in a coordinated effort, whereas each CS manages the OEM singularly. Taken together and complimenting prior works demonstrating differing perspectives in BSRs (e.g., Anderson & Narus, 1990; Nyaga et al., 2010), the findings of this study highlight the fact that CS and OEMs do not view contracting forms or their relations consistently. The findings, supportive of our theoretical arguments, that OEMs have a stronger preference than CSs for explicit contracts, whereas CSs have a higher preference than OEMs for normative contracting, with increasing levels of collaborative magnitude, extends our understanding of how OEMs regard explicit contracting (i.e., precision). Further, the finding that CSs consider there to be a stronger relationship between collaboration magnitude and normative contracting (i.e., mutual expectations) also extends previous safeguarding research (e.g., Heide & John, 1992). These results, demonstrating differences between CSs and OEMs in relation to governance mechanisms, should serve as a call to industrial marketing scholars to carefully consider not only the influence of role within the relationship when investigating relationship governance. More of note, these findings suggest that industrial marketing scholars could develop new theory, anchored in the context of the specific industrial exchange partner. Managerially, the results suggest that industrial marketing managers need to fully understand that as the collaboration's requirements for a breadth of commitments, complementary actions, management time and resources, and specific investments increases, buyers require higher degrees of explicit contracting, whereas sellers require higher levels of normative contracting. This finding necessitates not only understanding, but differing actions. For instance, in the prior example of Rockwell International and Cisco Systems, the implication of our findings would be that whereas Cisco would prefer greater explicit contracting, Rockwell would work to engage in greater normative contracting. Managers must be sensitive to the asymmetry in contract preferences, as forcing one's own expectations on the other in contract deliberations could breed difficulties in relationship. However, if managers are well prepared for the specific role difference preference structure, both contract negotiations and norm development can be more effectively managed. Further, the finding that the OEMs regard the positive relationship between explicit contracting and joint profits as higher than do CSs implies that in spite of its shortcomings, buyers may consider explicit contracting as a more effective mechanism for safeguarding profits than do sellers. That is to say, although CSs may not perceive threats to their ability to claim jointly created value in the relationship with their OEM

6. Limitations and further research This work advances the literature; however, it is not without limitations, which we address in combination with suggested research directions. First, our study is limited to a narrow definition of collaborative magnitude. Although is captures significant elements of collaborations, it does not consider other characterizations of collaborations such as “size” relative to other collaborations, timeframe, or alignment (e.g., Dahlquist & Griffith, 2015) or service complexity (Kreye, Roehrich, & Lewis, 2015) between the participating firms. Broadening the definition of collaborative magnitude could increase our understanding of CS and OEM behaviors in industrial channels. Second, our focus on governance mechanisms in this work is limited to explicit and normative contracting. Although explicit and normative contracting address each party's role, responsibilities, performance, and handling of unexpected events and failure to perform (Lusch & Brown, 1996), there are other governance mechanisms (e.g., monitoring) that serve to safeguard, as well as mechanisms that facilitate performance of the collaboration. We suggest that although explicit and normative contracting is a starting point for further research into the implications of collaborative magnitude, contracting, and other mechanisms for collaborative profit generation should also be investigated. Third, our examination of the effects of explicit and normative contracting on joint profits required the respondents to indicate agreement with the precision of the contract between the companies and agreement with the existence of mutual expectations with their partner. While we believe that this approach effectively provided for an assessment of these distinct mechanisms, it is likely that respondents were compelled to focus on relationships where both explicit and normative contracting exist; the respondents were less likely to consider a relationship where one or the other mechanism was not particularly relevant regardless of collaborative magnitude. As such, further research designed to more specifically investigate relationships that heavily rely on one or the other mechanism may be informative. For example, respondents could be asked to assess reliance on explicit contracting or normative as a percentage of the overall portfolio of governance mechanisms in use. Such a study may determine optimal combinations based on collaborative magnitude. Finally, although this research investigates interfirm behavior in an industrial channel context, the data were from non-nested CSs and OEMs. Greater insights could be gleaned by examining these effects in specific collaborations (most notably in relation to variations in perspectives of CSs and OEMs). As such, while the implications of the work are substantive, the specific findings should not be generalized without consideration of these limitations. Building on this point, expansion of this work from a private-private interorganizational context to publicprivate relations (e.g., Roehrich et al., 2014) could provide interesting and important insights. Appendix A. Operational measures of constructs — Component Supplier (OEM) Collaborative Magnitude, Seven-Point Likert-type Scale (1 = “strongly disagree,” 7 = “strongly agree”). The relationship between our firm and this OEM (Component 11

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Supplier) requires… … a wide breadth of financial and managerial commitments. (1). … numerous complementary actions. (2). … a great deal of management time and resources. (3). … significant investments specific to the relationship. (4). Explicit Contracting, Seven-Point Likert-type Scale (1 = “strongly disagree,” 7 = “strongly agree”). When considering the written contract we have with this OEM (Component Supplier)… … it precisely articulates the expectations of each party's role. (1). … it precisely defines the expectations of each party's responsibilities. (2). … it precisely defines the expectations of each party's performance. (3). … it precisely defines the handling of unexpected events. (4). … it precisely defines the remedies for a failure to perform. (5). Normative Contracting, Seven-Point Likert-type Scale (1 = “strongly disagree,” 7 = “strongly agree”). When considering this OEM (Component Supplier)… … we have a mutual understanding of each party's role. (1). … we have a mutual understanding of the expectations of each party's responsibilities. (2). … we have a mutual understanding of the expectations of each party's performance. (3). … we have a mutual understanding of how to handle unexpected events. (4). … we have a mutual understanding of remedies for a failure to perform. (5). Joint Profits, Seven-Point Likert-type Scale (1 = “strongly disagree,” 7 = “strongly agree”). The relationship between our firm and this OEM (Component Supplier)… … has the potential to generate a high level of profits for my firm. (1). … has generated a high level of profits for my firm. (2). … has the potential to generate a high level of profits for the partner firm. (3). … has generated a high level of profits for the partner firm. (4). Longevity: To better understand your firm and this customer (supplier), please estimate the number of years this OEM (Component Supplier) has been a customer (supplier) of your firm. (1). Strategic Importance, Seven-Point Likert-type Scale (1 = “strongly disagree,” 7 = “strongly agree”). Relative to other OEMs (Component Suppliers), this OEM (Component Supplier) is of high strategic importance to our firm. (1). Marketing Knowledge, Seven-Point Likert-type Scale (1 = “strongly disagree,” 7 = “strongly agree”). I am knowledgeable of my firm's marketing activities. (1). Financial Knowledge, Seven-Point Likert-type Scale (1 = “strongly disagree,” 7 = “strongly agree”). I am knowledgeable of my firm's financial results. (1). Marker Variable, Seven-Point Likert-type Scale (1 = “strongly disagree,” 7 = “strongly agree”). I am responsible for my firm's marketing budget. (1). References Anderson, E., & Jap, S. D. (2005). The dark side of close relationships. Sloan Management Review, 46(3), 75–82. Anderson, J. C., & Narus, J. A. (1990). A model of distributor firm and manufacturer firm working partnerships. Journal of Marketing, 54(1), 42–58. Argyres, N. S., Bercovitz, J., & Mayer, K. J. (2007). Complementarity and evolution of contractual provisions: An empirical study of IT services contracts. Organization Science, 18(1), 3–19. Armstrong, J. S., & Overton, T. S. (1977). Estimating nonresponse bias in mail surveys. Journal of Marketing Research, 14, 396–402. Bello, D. C., & Zhu, M. (2006). Global marketing and procurement of industrial products: Institutional design of interfirm functional tasks. Industrial Marketing Management,

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