Inter-Firm Governance and Relationship Performance: A Study of Market, Hierarchy and Relational Coordination Mechanisms

Abstract

Inter-firm alliances are an effective means of globalising, with each firm providing an element of the final product and receiving a share of total profit. However, activating and maintaining an inter-firm alliance is fraught with governance difficulties. Governance within inter-firm alliances refers to oversight of strategic direction and the mechanisms for resolving disagreement. Within inter-firm business relationships governance modes have been conceptualised as a mixture of three ideal coordination mechanisms: market, hierarchy, and relationships. Measuring governance effectiveness requires choice of a managerial goal. As the purpose of business relationships is profit through joint action, we examine governance effectiveness with regard to relationship performance. A coordination mechanism model of governance is proposed and examined in the empirical setting of 162 software-exporting firms and their cross-border business relationships. A structural equation model indicates that relational coordination is a mediator variable explaining relationship performance. Two governance modes explain relationship performance. A non-market relational governance mode and a plural mode comprised of contract-hierarchical and relational coordination mechanisms. The final sections of the paper discuss future research and managerial implications. © 2010 Nova Science Publishers, Inc. All rights reserved.