Vertical Relationships, Hostages, and Supplier Performance: Evidence from the Japanese Automotive Industry

32 Pages Posted: 19 Jan 2009

See all articles by Christina L. Ahmadjian

Christina L. Ahmadjian

Hitotsubashi University

Joanne E. Oxley

University of Toronto - Joseph L. Rotman School of Management

Date Written: June 15, 2007

Abstract

Since its first appearance, Williamson's (1983) hostage model of exchange has been highly influential in guiding analysis and interpretation of "non-standard" contracting arrangements. Prior research has developed a compelling case for the existence of hostage-type arrangements in many commercial settings, but direct evidence on how the presence of hostages impacts buyer or supplier behavior is still sparse. In this paper we examine how, in one particular context, the presence of a hostage impacts supplier performance under different demand conditions. We explore the extent to which Japanese automotive assemblers have "buffered" their affiliated suppliers from demand fluctuations to a greater extent than is the case for unaffiliated suppliers. Our empirical findings are consistent with the spirit of Williamson's model but highlight the subtlety of hostage arrangements in practice. In particular we find that assemblers indeed buffered their affiliated suppliers from the effects of the negative demand shock that occurred during the 1992-1995 recession, apparently favoring affiliates over unaffiliated suppliers during this period. However, we also find evidence of short-run "gap filling" by affiliated suppliers, whereby affiliated suppliers more frequently adjust production to accommodate assemblers' changing requirements in the course of routine demand fluctuations. We relate these findings to other research on Japanese supply networks and to more general research on the performance effects of firm boundary decisions.

Suggested Citation

Ahmadjian, Christina L. and Oxley, Joanne E., Vertical Relationships, Hostages, and Supplier Performance: Evidence from the Japanese Automotive Industry (June 15, 2007). Rotman School of Management Working Paper No. 1329048, Available at SSRN: https://ssrn.com/abstract=1329048 or http://dx.doi.org/10.2139/ssrn.1329048

Christina L. Ahmadjian

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

Joanne E. Oxley (Contact Author)

University of Toronto - Joseph L. Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-0305 (Phone)

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