Moderation

In this dissertation, I explored the moderation role of two environmental factors: supplier’s market dynamism and goodwill trust. In particular, I suspect that supplier’s market dynamism will moderate the relationship between absorptive capacity and visibility. Goodwill trust, on the other hand, may moderate the relationship between visibility and perceived supplier risk. I discuss each one next.

3.2.1. Supplier’s Market Dynamism as Moderator

A volatile environment results in higher transaction costs (S. Klein, Frazier, & Roth 1990). Given the fact that information exchange and obtaining visibility entail costs, the environment dynamism may influence the pathways that lead to visibility. I posit that supplier’s market dynamism may weaken the relationship between absorptive capacity and visibility. This is because such dynamic environment may dampen the cost-saving effects of absorptive capacity

for valuing and assimilating supplier’s knowledge and information. This line of argument could be explored from both sides of trading partners.

From the supplier side, when a supplier is working under a highly dynamic environment, its ability to make sense of the environment is reduced. This is because such volatile environment makes it harder for the firm to predict future (S. Klein, Frazier, & Roth 1990) and anticipate all the relevant future contingencies (Bello & Gilliland 1997). The supplier, therefore, will face with difficulties in making long-range plans and decisions (Bello & Gilliland 1997). It may be better for the firm then to create structures for sequential and adaptive decision making (S. Klein, Frazier, & Roth 1990). The adaptive nature for strategic decisions from the supplier then makes it harder for the supplier to integrate information and knowledge before transferring to the buyer in an accurate and timely manner.

From the buyer side, compared to a less dynamic environment, high dynamism in the supplier’s external environment will make the previous knowledge by the buyer less relevant and related. Moreover, training for the buyer’s employees is also more likely to be obsolete and irrelevant. Highly dynamic environment thus usually disrupts the routinization necessary for shared understandings between distant trading partners (Bello & Gilliland 1997). Thus under such circumstance, it is difficult for buyer firm to develop routines to capture the external information from its supplier (Anand & Ward 2004).

We can expect, therefore, that the supplier’s market dynamism will hamper the effect of its buyer’s absorptive capacity to realize its visibility into the supplier. Formally I hypothesize that:

H5. For a buying firm, the Supplier’s Market Dynamism will negatively moderate the

Dynamism is high, the positive relationship between Absorptive Capacity and Visibility will be

weaker, compared to when Supplier’s Market Dynamism is low.

Note that, however, I do not posit the moderating effect of supplier’s market dynamism on the relationship between IT integration and visibility. This is because the effect of IT integration on visibility is realized via reducing the cost of transferring information and knowledge. The supplier’s market condition, while it may influence the cost of integrating and absorbing information, may not have a significant effect on this kind of transferring cost. The market condition therefore may not moderate the relationship between IT integration and visibility.

3.2.2. Goodwill Trust as Moderator

Goodwill trust is the second moderator that may have an effect on our model relationships. In this dissertation, I posit that goodwill trust may substitute for visibility and thus reduce the effect of visibility on perceived supplier risk. This happens because of the following mechanisms.

First, a firm who trusts its partner may have less fear of being exploited (Geyskens et al 1996; Gilliland & Bello 2002). A buying firm trusting its supplier thus may be free of concerns over opportunistic intention and behaviors by the partner (Katsikeas, Skarmeas, & Bello 2009). Even when disruptions may occur then, the trusting buyer may believe its supplier will act on its behalf to reduce the potential damaging effect of such disruptions on the buyer. Therefore, when trust is high, visibility may not be necessary for a buyer in forecasting and predicting what may happen to prevent potential risks from its supplier. Empirically, Morgan and Hunt (1994) found that attitudinal trust of retailer on its supplier enhances the perception that the retailer is able to predict the consequences of decisions to be made and the confidence in those decisions when

working with its supplier. Thus buyer’s goodwill trust may substitute visibility in enhancing its perceived ability to forecast and then to act against disruptions.

Second, trust and formal control may act as the substitute to each other in mitigating supplier risk. This is because trust could be considered as the informal control while contract as the formal one which covers potential contingencies (R. Klein & Rai 2009). Firms with high trusting beliefs on their partners usually reduce or eliminate the necessity for covering all contingencies (R. Klein & Rai 2009). Goodwill trust, therefore, usually reduce the need to install contractual safeguarding mechanisms against opportunism (Lui & Ngo 2004). In the same vein, I posit that a trusting firm may have the sense of better control ability over its supplier because safeguarding mechanisms are not necessary. Thus high trust may make visibility less necessary in this regard. Goodwill trust, therefore, may substitute for visibility in providing control ability or a sense of it to mitigate supplier risk. Empirically, in the contractor partnership setting, Lui and Ngo (2004) found that goodwill trust actually could substitute for contractual control to influence cooperative outcomes.

Corroborating the above lines of arguments and empirical evidence, we have reasons to believe that goodwill trust can substitute visibility for mitigating supplier risk. Formally, I hypothesize that:

H6. For a buying firm, Goodwill Trust will negatively moderate the relationship between

Visibility and Perceived Supplier Risk such that when Goodwill Trust is high, the negative

relationship between Visibility and Perceived Supplier Risk will be weaker, compared to when

A summary of the hypotheses for the model in this dissertation can be found in Figure 3-1. To control for potential spurious effects I also include control variables for both perceived supplier risk and visibility when testing the model which I will discuss next.