The use of asset specific investments to increase customer dependence: A study of OEM suppliers

Abstract

Making asset specific investments without sufficient economic safeguards is usually seen as a poor managerial practice according to transaction cost economics. However, in practice, many suppliers still invest in asset specificity to satisfy their major customers` requirements, who do not make sufficient investment commitments. The objective of this study is to explore how suppliers that make asset-specific investments maintain long-term relationships with their customers and even make their customers reliant on them. Empirical analysis of data from a sample of Taiwanese original equipment manufacturer (OEM) suppliers shows a significant positive indirect effect of asset specificity on the dependence of customers on suppliers, mediated through joint learning capacity. In addition, a positive link between a proactive market orientation and the degree of customer dependence on the supplier was found. This investigation finds evidence that joint learning capacity and proactive market orientation play critical roles in linking asset specificity to customer dependence.