Abstract

Relation-specific investment creates an inherent dilemma as, although it increases transaction value, it also increases transaction costs for the investing party. Due to their low bargaining position, Taiwanese suppliers cannot demand any formal protection or legal assurance from international brand vendors for their relation-specific investments. Given their resource constraints, we find that Taiwanese suppliers tend to use unilateral relation-specific investments as a hostage to gain opportunities to cooperate with clients. Through this cooperation they may upgrade their capability and decrease the threat of meeting holdups. We argue that relation-specific investment is a multidimensional construct which includes relational investment and asset specificity. We also use two theoretical perspectives, the hostage theory and the capability-based view, to model the governance adopted by smaller suppliers in protecting relation-specific investment.