The Moderating Effect of Trust on Formal Control Mechanisms in International Alliances

Author:Bernardo Balboni, Marina Vignola, Gianluca Marchi
Publication Date:01 Dec 2018
The Moderating Effect of Trust on Formal
Control Mechanisms in
International Alliances
Department of Economics Marco Biagi, University of Modena and Reggio Emilia, Modena, Italy
This study aimsto shed light on the controversial debate regarding the substitutive orcomplementary natureof the
relationship between inter-organizational trust and formal control as governance mechanisms in affecting
internationalalliance performance. Wedeepen understanding of the trustformal control interaction by considering
the multidimensional nature of formal controlboth output and process control and examining the role of trust as a
moderating variable in the relationshipbetween these two distinct kindsof control and allianceperformance. We test
the research hypotheses on a sampleof 138 international alliancesinvolving Italian firmsand foreign partners. First,
we find that only output control has a significant positive influence on alliance performance and that trust shows a
fully significant positive effect on alliance success. Second, we find that trust moderates the effect of formal control
on alliance performance by reducing the relevance of output control and increasing that of process control.
Keywords: international alliance; inter-organizational trust; formal control mechanisms; alliance performance;
moderating effect
International strategic alliances (ISAs) are medium to
long-term inter-firm agreements, based on equity or a
contract, involving two or more legally distinct
organizations located in different countries (Contractor
and Lorange, 1988). In most industries, companies are
forming alliances at an increasing rate, since managers
consider them a strategic tool to acquire complementary
resources (Dhanaraj et al., 2004) and to face uncertainties
and complexities in foreign markets (Costa e Silva et al.,
2012). Yet despite theirgrowing adoption, ISAs are often
perceived as unstable and unsafe instruments: several
studies (e.g., Kale and Singh, 2009) have revealed that
the failure rate of international alliances is permanently
higher than alliances with domestic partners, because of
geographic, cultural, and institutional differences spread
across actors. It is no coincidence that achieving
improvements in the theory and practice of international
alliance management continues to pose a significant
challenge to scholar s.
Due to the high unc ertainty that ch aracterizes cros s-
border alliances (Krishnan et al., 2006), the role of
governance mechanisms has been investigated in several
studies (e.g., Robson and Katsikeas, 2005). In fact,
exchange hazards (Nooteboom et al., 1997) in ISAs
encompass both environmental uncertainty triggered by
factors external to the relationship, such as institutional
and bureaucratic impediments, political and economic
instability, and cultural and business differences (Poppo
and Zenger, 2002), and relational uncertainty, linked to
the unpredictability of partnersbehavior (Dyer and
Singh, 1998).
Drawing on alliance management studies (Das and
Teng, 1998; Zaheer et al., 1998; Poppo and Zenger,
2002), international alliance scholars have analyzed
governance mechanisms based on two main theoretical
perspectives (Lumineau and Henderson, 2012; Cao and
Lumineau, 2015). The first focuses on contractual
governance (e.g., Genҫtürk and Aulakh, 2007), defined
as a means of governance based on formal control
mechanisms that ensure respect for the transaction terms,
guaranteecorrect use of the conferredassets, and influence
the partnersbehavior in order to increasethe predictability
of her/his actions (Lee and Cavusgil, 2006). The second
perspective focuses on relational governance (e.g.,
Katsikeas et al., 2009), emphasizing inter-organizational
European Management Review, Vol. 15, 541558, (2018)
DOI: 10.1111/emre.12150
Correspondence: Marina Vignola, University of Modena and Reggio
Emilia Department of Economics Marco Biagi, Viale Berengario,51
41121 Modena, Italy, Tel: +39 059 2056948. E-mail marina.
©2017 European Academy of Management
trust as a socially embedded mechanism that mitigates
exchange hazards associated with uncertainty, facilitates
dispute resolution, and increases the partiesexpectations
of continuity (Abosag and Lee, 2013).
Several gaps exist in the way in which the extant
academic literature has considered the individual effect
of each governance mechanism on international alliance
performance, as well as the joint impact of governance
First, extant empirical studies have still shown
contradictory results about the individual effect of trust
(e.g., Lyles et al., 1999; Robson et al., 2008) and control
mechanisms (e.g., Aulak h et al., 1996; Mjoen and
Tallman, 1997) on international alliance performance
(Hsieh and Rodrigues, 2014). In line with Costa e Silva
et al. (2012), we believe that such conflicting findings
suggest not only that the linkages between governance
mechanisms and international alliance performance are
complex and poorly understood, but also that these
linkages are likely to be explained by other factors and
circumstances, such as the alliances life-cycle sta ge
(Abosag and Lee, 2013) and the nature of the formal
control governa nce mechanism co nsidered (Ouchi, 1 979;
Chen et al., 2009). In our study, focusing on the post-
formation phase of international alliance evolution
(Contractor, 2005; Kale and Singh, 2009; Hsieh and
Rodrigues, 2014), we control for the possible different
impacts of the two kinds of formal control mechanisms
output control (OC) and process control (PC) on
international alliance performance.
Second, with regard to the joint impact of trust and
control on alliance performance, two main competitive
views haveemerged in the alliance managementliterature.
According to the substitute view (Gulati, 1995; Uzzi,
1997; Dyer and Singh, 1998), control and trust are
antagonistic governance mechanisms: use of one reduces
or avoids use of the other, and their coexistence does not
contribute to the alliances success (Li et al., 2010).
Conversely, authors who have supported the existence of
a complementary effect (Luo, 2002; Poppo and Zenger,
2002; Patzelt and Shepherd, 2008; Liu et al., 2009) have
considered trust and control as mutually reinforcing
mechanisms: trust induces partners to reduce their
reluctance toward control mechanisms (Das and Teng,
2001), while formal control, by reducing the risks of
opportunism, ca n support the formation and con solidation
of trust-based governance (Poppo and Zenger, 2002). In
our paper, in lin e with the approach sugges ted by Puranam
and Vanneste (2009), we attempt to reconcile these
divergent complementssubstitutesviews. The apparent
dichotomy implied by the two competitive approaches
fails to capture the conceptualization of formal control as
amultidimensionalmechanism (Aulakh et al., 1996;
Patzelt and Shepherd, 2008; Şengün and Wasti, 2009;
Lumineau and Henderson, 2012; Cao and Lumineau,
2015) and the nature of the relationship between the
formal control mechanisms and trust (Das and Teng,
2001; Poppo and Zenger, 2002). In fact, despite the large
number of studies by alliance management scholars that
have addressed the subject (see Cao and Lumineau,
2015 for a review) and also by the ISA research (Luo,
2002; Li et al., 2010; Zhou and Poppo, 2010; Abdi and
Aulakh, 2012; Zhou andXu, 2012), the existing literature
on alliance governance mechanisms has revealeda lack of
empirical knowledge on how the interaction between trust
and different kinds of control mechanisms can shape
alliance performance (Malhotra and Lumineau, 2011). In
particular, our contribution consists of suggesting that
trust, by altering the willingness of the alliance partners
to assume risks (Nooteboom, 1996), is a moderator of
the direct relationship between the two types of control
mechanisms and alliance performance. The effect of trust
as a moderating variable, while contemplated at the
theoretical level (Das and Teng, 1998), has been poorly
tested empirically (Mellewigt et al., 2007). Thus, we
analyze whether, after the international alliance is up and
running, the effect of the two formal control mechanisms
on alliance performance is strengthened by trust, through
a complementaryeffect, or weakened, througha substitute
effect, according to the specific type of formal control
considered. Therefore, our paper offers a new perspective
on the controversial debate over the substitutive or
complementary nature of the trustformal control
relationship, by suggesting that the two views should be
considered not as competitive but as coexisting.
The paper is structured as follows. The next section
proposes a short discussion of literature addressing the
topic of control mechanisms and inter-organizationaltrust
in international alliances, to support the research
hypotheses of the study. The methods and measures are
highlighted in the third section, while the findings related
to a sample of alliances of Italian firms with foreign
partners are presented in the fourth. Furthermore, a
discussion is conducted, and the implications of the
findings, the studys limitations, and directions for further
research,are examined in the fifth and sixthsections of the
paper. Finally,the main contributions ofthe article and the
key implications for managers are recalled in the last
Theoretical framework and research
The relationship between trust and control-based
mechanisms and alliance performance has been vastly
debated in the literature. Over time, various studies have
argued and provided empirical evidence that trust and
control mechanisms are linked to the performance of both
domestic and international alliances. However, only a
542 B. Balbon i et al.
©2017 European Academy of Management

To continue reading

Request your trial