Effects of Environmental Uncertainty on Interfirm Governance Mechanisms: The Moderating Role of Structural Holes

Effects of Environmental Uncertainty on Interfirm Governance Mechanisms: The Moderating Role of Structural Holes

Purpose: Manufacturers rely on interfirm governance mechanisms to reduce the risks inherent in uncertain environments; however, it is unclear which governance mechanisms are developed to manage relationships with suppliers. This study sought to enhance knowledge of how environmental uncertainty affects interfirm governance mechanisms under conditions reflecting varying levels of structural holes. To this end, the study investigated the relationships between manufacturers and major first-tier and sub-suppliers. In particular, the moderating effect of structural holes is examined. Research design, data and methodology: A questionnaire survey was conducted with a major first-tier supplier of a Korean engineering firm. Proposed hypotheses were tested using structural equation modeling. Results: The results show that while the relationship between environmental uncertainty and unilateral governance is positive but statistically insignificant, with bilateral governance is negative and statistically significant. The study also demonstrates that when structural holes are considered, the effects between environmental uncertainty and governance mechanisms are attenuated. Conclusions: This study suggests some theoretical and managerial contributions between exchange partners, especially, the results suggest that structural holes have a critical competitive advantage in uncertain environments. Therefore, manufacturers should carefully consider how they deal with environmental uncertainty when they make a business decision under structural holes situations.