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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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Specific investments, which are tailored to a particular company or value chain partner, are important components of a firms' marketing strategies. At the same time, extant theory suggests that such investments pose considerable risk, because they put the receiver in a position to opportunistically exploit the investor.

Specific investments, or assets that are uniquely dedicated to another firm, are common features of many marketing relationships. For example distributors often invest in training to service the products of particular manufacturers. Similarly, manufacturers invest in human assets to support particular resellers. In franchising systems, franchisees are often required to invest in both human and physical assets that are tailored to the franchisor's brand. These assets include training, administrative procedures, and equipment (e.g.,Brown,Dev,and Lee 2000).In original equipment manufacturer(OEM)-supplier relationships. OEMs commonly make investments in tools, equipment, operating procedures, and systems that are specialized to the requirements of a particular supplier (e.g. Bensaou and Anderson 1990; Stump and Heide 1996).

The potential benefits of specific investments are considerable. As Ghosh and John (1999) note,specific investiments have important value-creation properties. In Jap's(1999) terminology, such  investments have the potential to expand the benefit ”pie.”For example, Jab describes how Xerox has worked closely with its suppliers to develop customized processes and components that have reduced copier-manufacturing cost by 30% to 40%.More generally from marketing strategy viewpoint, specific investments plays a key role in realizing particular value propositions and achieving  positions of competitive advantage(Ghosh and John 1999).

At the same time, specific investments involve considerable risk. The risk becomes apparent when the receiver of the investments in question is considered. According to transaction cost theory (e.g.,Williamson 1985),because specific investments by definition cannot be easily redeployed in other relationships,they effectively create a locking situation for the investor. This in turn enables the receiver to opportunistically exploit or expropriate the investments' value. Ultimately, concerns about opportunism may reduce a firm's incentive to invest in valuable assets in the first place, a decision may undermine the firm's marketing strategy ( Wathne and Heide 2000). We argue however, that the expropriation effect of specific investments is not the only plausible scenario. Since specific investments involve dedicated (rather than general purpose) assets, they also have the potential to create considerable value for the receiver and thus may actually discourage opportunism. For example Jab and Ganesan (2000) discuss how idiosyncratic investments made by a retailer can improve coordination between channel members and directly enhance a supplier's presence in the end market. Similar examples involving both demand and cost effects, are discussed by Ghosh and John (1999).Ultimately, to the extent that the returns from the specific investments  in question are sufficiently large, they may “bond” the receiver and discourage opportunistic actions that could cause relationship termination. Thus specific investments pose an inherent dilemma because they have the potential to both promote and reduce opportunism on the receiver's part.The actual effect of specific investiments on the receiver will depend on

 the relationships extendedness or future time dimension(e.g.,Axelrod 1984;Fudenberg and Maskin 1986).

 The norms that characterize the focal relationship.(e.g.,Coleman 1990;Macneil 1980).

Two relationship dimensions,extendedness and norms of solidality,may cause a shift in the effect of specific investments from expropriation to bonding.

Specific investments have considerably have less value outside of the relationship in which they are deployed(Williamson 1985).As such specific investments lock in the investor and pose a potential problem with regard to the focal receiver, because the latter can make opportunistic demands and enhance individual profit at the investors expense(Helde and John 1990;Klein 1996).From the investor's perspective ,specific investments create  a constrained decision calculus, in that it can either remain in the focal relationship and tolerate the opportunistic actions or leave the relationship and pay the relevant switching costs. In Ghosh and John's(1999)terminology, specific investments give rise to ‘'value -claiming”difficulties.

A key question is whether the receiver will actually exercise the given expropriation potential through opportunistic actions. Transaction cost theory suggests that opportunistic behavior is likely to take place when such behavior is feasible and profitable for a party(Achrol and Gundlach 1999;Anderson 1988;Gundlach,Achrol,and Mentzer 1995;Hill 1990).That is ,if no constraints exists on opportunistic behavior, such actions can be expected(Williamson 1993).

The general idea that economic exchange is influenced by norms appears prominently in many different streams of  literature,including sociology(e.g.,Granovetter 1985),organization theory(e.g.,Ouchi 1980),negotiation theory(e.g.,Greenhalgh 1987),economies(e.g.,Gibbons 1990),and marketing(e.g.,Noordewier,John,and Nevin 1990).

In general, norms are codes of conduct that either prescribe particular behaviors for parties or discourage behaviors by defining them as illegitimate in the context at hand(Coleman 1990;Gibbs 1981).Prior research has identified several norms that structure and govern exchange relationships(e.g., Kaufmann and Stern 1988;Macneil 1980;Noordewier,John, and Nevin 1990)Our focus is on a particular relational norm, the norm of solidarity, that we expect to influence the effect of specific investments on the receiver opportunism. In general, relational exchange norm prescribe behavior directed at maintaining the relationship and certain behavior that promotes the goal of the individual parties.

In general the inherent potential for expropriation that follows from specific investments is fundamentally transformed through the possibility of repeated interaction and the norm of solidarity. We note that we have advanced essentially parallel predictions for extendedness and the norm of solidality,in terms of the overall effects, the process by which the opportunism is managed in each scenario is quite different. On one hand solidarity norms control behavior on the basis of informal rules(e.g.,North 1990)which are enforced by incentives at the group or relationship level(Mantzavinos 2001).On the other hand, as Coleman(1990)notes, the ability of the repeated games to regulate behaviordoes no rest on rules .Rather ,a party's choice of strategy(such as the decision to pursue or refrain from opportunistic actions) is based

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