"Have a little faith": A vignette study of inter-organizational cooperation and innovation performance

Koster, Ferry; Bloem, Daan Article "Have a little faith": A vignette study of interorganizational cooperation and innovation performance International Journal of Business Science & Applied Management (IJBSAM) Provided in Cooperation with: International Journal of Business Science & Applied Management (IJBSAM) Suggested Citation: Koster, Ferry; Bloem, Daan (2018) : "Have a little faith": A vignette study of interorganizational cooperation and innovation performance, International Journal of Business Science & Applied Management (IJBSAM), ISSN 1753-0296, International Journal of Business Science & Applied Management, s.l., Vol. 13, Iss. 1, pp. 25-41 This Version is available at: https://hdl.handle.net/10419/261636 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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Journal of Business Science and Applied Management, Volume 13, Issue 1, 2018 “Have a little faith” A vignette study of inter-organizational cooperation and innovation performance Ferry Koster Department of Public Administration and Sociology, Erasmus University Rotterdam Burgemeester Oudlaan 50, PO Box 1738, 3000 DR, Rotterdam, The Netherlands Tel: +31 10 4082231 Email: [email protected] Daan Bloem Department of Public Administration and Sociology, Erasmus University Rotterdam Burgemeester Oudlaan 50, PO Box 1738, 3000 DR, Rotterdam, The Netherlands Tel: +31 10 4082231 Email: [email protected] Abstract This study contributes to our knowledge about the relationship between inter-organizational cooperation and innovation performance. While research shows that ties between organizations can be a precondition for innovation, less is known about how to govern these inter-organizational relations. Theoretically, relations between organizations can be based on prices (the market), authority (hierarchies), or trust (communities). A central debate in the literature concerns the question whether these mechanisms are substitutes or complements. If they are substitutes, only one of them should suffice, if they are complements, it is possible to have combinations of these mechanisms. A vignette study was conducted to answer this question. The results show that trust is the main mechanism in inter-organizational relations aimed at innovation performance. Furthermore, the results provide evidence that price, authority, and trust are complementary mechanisms. Keywords: innovation, inter-organizational relations, collaborative community, vignette study Int. Journal of Business Science and Applied Management / Business-and-Management.org 26 1. INTRODUCTION Several authors have argued that with the proliferation of the knowledge economy there has been a shift from innovation as a competitive advantage (Crossan & Apaydin, 2010) towards innovation as a cooperative advantage (Dyer & Singh, 1998; Contractor & Lorange, 2002; Koster, 2016). Hence, innovation not only strengthens the individual organization but it can also contribute to the performance of organizations joining forces. This implies that in their quest for innovation, organizations also rely on their ties with other organizations and share knowledge with them, rather than, and in addition to, improving their own stock of knowledge and innovativeness. While research shows that inter-organizational ties can enable the innovation performance of organizations (e.g. Pouwels & Koster, 2017), not much is known with regard to the governance of such interorganizational relations. This means that research is needed to address the question how interorganizational relations are structured and managed to facilitate organizational innovation. What is more, little is known about whether the structure and governance of these relations matter for innovation performance. In that regard, two strands of literature can be identified regarding the governance of inter-organizational relations: one underestimating the role of trust and one overestimating it. Theories underestimating the role of trust often rely on a conceptualization of inter-organizational relations using Williamson’s (1975; 1981) markets and hierarchy framework. Within this framework, inter-organizational relations are situated between market relations (guided by the price mechanism) and hierarchical relations based on authority (Adler, 2001; Contractor & Lorange, 2002; Koster, 2016). Economic theories of organizations ignore the role of trust since inter-organizational relations can be governed without it, either through the market or the hierarchy (Williamson, 1981; 1975; Geyskens, Steenkamp, & Kumar, 2006). Cooperation between organizations is seen as a hybrid form of organization mixing these two modes of governance. One of the main criticisms of this framework is that it is based on distrust. The core assumption of the model is that governance structures are necessary to decrease the chance that others parties act opportunistically. This sharply contrasts with other theories arguing that trust is a crucial ingredient of inter-organizational relations, in particular if they are aimed at innovation (Bøllingtoft, Donaldson, Huber, Håkonsson, & Snow, 2011; Snow, Fjeldstad, Lettl, & Miles, 2011). This argument can be found in the strand of literature that goes beyond the dichotomy of markets and hierarchies. In these studies, it is found that trust is a third mode of governance (Powell, 1990; Mayer, Davis, & Schoorman, 1995; Zenger & Hesterly, 1997). The theoretical difficulty with such conceptualizations, however, is that it assumes that trust is automatically present in these relations and that it is not possible to combine these modes of governance, since they are regarded as mutual exclusive options (e.g. Ouchi, 1980). Hence, these three modes of governance are viewed as substitutes: if one is present, the others are not. More recent theories, however, argue that the three modes of governance can complement each other (Poppo & Zenger, 2002; Gulati & Nickerson, 2008; Ryall & Sampson, 2009; Weber & Mayer, 2011). To a large extent, this discussion started with a provocative article by Alder (2001), in which he discusses the role of trust in the knowledge economy. He argues that in the knowledge economy none of the three governance mechanisms suffices. Instead, the three modes of governance need to be combined and are hence complementary. In other words, it is possible that inter-organizational relations consist of a mixture of market, hierarchy, and trust. As a consequence, there are eight possible modes of governance instead of three. To date, the question how these modes of governance are related to innovation performance has not been tested empirically. Hence, whether prices, authority, and trust are complimentary and whether and how they affect the level of innovation of organizations is largely unknown. As a result, answering this question may lead to theoretical progress. The present study aims to investigate the link between modes of governance and innovation performance by using Adler’s (2001) conceptualization as a starting point and investigating it empirically. Using a vignette study (N = 147) (a semi-experimental approach) enabled us to investigate the underlying mechanisms relating the governance of inter-organizational relations and innovation performance. 2. THEORETICAL BACKGROUND 2.1. Innovation, inter-organizational cooperation, and the problem of trust Innovation, defined as “the process of introducing new ideas to the firm, which results in increased firm performance” (Rogers, 1998, p. 2), is often seen as the generation and diffusion of knowledge, which contributes to organizational adaptation and product development (Leonard & Sensiper, 1998; Sveiby, 2001; Powell & Snellman, 2004; Snow, Fjeldstad, Lettl, & Miles, 2011). From the vast body of innovation literature, four distinct types can be derived: (1) product or service innovation; (2) process Ferry Koster and Daan Bloem 27 innovation; (3) market innovation; and (4) organizational or business-model innovation (Schumpeter, 1934; Boer & During, 2001; Pittaway, Robertson, Munir, Deyner, & Neely, 2004; Crossan & Apaydin, 2010; Pouwels & Koster, 2017). In the knowledge economy, generally defined as “production and services based on knowledge-intensive activities that contribute to an accelerated pace of technical and scientific advance, as well as to its rapid obsolescence” (Powell & Snellman, 2004, p. 199), the salience of innovation has grown considerably. In the knowledge economy, innovation has become both opportunity and heavy urgency for organizations (Crossan & Apaydin, 2010; Koster, 2016), which they also aim for through cooperation with others (Dyer & Singh, 1998; Contractor & Lorange, 2002; Alexiev, Volberda, & Van den Bosch, 2016). Resources and organizational assets required for innovation have become increasingly complex and knowledge-intensive, which makes managing and coordinating them increasingly challenging. In this respect, scholars stress the distinction between explicit knowledge and tacit knowledge. Tacit knowledge is implicit, unconscious knowledge embedded in individual, group, and organizational routines (Leonard & Sensiper, 1998; Bontis, 1999; Smith, 2001; Adler, Kwon & Heckscher, 2008; Koster, 2016). While tacit knowledge is important for innovation and therefore for organizational performance, it is difficult to share it within and between organizations. As a result, trust is a crucial part of inter-organizational relations aimed at innovation (Adler, 2001; Koster, 2016). Both (pure) markets and hierarchies are arguably inefficient as knowledge becomes more important and trust may reduce the transaction costs associated with these modes of governance. But whereas some scholars accept trust as an appropriate coordination mechanism, others utterly reject its importance by arguing that “the basic structure of capitalism – its fundamentally competitive and exploitive nature, its instrumental and contractual Gesellschaft character – makes any idea of a trust-based community in industry a fantasy” (Adler, 2015, p. 446). By following the notion of embeddedness (Granovetter, 1985), scholars assert that, in capitalist economy, economic actors and their economic relations are not merely instrumental and impersonal. Their behavior and decisions are not solely guided by rational interests, but also by the social institutions in which they are embedded (Dobbin, 2007; Fligstein & Dauter, 2007). Instead of insisting that markets, hierarchies, or trust are substitutes for the governance of interorganizational relations, Adler (2001) proposes a framework in which they can be combined and form a continuum of possible outcomes of organizational structuration and coordination. Therefore, the model acknowledges that ideal trust-based community forms are in itself not enough. Instead, market and hierarchy forces continue to be part of economic relations (Bickmore, 2005; Adler et al., 2008; Nowell, 2010; Bøllingtoft et al., 2011; Adler, 2015). As a result, the possible number of governance modes increases. 2.2. Modes of governance If the three modes of governance can complement each other, the inter-organizational relations can take eight different forms (Adler, 2001). Figure 1 presents these eight modes by distinguishing the modes without trust (the first four modes) and those with trust (the final four) (Koster, 2016). Int. Journal of Business Science and Applied Management / Business-and-Management.org 28 Figure 1: Eight modes of governance a. Modes without trust b. Modes with trust adopted from (Adler, 2001) Spot market and relational contracting. In the spot market mode, pure market logic and mechanisms are the only mode of governance underlying the inter-organizational relationship. In this environment trust does not play a role and no extra value through knowledge diffusion is to be expected (Colledge, 2005). In the spot market mode, firms impose sharp market discipline on their suppliers by aggressively demanding lower prices and rapidly moving to cut off suppliers who cannot deliver (Adler, 2001). The relational contract, in contrast, is a market-based contract in which the two parties trust each other through informal relations (Adler, 2001; Baker et al., 2002). In clans and asocial hordes, both market and hierarchy mechanisms are absent. If the interorganizational relation reflects an asocial horde, the mechanism of trust is also absent. Hence, if the inter-organizational relation reflects an asocial horde, none of the coordination mechanisms is present. In clans (Ouchi, 1980), trust is the main governance mechanism. The clan mode occurs in situations in which both markets and hierarchies fail. Markets fail if opportunism and uncertainty take over, whereas bureaucracies fail when performance evaluation reaches a certain level of ambiguity. In clans, common values and beliefs act as building blocks for trust. Nevertheless, the clan is characterized by high exclusiveness and low tolerance for diversity and thus creates an inhospitable context for innovation (Adler, 2015). Spot market Low-trust hybrid Asocial horde Coercive bureaucracy Market Hierarchy Relational contracts High-trust hybrid Clan Enabling bureaucracy Market Hierarchy Ferry Koster and Daan Bloem 29 In enabling and coercive bureaucracies, market mechanisms are absent. Therefore, we can speak of vertical integration (Baker, Gibbons & Murphey, 2002). Hierarchical structures are in place when the downstream party (the lead firm) owns the asset or becomes the owner by acquisition of the upstream party (Baker et al., 2002). The main purposes of bureaucracies are maximizing efficiency and establishing stability in organizations (Adler & Borys, 1996). Yet, this can happen under different conditions. Under conditions of trust, the bureaucracy enables participants to create and share knowledge, as well as to develop informal relations along the formal structure (Adler & Borys, 1996). In coercive bureaucracies, or capitalist firms (Adler, 2015), hierarchical control destroys informal knowledge diffusion. The low-trust hybrid and the high-trust hybrid. The low-trust hybrid entails a low-trust combination of market and hierarchical mechanisms. Firms are trying to force improvements upon their supplier base by introducing more complex ‘hierarchical contracts’ into their market relations. Such hierarchical elements do not only control product specifications, but also the suppliers’ internal processes (Adler, 2001). In the low-trust hybrid mode, improvements are forced upon suppliers. In the high-trust hybrid mode (which is also referred to as the “collaborative community”), however, improvements emerge out of trustful conditions (Adler & Heckscher, 2006; Adler et al., 2008). Like in the clan mode, common values and beliefs act as the building blocks for trust as a coordination mechanism. Yet, as noted before, both hierarchical and market mechanisms remain present. Hierarchically structured organizations are efficient in performing routine tasks, yet face difficulties in innovative new tasks which require new knowledge to be generated or used (Adler, 2001). In the competitive context of market structures based on the price mechanism, the generation of new knowledge is often optimized through intellectual property rights, which fundamentally block its diffusion (Adler, 2001). Trust, in contrast, facilitates an enlarged scope of knowledge generation and diffusion, and it significantly reduces transaction costs (Adler, 2001). Within the collaborative community, trust acts as the main coordination mechanism, whereas hierarchical rules maintain stability, and market dynamics assure flexibility (Adler et al., 2008). Therefore, the collaborative community can be defined in the following way: (1) with regard to its structure, it represents an organic division of labor, coordinated through conscious collaboration, and both horizontal and vertical collaborative interdependencies; (2) contribution to and concern for the process; (3) honesty as bases for trust; and (4) value-rationality with values of simultaneously high collectivism and individualism as bases for legitimate authority (Adler et al., 2008). However, solely using trust as a main argument may not suffice in answering how interorganizational cooperation can be designed. As Mayer et al. (1995) state, trust is not to be confused with cooperation. If it was sufficient, after all, there should be no expected difference between clans, enabling bureaucracies, relational contracts, and collaborative communities in terms of innovation outcomes. Moreover, this study seeks to investigate the process of inter-organizational cooperation. It does so by synthesizing different dimensions of inter-organizational cooperation into a comprehensive framework, in which market dynamics, the trust dimension, and the hierarchical stability dimension are complemented with components of the collaborative process framework (Ansell & Gash, 2008; Provan & Kenis, 2008) and dimensions of inter-organizational cooperation (Koster, Korte & Van de Goorbergh, 2016). It has to be noted that a one-way, positive relationship between inter-organizational cooperation and organizational innovativeness does not exist. Several risks for participating organizations are involved in the process (Ansell & Gash, 2008; Provan & Kenis, 2008; Pouwels & Koster, 2017). Ansell & Gash (2008) provide a framework for these risks and include preconditions for successful collaborative governance. Accordingly, successful collaboration depends on starting conditions, such as resource and power asymmetries; the institutional design, such as formal rules guiding the collaborative process; facilitative leadership; and the nature of the collaborative process itself. Int. Journal of Business Science and Applied Management / Business-and-Management.org 30 2.3. Conceptual model and hypotheses Figure 2: Conceptual model Figure 2 summarizes the expectations based on the theoretical assumptions. To test this conceptual model, the following hypotheses are formulated. First, we state that: H1: In partnerships including trust, innovation performance is higher than in partnerships without trust. From this first hypothesis, 4 additional hypotheses can be derived: H1a: In the clan mode, innovation performance is higher than in the asocial horde mode. H1b: In the relational contracting mode, innovation performance is higher than in the spot market mode. H1c: In the enabling bureaucracy mode, innovation performance is higher than in the coercive bureaucracy mode. H1d: In the high-trust hybrid mode, innovation performance is higher than in the low-trust hybrid mode. In addition, this study tests the conceptual model as displayed in figure 1, thereby arguing that, from the asocial horde towards the collaborative community, the likelihood of innovation increases. This study argues that from the asocial horde, with no coordination at all, towards coercive organizational modes with hierarchical control, innovation outcomes will improve. Moreover, towards trust coordinated modes and finally towards the high-trust hybrid, innovation outcomes will improve as well. Therefore, the following hypotheses are stated: H2: The more a partnership approaches the high-trust hybrid mode, the higher the innovation performance. 3. METHODOLOGY: EXPERIMENTAL VIGNETTE DESIGN 3.1. Data collection and respondent characteristics Ferry Koster and Daan Bloem 31 A vignette study was designed to test the hypotheses. In a vignette study, people are asked to imagine a situation and respond to a number of questions regarding the situation. An online survey was constructed and distributed among the professional network of the researchers. As a result, people in working environments involving decisions regarding innovations of their organization were approached to participate. The data collection covered a time span of 17 days. In total, 52 respondents answered a total of 147 Vignettes. Since the vignettes are the level of analyses in this study, this is also the N used in the analyses. Table 1 displays background information about the respondents and descriptive statistics. Table 1: Background statistics of the respondents Age Education level Representation Frequency Percentage Representation Frequency Percentage -25 24 16.3 26-30 53 36.1 College 21 14.3 31-40 13 8.8 University 105 71.4 41-50 15 10.2 University+ 21 14.3 50+ 42 28.6 Economic sector of organization Organization size Representation Frequency Percentage Representation Frequency Percentage 0-15 employees 30 20.4 Public sector 59 40.1 16-30 employees 6 4.1 Private sector 79 53.7 31-45 employees 6 4.1 Mixed sector 9 6.1 46-60 employees 19 12.9 60+ employees 86 58.5 Duration of employment Level of decision making authority Representation Frequency Percentage Representation Frequency Percentage 0-1 years 44 29.9 Never 3 2.0 1-2 years 21 14.3 Barely 36 24.5 2-3 years 11 7.5 Regularly 45 28.6 3-4 years 9 6.1 Often 51 34.7 4+ years 62 42.2 Always/I take them 15 10.2 Experience with situations setting Livelihood of setting Representation Frequency Percentage Representation Frequency Percentage No experience 57 38.8 Unnatural 12 8.9 Little experience 69 46.9 Neutral 72 49.0 Much experience 9 6.1 Natural 51 34.7 N = 52 respondents The research uses a quantitative experimental vignette design complemented by a traditional survey as described by Atzmüller & Steiner (2010). By randomly changing the experimental conditions it is possible to test theoretical mechanisms. This approach has been successfully applied in organizational settings (for example: Koster & Sanders, 2007; Fleischmann & Koster, 2017). In the present study, the experimental vignette component is designed to measure respondents’ subjective prediction of innovation outcomes. In order to secure both the internal and external validity of measurements, the experimental vignette is complemented by a traditional survey component, which measures respondent-specific characteristics. In the case of this research, these measures will function as control variables. The vignette design entails a pool with eight different condition-sets, which are built around the following imaginary situation: Int. Journal of Business Science and Applied Management / Business-and-Management.org 32 “Imagine a situation in which you are the executive of a company that needs to innovate. To that end, specific skills and knowledge are required. And, not all of these required skills and knowledge are present in your own company. However, other companies do possess them. To get them, you can buy the knowledge and skills from the other company or you cooperate with them by forming an alliance. In what follows, you will read more about the relationship with the other company. You, as the executive in search of skills and knowledge, are asked to review these possibilities.” After this part, respondents receive a description of one of the eight modes of governance (the exact operationalization is reported in the next section) and were asked to rate on a scale from 1-10 how successful they thought that the specific mode would be in leading to an innovative outcome. To follow previous research showing that innovation can take different forms, we asked them to do this for product/service innovation, process innovation, market innovation, and organizational/business-model innovation. To be sure that they knew what these kind of innovation mean, a short description of each of them was provided. Each respondent rated three modes of governance. 3.2. Measures The dependent variable is termed innovation performance. This is measured using a scale variable containing the answer to four questions in the vignette experiment, namely how likely respondents thought it was that a certain mode of governance would lead to service/product innovation, process innovation, market innovation, and organizational/business-model innovation. A reliability analysis shows that there is very little variance between the four items (Cronbach’s Alpha = 0.855). Moreover, a principal component of the four items shows that all four items belong to the same dimension. Therefore, the the four answers are added and divided by four to measure the variable innovation performance. Hence, the variable ranges from 1-10, where the value 1 represents ‘very unsuccessful innovation outcome’, and the value 10 represents ‘very successful innovation outcome’. Vignette conditions: modes of governance. The conditions measuring the eight modes of governance were constructed in two steps. First, the underlying dimensions were operationalized. These dimensions reflect market dynamics, pay-off division based on contributions, collective purpose, trust, collective decision-making, informal relations aimed at innovation, formal rules, and continuous improvement of formal rules. Table 2 provides the exact wording of the vignettes. Table 2: Representations of variable scores in vignettes Variable Variable score Representation Market dynamics 0 = low There is just one supplier in the market. Therefore, your organization has to buy the required knowledge and skills only from another organization. 1 = high There are more suppliers in the market. Therefore, your organization can choose with which supplier to engage in a partnership. Payoff division based on contributions 0 = low The payoffs generated by the innovation as a result of the partnership all go to the leading organization. 1 = high The payoffs generated by the innovation as a result of the partnership are fairly divided, based on contributions in the process. Collective purpose 0 = low The other organization does not care about the success of the innovation. There is no collective purpose in the partnership. 1 = high For both you and the partner organization, innovation is the main aim of the partnership. 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