Drivers of Virtual Interfirm Integration and Its Impact on Performance in International Customer-Supplier Relationships.

Author:Kim, Daekwan

1 Introduction and Motivation

Changes in the landscape of international business, specifically key globalization dynamics such as outsourcing and advances in information technologies (IT), have facilitated shifts in the strategy and structure of multinational enterprises (MNEs). An increasing emphasis focuses on specialized "slivers" of activities, i.e. disintegrating and stretching value-adding activities of MNEs with global suppliers (Buckley and Ghauri 2004). For example, established multinational companies such as Dell, GM, and Wal-Mart have de-risked their operating model and ceded control of foreign manufacturing to contracting suppliers that continue to work closely with them to produce their brand products. The advance of IT and modern supply chain management systems (SCMs) has led to MNEs building virtual connectivity and improve coordination with their suppliers in dynamic markets (Subramani 2004).

In line with this trend, the issues concerning IT development in shaping global supply chains have increasingly captured scholarly attention. The extant literature contends that IT advances have been a major driver in restructuring MNEs and their operations of global supply chains (Birkinshaw et al. 2001; Nolan et al. 2002). This is due to its effect of enhanced efficient coordination and communication within and across organizational boundaries. Virtual interfirm integration (Zaheer and Venkatraman 1994)--a specific form of quasi-integration achieved through the deployment of specific information systems between supply chain partners--has assumed a key role in information systems (e.g. Wang et al. 2006) and operations management literature (e.g. Kim et al. 2006). Virtual interfirm integration differs significantly from vertical integration in traditional organizations in that supply chain partners are integrated via information flows rather than ownership. Our objective is to add to the existing stock of knowledge on virtual interfirm integration in global supply chains by investigating a number of issues that have not received sufficient attention in the literature. We elaborate on these issues next.

First, most studies on virtual interfirm integration have been conducted in a domestic market setting (Mukhopadhyay and Kekre 2002). Scant empirical research has investigated virtual interfirm integration in cross-border exchange relationships. Although increased globalization has resulted in profuse inter-firm relationships across national borders, which makes IT enabled coordination more salient in this setting, understanding of antecedents and outcomes of virtual interfirm integration in the international customer-supplier context remains limited. While several scholars addressed this issue from an MNE perspective (e.g. Rangan and Sengul 2009), few have investigated the virtual interfirm integration behavior of suppliers.

Second, most previous studies have examined either the relationship between virtual interfirm integration and its antecedents, or the relationship between virtual interfirm integration and associated performance outcomes (Mukhopadhyay and Kekre 2002; Zaheer and Venkatraman 1994). Very few studies have attempted to model the complete picture of virtual interfirm integration through simultaneously examining drivers and performance implications. Addressing this issue is thus appropriate, because without building a comprehensive model of virtual interfirm integration and its link to performance, it is not possible to gain a full understanding of the condition under which virtual interfirm integration serves multinationals and their suppliers' coordination efforts in cross-border transactions.

Third, most prior studies have conceptualized virtual interfirm integration through adopting inter-organizational information systems (IOS) that focus more on the context of electronic data interchange (EDI) (Grover and Saeed 2007) to conduct operational tasks such as transactions, checking inventories, or output and process control between channel parties. However, technological innovation has resulted in contemporary IOS shifting from EDI toward more Internet-based, open standard IOS which incorporates functionalities such as collaborative forecasting, beyond the ones provided by traditional EDI (Zhu et al. 2006a). Hence, there is a need to conceptualize virtual interfirm integration as a multi-dimensional construct, which incorporates both electronic coordination and electronic collaboration.

Finally, the debate about the value of IT is still unresolved. Researchers have examined the value of IT applications in the inter-organizational context in general, and in supply chain relationships in particular (Sanders 2008, 2007). It is still not yet clear whether and how IT investments create value in international exchange relationships. In addition, while research argued environment may shape IT-performance relationships, IT value under environmental uncertainty is still an open issue (Melville et al. 2004; Wade and Hulland 2004). Thus, this research examines the contingency factors, including environmental volatility and communication culture in cross-border exchange relationships.

The specific context relates to cross-cultural exchange relationships between MNEs and their suppliers. Drawing on the literature of transaction cost economics (Williamson 1975), the resource based view (Barney 1991), and international business, we develop and test a model that explains the driving forces and performance consequences of virtual interfirm integration in the international customer-supplier arrangements. Specifically, we conceptualize virtual interfirm integration in terms of coordination and collaborative arrangements via electronic media between suppliers and their international customers. These relationships between Taiwanese original equipment manufacturing (OEM)/original design manufacturing (ODM) suppliers and their MNE customers in the electronics industry provide the context of this investigation. This context is ideal for our study, because customers of Taiwanese OEM/ODM suppliers pursue coordination and collaboration and strongly rely on electronic media. Further, contracting supplier relationships with Taiwanese firm frequently involves asymmetric bargaining power, where MNE buyers usually have the upper hand. This context is thus ideal to examine how virtual interfirm integration can serve as an alternative mechanism to govern asymmetry in international customer-supplier relationships.

Finally, we contend that internal, inter-organizational, environmental, and cultural factors influence the virtual interfirm integration of suppliers with MNE customers. We consider innovativeness as a key dimension, internal to the organization. Trust is an inter-organizational relationship dimension and in terms of environmental dimensions, we explicitly consider environmental volatility. In terms of cultural factors, we also consider the context of communication culture (Hall 1976). This is critically important to the context of virtual interfirm integration, since research has found communication culture to be an antecedent of virtual interfirm integration in international supplier-customer relationships (Jean et al. 2010). We contend that trust, innovativeness, context of communication culture and environmental volatility are associated with virtual interfirm integration, and investigate the direct and moderating link between virtual interfirm integration and relationship performance.

The remainder of this article is organized as follows. A conceptual model is developed to delineate the relationships among key constructs. Predictions regarding the antecedents, moderators, and consequences of virtual interfirm integration are offered. These hypotheses are tested empirically, and the results are presented. The paper concludes with a discussion of findings and directions for future research.

2 Background and Conceptualization of Virtual Interfirm Integration

Virtual interfirm integration refers to a specific form of vertical-quasi integration achieved through implementing information systems (Wang et al. 2006). This research focuses on specific inter-organizational information systems: supply chain communication systems (SCCS). We define SCCS as an inter-organizational system shared by suppliers and international customers to carry out supply chain activities ranging from operational levels such as tracking orders, dealing with invoices and strategic levels such as collaborative demand planning and forecasting (Kim et al. 2006). TCE contends that vertical integration is preferred over market exchange when the sum of transaction and production cost of market exchange exceeds those of hierarchy (Williamson 1975). However, vertical integration incurs significant drawbacks such as inflexible structure and unable to deal with changing circumstances.

Thus, virtual interfirm integration is an alternative governance and coordination mechanism, providing such benefits as reduced coordination cost and transaction risk, which vertical integration does not always provide (Wang et al. 2006; Kim and Mahoney 2006). Scholars have argued that IT-enabled integration is an effective governance mechanism that does not involve common ownership for exchange parties (Zaheer and Venkatraman 1994). Virtual interfirm integration constitutes a mechanism which relational governance could provide, because of its requirement that both exchange parties to invest in relationship-specific investments and mutual commitment (Kim and Mahoney 2006). Thus, it has been argued that virtual inter-firm integration facilitates joint decision-making and collaborations in exchange relationships to give firms better capability in managing their channel relationships (Kim et al. 2006).

Researchers have proposed varying approaches to operationalizing virtual inter-firm integration (Wang et al. 2006; Zaheer and Venkatraman 1994). Earlier research...

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