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The concept of trust has been examined in a wide variety of organizational and social settings, and accordingly conceptualized in different ways see (Hosmer 1995 for a review). For instance, trust in interpersonal relations is defined as the willingness of one person to increase his/her vulnerability to the actions of another person (e.g., Zand 1972); in economic exchanges as the expectation that parties will make a good faith effort to behave in accordance with any commitments, be honest in negotiations, and not take advantage of the other, even when the opportunity is available (Hosmer 1995); and in society as a collective attribute based upon the relationships in a social system (Lewis and Weigert 1985).
A review of the literature examining trust points towards two issues relevant to this study. First, although trust, with its property of bilateral expectations of behavior, exists between individuals, it can be extended to exchanges between organizations because interorganizational relationships are managed by individuals in each organization (e.g., Bradach and Eccles (1989); Hosmer 1995). Thus, as suggested by Madhok (1995) and Thorelli (1986), trust in inter-firm relationships includes a set of expectations between the partners regarding each other’s behavior and each partner’s fulfillment of its perceived obligations in light of such anticipation.
Second, the literature suggests that the “expectations of behavior” between exchange partners has two components: structural and behavioral (Hosmer 1995; Madhok 1995). The structural component refers to the form of trust fostered by mutual hostages and complementarity of resources contributed by the partners (Madhok 1995). As suggested by Madhok (1995), the structural dimension may be essential for the creation of the relationship but not sufficient for its continuation, because one partner may become more vulnerable in the relationship because of unequal dependence.
The behavioral component of trust refers to the confidence aspect in exchange relationships. For instance, Moorman, Deshpande and Zaltman (1993: 82) define trust as “a willingness to rely on an exchange partner in whom one has confidence.” Similarly Anderson and Narus (1990: 45) focus on this confidence aspect of trust by defining it as a “firm’s belief that another company will perform actions that will result in positive outcomes for the firm as well as not take unexpected actions that result in negative outcomes.” This behavioral element of trust becomes particularly useful in the maintenance of ongoing relationships, since cooperation is not achieved with structural vulnerability but due to the confidence in the integrity of the exchange partners. Thus, following Morgan and Hunt (1994), we focus on the behavioral dimension by conceptualizing trust in a partnership as the degree of confidence the individual partners have on the reliability and integrity of each other.
There are three interrelated roles of trust in interorganizational exchanges. First, trust in organizational exchanges is an important deterrent to opportunistic behavior (Bradach and Eccles 1989). Since interorganizational partnerships involve two or more firms which try to balance individual gains with joint partnership performance, there is a strong probability that partnership goals are sacrificed for individual benefits, especially when such behavior is not transparent to the partner firm. However, if trust is embedded in the partnership, opportunistic behavior is unlikely to occur because partner firms will pass short term individual gains in favor of the long-term interests of the partnership (Axelrod and Stincombe 1986, and Beamish and Banks 1987).
It should be noted that the structure of interorganizational relationships also reduces opportunistic behavior by the partner firms due to forbearance accomplished through a mutual hostage situation (Buckley and Casson 1988) or “tit for tat” possibility in a game theoretic sense (Parkhe 1993b). However, unlike the structural approach where the ability of partner firms to behave opportunistically is curbed, in a trust-based approach, the motivation for opportunistic behavior is minimized, because “behavioral repertoires are biased toward cooperation, rather than opportunism” (Hill 1990:511).
Second, trust is considered to be a substitute for hierarchical governance, thus accomplishing organizational objectives in inter-firm partnerships when ownership-based control is not strategically viable or economically feasible. Unlike hierarchical exchanges, where formal authority structures based on ownership are used to enforce contractual obligations, trust-based interorganizational exchanges rely on mutuality of interests between partner firms
(Bradach and Eccles 1989; Dwyer, Schurr and Oh 1987). Trust allows for bilateral governance which accomplishes individual goals for independent organizations through joint accomplishments, shared beliefs, and mutual concern for long term benefits (Heide 1994; Ouchi 1980).
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