The effect of interorganizational
trust on make-or-cooperate decisions:
Disentangling opportunism-dependent
and opportunism-independent effects
of trust

Werner H Hoffmann, Kerstin Neumann, Gerhard Speckbacher

WU Vienna U. of Economics and Business, Department of Strategy and Innovation, Vienna, Austria

Correspondence:
Kerstin Neumann, WU Vienna U. of Economics and Business, Department of Strategy and Innovation, Nordbergstr 15,
Vienna, 1090, Austria.
Tel:

þ 431313364204;

Fax:

þ 43131336763;

E-mail: [e-mail]

Abstract
This paper seeks to analyze the effects of interorganizational trust on the decision to
vertically integrate a strategically important activity (‘make’) or sign a long-term agree-
ment with an external exchange partner to perform such an activity in collaboration
(‘cooperate’). On the basis of the literature available on interorganizational trust in
economics and sociology, we aim at theoretically and empirically disentangling
opportunism-based and opportunism-independent effects of trust on governance
choices. We develop a set of hypotheses on the moderating and direct roles of trust,
which are tested using a sample of integration/collaboration decisions made by Austrian
and German automotive suppliers. The results confirm both an opportunism-mitigating
effect of trust that lowers the transaction costs of a collaborative exchange and an
opportunism-independent effect that increases the transaction value of a collaborative
exchange and also encompasses non-economic motives for collaboration.
European Management Review (2010) 7, 101–115. doi:10.1057/emr.2010.8;
published online 27 May 2010
Keywords:

interorganizational trust; governance decisions; strategic alliances; cooperation; vertical

integration

Introduction

T

he question of whether a specific transaction should be
managed within the confines of a particular firm or in
collaboration with other firms is of key strategic

importance (Madhok and Tallman, 1998; Barney, 1999;
Leiblein and Miller, 2003). Furthermore, given the dramatic
increase in the number of collaborative, interorganizational
relationships seen in recent years (Osborn and Hagedoorn,
1997; Harbison and Pekar, 1998), such decisions are also of
high practical relevance.

Previous research indicates that the governance choices

made by firms are affected by the level of preexisting inter-
organizational trust between exchange

1

partners (Chiles

and McMackin, 1996; Zaheer and Harris, 2006; Gulati and

Nickerson, 2008). The standard theory put forward in the
analysis of decisions on firm boundaries is transaction cost
economics (TCE). According to standard TCE reasoning,
the impact of trust on governance choice is driven by the
threat of opportunistic behavior. Defining trust as ‘a type of
expectation that alleviates the fear that one’s exchange
partner will act opportunistically’ (Bradach and Eccles,
1989: 104), it has been argued that a higher level of trust
between exchange partners implies that fewer resources will
have to be spent on costly safeguards against opportunism
(see e.g. Lorenz, 1988; Barney and Hansen, 1994; Cummings
and Bromiley, 1996; Bigley and Pearce, 1998; Gulati and
Nickerson, 2008). Hence, trust ‘can substitute for hierarchical
contracts in many exchanges and serves as an alternative

European Management Review (2010) 7, 101–115

&

2010 EURAM Macmillan Publishers Ltd. All rights reserved 1740-4754/10

palgrave-journals.com/emr/

control mechanism’ (Gulati, 1995: 93). Since the threat of
opportunistic behavior is a main driver favoring hierarch-
ical governance, a higher level of trust between exchange
partners results in a lower need for hierarchical governance.
This makes collaborative interorganizational exchanges
more attractive with collaboration substituting hierarchy
(Chiles and McMackin, 1996; Zaheer and Harris, 2006;
Gulati and Nickerson, 2008).

However, it has also been argued that TCE theories on

firm boundaries overemphasize the danger of opportunistic
behavior and the role of trust in averting negative outcomes
of opportunistic behavior while ignoring the relevance of
factors other than transaction costs (e.g. Zajac and Olsen,
1993; Conner and Prahalad, 1996; Ghoshal and Moran,
1996; Madhok and Tallman, 1998; Lindenberg, 2000). In
particular, existing literature on strategic alliances high-
lights the importance of trust as the ‘catalyst’ and ‘glue’
between transaction partners and an influencing factor in
governance choices (e.g. Ring and Van de Ven, 1992; Ring,
1996; Lane and Bachmann, 2000; Sydow, 2000; Bachmann
and Zaheer, 2006). Within collaborative exchange relations,
interorganizational trust can make communication and
coordination more effective, lead to deeper and broader
levels of cooperation and enhance information and knowl-
edge sharing routines (see e.g. Uzzi, 1997; Rousseau et al.,
1998; Mo¨llering, 2006).

Obviously, these lines of reasoning employ a broader

definition of interorganizational trust that extends beyond
an expectation that an exchange partner will not engage in
opportunistic behavior. In this paper we will also employ
a broad concept of trust which encompasses both – i.e.,
opportunism-dependent

and

opportunism-independent

explanations of the role of trust.

Using this broad concept of trust, we build on the literature

on strategic alliances and integrate existing research on the
role of trust within strategic alliances into the literature on
corporate boundary choices – i.e., choices between alliances
and vertical integration. We argue that preexisting inter-
organizational trust within collaborative relationships (alli-
ances) between firms (1) can substitute at least some of the
merits of ‘belonging to the same firm’ (e.g. mechanisms for
identification, coordination, communication and knowledge
sharing), (2) can lead to additional relational rents and, (3)
may function as a social mechanism that drives cooperation
independently of cost–benefit calculations. Hence, interorga-
nizational trust makes interfirm collaboration more likely
and leads to collaboration substituting hierarchy. While this
line of reasoning again leads to the prediction of a negative
effect of preexisting trust on the decision to integrate an
activity, it also complements the TCE view, since it proposes a
role of interorganizational trust even in cases where the threat
of opportunism is low and significant exchange hazards are
absent. In such a situation, TCE would not expect trust to
affect either governance costs or the governance mode (e.g.
Gulati and Nickerson, 2008: 692).

On the basis of previous research on interorganizational

trust in economics and sociology, our paper aims to
theoretically and empirically disentangle opportunism-
based and opportunism-independent effects of trust on
decisions between vertical integration and interfirm colla-
boration. In particular, we analyze whether the impact of
interorganizational trust on such decisions is conditional

on the threat of opportunistic behavior and whether trust
has an important impact even in cases where opportunism
does not play a significant role.

The role of trust in governance choices: an overview
Evidence from various disciplines strongly supports
the inclusion of trust as a critical element in economic
transactions (see e.g. Ring and Van de Ven, 1992; Mayer
et al., 1995; Ring, 1996). As far as collaborative exchanges
are concerned, it has been shown that interorganizational
trust impacts organizational structure (Gulati and Singh,
1998), contract design (Poppo and Zenger, 2002) as well as
transaction costs and performance outcomes (Aulakh et al.,
1996; Carson et al., 2003; Dyer and Chu, 2003; Gulati and
Nickerson, 2008).

The multidisciplinary nature and multitude of different

perspectives, levels and facets behind trust research make
agreement on a universally accepted definition of trust
difficult. However, building on a cross-disciplinary review
of scholarly writing, Rousseau et al. (1998: 395) conclude
that there are some ‘critical components’ common to the
notions of trust found in different disciplines. They suggest
the following ‘generally agreeable’ broad definition of trust:
‘Trust is a psychological state comprising the intention to
accept vulnerability based upon positive expectations of the
intentions or behavior of another’. There is a broad
consensus that – although trust is clearly a sociological
phenomenon that primarily emerges among individuals – it
can also be established between organizations if ‘the
positive expectations of the intentions or behavior of
another [organization]’ are shared by a dominant coalition
of the individuals in both organizations engaged in the
collaborative transaction (Nooteboom, 1996; Lane and
Bachmann, 2000; Zaheer and Harris, 2006).

The level of trust between the focal firm and its

(potential) exchange partner prior to the transaction
(preexisting trust, ex-ante trust) is relevant for analyzing
the effect of interorganizational trust on governance choice.
Ex-ante trust arises from (1) prior exchange experience, (2)
the general reputation of the (potential) exchange partner,
and (3) the broader institutional environment (e.g.
Bromiley and Cummings, 1995; Gulati, 1995; Bachmann,
2001; Bachmann and Zaheer, 2006).

Our study does not focus on how trust emerged and

which factors played what role in this process. Instead, we
focus on how the level of preexisting interorganizational
trust influences governance decisions. Our concept en-
compasses different aspects of trust (in particular calcula-
tive and non-calculative aspects), which correspond to
different sources and antecedents. Of course, from a
dynamic perspective it would also be interesting to analyze
how trust between exchange partners emerges over time
(see e.g. Gulati (1995) and Goerzen (2007) who point to the
importance of repeated interaction between exchange
partners to build up trust) and how this level of trust co-
evolves with governance decisions (e.g. Puranam and
Vanneste, 2009). However, an analysis of this kind lies
beyond the scope of our study.

In the following theory sections, we will build on the

above general definitions and illustrate how different
interpretations of interorganizational trust from various

Effect of interorganizational trust

Werner H Hoffmann et al

102

theoretical perspectives depend on the underlying beha-
vioral assumptions and considered forms of vulnerability.

The role of trust from a TCE view
TCE is the standard theory put forward in the analysis of
decisions on firm boundaries. The concept of transaction
costs goes back to Coase (1937). To use this concept to
explain firm boundaries, the exact nature and sources of the
costs involved must first be specified, whereby two main
specification traditions prevail (see e.g. Langlois and
Robertson, 1989: 362).

The first line of research points to technological

indivisibilities and their resulting contracting and measure-
ment costs (Alchian and Demsetz, 1972; Barzel, 1982;
Cheung, 1983; Demsetz, 1988), while the second stresses the
importance of incomplete contracts and asset specificity
(Williamson, 1975, 1985). Both approaches work on the
assumption that actors might behave opportunistically and
predict a positive influence of such possible opportunistic
behavior on vertical integration.

Alchian and Demsetz (1972) argue that technological

indivisibilities in team-based production make it difficult to
link the rewards for cooperating team members to their
productivity. These difficulties are caused by the inter-
dependent resources of the transacting partners and result
in contracting costs and costs for monitoring partner
performance. An imperfect link between rewards and
performance may result in shirking or costly disputes
regarding the distribution of generated rents among the
cooperating partners. Internalizing a transaction may avoid
measurement and contracting costs, although the costs of
monitoring and measurement problems still also hinder the
performance of hierarchical transactions (Barzel, 1982;
Cheung, 1983; Demsetz, 1988; Masten et al., 1991). In
addition to a possible reduction in contracting and
measurement costs, internalizing a transaction significantly
reduces the problem of rent appropriation. However, even
if a transaction is internalized, disputes on rent distribution
can still occur between the actual business unit performing
the transaction and other business units (particularly if
these are organized as separate profit centers). But, since
the owners of the firm ultimately have the right to
appropriate all rents generated in all its business units,
the distribution of rents among different business units
becomes simply a matter of internal accounting. In
contrast, if different firms are involved, their owners will
have to negotiate for the generated rents, thus according
greater relevance to the issue of measuring the performance
of the individual transaction partners. Consequently, this
theory emphasizes the difficulties in evaluating the
performance of transaction partners (the so-called mea-
surement difficulties) as a behavioral uncertainty that can
favor vertical integration.

The second stream of TCE research – focusing on asset-

specificity – has clearly been the dominant approach in the
study of vertical integration. In essence, this approach
analyzes the effects of contractual incompleteness when
resources are transaction-specific (Williamson, 1975, 1985,
1991; Klein et al., 1978). Since drafting complete contracts,
which specify each party’s rights and obligations in an exact
and enforceable manner, can be costly (or even impossible),

this opens the door for ex-post bargaining among the
contracting parties. Providers of transaction-specific assets
are locked into the exchange relationship, since these assets
lose much of their value outside that particular relation-
ship. This can lead to costly renegotiations and – more
importantly – an ex-ante underinvestment in value enhan-
cing specific assets if the contracting parties suspect they
are not receiving their ‘fair share’ of the rents generated in
the course of the exchange relationship (the so-called hold-
up problem).

The hold-up problem makes more complex (and thus

more costly) governance forms (market

- hybrid -

hierarchy) advantageous, since they help to avoid the costs
that stem from opportunistic behavior on the part of
transaction partners. From a TCE perspective, activities
that are vertically linked with high transaction-specific
investments should be integrated when the risk of hold-up
is high. Conversely, activities with minimal specific
investments should be disintegrated. Using vertical alli-
ances, even activities with medium-scale transaction-
specific investments can be outsourced, particularly if
appropriate control and monitoring mechanisms are in
place to reduce the risk of opportunistic behavior on the
part of the transaction partner. The cornerstone of this line
of TCE reasoning is the behavioral uncertainty caused by
specific investments made by at least one of the transaction
partners.

TCE is built on the assumption of opportunistic behavior

and highlights two forms of vulnerability induced by such
behavior, namely (1) the inability to monitor and assess an
exchange partner’s performance, and (2) a lock-in condi-
tion caused by transaction-specific investments (see e.g.
Wathne and Heide, 2000: 42). Typically, in economics
literature in general and in TCE literature in particular,
trust is interpreted as the expectation that an exchange
partner will not (or at least only to a restricted extent)
engage in opportunistic behavior, i.e. will not take max-
imum advantage of arising opportunities and changing
conditions at the expense of the other exchange partner
(see e.g. Barney and Hansen, 1994: 176; also Zand, 1972;
Bradach and Eccles, 1998; Ring and Van de Ven, 1992;
Frank, 1993; Chiles and McMackin, 1996; Nooteboom, 1996).
As Williamson (1979: 234) notes, TCE does not assume
that all actors are ‘opportunistic in identical degree’. There
may be actors who engage only in simple self-interest
seeking (without guile) and others who engage in self-
interest seeking with guile, i.e. ‘lying, stealing, cheating, and
calculated efforts to mislead, distort, disguise, obfuscate,
or otherwise confuse’ (Williamson, 1985: 47). Since it is
difficult to actually distinguish between the less and the
more opportunistic, and since ‘even among the less
opportunistic most have their price’ (Williamson, 1985:
47), according to TCE the transaction partners basically
have to be prepared for the worst case.

Given the above general definition, we contend that –

from a TCE perspective – trust can be interpreted as a
positive expectation regarding the degree of opportunistic
behavior. In other words, the estimated probability that the
exchange partner will lie, steal, cheat, etc. is relatively low.
Nonetheless, the exchange partners are aware that – even in
trustful exchange relationships – there can be a ‘level of
temptation’ in which opportunistic behavior emerges to

Effect of interorganizational trust

Werner H Hoffmann et al

103

some degree. Therefore, trust in this sense does not mean
there is no need at all for safeguards, monitoring and
control. In situations involving high specific investments
and where high performance measurement difficulties
make it easy to cheat, there is more room for opportunistic
behavior and a higher incentive for such opportu-
nistic behavior. Nonetheless, the expected level of oppor-
tunistic behavior remains lower in trusting exchange
relationships, despite the level of specificity and measure-
ment difficulties. As a consequence, fewer monitoring and
control mechanisms are required in a trusting exchange
relationship for all levels of asset specificity and perfor-
mance measurement difficulties, generally resulting in
lower transaction costs and, hence, less need for vertical
integration. The level of required monitoring and control
mechanisms, however, does increase with the degree of
asset specificity and performance measurement difficulties
for all levels of trust, but a high level of trust weakens the
positive influence of these transaction characteristics on
vertical integration (Lorenz, 1988; Barney and Hansen,
1994; Cummings and Bromiley, 1996; Dyer, 1997; Bigley
and Pearce, 1998; Das and Teng, 1998; Das and Teng, 2001).
Obviously, such a notion of trust is, of course, calculative.
Trust refers to a calculation of the optimal level of
monitoring and control mechanisms needed for a particular
transaction with a particular exchange partner.

With respect to the choice of governance modes, this

implies a moderating effect of trust. According to TCE, both
forms of vulnerability drive vertical integration. When the
level of interorganizational trust is low and opportunism
prevails, asset specificity and measurement difficulties both
induce a need for complex and costly monitoring and
control mechanisms. Substantial monitoring and control
costs can be avoided if the transaction partners are part of
the same firm, i.e. if the transaction is vertically integrated.
However, if the expectations of the level of opportunistic
behavior are positive in the above sense – that is if trust
prevails – fewer resources will have to be spent on
monitoring and control mechanisms. This implies that
the positive effect of performance measurement difficulties
and transaction-specific investments on vertical integration
is weaker when the level of trust is higher. In other words,
the effect of performance measurement difficulties and
asset specificity on the decision to vertically integrate a
transaction is moderated (i.e. attenuated) by the existing
level of trust between the exchange partners.

The moderating effect of trust on the impact of asset

specificity on governance choice has been argued theo-
retically in detail and clarified by Chiles and McMackin
(1996). Also the empirical findings by Artz and Brush
(2000) and Joshi and Stump (1999) indicate that the negative
impact of transaction-specific investments on collabora-
tive exchange is weakened by a high level of interorgani-
zational trust because trust reduces the perceived amount of
behavioral uncertainty (danger of hold-up). Thus, we
hypothesize:

Hypothesis 1:

Trust attenuates the positive relationship

between transaction-specific investments and integration.

If the performance of an exchange partner is difficult

to measure and assess, it is easier to cheat and there is

more room for opportunistic behavior. Hence, according
to standard TCE reasoning, performance measurement
difficulties have a positive effect on monitoring and
control costs as well as on bargaining costs on rent
distribution between the independent exchange partners.
According to TCE, such costs can be (partly) avoided
using hierarchical governance, making integration more
attractive. If trust prevails, i.e. if the expected degree
of opportunistic behavior on the part of the exchange
partner is lower, the need to monitor and control said
exchange partner’s performance is lower and costly
disputes on rent distribution are less likely to occur.
Moreover, pre-existing trust between the exchange
partners can make the performance measurement pro-
cess easier and less costly. Thus, the positive direct effect
of performance measurement difficulties on the decision
to vertically integrate a transaction is weaker when the
existing level of trust between the exchange partners is
high. Thus, we hypothesize:

Hypothesis 2:

Trust attenuates the positive relationship

between performance measurement difficulties and
integration.

The role of trust beyond mitigating opportunism: transaction
value and sociological views
As Mo¨llering (2006: 24) notes, the opportunism-mitigating
role of trust represents a fairly restricted view of trust that
results from the fact that economic research on trust is
‘conservative’ in the sense that it focuses on opportunism
only. Here, the role of trust is to avert the negative
outcomes of opportunistic behavior, while other genuinely
positive effects of trust – such as more effective commu-
nication and coordination – are typically neglected (see also
Lindenberg, 2000). This TCE focus on possible negative
outcomes and neglect of factors that drive transaction value
have been widely criticized (e.g. Zajac and Olsen, 1993;
Dyer, 1997; Geyskens et al., 2006).

In the following section, we draw on insights regarding

the nature and effects of trust that go beyond its role in
averting the transaction costs stemming from opportunistic
behavior. While such concepts are compatible with the
above general definition of trust, the behavioral assump-
tions here differ significantly from those made in TCE and
also employ a broader concept of vulnerability. Vulner-
ability is created not only through specific investments and
performance measurement difficulties in the face of a
danger of opportunistic behavior, but also more generally
through the dependence on the exchange partner inherent
in every economic and social exchange relationship
(Sabel, 1993).

In contrast to the notion of trust found in TCE, this

suggests a significant impact of interorganizational trust on
the decision to collaborate which is independent of the
assumption of opportunistic behavior. In particular, inter-
organizational trust is expected to have a positive impact on
the decision to collaborate even for such transactions whose
characteristics do not indicate a high degree of exchange
hazards. Both economic and social motives can play a role
and are often interrelated.

Effect of interorganizational trust

Werner H Hoffmann et al

104

Trust and transaction value
We will first focus on economic rationales for the
importance of trust in collaborative exchange that go
beyond TCE reasoning. Here we build on existing literature
on strategic alliances, which highlights the importance
of trust as the ‘catalyst’ and ‘glue’ between transaction
partners and as an influencing factor in governance choices
(e.g. Dyer and Singh, 1998; Bachmann and Zaheer, 2006;
Zaheer and Harris, 2006). From an economic perspective,
trusting an exchange partner and establishing a collabo-
rative exchange aimed at gaining economic benefits is a
quasi-rational choice. In addition to its capacity to reduce
transaction costs, trust can give ‘access to economic gains
from cooperation’ (Rousseau et al., 1998: 396) and, hence,
increase transaction value.

Such gains can arise from the (trustful) sharing of new

technology among producers and suppliers, the disclosure
and transfer of valuable information (Dyer and Chu, 2003)
and the joint learning and knowledge sharing enabled by a
common language and shared routines (Szulanski et al.,
2004). The better the collaborating partners know each
other and the more openly they share their knowledge,
the more (new) opportunities to utilize synergies will be
identified and exploited. Indeed, activities can be organized
in a trustful exchange relationship in ways that approx-
imate their intra-firm counterparts while avoiding the costs
of hierarchical governance. In fact, interorganizational trust
positively influences all four determinants of relational
rents identified by Dyer and Singh (1998: 663): (1) Trust
supports the development and refinement of interorganiza-
tional problem-solving routines (Lane and Lubatkin, 1998).
(2) Trust increases the efficiency and effectiveness of the
governance of the cooperative relationship because it leads
to fewer conflicts and helps resolve emerging disputes, an
aspect that also has a positive impact on the length of
the collaboration (Ganesan, 1994). (3) Trust improves the
degree of compatibility in the organizational systems, pro-
cesses and cultures of exchange partners, thereby also
increasing the organizational complementarity of the
cooperating firms. According to Dyer and Singh (1998), a
high degree of organizational complementarity and a sound
cultural fit increase the economic gains of partnering. (4)
Trust has a positive influence on the scope and longevity of
the partnership and thus supports the development of
co-specialized assets by both exchange partners over time,
with a positive impact on the relational rents obtained from
the collaboration.

Sociological views of trust
However, the economic view on trust as a quasi-rational
choice has long been criticized for its undersocialized view
of human behavior. Since transactions are frequently
embedded in social relationships, the individualistic view
of human behavior found in economic theory limits the
scope and validity of an economic analysis of transactions
(see e.g. Granovetter, 1985). The sociological view of person-
hood is based on ‘the idea that persons are constituted, or
can constitute themselves, only in society’ (Sabel, 1993:
109). Such a view might well be expected to provide insights
into the importance of trust that go beyond the explana-
tions found in economic theory. With respect to the

concept of trust, the sociological view employs a model of
human action that differs from the behavioral assumptions
of economic theory (quasi-rational choice). Trust in this
sense means the non-calculative reliance on the goodwill
and integrity of others (Baier, 1986; Ring, 1996). From a
sociological perspective, trust is affect-based in the sense
that it is ‘grounded in reciprocated interpersonal care and
concern’ (Ring, 1996: 156; also Baier, 1986; McAllister,
1995). It refers to shared expectations, shared under-
standings, shared values, loyalty, a common language and a
common view of the world (see e.g. Sabel, 1993; Uzzi, 1997;
Rousseau et al., 1998; Nooteboom, 2000; Mo¨llering, 2006).
This ‘socialized’ notion of trust is also important for
collaborative interfirm exchanges since they are also
socially embedded and, as discussed above, interpersonal
care and concern and common understandings and feelings
can be expanded to an interorganizational level and become
a collective orientation for the individuals engaged in
the collaborative exchange (Nooteboom, 1996; Lane and
Bachmann, 2000). Social norms of reciprocity and indebt-
edness and the corresponding social (institutional) pro-
cesses and pressures may drive firms to opt for a colla-
borative arrangement – independent of economic consid-
erations.

While calculative (economic) and non-calculative (socio-

logical) explanations of the direct impact of interorgani-
zational trust on governance choices differ, all three lines
of theorizing – TCE, transaction value-based theories
and sociological views – nonetheless assume a positive
direct effect of trust between a firm and its potential
exchange partner on said firm’s decision to collaborate
instead of performing a transaction in-house. The higher
the level of pre-existing interorganizational trust bet-
ween the firm and its potential external exchange partner,
the greater the probability the firm will decide to
collaborate.

Hypothesis 3:

A high level of trust between a firm and its

potential external exchange partners has a negative effect
on integration.

However, the three lines of reasoning on the role of trust

differ in how they explain the effect of trust on governance
choice. According to TCE, the role of trust depends on its
capacity to reduce the likelihood of opportunistic behavior
by an exchange partner. Hence, trust moderates the impact
of the drivers of opportunistic behavior on integration. As
proposed by TCE, there are two such drivers, asset
specificity and performance measurement difficulties. For
transactions, however, where the threat of opportunism is
low and significant exchange hazards do not exist (i.e. when
neither asset specificity nor performance measurement
difficulties play a major role), TCE would expect no effect of
trust on governance costs and hence no effect on the make-
or-cooperate decision (e.g. Gulati and Nickerson, 2008:
692). As long as the threat of opportunistic behavior is low,
lack of trust does not drive a firm to integrate an activity it
would otherwise have carried out in collaboration with an
external exchange partner. Instead, TCE limits the oppor-
tunism-based effect of trust on the make-or-cooperate
choice to transactions with a substantial threat of
opportunistic behavior.

Effect of interorganizational trust

Werner H Hoffmann et al

105

Should a significant influence of trust on make-or-

cooperate decisions also be observed for transactions
associated with a low to medium threat of opportunistic
behavior, this effect cannot be explained using a TCE-based
argumentation but instead indicates an opportunism-
independent influence of trust on the choice between
integration and collaboration. The economic and non-
economic roles of trust discussed above imply that –
independent of the assumption of opportunistic behavior
– firms are less likely to choose a hierarchical governance
mode over a collaborative arrangement if there is a
potential exchange partner available who can be trusted.
A high level of interorganizational trust enables the
cooperating firms to enjoy many of the advantages typically
found in hierarchical governance (effective learning,
coordination and identification) and, at the same time,
more fully exploit the value creation potential (relational
rents) presented by a collaborative exchange. Moreover,
social norms, bonds and obligations may also drive firms to
establish a collaborative exchange even when the economic
gains from this mode of governing a given activity are
insignificant compared to fully integrating this activity.

Thus, we anticipate a significant – albeit weaker –

positive impact of interorganizational trust on collabora-
tion even for transactions associated with a relatively low
risk of opportunistic behavior and we hypothesize:

Hypothesis 4:

A high level of trust between a firm and its

potential external exchange partners has a negative effect
on integration, even if the threat of opportunistic
behavior is low.

Table 1 summarizes the different aspects of how

interorganizational trust influences make-or-cooperate
decisions of firms. From an economic perspective, choosing
between distinctive governance modes is a quasi-rational
choice. Interorganizational trust may reduce the transac-
tion costs and increase the negotiation efficiencies
(Mesquita and Brush, 2008) of collaborative exchange in
situations in which exchange characteristics open up room

for opportunistic behavior. But trust may also enhance the
transaction value and the production efficiencies (Mesquita
and Brush, 2008) of a collaborative exchange independent
of the risk of opportunism. From a sociological perspective,
governance decisions are not viewed as quasi-rational
choices, but as decisions that are socially embedded and
constrained. These social (institutional) forces may drive
firms to collaborate even when there are no positive
economic gains over vertical integration.

Methods and data

Data collection
The data for this study were obtained through a survey of
integration/cooperation decisions made by automotive
suppliers in Austria and Southern Germany. The auto-
motive supply industry provides an excellent example for
the decomposition and reconfiguration of the value chain
by using interorganizational relationships. Automotive
suppliers are positioned at different steps in the value
chain of the automotive industry ranging from first to lower
tier suppliers. Therefore, decisions whether an activity
should be undertaken by the supplier itself or jointly
performed in a long-term cooperative relationship are both
common and of high strategic significance.

To determine the survey questions, we carefully reviewed

the relevant academic literature. We then conducted an
extensive pre-test with company General Managers to verify
the clarity of the structured questionnaire. Following the
pre-test, we modified the wording of some items slightly
(those that were confusing or lacked consistency in
interpretation), a process that further strengthened content
validity. Since data collection was to be carried out using a
web-based questionnaire, we also used the pre-test to verify
that the system functioned properly and was easy to use.

To ensure a sufficient respondent involvement and

response rate, we used a two-step data collection procedure.
In a first step that was conducted in autumn 2005, we
contacted the CEOs of 926 Austrian and Southern German

Table 1 Different views on the effects of interorganizational trust on make-or-cooperate decisions

Transaction cost view in economics

Transaction value view in economics

Sociological view

K

Boundary decisions as a quasi-
rational choice

K

Trust mitigates behavioral
uncertainties stemming from the
danger of opportunistic behavior
in a collaborative exchange

K

Trust lowers transaction costs
and increases negotiation
efficiencies in a collaborative
exchange

K

Indirect effect of trust
(moderating the direct effect of
exchange characteristics on
governance choice) and direct
positive effect of trust on
collaboration

K

Boundary decisions as a quasi-
rational choice

K

Trust increases economic gains
from a collaborative exchange
(independent of the danger of
opportunism)

K

Trust increases transaction value
and production efficiencies in a
collaborative exchange

K

Direct positive effect of trust on
collaboration

K

Boundary decisions are
constrained by social
(institutional) processes and
pressures

K

Trust between economic actors
stemming from their social
(institutional) embeddedness
influences their behavior –
independent of economic
considerations (social norms,
bonds and obligations)

K

Direct positive effect of trust on
collaboration

Effect of interorganizational trust

Werner H Hoffmann et al

106

automotive suppliers. We asked if they had had to make a
decision in the last 2 years to either perform a strategically
important transaction in-house (‘make’) or sign a long-
term agreement with an independent partner to perform
such a transaction in collaboration (‘cooperate’). Those
who answered ‘yes’ were then asked to tell us which of the
two options they had chosen (‘make’ or ‘cooperate’). We
also asked whether they would be willing to take part in a
study to identify the factors influencing this type of
decision and provide us with the name of an internal
contact person with the most knowledge of this transaction
(most knowledgeable informant; Kumar et al., 1993). The
CEOs of 459 firms responded that such a decision had had
to be made in their firms in the last 2 years and provided
the relevant contact details. To collect the relevant infor-
mation on transaction characteristics, transaction context
and the (potential) collaboration partner, we designed two
versions of a structured questionnaire, one for transactions
in which the decision-makers had opted for a collaborative
arrangement and another in which vertical integration
(‘make’) had been chosen. It was pointed out to the
decision-makers that all responses had to refer to the time
the decision was made. Those who had opted to integrate
the transaction were asked to refer in their answers to
questions on the potential collaboration partner to their
most preferred partner of any potential partners. In a
second step which was conducted in summer 2006, we sent
a personalized e-mail to the respective contact persons
(decision-makers) in the 459 firms. The e-mail included an
explanation of the aim of the study, a link to the online
questionnaire and a personalized log in code (these codes
also enabled us to monitor the responding firms). We
followed this up with telephone reminders and a second
e-mail and finally received a total of 151 usable ques-
tionnaires. We believe that the data collection procedure
used provides credibility to our data as it makes sure that
the questionnaire was answered by the ‘right’ person, i.e.
the most knowledgeable informant with the authority to
take the underlying make-or-cooperate decision.

In line with Armstrong and Overton (1977) – and also

recently applied, for example, by Krishnan et al. (2006) and
Poppo and Zenger (2002) – we examined the likelihood of
non-response bias by comparing early to late respondents
using study variables. The assumption of the analysis is that
late respondents are representative of non-respondents. Our
analysis indicated that no significant mean differences exis-
ted between early and late respondents. Furthermore, we had
information on firm characteristics such as sales volume and
employee numbers for every firm in our initial sample (926).
As already suggested by, for example, Celly and Frazier
(1996), we compared such data from non-respondents with
data from respondents and again found no significant
differences. These analyses indicate that we had no serious
problem regarding non-response bias in our sample.

Measures
The questionnaire items for all independent variables,
unless stated otherwise, were measured using a 7-point
scale (where ‘1’ represented ‘disagree’ and ‘7’ represented
‘strongly agree’). For a detailed account of the use of
independent variables in this study, see Appendix Table A1.

Dependent variable
The objective of our study was to analyze the effects of
different transaction characteristics on decisions to either
vertically integrate a transaction or cooperate in a long-
term contractual relationship with a transaction partner.
Thus, the dependent variable is dichotomous with expres-
sions of integration (1) and cooperation (0). We refer to
‘integration (1)’ as a decision to perform a transaction
in-house (acquisitions excluded), while ‘cooperation (0)’
characterizes a transaction performed under a long-term
contractual agreement with an independent transaction
partner (i.e. non-equity alliances).

Trust
In our study, the level of interorganizational trust prior to
the transaction was measured using a 4-item scale based on
Zaheer and Venkatraman (1995) and Zaheer et al. (1998).
Our notion of trust includes not only calculative but also
non-calculative elements in the sense of ‘noncalculative
reliance in the moral integrity, or goodwill, of others’
(Ring, 1996: 156), with both these elements typically being
interrelated.

We measure interorganizational trust using the assess-

ment of the relevant decision-maker (the most knowledge-
able informant) of the most preferred (potential) collabo-
ration partner for the transaction in question. In our study
interorganizational trust is an expectation (expressed by the
relevant decision-maker) of the intentions or behavior of
the most preferred (potential) collaboration partner. This
expectation is the result of possible previous exchanges
with this (potential) partner, this partner’s general reputa-
tion and the broader institutional environment in which
this partner is embedded.

Asset specificity
A variety of forms of asset specificity have so far been
identified in literature (for an overview see David and Han,
2004; Geyskens et al., 2006). These include property, whose
value is specific to a particular site, customized physical
assets and human capital, as well as processes and products
tailored to a particular application. The asset specificity of a
transaction refers to the degree to which the assets that
support the transaction can be redeployed to ‘alternative
uses and alternative users without sacrifice of productive
value’ (Williamson, 1991: 282). Since it measures how
easily assets can be redeployed outside a particular bilateral
exchange relationship, it also serves as a measure for the
degree of bilateral dependency (David and Han, 2004;
Geyskens et al., 2006). To define asset specificity for our
study, we adopted proven measurement concepts from
other studies (including Anderson and Schmittlein, 1984;
Heide and John, 1990; Coles and Hesterly, 1998; Joshi
and Stump, 1999). We used a 5-item scale that measures
the degree to which human assets, physical assets and
organizational processes are specific to the considered
transaction.

Measurement difficulties
Interestingly, only a few empirical studies have so far
tried to define measurement difficulties. To measure the
difficulties in monitoring and evaluating the performance

Effect of interorganizational trust

Werner H Hoffmann et al

107

of the transaction partner, we used a 2-item scale based on
Anderson (1985), John and Weitz (1989) and Poppo and
Zenger (1998). The first item measures the accuracy with
which the operational performance of the (potential)
exchange partner could be measured. The second item
measures the degree of transparency of the economic
benefits gained by the (potential) exchange partner from
the transaction.

Control variables
Since some studies report a significant direct effect of
environmental uncertainty on vertical integration, we
elected to use environmental uncertainty as a control
variable in our study. TCE proposes that environmental
uncertainty may have an effect on the decision to either
cooperate with an external exchange partner or integrate a
transaction and it therefore seemed appropriate to assess its
impact. For a detailed discussion of the mixed findings on
the relationship between environmental uncertainty and
vertical integration, see Krickx (2000), David and Han
(2004) and Geyskens et al. (2006). We categorized
environmental uncertainty into market (4-item measure)
and technological uncertainty (3-item measure). The items
are based on Walker and Weber (1987), Zaheer and
Venkatraman (1995), Robertson and Gatignon (1998) and
Sutcliffe and Zaheer (1998).

Researchers following a resource-based view of the firm

claim that the resources needed for a certain strategic
activitiy also play a crucial role in alliance decisions (e.g.
Eisenhardt and Schoonhoven, 1996; Madhok and Tallman,
1998; Das and Teng, 2000). Recent research offers strong
empirical support for the assumption that firms tend to
concentrate on activities where they possess – or are able to
build up – superior competences (e.g. Leiblein and Miller,
2003; Mayer and Nickerson, 2005). Consequently, we
included a control variable representing internal barriers
and constraints to develop the required competences
internally.

Empirical evidence shows that firms with high alliance

experience might have a greater propensity to cooperate
(and also be more successful in partnering) than firms with
low alliance experience, making cooperation experience a
further important control variable. Cooperation experience

was measured using a single item measure to determine
how much experience the responding firm had in managing
cooperative relationships.

Since a firm’s governance choices depend on its size, we

included firm size to control for a possible effect on the
make-or-cooperate decision. In line with previous research,
this variable was measured by the number of employees in
the organization. For data analysis, we used the natural
logarithm of the number of employees.

Methods and results
For the multi-item variables, each set of items was initially
subjected to item-to-total correlation to identify items that
did not belong to the specific theoretical construct. To
verify unidimensionality, a confirmatory factor analysis was
subsequently carried out for each multi-item variable using
the remaining sets of items (see e.g. Heide and John, 1990;
Stump and Heide, 1996). For every multi-item variable,
each set of items was hypothesized to be represented by a
single factor. Our results confirmed this hypothesis, and in
case of every multi-item variable the factor loadings exceed
0.4, which is seen to be an acceptable level (e.g. Stump and
Heide, 1996). To complete the construct validation process,
reliability was computed. All alpha coefficients of the multi-
item constructs display satisfactory levels of reliability,
i.e. greater than the 0.7 level recommended (e.g. Celly and
Frazier, 1996; see Table 2, alpha coefficients in parenth-
eses), with the exception of measurement difficulties, which
falls short of this threshold with an alpha coefficient of only
0.60. However, since this construct consists of only two
items with an inter-item-correlation of 0.43, the reliability
of measurement difficulties also lies at a satisfactory level.
Table 2 shows the correlation matrix with alpha coeffi-
cients, means and standard deviation. Unstandardized
means and standard deviations are reported for informa-
tion purposes; standardized variables (z-score transforma-
tion) are used in the analysis except for the dependent
variable. Correlations of the independent variables were
generally as expected and moderate in magnitude. Only the
measurement difficulties variable is significantly (P

o0.01)

correlated to asset specificity and trust. In addition, trust is
also significantly (P

o0.01) correlated with cooperation

experience.

Table 2 Means, standard deviations and correlations

a

Independent variables

Mean

SD

1

2

3

4

5

6

7

8

1. Ln (size)

3,088.31

b

12,334.63

b

2. Cooperation experience

4.32

1.53

0.27**

3. Resource barriers

3.42

1.87

0.12

0.17*

4. Market uncertainty

4.55

1.34

0.13

0.07

0.09

(0.85)

5. Technological uncertainty

3.85

1.56

0.11

0.03

0.13

0.09

(0.81)

6. Trust

5.27

1.14

0.01

0.24** 0.01 0.01

0.03

(0.83)

7. Asset specificity

4.21

1.29

0.04

0.07

0.03

0.01

0.15

0.07

(0.72)

8. Measurement difficulties

3.27

1.42

0.19*

0.28**

0.06

0.09

0.17* 0.26**

0.23** (0.60)

a

n

¼ 151.

b

Size.

*P

o0.05, **Po0.01, two-tailed tests.

Alpha coefficients appear on the diagonal in parentheses.

Effect of interorganizational trust

Werner H Hoffmann et al

108

To test Hypotheses 1, 2 and 3, we used hierarchical

logistic regression analysis because the dependent variable,
integration, is binary (Jaccard, 2001; Cohen et al., 2003).
These hypotheses were tested in three logistic regression
models (see Table 3).

Model 1 consists of all control variables. In model 2, all

main effects were added, while model 3 shows the full
model with the hypothesized interaction effects added. It
consists of (1) the set of control variables (firm size,
cooperation experience, resource barriers, market uncer-
tainty and technological uncertainty), (2) the main effects
from the second model, i.e. trust (Hypothesis 3), asset spe-
cificity and measurement difficulties, and (3) the inter-
action effects of trust and asset specificity (Hypothesis 1)
and trust and measurement difficulties (Hypothesis 2).

As Table 3 shows, the control variables in model 1 differ

regarding the significant impact on vertical integration. Our
results indicate that the characteristics of the resources
needed significantly affect boundary decisions. Internal
barriers and constraints to develop the required resources
internally significantly favor cooperation (0.65, P

o0.01,

odds ratio of 0.53). Considering the environmental
uncertainties, our results show a weak positive effect of
technological uncertainty on integration (0.36, P

o0.1, odds

ratio of 1.43) whereas no effect was found for market
uncertainty. However, as the further models show, the effect
of technological uncertainty seems to be not very robust.
This evidence is in line with the mixed empirical findings
on the influence of environmental uncertainty on boundary
choices (David and Han, 2004). Since TCE suggests an
impact of environmental uncertainty on governance
decisions, we tested for both the direct effect of environ-
mental uncertainty as well as for any interaction effects with

TCE variables, but found no significant results in our
sample. Similarly, in our data neither cooperation experi-
ence nor firm size play a significant role in boundary
decisions.

In model 2, the main effects, i.e. the effect of trust,

asset specificity and measurement difficulties on integra-
tion, were tested. Our results show that, in accordance with
Hypothesis 3, the higher the degree of trust in the
(potential) transaction partner, the lower the propensity
of the firm to integrate a strategically important activity
(0.73, P

o0.001, odds ratio of 0.48). We also found

support that the presence of the transaction characteristics
asset specificity and measurement difficulties positively
influences the integration decision (0.55, P

o0.05, odds

ratio of 1.73 and 0.52, P

o0.05, odds ratio of 1.68), which is

consistent with TCE reasoning and numerous previous
empirical studies.

In model 3, the two interaction terms test for the indirect

effect of trust on the make-or-cooperate decision to
examine the hypothesis that trust will attenuate the direct
effect of asset specificity (Hypothesis 1) and measurement
difficulties (Hypothesis 2), respectively. As Table 3 shows,
both hypotheses are indeed supported (P

o0.05). Moreover,

the odds ratio estimates indicate that each of these
significant interaction terms has a lower odds ratio than
the main effects of the TCE variables (Jaccard, 2001;
Santoro and McGill, 2005), indicating that the probability of
integration declines in combination with trust.

With regard to the goodness-of-fit statistics, the

chi-square goodness-of-fit estimates associated with all
models were significant (model 1 with P

o0.01, model 2 and

model 3 with P

o0.001). Furthermore, both models 2 and 3

significantly improve the prior models (P

o0.001 and

Table 3 Results of logistic regression analysis for Hypotheses 1, 2 3

a

Independent variables

Model 1

Model 2

Model 3

Step 1: Control variables

Ln (size)

0.02 (0.09) 1.02

0.02 (0.11) 1.02

0.03 (0.11) 0.97

Cooperation experience

0.24 (0.19) 0.79

0.06 (0.22) 1.06

0.08 (0.24) 0.92

Resource barriers

0.65** (0.20) 0.53

0.80*** (0.23) 0.45

0.97*** (0.26) 0.38

Market uncertainty

0.20 (0.18) 1.22

0.19 (0.22) 1.21

0.19 (0.22) 1.21

Technological uncertainty

0.36

+

(0.19) 1.43

0.34 (0.22) 1.41

0.48* (0.23) 1.62

Step 2: Main effects

Trust

0.73*** (0.22) 0.48

0.93*** (0.26) 0.40

Asset specificity

0.55* (0.23) 1.73

0.58* (0.24) 1.78

Measurement difficulties

0.52* (0.22) 1.68

0.56* (0.25) 1.75

Step 3: Interaction

Asset specificity trust

0.58* (0.25) 0.56

Measurement difficulties trust

0.67* (0.26) 0.51

Log-likelihood

185.38

153.96

140.16

Chi

2

18.04**

49.46***

63.26***

Likelihood ratio test (df) vs prior model

31.42 (3)***

13.80 (2)**

Pseudo-R

2

0.15

0.38

0.46

a

n

¼ 151.

Standardized regression coefficients and adjusted R

2

are reported with standard errors in parentheses and odds ratio estimates in bold.

+

P

o0.1, *Po0.05, **Po0.01, ***Po0.001, two-tailed tests.

Effect of interorganizational trust

Werner H Hoffmann et al

109

P

o0.01 respectively), and a different measure of fit, the

pseudo R

2

, underscores these findings. Hence, our results

emphasize both the importance of the direct effect of trust,
asset specificity and measurement difficulties, as well as
the moderating effect of trust on the make-or-cooperate
decision.

To further assess the implications of the regression

results, we plotted the relationship between the probability
of integration (as opposed to cooperation) on one axis and
asset specificity on the other axis, using separate graphs to
represent the different levels of trust. We also created a
similar plot for measurement difficulties as the independent
variable (see Figure 1). For this purpose, we split our
sample in two data sets: one containing all ‘high trust cases’
(trust44) and one containing all ‘low trust cases’ (trust

o ¼ 4).

The two graphs in Figure 1 illustrate that our data indeed

support Hypotheses 1 and 2. They show that the effects of
asset specificity and measurement difficulties on vertical
integration are much stronger when trust between the
transaction partners is low. In ‘high trust cases’, the direct
effects of the two TCE variables on vertical integration are
significantly attenuated.

Hypothesis 4 suggests that interorganizational trust

would have a negative effect on integration even when the
threat of opportunistic behavior is low. We created a new
variable opportunism by combining both drivers of oppor-
tunistic behavior according to TCE, asset specificity and
measurement difficulties. To test Hypothesis 4, we calcu-
lated the interaction effect of trust and opportunism by
categorizing the variable opportunism threefold: value zero
for all cases less than 3, value one for all cases between 3
and 5, and value two for all cases more than 5. The full
regression model consists of all control variables used in
the calculations of Hypotheses 1–3, the direct effect of trust
and the categorized variable of opportunism, and the
interaction effect between the two. The results of the
regression analysis show that trust indeed has a significant
negative effect on integration even when the magnitude of
opportunism is low (see Table 4).

Again, we plotted a graph (Figure 2) to further illustrate

these results. We considered opportunism, according to the

regression results to be low only in cases with a value less
than 3 and high in cases more than 5. For illustration
purpose we also include graphically the overall negative
effect of trust on the probability of performing an activity
in-house. This graph shows that trust has an influence on
the boundary choice even in cases with low opportunism,
i.e. there is still a negative influence on the probability of
performing an activity in-house. However, Figure 2 also
indicates that the influence of trust on boundary choices
plays a more important role when opportunism is
considered to be high.

Discussion and conclusion

Theoretical implications
The purpose of this paper is to contribute to providing a
better understanding of the role of trust in decisions
on firm boundaries. Bringing together explanations on the

Probability of integration

1

0

Asset specificity

Low trust

High trust

High

Low

Probability of integration

1

0

Measurement difficulties

Low trust

High trust

High

Low

Figure 1 Interaction effects of trust and asset specificity and trust and measurement difficulties on integration.

Table 4 Results of logistic regression analysis for Hypothesis 4

a

Independent variables

Model

Ln (size)

0.07 (0.11) 0.93

Cooperation experience

0.13 (0.23) 0.88

Resource barriers

0.99*** (0.26) 0.37

Market uncertainty

0.16 (0.23) 1.18

Technological uncertainty

0.51 (0.23)* 1.67

Trust

1.01*** (0.27) 0.36

Opportunism

0.81** (0.26) 2.26

Opportunism trust

0.99** (0.30) 0.37

Log-likelihood

141.73

Chi

2

61.68***

Pseudo-R

2

0.45

a

n

¼ 151.

Standardized regression coefficients and adjusted R

2

are

reported with standard errors in parentheses and odds ratio
estimates in bold.
*P

o0.05, **Po0.01, ***Po0.001, two-tailed tests.

Effect of interorganizational trust

Werner H Hoffmann et al

110

impact of trust from TCE and research on the value-
enhancing role of trust in strategic alliances, we analyze the
role of trust in the decision to either perform a strategically
important transaction in-house (‘make’) or handle it in
a long-term cooperative arrangement with an external
exchange partner (‘cooperate’). In particular, we use a
broad concept of trust that encompasses three different lines
of theorizing on the role of trust in governance choices –
TCE, transaction value-based theories and sociological
views – to disentangle opportunism-based and opportu-
nism-independent effects of trust. Our empirical results
confirm the relevance of both opportunism-based and
opportunism-independent explanations of the role of trust
in boundary choices. With respect to opportunism-based
explanations, our data provide strong evidence for the
TCE proposition that trust moderates the effect of asset
specificity on the decision to vertically integrate an activity
or carry it out with an independent exchange partner. We
extended the standard TCE explanation by including the
difficulties of measuring an exchange partner’s perfor-
mance in our model. Our data confirm that performance
measurement difficulties – in addition to asset specificity –
significantly influence make-or-cooperate choices. More-
over, we also anticipated a moderating effect of trust on
the influence of performance measurement difficulties on
make-or-cooperate decisions. This is confirmed by the
study and our results provide empirical evidence for the
existence of such a moderating effect. Since the negative
effect of trust on integration is shown to be significantly
stronger in cases where the threat of opportunistic behavior
is high, our study confirms theoretical reasoning and prior
empirical evidence that interorganizational trust reduces
transaction costs by mitigating the threat of opportunistic

behavior and enables firms to choose a less expensive
governance mode than vertical integration.

While our opportunism-based interpretation of inter-

organizational trust corresponds to Williamson’s (1993)
view that trust can be reduced to calculative behavior
(reserving non-calculative forms of trust for ‘personal
relations’, e.g. within families) in the context of economic-
ally relevant exchange relationships, we nonetheless pro-
pose that the role of trust in governance choices goes well
beyond averting the transaction costs stemming from
opportunistic behavior. Indeed, our study is the first to
provide empirical evidence that trust has a significant
positive impact on collaboration even for transactions with
a low danger of opportunistic behavior (stemming from
asset specificity and measurement difficulties) and for
which TCE would not propose a significant effect of trust
on the make-or-cooperate choice.

This opportunism-independent effect of interorganiza-

tional trust can be explained using both economic and non-
economic considerations. From an economic perspective,
interorganizational trust increases the transaction value
of a collaborative exchange by positively influencing the
breadth, depth and longevity of collaboration. Therefore, a
higher level of interorganizational trust makes collaborative
exchange economically more beneficial. This insight is parti-
cularly important with regard to opportunism-independent
theories of firm boundaries. A number of authors have
argued that firms provide specific mechanisms for identi-
fication, coordination, communication and knowledge
sharing, which generate value yet are not available through
market contracting (see e.g. Rumelt, 1995: 124; also Cohen
and Levinthal, 1990; Conner and Prahalad, 1996; Demsetz,
1988; Kogut and Zander, 1996; Poppo and Zenger, 1998).
While we agree with this view, we also contend that such
gains can – at least in part – also be realized within a
trusting collaboration. Hence, interorganizational trust can
substitute at least some of the merits of ‘belonging to the
same firm’ and make a collaborative arrangement more
valuable. In addition, a collaborative exchange with another
firm can generate relational rents (Dyer and Singh, 1998) by
effectively accessing external resources. Consequently, we
conclude that a high level of interorganizational trust
enables the cooperating firms to enjoy many of the advan-
tages typically found in hierarchical governance and, at the
same time, to more fully exploit the value creation potential
that comes from a collaborative exchange.

Looking beyond these opportunism-independent, yet

calculative explanations of interorganizational trust, we
also propose a non-economic explanation of the empirically
established opportunism-independent effect of interorga-
nizational trust. From a non-calculative perspective, social
(institutional) processes and pressures can also increase the
likelihood of collaborative exchange. Here, the decision to
collaborate (and to trust an external exchange partner) is
not so much the result of a calculation of the most
beneficial governance mode for a given transaction from an
economic perspective, but rather emerges as a result of
social norms, bonds and obligations. In particular, norms
of reciprocity and indebtedness as well as social proximity
(‘belonging to the same group’) can lead to collaborative
behavior independent of economic considerations. This
interpretation of the findings of our study is in line with the

Probability of integration

Trust

High

Low

High opportunism

All cases

1

0

Low opportunism

Figure 2 The effect of trust on integration when the threat of opportunism
is low.

Effect of interorganizational trust

Werner H Hoffmann et al

111

theoretical reasoning for interorganizational trust proposed
by neo-institutionalism (Zucker, 1987; Oliver, 1990) and
socio-psychology (Baier, 1986; Ring, 1996). Although we
argue that their interrelatedness makes it difficult to clearly
differentiate empirically between the different kinds of
opportunism-independent interorganizational trust, our
classification and discussion of the different effects of
interorganizational trust contributes to providing a better
understanding of the different roles of trust and, particu-
larly, to the controversial discussion on the relation
between trust and calculativeness (see e.g. Craswell, 1993;
Saparito et al., 2004; Bromiley and Harris, 2006).

Managerial implications
Trust does matter! Our study confirms anecdotes by
executives who, for a long time, have been pointing to the
central importance of inter-organizational trust for bound-
ary decisions.

Companies that have been able to develop and maintain

trustful relationships with a number of other companies do
have a fundamental strategic advantage. This social capital
makes it possible for the focal company to organize certain
activities more efficiently and flexibly with exchange
partners. Even when exchange hazards are low, the level
of trust between exchange partners plays an important role.
A high level of trust between them not only reduces
transaction costs but also enhances transaction value.
However, our argument that also non-calculative motives
might increase the propensity of companies to cooperate
sheds light on a potential danger: firms might choose a
cooperative exchange that is not economically beneficial to
them. Firms need to be aware that in situations character-
ized by repeated ties with a specific exchange partner, this
might lead to interorganizational inertia in the long run.
When firms are reluctant to terminate an established
cooperative relationship that is not economically beneficial
anymore, this will negatively influence their competitive-
ness and performance.

Limitations
As with all empirical studies, our study is not free from
several limitations. The findings of this empirical study are
based on data from 151 make-or-cooperate decisions in one
industry sector (automotive supply). Our sociological
considerations clarify the fact that the role of trust is, in
many ways, contingent on the ‘sociological context’ (see
Mayer et al., 1995; Rousseau et al., 1998). Cultural context,
values and practices strongly impact human behavior and
vary not only at the industry and organization level, but
also at the social level (Hofstede, 1980; House et al., 2004).
Gelfand et al. (2004: 457) note that the nature and impor-
tance of organizational trust vary with the level of
individualism/collectivism in the cultural context (Sako,
2000; Dyer and Chu, 2003; Huff and Kelley, 2003). The
automotive industry in Austria and Southern Germany is
characterized by a dense network of interorganizational
relationships. The different firms all know each other fairly
well and most of them are members of an ‘automotive
cluster’. These factors might result in a relatively important
role for trust and limit the generalizability of the empirical
results to other cultural contexts and to other industries. In

environments where the economic actors are not embedded
in a dense network of relationships, effects that rely on social
embeddedness might play a less prominent role. Thus, one
could argue that in such situations (industries) the impor-
tance of non-calculative trust will be lower than in highly
connected settings.

Moreover, our analysis does not focus on how trust is

created and extended, although it would indeed be
interesting to compare economic rationales for the creation
of trust with sociological views (on this see e.g. Sabel, 1993).
Obviously, the reasons why people trust each other may
be important in differentiating empirically between the
different forms of interorganizational trust and their
different effects on governance decisions. Our study is only
a first step towards exploring the specific effects of the
different aspects of interorganizational trust on governance
choices in greater detail. A dynamic and socialized view of
trust, which takes account of how it is generated and how
the trust-building process interacts with boundary choices,
could provide important additional insights (Gulati, 1995;
Goerzen, 2007; Puranam and Vanneste, 2009). Such an
analysis may even help to overcome the problem of how
to distinguish empirically between the different forms of
opportunism-independent interorganizational trust and
explore the relative importance and combined effects of
its calculative and non-calculative elements on boundary
choices.

Note

1 We use the terms transaction and exchange synonymously.

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Appendix

Table A1 Survey questions

a

Variable

Items

b,c

(1) Trust

Four items

(1-1)

We believe in the goodwill and moral integrity of our (potential) cooperation partner

(1-2)

The (potential) partner has always been even handed and caring towards us in negotiations about the cooperation

(1-3)

On the basis of our experience from previous cooperation with the (potential) partner and/or its reputation, we were
certain the partner was reliable and would keep the promises made to us

(1-4)

We were not worried that the (potential) partner would take advantage of our dependency and use modified
contextual constraints to profit at our expense

(2) Asset specificity Five items

(2-1)

Cooperation with the partner requires (would have required) transaction-specific manufacturing facilities and tools

(2-2)

Cooperation with the partner requires (would have required) transaction-specific expertise and know how

(2-3)

Cooperation with the partner requires (would have required) an investment in transaction-specific training for our
staff

(2-4)

Cooperation with the partner requires (would have required) a transaction-specific adaption of our production and
logistics processes

(2-5)

Changing the cooperation partner for this transaction requires (would have required) an investment in time and
money for us

(3) Measurement

difficulties

Two items

(3-1)

The partner’s level of performance, i.e. the level of effort, in the area of cooperation is difficult (would have been
difficult) for us to estimate

(3-2)

The economic benefit – in terms of profit or profitability – for the cooperation partner from the cooperation with us
is difficult (would have been difficult) for us to estimate

Control variables
(4) Market

uncertainty

Four items

(4-1)

Developments in market demand and market supply – in terms of volume – of the outsourced (integrated) activity
are difficult to predict

(4-2)

Developments in price levels for the outsourced (integrated) activity are difficult to predict

(4-3)

Developments in market demand – in terms of volume – for our end product are difficult to predict

(4-4)

Developments in price levels for our end product are difficult to predict

(5) Technological

uncertainty

Three items

(5-1)

The dynamics of change for the technologies relevant to the outsourced (integrated) activity are very high

(5-2)

The outsourced (integrated) activity is characterized by frequent change in technical specifications and short
technology life cycles

(5-3)

Technological evolution is rapid in our industry

(6) Resource

barriers

The barriers and constraints to develop the target resources internally, with particular emphasis on property rights
(patents, copyrights, etc.) and knowledge barriers (lack of knowledge base and absorptive capacity, extensive and
complex learning and development processes, etc.) are high

(7) Size

Number of employees

(8) Cooperation

experience

We have a great deal of experience in managing cooperative relationships

a

The questionnaires were originally conducted in German.

b

7-Likert scale, 1 disagree, 7 strongly agree.

c

Item column: from the questionnaire on cooperation; explanations in parentheses refer to the questionnaire on integration.

Effect of interorganizational trust

Werner H Hoffmann et al

115

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