the role of interpersonal trust for enterpreneurial exchange in a trnsition economy

The role of interpersonal trust for

entrepreneurial exchange in a

transition economy

Tatiana S. Manolova

Bentley College, Waltham, Massachusetts, USA

Bojidar S. Gyoshev

International Business School, Botevgrad, Bulgaria, and

Ivan M. Manev

Maine Business School, University of Maine, Orono, Maine, USA

Abstract

Purpose – While trust is widely recognized as central to the establishment of an effective market
economy, research on transition economies has not examined sufficiently its role in promulgating
economic development. This study seeks to ascertain the links between supplier trust, asset specificity,
and uncertainty reduction in the context of a transition economy, and to validate a measure of trust
developed in a Western developed market economy in the conditions of a transition economy.
Design/methodology/approach – A confirmatory factor analysis of trust, asset specificity and
uncertainty reduction was performed with a sample of Bulgarian small business owners.
Findings – Commensurate with expectations, supplier trust is significantly and positively associated
with both asset specificity and uncertainty reduction. The six-item measure of supplier trust is a valid
measure for new and small ventures in the context of a transition economy.
Originality/value – This paper demonstrates that private entrepreneurs in transition economies
compensate for the lack of institutional support through embeddedness in their relational exchange
network.

Keywords Trust, Assets management, Uncertainty management

Paper type Research paper

Introduction
Organizational researchers have devoted considerable attention to understanding the
significance of trust for organizations and economic activities (McEvily et al., 2003a).
Trust, or “the mutual confidence that no party in an exchange will exploit another’s
vulnerabilities” (Barney and Hansen, 1994), is an important non-market governance
mechanism, which facilitates long-term relationships between firms and is an
important component in the success of strategic alliances (Gulati, 1995). In more
uncertain environments trust lowers transaction costs in inter-firm collaborations,
thereby providing firms with a source of competitive advantage (Barney and Hansen,
1994). Trust is increasingly considered to be not only an organizing principle providing
the logic by which work is coordinated and information is gathered, disseminated, and
processed within and between organizations (Zander and Kogut, 1995; McEvily et al.,
2003b), but also a valuable contributor to economic exchange (Doney et al., 1998).

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1746-8809.htm

A previous version of this paper was presented at the Academy of Management Annual Meeting
in Honolulu, August, 2005.

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International Journal of Emerging

Markets

Vol. 2 No. 2, 2007

pp. 107-122

q Emerald Group Publishing Limited

1746-8809

DOI 10.1108/17468800710739207

In the area of entrepreneurship and small business research, in particular, trust has
been documented to significantly facilitate small firms’ commercial transactions
(Saparito et al., 2004).

The role of trust for entrepreneurial exchange is even more vital in the context of

transition economies, which are characterized by the fluidity, inconsistency, and
ambivalence of their formal institutions (Peng, 2004). These institutions, which are
themselves in upheaval (Newman, 2000; Roth and Kostova, 2003), offer few safeguards
that would relieve the need for added transaction-specific support (Khanna and Palepu,
2002; Hohmann et al., 2002). Personal trust often complements and even substitutes for
some of the legal and regulatory deficiencies, reduces uncertainty and encourages
entrepreneurial commitment to economic exchange.

While trust is widely recognized as central to the establishment of an effective

market economy, extant research has not examined sufficiently its role in
promulgating development in transition economies (Humphrey and Schmitz, 1998).
The patterns of institutional and governance mechanisms that have emerged in the
absence of strong legal regimes or binding social norms have been less understood
(Choi et al., 1999). In particular, research on the role of trust as a relational governance
mechanism has focused predominantly on the impact of informal social and business
networks fostering entrepreneurship in China (Wu and Choi, 2004; Peng, 2004; Choi
et al., 1999), while the role of trust in the institutional milieus of Central and Eastern
Europe has remained at the periphery of scholarly attention (Hohmann et al., 2002).

This study seeks to contribute to the better understanding of the role of trust in

forming the context for entrepreneurial economic exchange in an Eastern European
transition economy. Our goal is twofold. First, we seek to ascertain the links between
supplier trust, asset specificity, and uncertainty reduction. Our research context is
Bulgaria: a relatively understudied Eastern European country mid-way in its
transition to a market-based economy. Second, we seek to validate a measure of
supplier trust in the context of new and small ventures in a transition economy, thus
responding to recent calls for empirical validation of the theoretical developments on
trust (McEvily et al., 2003b), especially in the context of transition economies (Choi et al.,
1999; Humphrey and Schmitz, 1998). To entrepreneurs in transition economies, our
study provides insights to the role of supplier trust in reducing uncertainty and
facilitating economic exchange.

The paper is structured as follows. We start by presenting the context of the study

and discuss the role of trust in the formation of a context for entrepreneurial exchange
in transition economies, and in the context of Bulgaria, in particular. We then define the
constructs of interest to the study and present the hypothesized relationships between
them. Next, we describe our method and report on the findings from the analysis.
We conclude by discussing the study’s research and practitioner implications.

Trust and entrepreneurial exchange in transition economies
Transition economies have generally been described as “low-trust” societies
(Fukuyama, 1995; Humphrey and Schmitz, 1998; Hohmann et al., 2002),
characterized by a low regard for formal institutions, the rule of law, or contracts.
To a large degree, “low-trust” attitudes in transition economies are the institutional
legacy of central planning and single party political system. Under the former socialist
social order, the individual had little reason to trust a system in which contracts were

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supplanted by central planning directives, laws were superseded by party decrees, and
the party-state faced no institutional checks and balances. After the fall of communism,
the institutional upheaval of the transition to a market economy bred even more
caution and distrust, as the formal and informal bonds holding the economy together
were ruptured and uprooted. A recent study by the World Bank (Broadman et al., 2004)
established that economic growth in the emerging market economies in South Eastern
Europe has been impeded by the absence of effective market-based institutions to
protect property rights, fair competition, and financial discipline, making the risk and
costs of doing business excessively high. A large survey of over 6,000 firms across
26 transition economies sponsored by the European Bank for Reconstruction and
Development found that the average prepayment levels (a measure of the degree of
mistrust in economic exchange) are markedly higher in less reform-oriented and poorer
transition economies (Raiser et al., 2004).

Newly emerging private entrepreneurs in transition economies are especially

vulnerable to the pressures imposed by an uncertain, complex, and hostile institutional
environment. Frustrated by the ineffective legal enforcement of contracts and property
rights, private entrepreneurs depend to a large extent on informal norms for security
(Peng, 2004) and actively seek to design alternative governance structures and
contractual arrangements. Informal ties and relational governance fill in the
“institutional voids” left in the formal institutional infrastructure (Khanna and
Palepu, 1997; Peng and Heath, 1996; Xin and Pearce, 1996).

Empirical research has explored how firms operating in an environment where

formal institutions cannot be trusted invent compensatory strategies for overcoming
institutional deficiencies. Using a combination of surveys and in-depth interviews with
Russian business owners and top managers, Radaev (2004) found two main coping
strategies: private contract enforcement, which can undermine the standard rule-of-law
solution, and “bottom-up” conventions, based on informal shared understandings
within specific segments of the market, which in the long run may be backed by
government agencies and translate into formal government regulations. Similarly, a
study comparing business relationship governance mechanisms among small firms in
Slovenia and Bosnia found that business relations in Bosnia, characterized by a weaker
institutional environment, were likely to be based more on interpersonal, rather than on
institutional trust (Rus and Iglic, 2005). This finding is echoed by a comparative
exploratory study of small businesses in Germany, Estonia, and Russia (Welter et al.,
2004), which found that in more fragile institutional environments interpersonal trust
can substitute for institutional deficiencies.

Our research focuses specifically on entrepreneurial exchange in the context of

Bulgaria, whose institutional profile shares many commonalities with other economies
in transition, being characterized by voids in business legislation, compounded by a
regulatory flux. The high environmental turbulence and unpredictability have
presented numerous challenges to the growth of the private sector. Case-based research
documents that institutional actors are perceived as “opportunistic,” “self-serving,”
“obstructing,” “unfair,” and “hostile” (Manolova and Yan, 2002). Bartlett and
Rangelova (1997, p. 330) reported:

. . . many complaints that the administrative apparatus is not user friendly towards new
private projects, and that much red tape remains in place which hinders the entry and growth
of firms.

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In his interview-based study of 45 Bulgarian entrepreneurs Dadak (1995) noted that
most of the problems experienced by these entrepreneurs were created by government
inefficiency, bureaucratic obstruction, high taxes, and outdated and inconsistent
legislation. A study by Dragneva (1998) also echoed numerous problems arising from a
legal system that is weak in enforcing contracts. Overall, the high cost and uncertainty
of third party enforcement is characteristic of the task and institutional environment of
Bulgaria. Not surprisingly, experimental research based on economic game-theoretic
approaches has ascertained the high levels of horizontal (e.g. interpersonal) and low
levels of vertical (e.g. between an individual and an institution) trust characterizing the
Bulgarian institutional environment (Koford, 2003).

The main premise of our study is that in the context of a fragile institutional

environment, interpersonal trust will be positively associated with uncertainty
reduction and will encourage entrepreneurial commitment to economic exchange.
We focus on the dyad exchange relationships between new and small business owners
and their suppliers. Issues of trust and risk can be significantly more important in
supply chain relationships because these relationships often involve a longer-term
and a higher degree of interdependency between actors (La Londe, 2002). Thus,
buyer-supplier relationships provide a clearer representation of what may otherwise be
a common phenomenon: namely, that there is a significant and positive association
between interpersonal trust, uncertainty reduction, and resource commitment.

Theoretical perspectives and hypothesis development
This study draws on perspectives from transaction cost economics (Williamson, 1975,
1985, 1993) and social embeddedness (Granovetter, 1985) to assess the relationships
between interpersonal trust, uncertainty reduction, and resource commitment
(asset specificity). The transaction cost perspective suggests that under conditions of
asset specificity and environmental uncertainty, trust is an optimal non-market
governance structure because it reduces the information processing requirements and
alleviates the need for contractual hazard safeguards, thus lowering transaction costs
(Chiles and McMackin, 1996, pp. 91-2). The social embeddedness perspective
emphasizes the social nature of exchange (Macneil, 1980). It examines how economic
exchange relations “become overlaid with social content that carries strong expectations
of trust and abstention from opportunism” (Granovetter, 1985, p. 490).

Interpersonal trust
There is a considerable divergence in the conceptualization, as well as the levels of
analysis of trust (Zaheer et al., 1998). The transaction cost perspective (Williamson,
1993) makes a distinction between calculative, personal, and institutional trust.
Calculative trust refers to a “rational form of trust fostered by mutual hostages and
other economic commitments.” Personal trust applies, according to Williamson, only to
personal relationships. Finally, institutional trust derives from the social and
organizational embeddedness but in fact, according to Williamson, is calculative as
well (Young-Ybarra and Wiersema, 1999, p. 446). In other words, in the classic
transaction cost model, it is calculative trust (as residual risk) that dominates business
relations.

This self-interest-based conceptualization of trust contrasts with the views of

social embeddedness theorists (Granovetter, 1985; Gambetta, 1990) who argue that,

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as a matter of human nature, opportunism is far rarer and trust far more common than
is posited in transaction cost economics (Bensaou and Anderson, 1999, p. 462).
Through the interpretive view of social norms, “global trust in generalized others” is
generated through social norms such as reciprocity, obligation, cooperation, and
fairness (Chiles and McMackin, 1996, p. 86; Ghoshal and Moran, 1996).

Bridging the two perspectives, in her work of the production of trust Zucker (1986)

identified three forms of trust production: institution-, characteristic-, and
process-based. Institution-based trust relies on enforceable rules and rights, as well
as availability of reliable information on potential partners. Characteristic-based trust
is established by group membership and reputation. Process-based trust draws on
first-hand experience of exchange or cooperation with potential partners. Extending
this argument to the “low-trust” context of transition economies, characterized by low
levels of institution-based trust and low levels of “global trust in generalized others,”
it appears that the main form of trust production will be “process-based” trust,
stemming from first-hand experience of exchange and cooperation. Since, by definition,
first-hand experiences are generated by interpersonal relations, it follows that the main
form of trust governing business relations will be interpersonal trust.

Following Zaheer et al. (1998, p. 143), we conceptualize trust as the expectation that:

the actor can be relied on to fulfill obligations;

will behave in a predictable manner; and

will act and negotiate fairly when the possibility for opportunism is present.

We also follow Zaheer et al. (1998, p. 143) in that we focus on the exchange dyad and
develop a definition of trust that is inherently relational, because we are specifically
interested in studying the role of trust in economic exchange.

Asset specificity
Consistent with the transaction-cost approach, we use asset specificity to conceptualize
the resource commitment to a transaction. We follow Williamson (1985), who defined
asset specificity as “durable investments that are undertaken in support of particular
transactions, and the opportunity cost of (such) investments is much lower in best
alternative uses.” Thus, asset specificity refers to investments in physical or human
assets that are dedicated to a particular business partner and whose redeployment
entails considerable switching costs (Erramilli and Rao, 1993). Asset specificity is
particularly critical in the context of transition economies, because the market clearing
mechanisms are not sufficiently developed, which makes asset redeployment
problematic and very costly.

Uncertainty reduction
Uncertainty is a dimension of economic exchange, which arises when it is hard to
foresee the contingencies that might occur during the course of the transaction
(Williamson, 1985). Uncertainty causes problems in part because of bounded
rationality. Economic actors cannot foresee all possible eventualities. It might also
occur as a result of information asymmetries: buyers do not have the product or cost
information that suppliers do. Uncertainty causes problems because of the danger of
opportunistic ex-post renegotiation of contracts. Environmental uncertainty is one
of defining characteristics of transition economies. In addition, low financial and

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reporting transparency aggravates information asymmetry problems, thus increasing
uncertainty even more. Well established and stable relationships in economic
exchange, therefore, are instrumental in bringing order to a volatile and unpredictable
environment. We follow Zaheer et al. (1998), in conceptualizing uncertainty reduction
as the degree to which exchange relationships between a focal buyer and supplier help
reduce uncertainty in the task environment.

Asset specificity and interpersonal trust
The central proposition of the transaction cost perspective is that asset specificity
(i.e. anything tangible or intangible of value which is costly to shift from one
transaction context to another), creates contractual hazards: the greater the asset
specificity, the more elaborate the governance mechanism required to constrain the
opportunism

that

may

result.

specificity

mounts,

such

contracts

become (cognitively) impossible to write and (in practical terms) impossible to
enforce. This sparks a move to less complete contracts, which leave more to be worked
out later, and to relational governance mechanisms, such as close relationships and
joint actions between two parties that safeguard the firm’s transaction-specific assets
(Bensaou and Anderson, 1999, p. 462; Zaheer et al., 1998).

Trust reduces the information processing requirements and requires fewer

contractual hazard safeguards, thus lowering transaction costs (Chiles and
McMackin, 1996, p. 91-2). Dyer and Singh (1998, p. 670) suggest that self-enforcing
governance mechanisms such as trust are more effective than third-party enforcement
mechanisms at both minimizing transaction costs and maximizing value-creation
initiatives. We hypothesize a bidirectional causal relationship between trust and asset
specificity. For instance, when one trusts another party, one would be more willing to
make relation-specific investments, thus increasing asset specificity. Conversely, when
such relation-specific investments are made, this is likely to act as a sign of goodwill,
leading to the other party’s trust. In line with the central propositions of transaction-cost
economics, we expect the bi-directional relationship between trust and asset specificity
to be stronger under conditions of environmental uncertainty and small numbers
trading. Uncertainty exacerbates the problems arising from bounded rationality and
opportunism, while the presence of only a small number of players in a market limits the
possibility for disciplining the transaction partner (Williamson, 1975). Formally:

H1.

There is a positive relationship between asset specificity and interpersonal
trust.

Interpersonal trust and uncertainty reduction
Uncertainty prevents voluntary interactions, but institutions of trust can substitute for
knowledge by making promises relatively credible. In transition economies, in particular,
private sources of trust and recourse are superior to state-provided recourse (Benson,
2001). Trust reduces ex-ante information processing costs and increases information
sharing – a particularly valuable resource in contexts characterized by uncertainty (Dyer
and Chu, 2003). The need for trust is especially acute in risky situations (Mayer et al., 1995),
related to vulnerability and/or uncertainty about an outcome (Doney et al., 1998). Lewis
and Weigart (1985, p. 970) emphasize the need for uncertainty, because “if one were
omniscient, actions could be undertaken with complete certainty, leaving no need, or even
possibility, for trust to develop” (Doney et al., 1998, p. 603).

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Generally speaking, risk would be present, and trust necessary, in settings where

parties make transaction-specific investments and where there is a high degree of
environmental uncertainty (Dyer and Chu, 2003). Trust allows idiosyncratic exchange
relationships to survive greater stress and display greater adaptability (Williamson,
1975, pp. 62-3). Without trust, the uncertainty that pervades the organization and
coordination of economic activity would be debilitating. Although trust is not the only
solution to the organization of work, it can generate efficiencies by reducing
uncertainty, thus conserving cognitive resources, lowering ex-ante transaction costs,
and simplifying decision making (McEvily et al., 2003a, b). Conversely, having a
trusted partner in a relationship reduces uncertainty. Formally:

H2.

There is a positive relationship between uncertainty reduction and
interpersonal trust.

Transaction contextual factors: asset specificity and uncertainty
Finally, we assess the relationship between uncertainty and asset specificity.
We surmise that when a party in a relationship makes relation-specific investments,
this serves as a powerful goodwill signal, which helps reduce the uncertainty
surrounding the relationship. Conversely, the reduction of uncertainty encourages
asset-specific investments. In formal terms:

H3.

There is a positive relationship between asset specificity and uncertainty
reduction.

Methods
Survey and sample characteristics
We conducted a survey in a medium-sized city in Bulgaria with 170 owners of small
businesses, who underwent small business management training at a local university.
The survey was forward and backward translated to ensure semantic consistency.
Non-responses and unusable responses rendered a usable sample of 119 small business
owners, representing a response rate of 70 percent. Most of the studied businesses were
in retail (about 61 percent) and services (18 percent) while the rest were in
manufacturing (12 percent), wholesale (6 percent), and construction (3 percent).
This distribution is not much different from the industry structure of small businesses
in the country[1]. These were fairly young firms that have been established after the
beginning of reforms around 1990 (mean firm age seven years, sd. 3.1, range 1-13).
These firms were also small, with an average of about 4.6 employees (not counting the
owner; sd. 8.4, range 0-50). Again, this is typical for the country, where more than
70 percent employed of small businesses employed only one or two people, and over
90 percent had less than ten employees (Doudeva, 2001). The respondents ranged in
age between 20 and 61 years, with average 39.5 and sd. 10.2 years. Of them, 41 percent
were women, and 30 percent had at least some college education.

Measures
We asked respondents to list their four most important suppliers and then describe
each relationship separately. We then averaged these responses. For interpersonal
trust, we used Rempel and Holmes’ (1986) and Zaheer et al.’s (1998) instruments for

Role of

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supplier trust which we adapted to our research context. The selected questions reflect
the three components of trust – reliability, predictability, and fairness.

A fundamental challenge in conceptualizing the role of trust in economic exchange

is extending what is primarily an individual level phenomenon to the organizational
level of analysis. When research does not clearly specify how trust translates from the
individual to the organizational level, this may lead to theoretical confusion about who
is trusting whom because it is individuals as members of organizations themselves,
who trust (Zaheer et al., 1998, p. 141). Zaheer et al. (1998) find the degree of
interorganizational trust and interpersonal trust between boundary spanning agents to
be related, though empirically and theoretically distinct. The nature of our sample
alleviates the concern about the relationship between interpersonal and
interorganizational trust, being a sample of predominantly new and small, therefore,
less socially complex organizations. New and small businesses are built around the
entrepreneur, who determines to a large extent the strategic choices of the organization
(Cooper et al., 1994). Small business owners are the key, and oftentimes the sole
decision makers in their organizations. Therefore, small business behaviors are “little
more than the extension of the will of the dominant coalition of individuals” (Hannan
and Freeman, 1984, p. 158).

For uncertainty reduction, we asked respondents about the degree to which each of

their four suppliers reduced uncertainty. Again, we used items validated in extant
research in a Western context (Noordewier et al., 1990; Zaheer et al., 1998). Asset
specificity was measured by the degree of customization for the requirements of
the particular supplier. All items were measured on a seven-point Likert-type scale
(1 – strongly disagree, 7 – strongly agree). The questions are listed in the Appendix[2].
The reliability values for both trust and uncertainty reduction were above the
suggested threshold of 0.70 (Nunnally, 1978).

Results
Descriptive statistics and zero-order correlations are presented in Table I.

We first performed factor analysis for each construct to make sure it is unidimensional.

The items for both trust and uncertainty reduction loaded on single factors.

Mean

UR1

UR2

UR3

UR4

UR5

6.14

1.12

5.32

1.44

0.64

5.85

1.23

0.72

0.60

4.92

1.85

0.39

0.30

0.44

5.58

1.67

0.42

0.30

0.53

0.18

6.10

1.14

0.78

0.59

0.76

0.38

0.41

UR1

6.17

1.07

0.34

0.25

0.27

0.24

0.31

0.34

UR2

6.18

1.08

0.54

0.42

0.43

0.25

0.30

0.43

0.55

UR3

5.81

1.30

0.52

0.44

0.45

0.25

0.22

0.46

0.42

0.57

UR4

5.83

1.22

0.56

0.44

0.50

0.37

0.20

0.52

0.45

0.48

0.45

UR5

5.02

1.79

0.09

0.14

0.09

0.16

0.09

0.12

0.17

0.23

0.25

0.23

AS1

6.02

1.49

0.30

0.33

0.26

0.12

0.26

0.19

0.40

0.49

0.30

0.31

0.19

Notes: Coefficients of 0.18 and above are statistically significant at p , 0.05

Table I.
Descriptive statistics and
zero-order correlations

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Next we performed a confirmatory factor analysis using Amos 4.01 software (Arbuckle
and Wothke, 1999), specifying a maximum likelihood estimation procedure that is robust
against non-normality of data. The fitted model is shown in Figure 1.

We evaluated the fit of the model though several indicators. The

value of 69.79,

with 52 df. ( p ¼ 0.05) is still statistically significant though barely so. Nevertheless,
this represents a substantial improvement (98.5 percent) over the independence model.
Comparative fit index (CFI) and normed fit index (NFI) exceed the 0.90 threshold, above
which models usually cannot be improved substantially (Bentler and Bonnet, 1980;
Jo¨reskog and So¨rbom, 1989) The upper bound of root mean square error of
approximation (RMSEA) (90 percent confidence level) is approximately at the
suggested threshold value of 0.08, therefore, the error of approximation is reasonable
(Browne and Cudeck, 1993). These measures demonstrate an acceptable fit between
the actual and predicted covariance structures.

The fitted model suggests that the six-item measure of supplier trust is a valid

measure for new and small ventures in the context of a transition economy. All the

estimates for the loadings of the observable indicators are statistically significant,
which demonstrates that they are in fact measuring the underlying latent variable. The

estimates for covariance are also statistically significant, which shows strong

relationships between trust, uncertainty reduction, and asset specificity. As predicted
by H1, trust is significantly and positively associated with asset specificity (R ¼ 0.31,

Figure 1.

Trust, asset specificity,

and uncertainty reduction:

confirmatory factor

analysis

Trust

ST1

ST2

ST3

ST4

ST5

ST6

Asset

Specificity

AS1

Uncertainty

Reduction

UR3

e10

UR2

UR1

UR4

e11

UR5

e12

0.69

0.85

0.88

0.70

0.46

0.50 0.87

0.55

0.80

0.67

0.29

0.64

0.73

0.31

1.00

Notes:

=69.7, 52 d.f., p =.05; NFI =0.98; CFI =0.99; RMSEA=0.05, lower bound 0.00,

upper bound 0.08.Standardized estimates.All coefficients are significantat p < 0.001,
except the correlation between trust and asset specificity as well as the regression
weight for UR5, both of which are significant at p < 0.01

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p , 0.01). H2 was also supported: trust is particularly strongly and positively
(R ¼ 0.73, p , 0.001) associated with uncertainty reduction. Finally, in support of H3,
asset specificity is strongly and positively associated with uncertainty reduction
(R ¼ 0.55, p , 0.001).

Discussion
With this research, we sought to make two contributions. First, we sought to ascertain
the relationships between interpersonal trust, asset specificity, and uncertainty
reduction, which form the context of economic exchange in a transition economy.
Second, we sought to validate a scale of supplier trust, developed in the context of
developed market institutions in a sample of new and small ventures in the context of a
transition economy with underdeveloped market institutions. The results from our
empirical analysis have implications in three principal areas, which we discuss below.

Interpersonal trust shapes the context of economic exchange for new and small players in
transition economies
Results from our empirical analysis show that in the context of transition economies asset
specificity is significantly and positively associated with interpersonal trust. In other
words, as the level of transaction-specific assets increases, so does the role of interpersonal
trust as a relational governance mechanism. To paraphrase Bensaou and Anderson (1999,
p. 462), if there is much at stake, the payment to collect on promises is high and collection
itself is uncertain, one would be very careful to act only on trustworthy promises. Further,
results reveal trust is significantly and positively associated with uncertainty reduction,
suggesting that suppliers who reduce uncertainty for the focal firm most have the highest
degree of trust. Interpersonal trust can generate efficiencies by reducing uncertainty, thus
conserving cognitive resources, lowering ex-ante transaction costs, and simplifying
decision making (McEvily et al., 2003a, b).

These findings support prior research which has suggested that when the social and

political infrastructure is lacking, private entrepreneurs in transition economies try to
compensate the lack of institutional support by seeking deeper embeddedness in their
relational exchange network (Peng, 2004; Peng and Heath, 1996; Xin and Pearce, 1996).
Thus, relational embeddedness is a compensatory mechanism for the lack of formal
institutional support (Xin and Pearce, 1996). It can clarify the meanings of activities and
define appropriate responses to uncertainties. It can foster information exchange,
facilitate recognition of mutual interests, and provide a forum for common identity
formation. It can also maintain credibility among customers and smoothen exchanges
by facilitating credible commitments or enabling collective action (Oliver, 1991; Miner
and Haunschild, 1995; McKendrick and Carroll, 2001, p. 664; Ingram and Simons, 2000).
For new and small players in transition economies who are extremely vulnerable
because of environmental turbulence and less than ubiquitous institutional endorsement,
this study suggests that effective relational, or social, capital should include a strong tie
network that provides support to the entrepreneur (Manev et al., 2005).

Interpersonal trust facilitates exchange in supplier networks in transition economies
Our second finding is related to the specific context of the study, namely supplier
networks in transition economies. Prior research has documented that high trust
increases affective commitment and reduces calculative commitment in distribution

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channel relationships (Geyskens et al., 1996). Similarly, in a study of 561 firms in the
global construction industry, Sarkar et al. (1998) found trust and commitment were two
dimensions of relationship bonding. The strong positive association of supplier trust
with asset specificity and uncertainty reduction revealed by our empirical analysis
provides further evidence there are benefits that flow from interpersonal trust in
economic exchange.

Supplier trust scale demonstrates cross-cultural validity
In this study, we validated Holmes’ (1986) and Zaheer et al.’s (1998) instrument for
supplier trust in the context of a transition economy. The selected questions reflect
the three components of trust – reliability, predictability, and fairness. Results from
the confirmatory factor analysis revealed high reliability, internal consistency, and
construct validity. All three dimensions loaded on a single factor, suggesting the three
components of trust (reliability, predictability, and fairness) refer to a unitary
phenomenon. Thus, the study provides strong support for the cross-cultural validity of
a scale originally developed in the context of market economies with well established
institutional and market governance mechanisms. This finding has implications for
future research. In particular, the results from this study suggest that Zaheer et al.’s
(1998) supplier trust scale can be effectively employed when conducting research on
the topic of supplier trust in the context of transition economies.

Limitations
This study had several limitations, which need to be considered when its results are
generalized. In the first place, the dataset comes from a single transition economy.
The context for entrepreneurial exchange may differ in other transforming economies,
warranting further research to extend these findings to other countries. Second, the
sample came from small business owners who were enrolled in business training.
Though their businesses are not substantially different from the national profile of
small businesses in the country, they may be somewhat better educated than the
national average. A future study with a random and larger sample would undoubtedly
correct for this. Thirdly, by studying trust in suppliers we focus on one side of
the entrepreneurial exchange – between the focal firm and its suppliers. As
entrepreneurial firms are often involved in buying from as well as selling to other
organizations, further research would benefit from examining relations between the
focal firm and its buyers as well[3]. Fourthly, our sample represented mostly retail and
services. The role of trust, asset specificity, and uncertainty reduction may differ
for other industries such as high technology or manufacturing, depending on the
configuration of the industry value chain.

Implications and conclusion
The results from this study encourage several directions for future research. One
logical extension would be to replicate the study in other transition economy contexts.
While transition economies have been broadly characterized as “low trust”
environments (Fukuyama, 1995), important cross-national differences may be
embedded in historical experiences, institutional heritage, norms, or cultural values
(Hohmann et al., 2002), providing idiosyncratic institutional milieus for entrepreneurial
behaviors and strategies. In addition, future research can incorporate multiple

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trust

117

dimensions of trust, such as extended, or institution-based trust, process-based trust,
exemplified by trust in partners in economic exchange, as well as interpersonal
cognitive and affective trust. This would allow to ascertain which dimensions of trust
characterize the institutional milieus of individual transition economies, and how these
milieus change as the transition to better established market institutions progresses.
Finally, research is also suggested on the link between trust, transaction costs,
transactional value, and overall entrepreneurial performance. It is possible that
different configurations of the context for economic exchange would result in
differential performance outcomes.

In conclusion, the results from this study suggest that interpersonal trust, asset

specificity, and uncertainty reduction shape the context for economic exchange for new
and small ventures in transition economies. The study findings also indicate supplier
trust scales developed in the context of established market economies can be fruitfully
employed in research in other institutional contexts. It is hoped that this study will help
build a framework for future research on the topic.

Notes

1. The Bulgarian Government’s Agency for Small and Medium-Sized Enterprises reports the

following industry breakdown: agriculture and forestry 3.1 percent; extraction 0.1 percent;
manufacturing 11.2 percent; utilities 0.1 percent; construction 3.6 percent; retail and repair
shops 50.8 percent; lodging 9.7 percent; transport and communications 7.3 percent; finance
and insurance 0.7 percent; real estate 8.4 percent; education 0.6 percent; healthcare and
veterinary services 2.2 percent; others, including non-profits 2.3 percent (ASME, 2002, p. 32).

2. We asked a number of other questions, e.g. for asset specificity we inquired whether the

respondents had spent a lot of money to use the product/service of the supplier (per Zaheer
et al., 1998). This item exhibited poor correlation with the other measure of asset specificity
which appeared more relevant (whether there has been specific tailoring to meet the
requirements of a particular supplier’s product or service) and was dropped.

3. We are indebted to an anonymous reviewer for suggesting this point.

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