Working hard for long‐distance relationships: Geographic proximity and relationship‐specific investments

Abstract

Suppliers that are farther away from their customers make more relationship-specific investments (RSI). This association is more pronounced when it is less costly for the customer to switch to alternative suppliers and when the supplier operates in relatively opaque information environments. Using the introduction of new airline routes as an exogenous shock to the distance between supply chain partners, we show that the relation between supplier RSI and distance may be causal. We also provide evidence that suppliers with larger RSI are better able to maintain long-distance business relationships and are associated with higher firm value. These findings suggest an important dimension of supplier commitment: Suppliers use RSI as a signal of their willingness to fulfill on-going implicit claims.

The Influencing Factors of Relationship-specific Investment: A Literature Review

“…Because geographical proximity is positively related to information acquisition costs (Giroud, 2013), it is difficult for customers to provide timely transactional information to suppliers or to monitor supplier behavior [14]. Kershen Huang et al (2021) analyze the switching costs of customers switching suppliers and confirm this inference [15]. They used the supplier's industry size, the supplier's market competitiveness, and the supplier's product similarity to measure the customer's replacement cost to the supplier and found that in a long-distance relationship, customers tend to have more similar suppliers to choose from and the goods of a single supplier are not highly unique.…”

Does informal governance matter to institutional investors? Evidence from social capital

“…Our results show that the variation in social capital across US counties has important implications on firms' investor base, which may be a potential mechanism behind the documented benefits of social capital. On a broader scale, this paper also relates to the extant literature on the empirical relations between geographic characteristics and financial markets (e.g., Francis et al, 2016;Huang et al, 2021;John et al, 2011;Malloy, 2005).…”