2.7.3. Types of Relationships
From the viewpoint of a project implementer, inter-firm relationships may be effective or ineffective in facilitating inclusive industry competitiveness (i.e., competitiveness that enhances MSE benefits). Firms themselves may view their relationships with others in the value chain as being either supportive of their business goals or adversarial to them. Inter-firm relationships can also be placed on a spectrum from socially-based relationships to strictly commercial relationships.
Relationships that support industry competitiveness occur horizontally (between similar kinds of firms), vertically (between buyers and sellers in a value chain), and between value chain actors and other stakeholders (such as service providers or relevant government bodies). Supportive relationships typically have the following characteristics:
- mutually beneficial—all firms in a relationship recognize that they reap benefits as a result that more than compensate for the costs involved in establishing and maintaining the relationship
- recurrent and substantial—firms relate repeatedly over time, exchanging information, skills and services in addition to product and money; this is in contrast to brief, isolated interactions that facilitate only simple commercial transactions
- voluntary—supportive relationships are entered into freely from a motive of self-interest, without social or government pressure; and social, political or economic power is not used to establish relationship terms that are detrimental to the other party
Supportive relationships have many benefits.
While supportive inter-firm relationships are based on a long-term view of the industry, adversarial relationships are structured to maximize short-term profits. Horizontal relationships dominated by self-interest rather than driven by common objectives often exhibit free-rider problems or invite corruption—as many failed cooperative development programs can attest. Vertical relationships are generally inequitable: In most industries, buyers are more powerful than suppliers and are therefore able to reap greater benefits from an adversarial relationship. Various factors may facilitate such relationships. For example, where switching costs are low, buyers can exploit producers with impunity, knowing that there are other suppliers from whom they can purchase. Similarly, when there are only a few buyers (monopsony) the potential exists for collusion to maintain inequitable transaction terms and conditions.
With such clear benefits arising from supportive relationships, why do so many firms continue to establish adversarial relationships?
Social relationships are based on ties to family and friends that are not easily broken even if they result in financial losses. In contrast, strictly commercial relationships are formed for a specific economic purpose and can be severed if they fail to serve that purpose. Socially based relationships apply social pressure to force behavioral conformity. While this can be a positive factor—prohibiting opportunistic behavior, for example—social relationships can be detrimental to value chain development since there is no inherent convergence with economic self-interest. The degree to which industry actors make distinctions between socially and commercially driven relationships is a critical factor in determining if the industry will be able to reach beyond kinship networks to integrate into more distant markets and include large numbers of MSEs.