Trust, Control, and Risk in Strategic Alliances: An Integrated Framework

Organization Studies, March, 2001 by T. K. Das, Bing-Sheng Teng

Abstract

Trust and control are inextricably interlinked with risk in strategic alliances. Hence, to understand how partner firms can effectively reduce and manage this risk, we need to examine the inter-relationships between trust, control, and risk. In this article, we propose a comprehensive and integrated framework of the three constructs in the context of strategic alliances, contending that trust and control are the two principal antecedents of risk. First, we suggest that the three constructs are each comprised of certain key dimensions. Risk can be considered separately as relational risk and performance risk. The two dimensions of trust are identified as goodwill trust and competence trust, and control is differentiated in terms of the three modes of behaviour control, output control, and social control. Second, we discuss systematically the various linkages between the different types of trust, control, and risk in alliances. Third, we suggest several risk reduction approaches -- minimizing relational risk th rough goodwill trust, behaviour control, and social control, while minimizing performance risk through competence trust, output control, and social control. Fourth, we discuss a number of trust-building techniques and control mechanisms to reduce risk in different types of strategic alliances. Finally, we develop propositions for empirical testing of the integrated framework and offer brief comments on future research directions and managerial implications.

Descriptors: trust, control, risk, strategic alliances

Introduction

Trust and control are inextricably interlinked with risk in strategic alliances. Hence, for effective alliance performance, partner firms need to manage this risk adequately by understanding the conjoint roles of trust and control. Our aim here is to develop a comprehensive and integrative framework of trust, control, and risk in the context of strategic alliances. We begin by noting that risk is one of the most encompassing -- and widely researched -- concepts in the social sciences. It is used to denote both outcome variations in general and negative variations specifically in outcomes of importance. This latter view focuses on possible losses and is called downside risk.

In strategic alliances, downside risk is of two primary types -- relational risk and performance risk. Relational risk and performance risk are about the uncertainties, respectively, in partner cooperation and in alliance performance. Risk is the variable that connects trust and control in our comprehensive framework. The overall proposition is that trust and control jointly determine one's perceived total risk -- that is, relational risk and performance risk -- in strategic alliances.

Second, we treat trust as a multidimensional concept. We attempt to capture the complexity of the trust concept in the proposed framework by examining separately its two dimensions -- namely, goodwill trust and competence trust, using the terminology from the literature that seems to best reflect the nature of the two dimensions.

Our third objective is also to incorporate -- as with the trust concept -- a comprehensive typology of control modes. Some researchers have noted the effects of formal control and social control on trust; in this article we adopt three control modes -- namely, behaviour, output, and social control. We suggest that these three control modes have differential impacts on the various dimensions of trust and risk. In brief, we will propose specific determinative relationships among the dimensions of trust, control, and risk in strategic alliances.

We divide the rest of the article into seven sections. First, we discuss the importance of risk in alliances, giving particular attention to the notions of relational risk and performance risk. In the second section, we present the two dimensions of trust mentioned earlier and examine their relationships with risk. Third, and in a similar fashion, we discuss various control modes and their relationships with risk. We then explore the trust-control relationship, following up with an examination of how risk impacts on trust and control. Sixth, we discuss trust, control, and risk reduction in different alliance types. Finally, we suggest a number of trust-building techniques and control mechanisms for the purpose of reducing risk in different types of strategic alliances.

Risk in Strategic Alliances

Risk and risk taking occupy a prominent position in the social sciences. Risk is often conceptualized as variances in outcomes of importance to the risk-taking subject. Perceived risk, however, is different from a condition of uncertainty, because risk perception usually relates to the estimated probabilities of several outcomes. Since risk taking is often associated more with potential losses than associated gains, researchers have begun to focus on downside risk. This focus on the negative outcomes of risk taking is generally acknowledged to be managerially most relevant (March and Shapira 1987), and empirical studies on interfirm trust have also operationalized risk in accordance with this view (Inkpen and Currall 1997).