Many inter-firm relationships evolve over time and become embedded in the forces of history and socialization. Such over-socialized markets take on distinct governance properties (Granovetter 1985, Heide and Wathne 2006, Grayson 2007) that can affect performance in unique ways. While past studies have investigated performance outcomes using a narrow cost-minimization calculus, emerging research considers value-enhancing consequences like the degree of innovation in embedded ties (Wathne, Biong and Heide 2001, Uzzi 1997).

This dissertation investigates how certain distinct properties of embedded markets affect innovation in buyer-seller relationships. Innovation is primarily influenced by two distinct yet co-existing relationship roles, i.e., 1) a businessperson role (BR) conditioned by the logic of economic consequences, and 2) a friendship role (FR) shaped by the logic of social appropriateness. Businessperson roles tend to create a rigid environment of expectations that constrain creative ideas, risk taking, and innovation while friendship roles are less scripted, more flexible, and support innovation.

A hybrid design using a mail and an e-mail survey of key informants in the apparel and electrical/electronics industries yielded 99 usable responses. Overall, the statistical results support the central premise that relationship roles affect innovation in distinct ways. Specifically, the interaction analyses suggest that the embeddedness-innovation effect increases across the range of the FR and decreases across the range of the BR. Similar results are found for two out of three component measures of embeddedness. Results indicate that a low FR and a high BR constitute the weakness of strong ties.

Several avenues for future research and managerial implications are discussed. First, this work suggests that studying highly socialized relationships should move beyond a narrow consideration of transaction cost consequences to encompassing more detailed consideration of process issues such as relationship roles. Finally, in practice, managers can influence performance by paying more attention to relationship roles in inter-firm settings. For example, achieving efficiency by promoting, developing, and enhancing long-term relationships with suppliers may be futile if associated processes like relationship roles are under-managed.