Determinants of contract renewals in business-to-business relationships

Cabral, Sandro; Ribeiro, Priscila Fernandes; Romão, Sanders Zurdo

doi:10.1108/RAUSP-04-2019-0057

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Research Paper • RAUSP 55 (4) • Oct-Dec 2020 • https://doi.org/10.1108/RAUSP-04-2019-0057 copy

Determinants of contract renewals in business-to-business relationships

Authorship SCIMAGO INSTITUTIONS RANKINGS

Abstract

Purpose

This paper aims to analyze the underlying factors of contract renewals in business-to-business (B2B) contracts.

Design/methodology/approach

The authors build a unique data set with 296 contracts signed between a major firm supplying petrochemical goods and its 128 customers between 2013 and 2016. They use Insider Econometrics as their methodological approach.

Findings

The econometric results suggest that contracts involving higher volume of trade, higher levels of dedicated assets representing seller’s specific investments in each transaction, and contracts comprising more than one product present an increased likelihood of being renewed.

Research limitations/implications

Although limited to a single organization, this paper contributes to management theories focused on buyer–supplier relationships in which coordination between interdependent parties is required.

Practical implications

Practitioners engaged in B2B relationships may benefit from the findings to shape their bargaining strategies in contexts of high levels of asset specificity and bilateral dependence.

Originality/value

This paper contribute to theories related to the strategic negotiation between buyers and suppliers by emphasizing the importance of asset specificity in a nuanced and multifaceted fashion, by highlighting aspects related to resource dependency, and idiosyncratic characteristics on contract renewal.

Transaction costs; Buyer–supplier relationships; B2B contracts; Contracts renewal

Industry	Quantity
Specialized construction	2
Electric equipment	5
Industrial machinery	1
Food products	5
Rubber products	2
Metal products	37
Paper products	6
Ceramics and glass products	5
Chemical products	7
Services	45
Primary iron and steel metallurgy	10
Others	3
Total	128

Companies	Quantity	(%)
Contracts renewed	48	37.5
Contracts not renewed	80	62.5
Total	128

Continuous variables	Description	Average	Deviation-standard	Minimum	Maximum	p5	p25	p50	p75	p90	p95
Volume	Volume	567,759.00	1,543,000.00	499.10	11,700,000.00	2,247.00	15,611.00	54,049.00	304,216.00	1,514,000.00	2,786,000,000.00
log Vol	ln Volume	11.16	2.12	6.21	16.28	7.72	9.66	10.90	12.63	14.23	14.84
Distan	distance (in kilometers)	116.00	96.32	5.00	412.50	5.00	48.50	88.37	165.50	243.90	356.10
Discrete Variables		Successful frequency	Failure frequency	Minimum	Maximum	p5	p25	p50	p75	P90	p95
Renov	Indicates if the contract was renewed	0.37	0.63	0.00	1.00	0.00	0.00	0.00	1.00	1.00	1.00
EmpMA	Indicates the supplier with the best alternative	0.16	0.84	0.00	1.00	0.00	0.00	0.00	0.00	1.00	1.00
Ad Prod	Indicates if it contracted more than one product	0.16	0.85	0.00	1.00	0.00	0.00	0.00	0.00	1.00	1.00

Variable		Description	Type	Hypothesis	Expected sign
log Vol	Log volume	Annual volume acquired (natural logarithm)	Continuous	H1	+
EmpMA	Better alternative	Identifies if the observed supplier is the closest supplier to the buyer company, compared to competitors	Discrete	H2	+
Distan	Distance	Distance, in kilometers between buyer and supplier	Continuous	H3	−
AdProd	Additional products	Identifies if the observed contract involves more than one product	Discrete	H4	+

	Renov	log Vol	Volume	Distan	EmpMA	AdProd
Renov	1.000
log Vol	0.286	1.000
Volume	0.286	1.000	1.000
Distan	−0.010	−0.052	−0.052	1.000
EmpMA	0.167	0.228	0.228	−0.619	1.000
AdProd	0.195	0.026	−0.026	−0.028	0.043	1.000

Dependent variable: renewed contract
	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
log_Vol	0.2894^* Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.0553)	0.2886^* Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.0563)					0.2686^* Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.0571)	0.2666^* Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.0586)
Distan			−0.0000 (0.0012)	−0.0000 (0.0013)			0.002 (0.0014)	0.002 (0.0014)
EmpMA					0.9067^* Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.3233)	0.9143^* Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.3328)	0.8119^ Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.4064)	0.8187^ Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.4107)
AdProd							1.1164^* Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.3449)	1.1113^* Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.3501)

Constant	−3.8135^* Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.6310)	−3.6248^* Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.6647)	−0.5382^* Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.1884)	−0.3376 (0.2466)	−0.6931^* Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.1347)	−0.4935^ Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.2104)	−4.1279^* Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.6773)	−3.9221^* Notes: Robust standard errors in parentheses; * p < 0.01; ** p < 0.05; * p < 0.1 (0.7182)
N. Obs	296	296	296	296	296	296	296	296
Pseudo R2	0.0613	0.0673	0.0000	0.0080	0.0204	0.0284	0.1000	0.1060
Year Dummies	No	Yes	No	Yes	No	Yes	No	Yes
Wald Estat	27.360	28.500	0.000	3.037	7.867	10.490	35.170	35.980
p-value Wald	0.0000	0.0000	0.9916	0.5517	0.0050	0.0330	0.0000	0.0000

Dependent variable: Contract renewed
	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
log_Vol	1.336^* Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (0.0739)	1.335^* Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (0.0751)					1.308^* Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (0.0746)	1.305^* Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (0.0764)
Distan			1.000 (0.00125)	1.000 (0.00126)			1.002 (0.00142)	1.002 (0.00143)
EmpMA					2.476^* Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (0.800)	2.495^* Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (0.830)	2.252^ Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (0.915)	2.267^ Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (0.931)
AdProd							3.054^* Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (1.053)	3.038^* Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (1.064)
Constant	0.0221^* Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (0.0139)	0.0267^* Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (0.0177)	0.584^* Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (0.110)	0.713 (0.176)	0.500^* Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (0.0673)	0.610^ Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (0.128)	0.0161 (0.0109)	0.0198^* Notes: Robust standard errors in parenthesis; * p < 0.01; ** p < 0.05; * p < 0.1 (0.0142)
No. Obs	296	296	296	296	296	296	296	296

	Prob(Renov)	Standard errors	Confidence interval
EmpMA
0	0.338	0.0312	0.277	0.399
1	0.515	0.0824	0.354	0.676
AdProd
0	0.328	0.0307	0.268	0.388
1	0.571	0.0701	0.434	0.708

	Observed
Classified	Renov = 1	Renov = 0	Total
Renov = 1	42	30	72
Renov = 0	67	157	224
Total	109	187	296

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E-mail: rausp@usp.br

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[1] *Corresponding author Sandro Cabral can be contacted at: sandroc2@insper.edu.br