Management control systems and performance in Australian inter-organizational relationships: the role of trust

This paper examines the relationships among management control systems (control extent, formal and social control mechanisms), inter-firm trust (goodwill and competence trust) and relational performance in Australian inter-organizational relationships (IORs). Using survey data from 232 Australian IORs, structure equation modelling (SEM) was applied to analyse direct and indirect (mediation and moderation) relationships. The analysis indicates that the use of tight controls and social control mechanisms are positively associated with goodwill trust, competence trust and relational performance. The use of formal controls is also positively related to goodwill trust and relational performance, although no direct association was found between formal controls and competence trust. Both goodwill trust and competence trust present strong positive associations with inter-organizational performance. Furthermore, we demonstrate that the positive relationships between the use of tight controls and social controls, on one hand and relationship performance, on the other hand, are fully mediated by goodwill trust and competence trust. There were no mediation effects found for neither goodwill trust nor competence trust on the direct positive relationship between formal controls and relational performance. Goodwill trust and competence trust have different influences on the configuration of management control systems in IORs. Tight use of controls and social controls help with inter-firm trust-building and IOR performance through both goodwill trust and competence trust. Formal controls can both directly improve relationship performance and develop goodwill trust, but no evidence shows formal controls help in competence trust-building.