Is the formalization of NPD collaboration productive or counterproductive? Contingent effects of trust between partners

Abstract

New product development (NPD) collaborations with external partners involve high coordination costs and run substantial risks. Formalization seems to be an effective mechanism to mitigate said costs and risks, although the issue of whether formalization actually proves productive or counterproductive remains an open question. This study empirically analyses the direct impact of formalization and the interaction effect between formalization and trust between partners in order to gauge their influence on NPD collaboration performance. Findings indicate that formalization directly boosts the quality and novelty of the new product developed in collaboration, but that it does not affect adherence to schedule. In addition, trust reinforces the productive effect of formalization on new product quality and novelty, and makes the impact of formalization on adherence to schedule positive. However, without trust, we find a null impact of formalization on new product quality and a counterproductive impact on adherence to schedule. These results suggest that formalization and trust may complement each other, reinforcing each other’s positive effect on new product quality and novelty and presenting a positive synergistic effect, while helping to overcome the counterproductive effect of formalization on adherence to schedule. JEL CLASSIFICATION: O32