Relational Contract, Asset Specificity and Business Performance: An Empirical Investigation of Small Enterprises in Seethawaka Divisional Secretariat Division in Colombo District, Sri Lanka

Abstract

This study explores the effect of relational contracts on asset specificity and business performance of Small Enterprises (SEs) in Sri Lanka. The study used primary data gathered from 197 SEs in Seethawaka Divisional Secretariat Division in Colombo District using a structured questionnaire survey. Partial Least Square - Structural Equation Modelling was used to analyze the data. Empirical results show that relational qualities positively influence business performance and asset specificity. Further, asset specificity and business performance have a positive association. Also, asset specificity acts as a mediator by improving the relationship between relational contract and business performance. Therefore, the business performance of SEs can be enhanced by organizing network formation programs such as seminars and conferences to create strong relationships with exchange parties that encourage asset specificity.