Optimal relation-specific investment, financing, and the supply chain capital structure under uncertainty

Growing risks and potential disruptions in global supply chains underscore the urgent need to enhance supply resilience. This research focuses on relationship-specific investments by suppliers that target resilience enhancement through performance improvements, cost efficiency, and the establishment of trust. Using a real options framework, we construct a coopetition model between suppliers and manufacturers to investigate how supplier investments and financing decisions are influenced by market uncertainties and bargaining power in the presence of manufacturer subsidies. Our analysis reveals that compared to full equity financing, debt financing by an upstream supplier supported by subsidies from a downstream manufacturer can mitigate underinvestment to some extent. Moreover, in contrast to the existing literature, we find that the effect of leverage on investment timing is non-monotonic. Finally, we identify a U-shaped relationship between suppliers' bargaining power and the timing of relationship-specific investments. • Underinvestment in supply chain-specific relationships is prevalent due to high costs and irreversibility. • Debt financing mitigates underinvestment by upstream suppliers better than all-equity financing. • The effect of leverage on investment timing is non-monotonic. • There is a U-shaped relationship between supplier bargaining power and the timing of relationship-specific investments.