4 Trust and Risk in Business Networks: Towards a Due Diligence for Electronic Commerce
ties to provide and exchange information and support communication between businesses.
However, it is not known which information needs to be communicated in electronic transac-
tion environments to support the set-up of transactions with new partners and how the commu-
nication of this information can be supported electronically.
Due diligence is a mechanism known in company mergers and acquisitions and refers to the
reduction of risks and uncertainties from the transaction through the provision of information
about the company, its organization, or its market (Berens et al., 2005). It is the objective of
this paper to develop a due diligence for electronic transactions with new partners in business
networks with complex goods. The due diligence is meant as a means to reduce perceived risks
and uncertainties for the businesses and create trust and confidence in the transaction with
appropriate information. The paper first introduces the application scenario of business net-
works in more detail and describes the problem situation and food networks. Next, it develops
a conceptual framework for e-commerce due diligence and operationalizes the framework.
2 Application scenario food networks
In food networks, transactions between companies take place to exchange goods between the
different levels of the value chain (Zylbersztajn, 1996; McCorriston, 2002). Often, transactions
occur within a network of companies with relatively stable relationships (Galizzi, Venturini,
1999; O’Reilly et al., 2003). This phenomenon is caused by the need for explanation of food
products where certain quality characteristics cannot be determined in the product at hand and
the resulting information asymmetry between buyers and sellers (see Akerlof, 1970; Nelson,
1970). In these networks, varying supply and demand situations in food networks caused by
production conditions and consumption dynamics regularly create the urgency for companies
to search for new buyers and for new suppliers outside an existing network. This is particularly
true for perishable food products. However, fragmented and therefore intransparent food mar-
kets, the complexity of food products causing an information asymmetry between sellers and
buyers create uncertainty and induce buyers to perceive risks, in particular in a first transaction
with a new and so far unknown transaction partner. This is particularly true when it comes to
food products only to acquire on international markets where not only uncertainties caused by
differences in legal systems come into play, but also cultural differences between business
partners are a barrier for effective communication (see Hofstede et al., 2002).
To overcome uncertainties and perceived risks, sellers and buyers need information, e.g., about
the partner, his trustworthiness, production method, payment habits, or supervision and control
opportunities. Various control and safeguard mechanisms have emerged as communication
device of such information in food networks. They include quality signs, third party auditing,
or guarantees. The search, analysis, and monitoring of this information to reduce the transac-
tion risk are transaction costs (Williamson, 1985) is an upfront investment for companies. An
important supplement and sometimes substitute for control and safeguards in transactions is
trust between transaction partners (Fynes et al. 2001). Control and trust in transactions are
highly interlinked and complex mechanisms. Trust between transaction partners is of interest
for the efficiency of transactions as it is less costly than control and safeguards (see Dyer,
1997, Zak, Knack, 2001). Trust in relationships between buyers and sellers lowers transaction