Unpacking Firm External Dependence: How Government Contract Dependence Affects Firm Investments and Market Performance

We advance resource dependence theory (RDT) by answering calls for theorizing on both how being dependent on external entities for resources affects firms and the heterogeneous nature of such dependencies. Specifically, we theorize how internal firm dynamics and performance are affected by resource dependence by integrating resource orchestration (RO) into RDT. Building on RO, we argue that as the degree to which a firm is dependent upon a single source of revenue increases (a core tenet of RDT), the firm adjusts internally by reducing investments and the market responds negatively as well. Further, we argue that the heterogeneous nature of such dependence—namely, dependence scope (the spread of dependence throughout the entity with which the dependence relationship resides), dependence supplementation (the addition of new relationships within the prior dependence relationship), and dependence stability (the expected length of the dependence relationship)—moderates the relationship between the level of dependence and these outcomes. We find broad support for our theorizing in a longitudinal sample of manufacturing firms’ dependence upon governmental contracts for revenue. Collectively, we advance understanding of RDT by adding nuance to both explanatory mechanisms underlying dependence and conceptualizations of firms’ external dependence relationships, posing theoretical and practical implications.