How foreign firms curtail local supplier opportunism in China: Detailed contracts, centralized control, and relational governance

Kevin Zheng Zhou, Dean Xu

Research output: Contribution to journalArticleResearchpeer-review

126 Citations (Scopus)

Abstract

An ongoing debate in the interfirm exchange literature concerns whether economic and social governance mechanisms function as substitutes or complements. We advance a more nuanced approach to examining how detailed contracts and centralized control interact with relational governance differentially in curbing local supplier opportunism in emerging markets. We suggest that where legal institutions are weak, detailed contracts are ineffective in containing partner opportunism in contractually specified areas. Under such circumstances, relational governance provides a proxy for legal institutions to ensure contract execution. Meanwhile, relational governance serves as an alternative mechanism to centralized control for ensuring contingency adaptations. Based on a sample of 168 foreign buyer-local supplier exchanges in China, we find that relational governance complements detailed contracts but substitutes for centralized control in curtailing opportunism. Therefore foreign firms must be cautious in their combinative use of social and economic mechanisms in governing exchanges with local suppliers in emerging markets.

Original languageEnglish
Pages (from-to)677-692
Number of pages16
JournalJournal of International Business Studies
Volume43
Issue number7
DOIs
Publication statusPublished - Sep 2012
Externally publishedYes

Keywords

  • buyer-supplier exchange
  • China
  • opportunism
  • relational exchange theory
  • transaction cost economics

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