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

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.

Does Informal Knowledge Sharing Breed Innovation in Industrial Clusters?

“…As a rule of thumb, the AVE scores should be higher than HSV values to indicate discriminant validity among constructs (Zhou and Xu, 2012;Fornell and Larcker, 1981) The trust construct in the retailer sample has its HSV with the knowledge-sharing construct. This result can be expected since the two make the composite construct informal [4] This aspect has been shown in another study in the same cluster by Şengün and Önder (2009).…”

Concurrent sourcing and supplier opportunism

“…On the other hand, he also recognises that trust may break down, and generally there is a broad recognition that a rational calculation approach to opportunism may be useful. More recent models have combined agency theory and transaction cost theory with network theory (Liu et al, 2014), cultural and institutional factors (Yan and Kull, 2015), social norms (Heide et al, 2014), relational exchange perspectives (Zhou and Xu, 2012), and social exchange theory (Chung, 2012) to explain supplier opportunism.…”

Institutional Legitimacy, Cross-Border Trade and Institutional Voids: Insights from the Cocoa Industry in Ghana

“…In the subsequent years, a plethora of scholarly works has emerged on supply chain partnerships in emerging economies which articulates the ramifications of such voids and their ability to instigate partners' opportunism (Liu, Luo, and Liu, 2009). In spite of a growing body of literature on opportunism in inter-firm relationships (Zhou and Xu, 2012) and supply chain risks in emerging economies (Liu et al, 2009), it remains unclear how supply chain partners abuse the institutional voids emanating from weak markets and legal enforcement mechanisms (see Luo and Chung, 2013;Zhou and Xu, 2012).…”

“…Although some scholars have examined how partners curtail local supplier opportunism (Zhou and Xu, 2012), our understanding of how institutional voids create space for illegitimate activities to occur in the supply chain remains limited. Surprisingly enough, however, development studies and supply chain management scholars have remained silent on this important issue.…”

“…We make two key contributions to regional and development studies, operations strategy, economic geography and supply chain literatures. First, we combine the 'institutional voids' concept (Khanna and Palepu, 1999) with that of 'opportunism in inter-firm relationships' (Wathne and Heide, 2000;Zhou and Xu, 2012) to develop a novel perspective and framework of how such voids create conditions for illegal activities to occur in inter-firm relationships. Second, we provide unique insights into how the roles of agents manifest itself into opportunistic behaviour in interfirm relationships.…”