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Exchange hazards, relational reliability, and contracts in China: The contingent role of legal enforceability

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  • Kevin Zheng Zhou

    (School of Business, University of Hong Kong, Pokfulam, Hong Kong)

  • Laura Poppo

    (School of Business, University of Kansas, Lawrence, USA)

Abstract

Building on institutional and transaction cost economics, this article proposes that legal enforceability increases the use of contract over relational reliability (e.g., beliefs that the other party acts in a non-opportunistic manner) to safeguard market exchanges characterized by non-trivial hazards. The results of 399 buyer–supplier exchanges in China show that: (1) when managers perceive that the legal system can protect their firm's interests, they tend to use explicit contracts rather than relational reliability to safeguard transactions involving risks (i.e., asset specificity, environmental uncertainty, and behavioral uncertainty); and (2) when managers do not perceive the legal system as credible, they are less likely to use contracts, and instead rely on relational reliability to safeguard transactions associated with specialized assets and environmental uncertainty, but not those involving behavioral uncertainty. We further find that legal enforceability does not moderate the effect of relational reliability on contracts, but does weaken the effect of contracts on relational reliability. These results endorse the importance of prior experience (e.g., relational reliability) in supporting the use of explicit contracts, and alternatively suggest that, under conditions of greater legal enforceability, the contract signals less regarding one's intention to be trustworthy but more about the efficacy of sanctions.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Journal of International Business Studies.

Volume (Year): 41 (2010)
Issue (Month): 5 (June)
Pages: 861-881

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Handle: RePEc:pal:jintbs:v:41:y:2010:i:5:p:861-881

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Cited by:
  1. Jia, Flora Fang & Wang, Jeff Jianfeng, 2013. "Marketing channel relationships in China: A review and integration with an institution-based perspective," Journal of Business Research, Elsevier, Elsevier, vol. 66(12), pages 2545-2551.
  2. Sheng, Shibin & Zhou, Kevin Zheng & Lessassy, Leopold, 2013. "NPD speed vs. innovativeness: The contingent impact of institutional and market environments," Journal of Business Research, Elsevier, Elsevier, vol. 66(11), pages 2355-2362.
  3. Hutzschenreuter, Thomas & Horstkotte, Julian, 2013. "Performance effects of international expansion processes: The moderating role of top management team experiences," International Business Review, Elsevier, Elsevier, vol. 22(1), pages 259-277.
  4. En Xie & Mike Peng & Wenhong Zhao, 2013. "Uncertainties, resources, and supplier selection in an emerging economy," Asia Pacific Journal of Management, Springer, Springer, vol. 30(4), pages 1219-1242, December.
  5. Wang, Longwei & Yeung, Jeff Hoi Yan & Zhang, Min, 2011. "The impact of trust and contract on innovation performance: The moderating role of environmental uncertainty," International Journal of Production Economics, Elsevier, Elsevier, vol. 134(1), pages 114-122, November.
  6. He, Xinming & Wei, Yingqi, 2011. "Linking market orientation to international market selection and international performance," International Business Review, Elsevier, Elsevier, vol. 20(5), pages 535-546, October.

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