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

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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.

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Acknowledgements

Both authors contributed equally to the paper. The authors thank the anonymous reviewers and Area Editor, Daniel Bello, for their insightful and constructive comments on earlier versions. This study was supported by the General Research Funds from the Research Grants Council, Hong Kong SAR Government (Project no. HKU 757810H and HKU 753608) and the Faculty Research Grant Program at CEIBS.

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Authors and Affiliations

  1. School of Business, The University of Hong Kong, Pokfulam, Hong Kong

    Kevin Zheng Zhou

  2. China Europe International Business School, Shanghai, China

    Dean Xu

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  1. Kevin Zheng Zhou
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Correspondence to Dean Xu.

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Accepted by Daniel Bello, Area Editor, 11 January 2012. This paper has been with the authors for four revisions.

APPENDIX

APPENDIX

Table A1

Table A1 Measurement items and validity assessmenta
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Zhou, K., Xu, D. How foreign firms curtail local supplier opportunism in China: Detailed contracts, centralized control, and relational governance. J Int Bus Stud 43, 677–692 (2012). https://doi.org/10.1057/jibs.2012.7

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