Contract ineffectiveness in emerging markets: An institutional theory perspective⋆

Abstract

The effectiveness of contracts is bounded by the institutional environment in which they are designed and enforced. When firms form supply chain partnerships in emerging markets, they may experience contract ineffectiveness, which is defined as a firm's perceived limits of contracts with respect to safeguarding interests and coordinating activities. Specifically, we identify two institutional factors that may give rise to contract ineffectiveness, information transparency and legal enforceability, as they determine how effectively a firm designs and enforces a contract. In addition, we reveal that contract ineffectiveness prompts a firm to seek social ties, including business ties and political ties, to overcome the institutionally induced limits of contracts. These efforts, however, are moderated by the type of predominant pressure a firm bears. While equity pressure strengthens the relationship between contract ineffectiveness and a firm's pursuit of social ties, efficiency pressure weakens this relationship, because seeking social ties imposes an extra burden of efficiency. Tested by data collected from 187 distributors in China, our study reveals the institutional causes and the consequences of contract ineffectiveness, which is a common problem encountered by firms when forming supply chain partnerships in emerging markets.

Governing Interfirm Relationships for Social Sustainability: The Relationship between Governance Mechanisms, Sustainable Collaboration, and Cultural Intelligence

“…The earlier researchers have highlighted the impact of legal and institutional factors on contract governance [85,86]. This research contributes to governance literature by analyzing common problems companies experience in long-term contract ineffectiveness [86]. The present results reveal two cultural intelligence dimensions that might give rise to such contract effectiveness.…”

“…This study provides new insights, such as how dimensions of cultural intelligence (CQ) affect the relationship between contract governance and collaboration. The earlier researchers have highlighted the impact of legal and institutional factors on contract governance [85,86]. This research contributes to governance literature by analyzing common problems companies experience in long-term contract ineffectiveness [86].…”

Effectiveness of bonus and penalty incentive contracts in supply chain exchanges: Does national culture matter?

“…Contracts are effective when they achieve efficient coordination of activities, fair outcomes, and safeguard against opportunism (Shou et al, 2016). Their role is especially critical in transactional exchanges, which are defined as arms-length exchanges between distinct firms and characterized by low interdependence and low asset specificity (Williamson, 1985(Williamson, , 1991.…”

Factors for Improving and Moderating a Successful Supply Chain

“…Information transparency means that related resource information, including capacity information, such as human, equipment, and others, should be completely released to the supply chain partners (Shou et al, 2016). The resource adjustment and redistribution ability means that when manufacturers and their partners are handling existing orders but new orders appear, they can immediately analyse and integrate their existing available resource, and further adjust or redistribute them to address the new order (Fischl et al, 2014).…”

“…To improve resource adjustment and redistribution ability, the information used by manufacturers and partners in production and operations should be completely transparent. Information transparency means that related internal resource information, including capacity, human resources, equipment, and others, should be fully released (Shou, Zheng, & Zhu, 2016). When all information is released, manufacturers and partners are able to understand the resource usage situation and quickly adjust and redistribute available resource to address a new order.…”