Formal international contracts in the presence of cultural distance: An empirical analysis of biopharmaceutical alliances

Abstract

Formal contracts are designed to manage the moral hazard issues and inherent risks that come with relationships between organizations. These contracts play an important role in nonequity international alliances, where greater cultural distance between the partners gives rise to more uncertainty in the relationship. At the same time, the contract is the outcome of a negotiation process, and this process is affected by the cultural distance between the partners. This article addresses whether cultural distance affects contract design and content. Rather than test an established model, we use an inductive approach to conduct a detailed empirical analysis of 135 two-party international research-and-development contracts for clinical development in the biopharmaceutical industry. The results show that cultural distance wields complex effects on the contract and its content. They also indicate that a contract will be less detailed-with fewer monitoring clauses and a narrower definition of the collaborative scope-when the partnering firms operate in highly distant national cultures. K E Y W O R D S

Cultural communication style and international joint venture contract length

“…While the above hypothesis accords with previous findings on the subject of cultural context and contract length (Delerue and Sicotte, 2018), we wish to carry the analysis a step further by examining the possible combinations between the contracting parties in terms of low-high and high-low context interactions. To our knowledge, there are no studies on how a contract will be affected by an interaction between a high-context and a low-context culture.…”

“…Here, the evidence suggests that low-context cultures tend to produce thorough documents which anticipate as many possible contingencies as possible and are therefore longer. On the other hand, contracts in high-context cultures tend to be shorter because general clauses are understood to encapsulate most contingencies that may arise while retaining flexibility in implementation and conflict resolution (Delerue and Sicotte, 2018).…”

“…Furthermore, the very existence of a substantial distance on the individualist-collectivist continuum may, ipso facto, tend to shorten contracts. Delerue and Sicotte (2018), for instance, deploy cultural familiarity theory to suggest that limited knowledge and/or shared information between culturally distinct partners militates against elaborate and costly contract design. Collectivist cultures tend to give prominence to relation-building in business settings, rather than contractbuilding (Handley and Angst, 2015).…”

Toward an understanding of the implementation of management innovation in international joint ventures: A multilevel perspective

“…Organizational culture differences distinguish IJV partners through their management practices, which are deemed essential for the functioning of their respective organizations. Differences in practices represent conflicting expectations and incompatible organizational processes that can influence the interpretation of and response to strategic and managerial issues, compounding transactional difficulties (Delerue & Sicotte, 2019; Park & Ungson, 1997; Pothukuchi et al, 2002; Sarkar et al, 2001). Communication and language differences between partners can lead to frustrations that hinder innovation cooperation and disadvantage the quality of the interorganizational relationship (Shenkar, 2001).…”

Exploring the U.S. Securities and Exchange Commission’s Edgar database by sampling joint venture contracts

“…The most widely used database for the study of alliances is Securities Data Company (SDC) (Refinitiv) 6 ; however, it does not offer full contract texts. Alliance scholars working on contracts tend to use the MERIT-CATI (now discontinued), Clarivate Cortellis Deals Intelligence Analytics (formerly Thomson Reuters Recap), 7 and Current Agreements 8 databases (Choi and Contractor 2016;Delerue and Sicotte 2018;Kwon et al 2016). Each of these has advantages and limitations as summarized in Table 1.…”