Governing local supplier opportunism in China: Moderating role of institutional forces

• Published date: 01 September 2016
• Author: Mengyang Wang,Qiyuan Zhang,Shibin Sheng,Yonggui Wang
• DOI: http://doi.org/10.1016/j.jom.2016.07.001
• Date: 01 September 2016

Governing local supplier opportunism in China: Moderating role of

institutional forces

Mengyang Wang

a

, Qiyuan Zhang

b

,

*

, Yonggui Wang

c

, Shibin Sheng

d

a

Faculty of Business and Economics, The University of Hong Kong, Pokfulam, Hong Kong

b

School of Management, Zhejiang University, Hangzhou, 310058, China

c

School of Business, University of International Business and Economics, Beijing, 100029, China

d

Collat School of Business, The University of Alabama at Birmingham, Birmingham, AL, USA

article info

Article history:

Accepted 25 July 2016

Available online 4 August 2016

Accepted by: Mikko Ketokivi

Keywords:

Supplier opportunism

Contracts

Trust

Institutional theory

China

abstract

China provides a vast and prominent manufacturing base, so curtailing its local supplier opportunism

represents a primary concern for local and foreign buyers. Drawing on institution al theory, this study

examines how regulatory uncertainty and relationship structure moderate the role of contracts and trust

in restricting local supplier opportunism in China. An analysis of 293 buyeresupplier dyads in China

reveals that contracts are more effective in deterring supplier opportunism when regulatory uncertainty

is high. In addition, contracts help curtail opportunism more in domestic, compared with international,

buyeresupplier relationships, whereas trust is more effective in restricting supplier opportunism in

international relationships than in domestic ones.

©2016 Elsevier B.V. All rights reserved.

1. Introduction

In the past two decades, China has become the most important

manufacturing base for global purchasers, generating more than

20% of manufacturing activities in the world (National Accounts

Statistics, 2013). Despite its strategic importance, the environ-

mental uncertainties and operational complexities in China chal-

lenge local and foreign investors (Zhou et al., 2014). China's

institutional environments are fast changing, and the factor mar-

kets underpinning its business operations are underdeveloped,

elevating the difficulty of predicting and managing supply chain

activities (Peng, 2003; Yang et al., 2012).For example, opportunistic

exploitation of supply chain participants by other members of the

supply chain impairs efficiency, hinders task accomplishment,

jeopardizes cooperation, and even can disrupt partnerships or

supply chains overall (Liu et al., 2009). Mitigating local supplier

opportunism and improving operational performance thus are

central challenges for both local and foreign buyers in China (Zhou

and Xu, 2012).

Previous supply chain governance literature highlights two

mechanisms to mitigate opportunism: formal governance, such as

contracts, and informal governance, such as trust (Liu et al., 2009;

Lumineau and Qu

elin, 2012). Contracts provide a formalized

framework that specifies the details of the transaction, exerts

punishments for contract violations through legal enforcement,

and reduces incentives for opportunistic behaviors (Joskow, 1987;

Williamson, 1996). For example, Lenovo, a top computer manu-

facturer in China, adopts detailed formal agreements with its

suppliers so as to take full control of the operational procedures

(Feng, 2011). In contrast, trust reduces transactional risks by pro-

moting an implicit understanding of mutual goals, facilitating in-

formation sharing among supply chain participants, and

encouraging a shared identity to ensure ongoing transactions (Cai

et al., 2010; Heide and John, 1992; Wathne and Heide, 20 00). For

example, by offering more autonomy to local partners, Panasonic

emphasizes the role of trust in China and obtains great flexibility

from its collaborative relationship with local partners (Wakayama

et al., 2012). Both contracts and trust are prominent governance

mechanisms; prior supply chain literature emphasizes that their

efficacy is contingent on the context, including macro-level insti-

tutional environments (Cao and Lumineau, 2015;Zhou et al., 2014).

In emerging markets, regulatory agents (mainly central and

local governments) have a strong influence in regulating economic

exchanges(Sheth, 2011). In China's “pragmatic”approach to market

reform (Child and Tse, 2001), the development of its formal in-

stitutions has been characterized by intensive governmental

*Corresponding author.

E-mail addresses: mengyang@hku.hk (M. Wang), bessieqy@zju.edu.cn

(Q. Zhang), ygwang@uibe.edu.cn (Y. Wang),ssheng@uab.edu (S. Sheng).

Contents lists available at ScienceDirect

Journal of Operations Management

journal homepage: www.elsevier.com/locate/jom

http://dx.doi.org/10.1016/j.jom.2016.07.001

0272-6963/©2016 Elsevier B.V. All rights reserved.

Journal of Operations Management 46 (2016) 84e94