The effectiveness of contractual and trust‐based governance in strategic alliances under behavioral and environmental uncertainty

• DOI: http://doi.org/10.1002/smj.2469
• Author: Rekha Krishnan,Jan‐Benedict E. M. Steenkamp,Inge Geyskens
• Published date: 01 December 2016
• Date: 01 December 2016

Strategic Management Journal

Strat. Mgmt. J.,37: 2521–2542 (2016)

Published online EarlyView 5 January 2016 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2469

Received 30 December 2011;Final revision received11 October 2015

THE EFFECTIVENESS OF CONTRACTUAL AND

TRUST-BASED GOVERNANCE IN STRATEGIC

ALLIANCES UNDER BEHAVIORAL AND

ENVIRONMENTAL UNCERTAINTY

REKHA KRISHNAN,1*INGE GEYSKENS,2

and JAN-BENEDICT E. M. STEENKAMP3

1Beedie School of Business, Simon Fraser University, Burnaby, British Columbia,

Canada

2Department of Marketing, Tilburg University, Tilburg, The Netherlands

3Kenan-Flagler Business School, UNC Chapel Hill, Chapel Hill, North Carolina, U.S.A.

Research summary: We examine the interplay of behavioral and environmental uncertainty

in shaping the effectiveness of two key governance mechanisms used by strategic alliances:

contractual and trust-based governance. We develop and test hypotheses, using a meta-analytic

dataset encompassing over 15,000 strategic alliances across 82 independent samples. We nd

that contractual governance works best under low to moderate levels of behavioral uncertainty

and moderate to high levels of environmental uncertainty, while it is detrimental to alliance

performance when both types of uncertainty are low or high. Trust-based governance is most

effective at high levels of behavioral uncertainty and low levels of environmental uncertainty.

It suffers a large loss of usefulness at high behavioral uncertainty as environmental uncertainty

increases.

Managerial summary: Strategic alliances allow rms to gain greater efciency and create

value. Yet, many such alliances fail because they are not able to deal with the twin challenges

posed by behavioral and environmental uncertainty. Findings from our meta-analysis imply that

under conditions of high behavioral uncertainty and low-to-moderate levels of environmental

uncertainty, the use of trust-based governance alongside contractual governance might enhance

the latter’s effectiveness. The combined effectiveness of contractual and trust-based governance

under high levels of both behavioral and environmental uncertainty is not obvious. When

both behavioral and environmental uncertainty are high, contractual governance hurts alliance

performance while trust-based governance does not function at its best either. Under these

conditions, it might be better for rms to turn to hierarchy or vertical integration. Copyright

© 2015 John Wiley & Sons, Ltd.

INTRODUCTION

Strategic alliances have risen in prominence over

the past two decades, allowing rms to gain greater

Keywords: alliances; performance; trust-based gover-

nance; contractual governance; uncertainty

*Correspondence to: Rekha Krishnan, Associate Professor,

Beedie School of Business, Simon Fraser University, 8888

University Drive, Burnaby, BC V5A 1S6, Canada E-mail:

rekhak@sfu.ca

Copyright © 2015 John Wiley & Sons, Ltd.

efciency and create value (Faems etal., 2008).

These benets notwithstanding, many strategic

alliances fail because they are not able to deal

with the twin challenges posed by behavioral and

environmental uncertainty (Gulati and Singh, 1998;

Sutcliffe and Zaheer, 1998). Behavioral uncertainty

is the uncertainty that arises because of the pos-

sibility of “strategic non-disclosure, disguise, or

distortion of information” by the exchange part-

ners (Williamson, 1985: 57). Certain transaction

2522 R. Krishnan, I. Geyskens, and J.-B. E. M. Steenkamp

attributes increase the potential for opportunistic

gains from behavioral uncertainty. Environmental

uncertainty, the difculty in predicting external

changes outside the control of the alliance, is a

key factor underlying coordination difculties that

are “innocent” and “non-strategic” (Williamson,

1985: 57). Coordination failures may arise even if

the potential for opportunistic gains from behav-

ioral uncertainty is low (Gulati, Lawrence, and

Puranam, 2005).

Alliance success under conditions of behavioral

and environmental uncertainty relies heavily on

effective alliance governance. Consequently, much

research has been devoted to understanding the

efcacy of the governance mechanisms that can

be crafted by strategic alliance partners. Our

understanding of these governance mechanisms is

guided by two dominant theoretical lenses (Faems

et al., 2008)— transaction cost theory (Williamson,

1975) and relational theory (Dyer and Singh,

1998). Scholars relying on transaction cost theory

maintain that contractual governance— the crafting

of detailed contracts covering as many contingen-

cies as possible— safeguards against opportunism

concerns and facilitates coordinated response

to the environment (Mayer and Argyres, 2004).

Inspired by Macaulay (1963), scholars following

the relational perspective propose that trust-based

governance is also capable of dealing with the

challenges posed by behavioral and environmental

uncertainty (Gulati, 1995; Uzzi, 1997). In the

case of trust-based governance, partners govern

their relationship informally, based on the bilateral

expectation that the other will act in a way that

serves, or at least is not inimical to, one’s interests

(McEvily, Perrone, and Zaheer, 2003).

There has been considerable scholarly debate

on whether contractual governance and trust-based

governance substitute or complement each other

in strategic alliances (e.g., Faems et al., 2008;

Lui and Ngo, 2004; Luo, 2002b; Puranam and

Vanneste, 2009). But while scholars have been

debating whether contractual and trust-based

governance substitute or complement each other,

the fact that contractual and trust-based governance

might have differential effects under behavioral and

environmental uncertainty is yet to gain attention.

In this spirit, we set out to assess whether the two

governance mechanisms are more effective in deal-

ing with one type of uncertainty and less effective

in dealing with the other. We test our predictions

on the collectivity of empirical evidence, using a

meta-analysis of more than two decades of research.

In meta-analysis, the abundance of accumulated

empirical research across thousands of alliances

is taken into account, weighed, and corrected

for artifacts to obtain an accurate estimate of the

effectiveness of the two governance mechanisms

under behavioral and environmental uncertainty.

THEORY AND HYPOTHESES

Contractual and trust-based governance

Contracts are legally binding agreements between

two parties with each promising to perform partic-

ular actions in the future. Contracts can be sim-

ple or complex. Simple contracts are suitable for

standard exchanges that are akin to market trans-

actions (e.g., a standard purchase order for com-

modities) (Williamson, 1979). Elaborate contracts

serve as a form of quasi-integration by establish-

ing an inter-rm authority relation (Stinchcombe,

1985). We dene contractualgovernance as the use

of an extensive set of terms and clauses specifying

mutual rights and obligations with legal and pri-

vate sanctions for noncompliance (cf. Klein, 1980,

1996; Wuyts and Geyskens, 2005). As we argue

below, if both behavioral and environmental uncer-

tainty are moderate and manageable, the details

laid out in the contract can effectively curb oppor-

tunistic appropriation and provide well-coordinated

responses to the environment. Contractual gover-

nance safeguards against opportunism by constrain-

ing partner behavior through extensive monitoring

and the threat of relationship termination. Similarly,

by providing structure for information ow, con-

tractual governance allows for coordinated response

to shifts in the environment.

Trust-based governance relies on the bilateral

expectation held by the exchange partners that the

other will act in a way that serves, or at least is not

inimical to, one’s interests (Barney and Hansen,

1994). Following Mayer, Davis, and Schoorman

(1995) and considering the majority of research on

trust in the context of strategic alliances, we focus

on two types of trust: integrity-based trust and

benevolence-based trust. In the case of integrity-

based trust, exchange partners are condent

that neither side will engage in behavior that is

self-interested in nature because such behavior

would violate a set of principles that the part-

ners nd acceptable (Mayer et al., 1995: 719).

Integrity-based trust includes aspects such as a

Copyright © 2015 John Wiley & Sons, Ltd. Strat. Mgmt. J.,37: 2521–2542 (2016)

DOI: 10.1002/smj