Contract ineffectiveness in emerging markets : An institutional theory perspective

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)38-54
Journal / PublicationJournal of Operations Management
Publication statusPublished - 1 Sep 2016


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.

Research Area(s)

  • Contract ineffectiveness, Efficiency pressure, Equity pressure, Information transparency, Legal enforceability, Social ties