Contractual Governance and
Relational Governance and
their Impact on Performance
The Case of International Strategic Alliances between
Dutch and Chinese Dairy Enterprises
R.A. Markvoort, S2807173
MSc. Thesis International Business and Management
June 2016
University of Groningen
Faculty of Economics and Business
First supervisor: dr. H. Khodaei
Abstract
Table of content
1. Introduction ... 3
2. Literature Review ... 6
2.1 Contractual governance ... 6
2.2 Relational governance ... 7
2.3 Relation between Contractual Governance and Relational Governance ... 9
2.4 Research Framework ... 11 2.5 Constructs ... 11 2.6 Hypotheses ... 13 3. Methodology ... 18 3.1 Research Method ... 18 3.2 Data Collection ... 19 3.3 Research setting ... 20 3.4 Case analysis ... 21 4. Results ... 21 4.1 Case introduction ... 21 4.2 Relational governance ... 22 4.3 Contractual governance ... 30 4.4 Performance outcomes ... 36 4.5 Hypotheses ... 36 5. Discussion ... 41 6. Conclusion ... 44 Acknowledgement ... 47 References ... 48
Appendix I Interview questions ... 52
1. Introduction
“I have a dream and my dream is that each Chinese person, especially the children, can afford to buy one jin (500 g) of milk to drink everyday,” said the Chinese Premier Wen Jiabao in 2006 (Sharma & Rou, 2014). Since the 1980s the production and consumption of dairy products in China has boomed, with a yearly growth of over 12% since 2000. However, in 2008 a chemical, used in the production of plastic named melamine, was added in the production of milk. As a result, 300,000 infants got sick and six even died (Junting, 2010). Consequently, the Chinese consumers massively lost their trust in their domestic dairy products, which led to an enormous rise in the demand of foreign dairy products. Especially Dutch, Israeli and American products were, and still are, regarded as high level products (Daas, 2015). The Chinese dairy market was worth €38 billion in 2012 and is expected to grow up to €102 billion in 2020 (Daas, 2015). The potential of the Chinese market raised interest by Dutch dairy enterprises. A successful trade was expected: the large demand for foreign products could (partly) be served by the Dutch firms, eager to do business with China. However, it turned out to be a complex trade.
In trading with China, an international strategic alliance has to be formed. This can be an exporting relationship, but due to the characteristics of dairy products (e.g. large volumes and the perishable nature) it can be favourable to be close to the market. Managing strategic alliances is complex, especially because of the different backgrounds and cultures of both partners. For example, the French dairy enterprise Danone blamed their Chinese joint venture partner Wahaha in 2008 for selling Danone’s products under the brand name Wahaha. Later, Danone even gave up the IJV by selling all its shares (Barboza, 2009).
It is widely accepted that the fundamental ways in how to governance a strategic alliance differs between Chinese and Dutch firms. China has a long tradition of doing business based on interpersonal relationships (some researchers refer to do this relationship building as guanxi). An example of the importance of relationships in China is that Chinese firms regard contracts more as guidelines than as strict rules (Luo, 2002). The relationship determines how the contract is interpreted. Dutch organizations consider interpersonal relationships as less important. Although relationship building plays a role in a strategic alliance, Dutch firms like to govern on the basis of contracts at the same time. Thus, there is a tension between relational governance and contractual governance between Chinese and Western firms. This tension can be examined well by looking at the relationship between relational governance and contractual governance in diary strategic alliance between a Dutch and Chinese firm.
contractual governance on performance is positive or negative depends on the context (Cao & Lumineau, 2015).
While most of the papers that investigate the relationship between contractual and relational governance focused on either the mutual relationship or the joint impact on performance, this research will apply both application possibilities. By doing this, a more integrative view can be provided. This is necessarily, because as mentioned in the previous paragraph, the relationship between contractual and relational management in both streams of research is very context specific. Because of this context specificity a case study is performed. By looking at strategic alliances with a Chinese and Dutch firm operating in Chinese dairy market, a clear research area is defined.
The research question of this paper therefore is: What is the relationship between contractual governance and relational governance and their impact on performance outcomes in international strategic alliances between Dutch and Chinese dairy enterprises?
This research paper has both theoretical and managerial relevance. It is theoretical relevant because it provides detailed information about the complex relationship between contractual and relational governance and their impact on performance outcomes. More research on how different functions of contracts interact with various dimensions of the relationship is an emerging research area (Cao & Lumineau, 2015). In addition, more insight is needed in the dynamic process of how roles and interplay between contractual and relational governance evolve as cooperation proceeds (Cao & Lumineau, 2015). While the large majority of previous literature about contractual and relational governance regards these concepts as static ones, this paper takes a more realistic approach and recognizes these concepts as dynamic. This paper also contributes in the research area of cultural differences between Chinese and Dutch firms. Although a lot of papers are published about cultural differences, case studies in the dairy market are very limited. Such a case study can be valuable because it distinguishes itself from previous literature in mainly two ways. First, while most research focused on Western firms reaching for Chinese products, this study looks at Chinese firms which acquire Western (Dutch) products. Second, dairy products are relatively straight forward. This limits the number of factors influencing the relationship, which results in a more realistic analysis.
quality and safe food industry is one of the top priorities for the Chinese government. Therefore, mutual benefits can be achieved. Insights in how to successfully manage a strategic alliance benefits both Dutch and Chinese managers and these insights might also be applicable is other industries.
This paper is structured as follow: first, the literature review is described containing the theory, research framework, constructs, and hypotheses. Next, the research methodology is elaborated, containing the data collection, research setting, and case analysis. Subsequently, the results are provided, starting with an introduction of the cases. The main findings about the different relational and contractual dimensions are mentioned next. Thereafter, the outcomes of the hypotheses are addressed, followed by a summary of the analyses. Lastly, a discussion and conclusion is provided.
2. Literature Review
The governance of interfirm collaboration is an important topic in strategic organization literature. Two main governance mechanisms can be distinguished: contractual governance and relational governance. Both governance perspectives will be discussed separately first and then their interrelationship will be described. Next, following from the literature review a conceptual framework with three constructs and four hypotheses will be examined.
2.1 Contractual governance
Contractual governance refers to the extent to which an interfirm relationship is governed by a formal, written contract which explicitly describes the responsibilities and obligations of each party (Abdi & Aulakh, 2012). The contractual (or structural) perspective is based on the transaction cost theory and looks at single transactions. The main assumptions from this theory are that partners tend to act opportunistically when possible and alliance performance is driven by the quality of initial structural design.
the adaption function, which deals with uncertainty. The inter-organizational relationship is affected by this environmental driven uncertainty. The adaption function of a contract describes a ‘guideline’ for when such uncertain events occur (Lumineau & Quélin, 2012; Schepker et al., 2014) .
The contractual governance perspective is also criticized, because it takes an under socialized view of human action. Furthermore, it has some other limitations. First, contracts are unavoidably incomplete, which gives room for opportunistic behaviour. Second, contracts in general may be a signal of distrust. Lastly, the application of contracts between parties can cause tensions, since some parties may apply the contract stricter than others. This in turn can lead to a decreasing level of trust.
Literature about contracts in the Chinese dairy market is scarce. A reason for this is that in China contracts are regarded as business secrets (Duan, 2012). It is widely accepted that contracts in China are seen more as a guideline than strict rules (Luo, 2002). On top of that, the formal institutions in China are lacking for parties that want to enforce a contract. In other words, the enforcement of the contract by a third party is not guaranteed. This is underlined in (Qian, Guo, Guo, & Wu, 2011) analysis about the Chinese dairy crisis in 2008. They discuss that for a sustainable dairy market “a legal framework within which law and order can be maintained and contracts enforced by the government” should be developed (Qian et al., 2011, p. 440). Due to the limited literature available about this topic, primary research should be used to find out more about the content use and functions of contracts between Chinese and Dutch dairy firms.
2.2 Relational governance
Relational governance refers to the extent to which an interfirm relationship is governed by social relations and shared norms (Poppo, Zhou, & Zenger, 2008). The relational perspective is based on the social exchange theory and looks at interfirm relationships. The main assumptions are that partners tent to act in a trustworthy way and alliance performance is driven by the quality of the ongoing relational process. The proposed governance mechanism is trust.
definition of trust however. Some researchers define trust as positive expectations regarding the other in a risky situation, others look at the behavioural implications of trust, and describe trust as a reliance on the other party in a risky situation (Nooteboom, 1996). In this study the former view is followed, thus trust is treated as a subjective state of positive expectations.
Trust is a multilevel and multidimensional concept. It plays a role within organizations (intra-organizational level), between organizations (inter-(intra-organizational level) and also between organizations with different nationalities (international-organizational level). Two different types of trust can be distinguished: competence based trust and goodwill based trust (Nooteboom, 1996). Competence based trust refers to the ability and expertise of the other party, while goodwill based trust focus on the intention. Thus, trust may concern a partner’s ability to perform according to agreements (competence trust), or his intentions to do so (goodwill trust) (Nooteboom, 1996).
The relational governance perspective is also criticized, since it takes an over socialized view of human action. It suffers from the limitation that is takes extensive time and resources to develop trust and that it can be easily destroyed. In addition, it also makes a party vulnerable for opportunistic behaviour.
China has a long tradition of doing business based on interpersonal relationships. These relationships, or personal connections are called guanxi (Luo, 2002). As mentioned before, formal institutions in China are lacking, making contracts very difficult to enforce. The lack of enforcement opportunities makes the importance of strong relationships even higher.
Table 1 below summarizes the main characteristics of contractual and relational governance.
Characteristic Contractual governance Relational governance
Focus of analysis Single transaction Interfirm relationship Theoretical basis Transaction cost theory Social exchange theory Main assumptions Partners tent to act
opportunistically
Alliance performance is driven by the quality of initial structural design
Partners tend to act in a trustworthy fashion
Alliance performance is driven by the quality of the ongoing relational processes
Proposed governance mechanism
Complex contracts Trust (competence based and goodwill based)
Criticism Under socialized view of human action Over socialized view of human action
2.3 Relation between Contractual Governance and Relational Governance
Although the contractual and relational view seems to be incompatible, they do interact with each other. As mentioned before, contracts are unavoidably incomplete because of bounded rationality, complexity and uncertainty that goes with transactions. As a result, when unexpected events occur and the contract doesn’t provide a direct solution, parties rely on relational governance. In other words, relational processes mediate between initial structural conditions and alliance outcomes (Doz, 1996).
Previous literature about the interplay between contractual and relational governance can be categorized into two groups, one that looks at the mutual relationship between contractual and relational governance and one that looks at their joint impact on performance.
Mutual relationship between contractual governance and relational governance
The first group looks at the mutual relationship between contractual and relational governance and aims to answer the question if they act as complements or substitutes.
One substream of this group states that a contract substitutes the relationship. The main argument for this statement are that a good relationship alone can govern the relation (Wang et al., 2011), and that a contract is a sign of distrust (Gulati & Nickerson, 2008; Malhotra, 2009).
The second substream of research in this group argues for a complementary relationship. First, it states that a contract complements the relationship, because confidence in good cooperation is created (Cannon, Achrol, & Gundlach, 2000; Poppo & Zenger, 2002). Furthermore, information asymmetry is reduced and a fair climate for relational governance is created (Yang et al., 2012). In addition, mutual understanding and trust is increased (Blomqvist et al., 2005; Lumineau et al., 2011). Second, it argues that the relationship complements the contract. A rationale behind this statement is that a ‘contractual mind-set’ can be created (Bastl, Johnson, Lightfoot, & Evans, 2012). For example, relational governance can address the limitations of contractual governance and vice versa (Huber, Fischer, Dibbern, & Hirschheim, 2013).
Evidence has been found for both substreams of research: whether relational and contractual governance are complements or substitutes, depends on the context (Cao & Lumineau, 2015).
governance can be both complements and substitutes. For example, Malhotra and Lumineau (2011) show that a controlling contract can leads to distrust, whereas a coordinating contract can increase the level of trust.
The joint impact of contractual governance and relational governance on performance
The second group of research looks at the interplay between contractual and relational governance as their joint impact on performance. Thus, it examines to what extent the increase of one governance mechanism (e.g. relational governance) leads to the increase or decrease of the other governance mechanism (e.g. contractual governance) on performance. This group of research can also be divided in two substreams.
The first substream argues for a negative relation on performance, so that contractual and relational governance substitute in explaining performance. An argument is that a contract is a sign of distrust which reduces the positive effect of relational governance on performance (Cavusgil et al., 2004; Lee & Cavusgil, 2006). Furthermore, it is found that a good relationship encourages parties to enforce the contract less strictly (Antia & Frazier, 2001). Lastly, simultaneously using both types of governance may be redundant (Huber et al., 2013; Yang, Zhou, & Jiang, 2011).
The second substream claims there is a positive relation on performance, so that complementarities between the two governance mechanisms increases performance. This side of the argument states that simultaneously using contractual and relational governance can lower ex post transaction costs (Yang et al., 2012). Furthermore, it can address each other’s limitations (Cao et al., 2013). Lastly, the joint impact of the two governance types can improve performance by facilitating knowledge transfers (Li, Poppo, & Zhou, 2010), promoting innovation (Wang et al., 2011) and seizing emerging opportunities (Lazzarini, Miller, & Zenger, 2008).
In this group of research as well, evidence is found for both substreams: whether the joint impact of relational and contractual governance on performance is positive or negative, again depends on the context (Cao & Lumineau, 2015).
as complements or substitutes depends on the context. According to Cao and Lumineau (2015), fourteen quantitative key studies on the interplay between contractual and relational governance in China are available. Overall, the majority of these studies found a complementary relationship. However, due to the different research settings, no general conclusions can be drawn.
2.4 Research Framework
Based on the theory discussed, a research framework with three central concepts and four hypothesis is developed. This framework can be found in figure 1. The central constructs and underlying dimensions will be discussed first. Then the hypothesis will be mentioned.
Figure 1 Conceptual framework
2.5 Constructs
The central constructs of this study are contractual governance, relational governance and performance outcomes.
Contractual governance refers to the extent to which an interfirm relationship is governed by a formal, written contract which explicitly describes the responsibilities and obligations of each party (Abdi & Aulakh, 2012). It is divided in two contractual dimensions: contractual complexity and contractual management (Qi & Chau, 2012). The definition of contractual complexity is based on a study of Barthélemy and Qúelin (2006). It refers to the extent to which contracts are composed of elaborate clauses. The definition of contractual management is based on a study of Qi and Chau (2012) and deals with the period after the contract is signed. It is defined as an action orientated competence that relates to the extent to which the contract is referred, reviewed and revised.
performed an analysis on management/marketing literature and researched the most used dimensions of relational governance. These are trust, commitment, communication quality and knowledge sharing, which will be used in this research. Trust is a comprehensive concept and therefore is split up in two types of trust. Nooteboom (1996) is followed which distinguishes trust in competence based trust and goodwill based trust. Competence based trust refers to the ability and expertise of the other party, while goodwill based trust focuses on the intention. The definitions of commitment, communication quality and knowledge sharing are based on the study of Qi and Chau (2012). Commitment is defined as the company’s belief that an ongoing relationship with the partner is so important that it would warrant their maximum efforts at maintaining the relationship. Communication quality is defined as the extent to which the formal and informal sharing of credible and meaningful information between the two parties are timely, accurate, credible, adequate, complete and useful. Knowledge sharing is defined as the activities of transferring or disseminating knowledge between the two companies.
2.6 Hypotheses
The first two hypotheses describe the relationship between contractual governance and relational governance. The first hypothesis studies weather there is a complementary or substituting effect of contractual governance on relational governance. The second hypothesis looks at it the opposite way, so it studies if there is a complementary or substituting effect of relational governance on contractual governance. It is mentioned before that the existing literature showed mixed results, depending on the context (Cao & Lumineau, 2015). The third hypothesis examines the effect of contractual governance on performance outcomes. The fourth hypothesis studies the effect of relational governance on performance outcomes.
2.6.1 Hypothesis 1
It is widely accepted that in China contracts are regarded more as guidelines than strict rules (Luo, 2002). Furthermore, contracts are not likely to be successfully enforced in China. In a study performed in the Chinese apparel industry, Duan (2012) found out that only seven out of the 45 Chinese managers believed a formal contract could be enforced. Enforcement issues are also experienced by the French dairy multinational Danone. In 2008, they publicly blamed their Chinese joint venture partner Wahaha for selling Danone products under the brand name of Wahaha. In 2009, Danone even gave up the venture by selling all its shares (Barboza, 2009).
Although contracts are not likely to be successfully enforced in China, they gain in popularity. Duan (2012) showed that Chinese managers regard contracts as documents of reference. He showed that terms such as ‘reference’, ‘right’, and ‘restraint’ appeared systematically in the definition Chinese managers give to contracts. In addition, a contract gives a clear expectation which prevents conflicts in the complex climate of building relationships (Duan 2012). Furthermore, a contract can complement the relationship, because it may inspire the confidence of cooperative parties in their cooperation (Cannon et al., 2000; Poppo & Zenger, 2002). The right and duties, long-term commitment, and punishment for opportunism help reduce information asymmetry and create a fair climate for relational governance (Yang et al., 2012). Last, a contract creates mutual understanding and increases the level of trust (Blomqvist et al., 2005; Lumineau et al., 2011).
trust and type. Thus, Liu again emphasized that the outcomes are context specific. Yang et al. (2011) distinguished between buyer-supplier relationships having a strong tie and those having a weak tie. They found that contract and trust complement each other only in a weak tie relationship. Three other studies show a complementary relationship (Cai & Yang, 2008; Han, Trienekens, & Omta, 2011; Ren, Oh, & Noh, 2010). The main rationale from these studies is that cooperative norms are improved.
In conclusion, most of the previous literature found a complementary relationship between contractual governance and relational governance, also in the specific context of China. In addition, contracts are gaining in popularity in China. Therefore I propose:
Hypothesis 1: Contractual governance complements relational governance
2.6.2 Hypothesis 2
In contrast to the majority of previous research that looked at the relationship between contractual and relational governance, this paper also looks at the effect of relational governance on contractual governance. Unfortunately, literature on this relationship is scarce.
Previous research showed that relational governance can both complement and substitute contractual governance. The main argument for the complementary side of the argument is that a ‘contractual mind-set’ can be created, in which relational governance can address the limitations of contractual governance (Bastl et al., 2012). To achieve a contractual mind-set, a good relationship and the willingness of both parties to constantly improve the contract are required. However, it is mentioned before that a contract can hardly be enforced in China. Constantly reviewing and revisiting a contract which has little legal value requires investments which are not needed in relational governance. Therefore, it seems likely that there is a low incentive to take this approach in China. The arguments for a substituting relationship seem more applicable to this study. The first is that a good relationship alone can govern the relation. For example, Wang et al. (2011) found in their study on the impact of trust and contract on innovation performance in China, that contract and trust are substitutes. Furthermore, Gulati and Nickerson (2008) proved that high levels of pre-existing inter-organizational trust increase the probability that a less formal, and thus less costly mode of governance is chosen over a more formal one.
importance of strong social relationships is underlined by the CEO of a large Western diary multinational. The CEO indicated that:
“In the beginning we were only exporting to China, but did not contribute to the local economic development. This didn’t help in our conversations with the government. You have to show commitment to the country” (Smit, 2014, p. 14).
Another example of the importance of relational governance over contractual governance is mentioned by the same CEO, when the firm got a fine for forbidden price fixing in China in 2013:
“The fine came as a complete surprise. It had nothing to do with price fixing, but it was just a contract with retailers. However, we knew better than fighting this” (Smit, 2014, p. 14).
This quote and previous literature underline the importance of relational governance and suggests that relational governance substitute contractual governance. Therefore I propose:
Hypothesis 2: Relational governance substitutes contractual governance.
2.6.3 Hypothesis 3
The third hypothesis looks at the effect of contractual governance on performance outcomes. Performance is related to the overall organizational advantage gained from the strategic alliance and measured on the basis of satisfaction. Contractual governance is split up in two contractual governance dimensions. These are contractual complexity and contractual management.
Contractual complexity is defined as the extent to which contracts are composed of elaborate clauses (Barthélemy & Qúelin, 2006). Previous literature provides different arguments for a positive relation between contractual complexity and satisfaction. These will be presented per function of the contract. As discussed in the literature the three functions are: safeguarding, coordinating and adapting.
In terms of the coordination function, a more complex and comprehensive contract can have two effects: more understanding and less misunderstanding. Blomqvist (2005) and Lumineau et al. (2011) proved that more mutual understanding leads to more trust, which in return in likely to increase the level of satisfaction. Less misunderstanding can be created by specifying the exact roles of the organizations, responsibilities and obligations, and determining the communication and information sharing methods (Woolthuis, Hillebrand, & Nooteboom, 2005). Furthermore, Li et al. (2010) showed that clearly specified roles and obligations lowers transaction costs.
In terms of the adaption function, a more complex and comprehensive contract results in a more detailed guideline for when uncertainties occur. The more possible uncertainties and their solutions are described in detail, the higher the probability that when such uncertainties occur, they will be settled in an acceptable way for both parties.
Contractual management is defined as an action orientated competence that relates to the extent to which the contract is referred, reviewed and revisited (Qi & Chau, 2012). Previous literature provided different arguments for a positive relation between contractual management and satisfaction. These will be presented on the basis of the different functions of the contract.
In terms of the safeguarding function of the contract, Yang et al. (2012) showed that managing the contract reduces the opportunities for contract breach and renegotiation. Therefore, ex post transactions costs are saved (Yang et al., 2012). Furthermore, different arguments are found which state that contractual management protects against opportunistic behaviour. For example, Cau and Lumineau (2015) described that frequently the relationship becomes superior to the contract when the relation evolves. In that case, the parties’ behaviour might be in conflict with the contractual agreements. Furthermore, during the relationship risks are faced which were unknown when the contract was initially signed. In both cases, updating the contract is necessarily to prevent from opportunistic behaviour.
In terms of the adapting function of a contract, the change of environmental conditions requires to include new scenarios in the contract.
Last, different scholars argue that continuously and simultaneous using contractual governance and relational governance promotes innovation and supports seizing emerging opportunities (Wang et al., 2013; Lazzarini et al., 2008; Mesquita & Lazzarini, 2008). Therefore I propose:
Hypothesis 3: Contractual governance is positively related to performance outcomes
2.6.4 Hypothesis 4
The fourth hypothesis looks at the relationship between relational governance and the performance outcomes. It is mentioned before that performance is related to the overall organizational advantage gained from the strategic alliance and is measured on the basis of satisfaction. Relational governance is split up in trust, commitment, communication quality and knowledge sharing. Previous literature provided different arguments in favour of a positive relationship between the relational dimensions and satisfaction.
Trust is broad concept and therefore is split up into two types: competence based trust and goodwill based trust (Nooteboom, 1996). Competence based trust refers to the ability and expertise of the other party, while goodwill based trust focusses on the intention.
Nickerson. They state: “Regardless of the governance mode chosen for an exchange, trust increases exchange performance” (Gulati & Nickerson, 2008, p. 688).
Commitment is defined as the company’s belief that an ongoing relationship with the partner is so important that it would warrant their maximum efforts at maintaining the relationship (Qi & Chau 2012). A high level of commitment is likely to result in a long term relationship. In a long term relation parties understand each other better and higher level trust is created (Morgan & Hunt, 1994). This in turn results in the effects named in the paragraph above.
Communication quality is defined as the extent to which the formal and informal sharing of credible and meaningful information between the two parties are timely, accurate, credible, adequate, complete and useful (Qi & Chau 2012). A higher level of communication quality results in less miscommunication and therefore lowers the transaction costs (Mesquita & Brush, 2008). Furthermore, the partners understand each other better which creates mutual empathy. This in turn strengthens the relationship.
Knowledge sharing is defined as the activities of transferring or disseminating knowledge between the two companies (Qi & Chau 2012). A higher level of knowledge sharing is likely to result in a more integrated relationship. This makes the relationship more long term orientated, increases the efficiency of the collaboration and more relation specific investments are made (Wagner & Bode, 2014). Furthermore, valuable knowledge can be acquired from the partner.
Previous literature shows arguments for a positive relationship between all the relational dimensions and satisfaction. Therefore I propose:
Hypothesis 4: Relational governance is positively related to performance outcomes
3. Methodology
In this section the methodology will be described. First, the research method used in this paper is examined, followed by the data collection. Next, the research setting and case analysis will be mentioned.
3.1 Research Method
question of this research is “What is the relationship between contractual governance and relational governance and their impact on performance outcomes in international strategic alliances between Dutch and Chinese dairy enterprises?”, this question still fulfils the underlying criteria of Yin. This is because this research is exploratory focussed. In addition, a case study should investigate why certain decisions are made, how these are implemented and what the result is. As mentioned before, this in indeed what will be done in this research. The second criteria is that the researcher has no control over the behavioural events. This is the case in this research, because the relationship between contractual and relational governance will be investigated in the timeframe past up until the present. Thus, there is no control whatsoever in the decisions made. The last criteria Yin (2013) describes is that contemporary events are preferred. In this research different strategic alliances between Dutch and Chinese firms are researched. The managers interviewed all work at firms which were accredited to have a production or processing plant in China in 2014. The exact date these firms entered the Chinese market differ per firms. However, this is an uncontrollable factor which is taken into account during the data analysis. Thereby, the third criteria of Yin is also met.
In general, the academic world is quite critical about the validity of multiple case studies. This is partially because researchers do not work systematically. Therefore, in this research the procedure of grounded theory development (Boeije, 2005) will be followed. This procedure concerns coding, categorising and conceptualising, which support transparency in the line of reasoning, decision making and concluding. In terms of reliability, a database is created with all steps taken (e.g. data collection methods, interview question development, interview results etc.). In this way, future scholars are able to repeat the procedures taken in this research. The research framework and the underlying theoretical foundations serve as the “descriptive theory”, which is considered to be sufficient for the scope and depth of the subject. The research framework and underlying theoretical foundation are also used as the predicted pattern in the pattern-matching data analysis process (Trochim, 1989; Yin, 2003). The check list from Dubé and Parés (2003) on how to conduct good descriptive case studies is followed wherever possible.
3.2 Data Collection
store and/or dry store in China. In total 108 firms are listed (although some companies are listed more than once with different subsidiaries). The firms which received an interview request are picked randomly, besides the five largest dairy firms. These are chosen purposely because they represent the majority of the Dutch dairy market in terms of revenue. For the sample selection Yin (2003) mentioned that researchers should select “exemplary” cases that reflect strong, positive examples of the phenomenon of interest. The cases should also show replication logic to prove the theoretical generalization of the phenomenon. Following Yin, six cases are selected.
For this case study both primary and secondary data is used. First, secondary data is gathered to find as much information as possible about the six case studies. The sources for the secondary data are newspaper articles, interviews, speeches, videos and photographs, chats and blogs, (auto)biographies, websites and published (annual) reports. Next, primary data is gathered by interviews.
3.3 Research setting
In this study, eight managers are interviewed from six companies. All the interviewees work on the level of designing or managing the contract or establishing or managing the relationship. An overview of the functions of the interviewees is presented in table 2.
Position Company 1 Company 2 Company 3 Company 4 Company 5 Company 6
Interviewee 1
Sales Export Manager
Sales
Manager Sales Director
Global Sales Manager Project Manager Global Marketing and Sales Executive Interviewee 2 Brand Manager Lawyer
Table 2 Overview functions interviewees
Follow-up phone calls were made for clarifying several unclear issues arising from the onsite interviews. Secondary information was used to supplement the understanding of the companies and the strategic alliances.
3.4 Case analysis
In analysing the case studies, Yin (2003) is followed, who suggested general analytic strategy and replied on theoretical hypothesis of the study. In analysing the interviews, the tape records are transcribed. Some interviews which were conducted in Dutch for practical reasons. These transcribes are carefully translated into English. To avoid translation and/or interpretation mistakes, all interview results are sent back to the interviewee. After the interviewee indicated the results were uniform the initial answers, the transcribes are coded and summarized manually. Next, the findings related to relational governance, contractual governance and performance outcomes are analysed. On the basis of these findings, the hypotheses are tested. Pattern-matching is used in the following cross case analysis, in which the empirical based patterns are compared with the predicted ones.
4. Results
In this section the results of this study are described. First, a case introduction for the six cases is provided. Next, the results of the relational dimensions are described, followed by the results of the contractual dimensions. Then, the performance outcomes are described and thereafter, the outcomes of the hypotheses. Lastly, a summary of the case analysis is provided.
4.1 Case introduction
Six cases are analysed and in total eight managers are interviewed. An overview of the general case study characteristics is presented in table 3. The full case descriptions can be found in appendix II.
Business characteristic Company 1 Company 2 Company 3 Company 4 Company 5 Company 6
Size Medium Medium Large Large Large Small Ownership structure Private equity Family owned Private
equity Listed n.a. Listed
FTE's 175 50 1250 1000 (400 in the Netherlands) n.a. 5.200 (15 in the Netherlands) International
experience > 15 years > 20 years >20 years > 20 years > 20 years > 10 years Start business with
China 2014 2013 2014 2011 1998 2012 Type of strategic
alliance
Exchange - Sub
contracting Exchange Franchise
Functional
organization Joint venture Exchange Consumer / business
to business market Both Both Both Both Both
Business to business Business phase Initial Developed Initial Developed Developed Developed
Table 3 Overview case study results
The types of strategic alliances named in the table above are based on research from Sydow (1992). Figure 2 below shows these types schematically.
Figure 2 Types of strategic alliances (Sydow, 1992)
4.2 Relational governance
Table 4 Overview findings relational governance dimensions
The most important findings are discussed below.
4.2.1 Trust
Transcript analysis shows that in general, trust is the most important relational dimension in the business relationship between a Dutch and Chinese firm. Trust is a comprehensive dimension however. Its meaning differs per person and there are different factors which influence trust. These factors will be explained below.
Competence based trust and goodwill based trust
Two types of trust are researched: competence based trust and goodwill based trust. Competence based trust focusses on the ability and expertise of the other party while goodwill based trust looks at the intentions (Nooteboom, 1996). In all six cases goodwill based trust turned out to be more important than competence based trust. Company 5 is an exception however in which goodwill based trust and competence based trust are valued equally. These results can be explained by the fact that all the firms are the supplier of dairy products for their Chinese partner. Therefore, the ability and expertise (competence) of the Chinese partner matters less, because they basically only buy the products from the Dutch partner.
Establishment of trust
The level of trust between the Dutch and Chinese partner turned out to be high in all six cases. This level can be regarded as the sum of all the underlying factors which create it. These factors differ depending on the period the parties have a relationship. A distinction is made between the time the parties get to know each other (establishment of trust) and the time afterwards in which the order details are discussed, the products produced and eventually shipped (development of trust).
Case 1 # 2 # 3 # 4 # 5 # 6 #
Relational governance
Trust High 14 High 4 High 9 High 3 High 4 High 6 Goodwill based trust 9 4 8 3 2 4 Competence based trust 5 0 1 0 4 2 Commitment Mod 2 Low 2 High 5 High 3 High 6 Low 1 Communication quality High 1 High 5 High 2 Mod 5 High 3 Mod 5 Knowledge sharing Low 0 Low 0 High 3 Mod 3 High 7 Low 1 # Number of times adressed in the interview
When the representatives of two firms meet for the first time, the interviewees of Company 1, 2, 3 and 6 refer to trust as ‘having a connection’ or ‘being on the same level’. For example, the Sales Director of Company 3 mentioned that:
“It [trust] is a combination of non-verbal language, information, interpretation of this information and gut feeling. […] Often we check with other firms in the market if they are familiar with the regarding company we want to do business with.”
If the first meeting is successful, the deal will be elaborated in the following sessions. Three companies (Company 1, 2 and 4) mentioned the importance of physical meetings and the so called drinking sessions in China. As an example, the Lawyer of Company 5 indicated that:
“… if you would distrust someone in business you don’t start talking with him at all, but you always are a bit suspicious in the beginning. Then you build the relationship and learn to trust each other. Meeting physically and have diner or drinks also helps, so that the other party also can see you just as a human being, out of the business context.”
Other factors that create trust during the first phase of the relation are having the same nationality (Company 1), having a good reputation (Company 3), government relations (Company 5) and sharing the same business philosophy (Company 5 and 6). An exception is Company 4 which trusts its partner because it got acquired by them in 2011.
Development of trust
If the parties decide to do business together, the order details are discussed, the order produced and eventually shipped. In the dairy sector a transaction requires a relative long preparation period, which takes half a year up until one and a half year (Company 2, 3 and 6). In this time, the customer is guided though the different steps of the production process. For example, the Global Marketing and Sales Executive of Company 6 indicated that:
exchange alliance. In these exchange alliances, business is coordinated by the market and transactions made on arm’s length distance. Although repeated sales are targeted, the main focus is on one transaction.
For highly integrated strategic alliances, such as the joint venture of Company 5, the ‘level of suppleness’ during the negotiations is mentioned as a trust building factor (Company 5). This refers to a situation in which the partners award each other rather than aiming for the individual benefits on every business aspect.
In general, an important factor that builds trust is the ability to recognize emotions and having the same common sense (Company 6). This means that trust is build when the partners understand each other’s situation and behaviour. Furthermore, unregarded the type of strategic alliance, solving problems together is named as an important factor which builds trust. For example, the Global Marketing and Sales Executive of Company 6 mentioned that:
“…For example, I once got an order of 80 metric tonnes. After three months, when we already had produced 40 metric tonnes, the customer came to us and said he wanted to postpone the deal or maybe even cancel it. […] A Western would say: “well, that’s your problem”. A Chinese however would say: “it is our problem”. So if he does something wrong and cannot meet the agreement, it is our problem and not his problem. If you solve the problem then together, you really get into business. Thus, if he sees that you think with him, you earn loyalty. […] Building a relationship with a Chinese is about solving those problems together.”
General level of trust in China
Although a high level of trust is present in every company researched, it is mentioned in four different interviews (Company 2, 3, 5 and 6) that the general level of trust in China, especially among the Chinese is very low. For example, the Sales Director of Company 3 indicated that:
“…for example, if you are a distributor in China and you deliver to several salesmen, these salesmen will try to overrule you by calling me, the producer, directly. So the Chinese doesn’t trust each other at all. If they can trick each other they will definitely do so.”
“In the Netherlands when two strangers meet, trust is, in most cases naturally present, whereas in the same situation in China this is not naturally the case.”
Furthermore, the definition of trust differs between Chinese and Western firms. For Dutch firms trust mainly relates to meet the agreements both parties made, whereas trust is a more comprehensive and personal concept in China. For example, the Global Marketing and Sales Executive of Company 6 mentioned that:
“The Western definition of trust is doing as you agreed. Chinese look more at the long term. They are also sensitive to vigorously behaviour, but it is also in, I would say, almost silly things. For example, I had a Chinese colleague which I sent some product samples. The samples were at her office in Beijing and she delivered those products to a customer on an eight hours drive. I [the interviewee] said: “why don’t you just sent it by mail?” She replied that it makes impression to hand it over personally.”
4.2.2 Commitment
Commitment is defined as the company’s belief that an ongoing relationship with the partner is so important that it would warrant their maximum efforts at maintaining the relationship (Qi & Chau 2012). The level of commitment differs per case and a high variety is found. Transcript analysis show that the level of commitment correlates with the type of strategic alliance. The more integrated the alliance, the higher the level of commitment. A low level of commitment is found at Company 2 and 6, which both have an exchange alliance and do business on arm’s length distance. A moderate level of commitment is found at Company 1, whose type of strategic alliance tends towards a hybrid firm. Company 3, 4 and 5 indicated that a high level of commitment is present and indeed are either hybrid strategic alliances or a functional organization. This correlation makes sense because in highly integrated strategic alliances a long term relationship is aimed.
Different aspects are found which show commitment in the relationship. One is mutual investments made in the strategic alliance (Company 1, 3 and 5). Another sign are physical visits to the partner, which is mentioned in three interviews (Company 2, 3, and 4). For example, the Brand Manager of Company 4 indicated that:
In these visits, the relationship is maintained and in some cases knowledge shared. Company 3 for example visits its Chinese partner every four months to train and support them with practical and strategic knowledge. The Sales Director mentioned:
“It is just a matter of a lot of attention and providing the right support. It is also the case that you say to the partner you will invest a lot of time, attention and money in him, so you expect something back. So it is a trade-off. But anyhow, we see a growing pattern and our partner will invest within a year in branded shops, which is completely his investment without any financial support of us. However, the concept of these shops is developed by us. Preparing that concept took us some serious time and money.”
Of the companies researched, Company 5 shows most commitment to its Chinese partner and the Chinese government. It is a large multinational and supports the Chinese government improving the dairy sector by sharing knowledge. Furthermore, they established different local training programmes and established a corporation between a Dutch and Chinese university. Lastly, the current CEO of the Joint Venture is from Chinese origin.
Besides mutual investments made, two interviews indicated other signs which show commitment from the Chinese partner to the Dutch company. The first is exclusively in working the company’s brand (Company 3) and the second is working with a Dutch planning system (Company 6).
4.2.3 Communication quality
Communication quality is defined as the extent to which the formal and informal sharing of credible and meaningful information between the two parties are timely, accurate, credible, adequate, complete and useful (Qi & Chau 2012). In general the communication quality between the researched Dutch companies and their Chinese partners is high. However, in two cases (Company 4 and 6) a number of challenges are experienced. Transcript analysis shows no repeated pattern between the level of communication quality and other relational dimensions.
and 3 experience no communication issues with their China partners or in China in general. For example, the Sales Manager of Company 2 mentioned that:
“Their English is as good as ours. Well, not everyone actually, there are some who are very difficult to understand. But we are businessmen, so with gestures you can achieve a lot. […] It also happens often that a Chinese firm has a Dutch contact [speaking Dutch] which visits your company in the name of their Chinese partner.” Company 5 and 6 experience differences in the communication quality between different Chinese partners. With multinational enterprises or large domestic enterprises Company 6 experiences no problems, but with the local distributor they do. Aside from understanding each other, challenges are faced in the interpretation of the messages and translating them to do final customers. This is partly because of cultural differences. For example, the Global Marketing and Sales Executive of Company 6 mentioned that:
“My experience is that the best way is to communicate is talk on the phone and confirm by mail. That’s also the Western way of thinking, that you put it on mail and that he replies ‘I understand it’. However, ‘I understand’ doesn’t mean ‘I agree’. So that’s a really subtle difference. […] I do business now with China for some ten years and think I get only 20% of why they ask certain things.”
Company 4 forms a functional organization with their Chinese partner. However, the majority of their Chinese colleagues does not speak English at a sufficient level. The ones who do speak English communicate in the name of the ones who don’t. This creates delays and sometimes communication issues. The Brand Manager of Company 4 indicated that:
“They [English speaking Chinese colleagues] are present at the meetings and act as a kind of spokesman. They are in turn in contact with the person having the final responsibility. This makes things quite hard actually, because the people you speak to are not allowed to make decisions. Consequently, the discussions take longer than needed. So basically a language barrier is present.”
4.2.4 Knowledge sharing
Knowledge sharing is defined as the activities of transferring or disseminating knowledge between the two companies (Qi & Chau 2012). The level of knowledge sharing differs per case and a high variety is found. In the two cases with a high level of knowledge sharing (Company 3 and 5), both the level of commitment and communication quality is also high. However, in the cases with either a high level of commitment or communication quality no repeated patterns are present in relation to knowledge sharing. Furthermore, a high level of knowledge sharing is only present with the multinationals researched (Company 3 and 5). In addition, transcripts analysis shows a correlation between knowledge sharing and the type of strategic alliance. In alliances coordinated by the market (Company 1, 2, and 6) little or no signs of knowledge sharing are found. The highest level of knowledge sharing are found in the hybrid strategic alliances (Company 3 and 5). Company 4 seems to be an outlier. It forms a functional organization with its partner and is a relatively large multinational, but the level of knowledge sharing is moderate. Between Company 4 and its partner, only practical knowledge is shared to facilitate the daily operations.
Company 3 operates in the beverages industry and their product require practical knowledge in order to be prepared well. This knowledge is intensively shared with the Chinese. Employees fly every four months to China to train their partner and his employees. In the future a local training programme will be established. Furthermore, Company 3 supports its partner in developing the business, for example by standing together on fairs.
Company 5 shares knowledge as a strategic tool. They agreed with the Chinese government to support them in improving the safety of the dairy supply chain, increase the milk production and the milk quality. The Project Manager of Company 5 indicated that:
“We share our dairy expertise with the Chinese dairy sector. By showing them how we safeguard the safety and quality of our products, we hope to build trust and inspire them. We are ready to share this knowledge with the Chinese government, in order for them to improve the quality of their dairy products.”
4.3 Contractual governance
Contractual governance is measured on the basis of contractual complexity and contractual management. A contract is used in all the companies researched. Furthermore, in all interviews, contractual complexity is addressed more often than contractual management. Transcript analysis shows no correlation between these figures and the number of times relational dimensions are discussed. An overview of all findings is presented in table 5.
Table 5 Overview findings contractual governance dimensions
Before the most important findings of contractual governance will be discussed, the findings of the value of contracts in China in general will be named.
The value of contracts in China
Previous literature shows that contracts in China are regarded more as guidelines than as strict rules. This statement is presented to the interviewees and their opinions differ. Company 6 for example regards the value of contracts in China as very low. An exception is the price mentioned in the contract, which is a strong agreement. The Global Marketing and Sales Executive indicated that:
“A contract doesn’t tell a Chinese anything. […] They make a contract, but that’s completely different than commitment. If a Western business man signs a contract, it means commitment. A Chinese can say: “well yes but there turned out to be circumstances which I didn’t know beforehand.” [….] I regard it [the contract] as a kind of ‘document of pretending’. Well, you get that if you agree on a certain price, that cannot be changed. That’s fine, but volume is flexible.”
In contrast to this finding, the Lawyer of Company 5 mentioned that the value of contracts in China rose the last decades. Whereas Chinese didn’t read contracts at all in the 1990s, nowadays that is completely different. He indicated that:
Case 1 # 2 # 3 # 4 # 5 # 6 #
Contractual governance
Contractual complexity Low 5 Mod 2 High 8 Low 7 High 7 Mod 6 Contractual managment Low 1 Low 1 Mod 5 Low 3 High 3 Low 2 # Number of times adressed in the interview
“…We have a professional experience with our partner anyway. For example, we negotiated hard on contractual points. The contract was definitely not a side issue for them so to speak.”
Although Company 5 has trust in the contract with their Chinese partner, they do not rely on the Chinese law system. Their joint venture is registered in Hong Kong and an arbitrator will be consulted in the case of a dispute. The parent company of Company 3 is also registered and listed in Hong Kong. According to the Lawyer of Company 5, the interpretation of the law in China can occasionally be arbitrary. In addition, sometimes it happens in China that the law is used to support economic policies. For example, he indicated that:
“They [Hong Kong] still use the system which is based on the old English system. This system is way more flexible and recognizable for us than the Chinese system. Also the law system works a lot faster in Hong Kong, is more predictable.”
Company 3 experienced that the contract does have value in China, but that the process of making contractual agreements differs. Agreements are made in the Netherlands before the contract is signed, but Company 3 have had the experience that this happens afterwards in China. The Sales Director mentioned that:
“They regard contracts as a starting point for further negotiation. […] Just then [after the contract is signed] they come up with lots of specific demands.”
4.3.1 Contractual complexity
The less complex contracts are used in the strategic alliances of Company 1 and 4. Company 1 created a contract with its Chinese partner to show mutual confidence in the corporation. They built a strong relationship in the past one and a half year, but the business is in its initial phase. The Sales Export Manager indicated that:
“The goal of the contract was to show that they [the Chinese partner] want to import our cheese in China and make it big there. [...] It [the contract] mainly reflect our fundamental approach to this business. First, we want to show to our partner in China that we want to do business with them. In addition, some guidelines are described since we are a brand after all. Thus, a conformation of wanting to do business basically.”
Company 4 forms one legal entity with its Chinese partner. Contracts are used in the daily operations and solely have a coordinating function to avoid miscommunication. For example, the Brand Manager indicated that:
“In an email or conversations things can just be interpreted wrong. A contract provides clarity.”
A moderate level of contractual complexity is found for Company 2 and 6, which makes use of purchasing contracts. These are industry wide used contracts in which agreements about one transaction are described. The most important agreement is related to the price, product, product quality, product quality ensuring measures, delivering conditions, packaging and payment. The main function of these contracts is safeguarding. Although both companies use the same contract structure, they have a different view on contractual governance. Company 2 mentioned that the contract is not the most important tool in China, but the amount of documentation. For example, the Sales Manager mentioned that:
Company 6 uses the contract to create short term certainty. However, they feel that the contract is perceived more as guidelines for the Chinese than as strict rules, especially in terms of sales volume. The Global Marketing and Sales executive mentioned that:
“In China a contract is more a guideline than strict agreements, it is a certain indication. If the contract describes 100 metric tonnes will be bought, it is between 10 and 700.”
A high level of contractual complexity is found at Company 3. They make strict agreements with the distributors they work with. These contracts mainly have a safeguarding and coordination function. The most important safeguarding clauses are the type of corporation, the duration of the partnership, the different delivery conditions, the price and the geographic area. The latter describes in which region the partner is allowed to sell Company’s 3 products. The contract coordinates by containing goals, such as the targeted sales volume. With its partner in China agreements regarding the franchise are made as well.
The most complex and comprehensive contract is used by Company 5 has. The joint venture contract has different functions. It describes the joint venture structure, and a large part is covered by exit strategies. Furthermore, the contract has an adapting function and provides solutions for when the relationship does not go that well, or if one party does not stick to the governance agreements.
4.3.2 Contractual management
Contractual management refers to an action orientated competence that relates to the extent to which the contract is referred, reviewed and revised (Qi & Chau, 2012). In four of the six cases (Company 1, 2 4 and 6) a low level of contractual management is found. A moderate level of contractual management is present at Company 3 and a high level in Company 5. The latter both are large multinationals. Transcription analysis shows that there is not a strong correlation between contractual complexity and contractual management, although some signs of patterns are visible. In all the cases with a low or moderate level of contractual complexity (Company 1, 2, 4 and 6), a low level of contractual management is present. Only when contractual complexity is high, a moderate or high level of contractual management is found.
Contractual management systems
initial phase and the contract has not been reviewed or revisit since it is signed. There are also no contractual management systems present at Company 2, 4 and 6. Company 4 uses contracts as coordination tool to avoid miscommunication with its parent company. These contracts specify certain orders and at the point the order is sent, the contractual agreements are fulfilled. Company 2 and 6 both use purchasing contracts and the type of strategic alliance with their Chinese partner is an exchange alliance. This means that the contract facilitates one transaction, which is done on arm’s length distance. At the moment the transaction is paid and the products shipped, all the contractual obligations of Company 2 and 6 are fulfilled.
A moderate level of contractual management is present at Company 3. In their contract a framework is included which describes the conditions under which the Chinese partner is allowed to use Company’s 3 brand and products. If the partner wants to deviate from these agreements, it has to ask permissions from Company 3. Furthermore, the geographic area in which distributors sell the products is checked regularly.
The contract is very actively managed at Company 5. For example, the board of their joint venture meets four times a year. These meetings are prepared by a team which looks if revisits in the contract are needed, certain clauses missing or situations changed. Furthermore, every board member and involved employee is trained about the content of the contract. The Lawyer of Company 5 mentioned that:
“In principle people should know what’s in the contract and who to contact if something goes wrong. Still every now and then something goes wrong of course, but in most of the cases it is quickly solved. So we manage it by informing employees and look at the contract on regular basis. […] The shareholders don’t pay as much attention to the contract, but we cannot permit that. That’s the core of our job. We cannot permit ourselves to end up in court for a small, predictable issue. In the past in happened that due to a certain action in the group a contract would almost be breached. Now we try to prevent that by keeping the involved parties constantly on the same page.”
Contract enforcement
to be enforced by an independent third party. However, four of the six firms (Company 1, 2, 4 and 6) created the contract solely as a governance tool between the two parties. In other words, these contracts are not designed to be enforced. An example of solving issues mutually comes from Company 2. In the past, they had to wait once on a payment for nine months. During this period, they did not try to enforce the contract by a third party. Instead, they only communicated with the customer. Company 6 on the other hand indicates not to desire enforcement because it results in the end of the relationship. For example, the Global Marketing and Sales executive indicated that:
“I signed a significant amount of contract but never saw a courtroom. You don’t want that. At the point you win a lawsuit… Well you only do that if it is about a lot of money and you are sure you will never face the other customer again. After a lawsuit, you obviously don’t award each other jobs anymore. […] If a Chinese does not meet the volume commitment, it is unwise to take actions. The country is so big. Thus, product and planning wise it is difficult, but commercially it is fantastic. The scale in China is just extreme.”
Company 4 is one legal entity with its Chinese partner and enforcement is therefore not applicable. However, with external parties they design a contract to have enforcement capabilities. Company 4 has trust in successful enforcement by an independent third party. For example, the Global Sales Manager indicated that:
“In the case of a dispute you try to take care of the situation with each other first, of course. If that doesn’t work out you have the contract as a backup. The international law is applicable in these situations. Different clauses are described in the contract which refer to international conventions.”
Company 3 designed the contracts to have enforcement capabilities. However, it is mentioned that successful enforcement in China is difficult. Until present all issues are solved between them and the partner. The most powerful tool Company 3 has in disputes with distributors is (threating with) withdrawing the distribution rights. Actual withdrawing of these rights never happened so far.
