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Behind The Length Of Contract During Market Transitions

Xin Chen, En Xie, Mike W. Peng, Brian C. Pinkham

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Purpose The purpose of this paper is to examine an important yet underexplored research question in the literature: What determines the length of contract governing buyer–supplier relationships during market transitions? The length of contract is a solid indicator of the comprehensiveness of a contract. By integrating transaction costs economics, the embeddedness perspective and the institution-based view, the paper develops a model that incorporates specific investments and perceived opportunism, strategies to select suppliers and buyer firms’ confidence in the institutional environment. It further posits how buyer firms’ dependence on suppliers moderates these relationships. Design/methodology/approach Data were collected nationwide via face-to-face interviews with 328 executives in 164 Chinese firms who shared information pertaining to 774 buyer–supplier contracts. A fine-grained mixed-empirical method was designed to test the proposed hypotheses, to confirm the reliability and to generalize the research findings. Findings All the proposed factors significantly influence the length of the contract. Results obtained through a moderated mediating model suggest that buyers with supplier-specific investments and that choose market-based selection relative to a relationship-based tend to perceive more opportunism in buyer–supplier relationships, which will lead to shortening the length of the contract. However, the buyer’s perception of opportunism will decrease when buyers perceive higher levels of confidence in their legal institutions. Practical implications The study discusses several practical implications for B2B managers who typically involve in interfirm exchanges as well as for emerging economies’ institutions. Originality/value Leveraging theoretical insights from transaction cost economics, the institution-based view and buyer–supplier relationships literature, this empirical study adds unique contributions to B2B research in general and emerging economies’ institutional literature in particular.