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Do country-level institutional frameworks and interfirm governance arrangements substitute or complement in international business relationships?

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Abstract

Interfirm relationships among partners from institutionally distant environments are subject to governance difficulties, owing to the paucity of shared cognitive and regulatory frameworks. We examine the potential of formal contracting and relational governance developed at the partnership level to overcome the formal and informal institutional gap at the country level. Empirical results from a sample of 184 international partnerships of large US firms support an overall substitutive relationship between informal institutional frameworks and interorganizational relational arrangements whereby the performance benefits of relational governance are reinforced at higher degrees of informal institutional distance. Contrastingly, formal institutional frameworks and contractual governance are found to have a complementary relationship, with performance gains from formal contracting undermined at higher degrees of formal distance.

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Notes

  1. Given the context of our study, the most relevant formal institutions would be those associated with implementation of the contractual terms, protection of property rights, and legal frameworks.

  2. Other four aggregate indices quantify aspects of formal institutional environments marginally relevant to facilitating interfirm partnerships. Those four indices measure the absence of violence/terrorism and political stability, voice and accountability, government effectiveness, and control of corruption.

  3. We also examined for the possibility of off-diagonal (formal with informal) relationships between institutional and transaction-level arrangements. Neither of these two potential relationships (formal contracting with cultural distance as well as relational governance with legal dissimilarity (hazard)) turned out statistically significant.

  4. Please note that we are discussing a difference in the nature of relational governance rather than its extent. The influence of institutional similarity on the extent of relationalism is controlled out by modeling governance mechanisms as endogenous variables: the third stage of our three-stage estimator uses “residuals from regressing relational governance on institutional distance” (and other covariates) as indicators of relational governance. This essentially captures out the effect of institutional similarity on the extent of relational governance.

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Acknowledgements

We would like to thank the JIBS Area Editor, Gabriel Szulanski, and three anonymous reviewers for their support and valuable comments, which have assisted in the development of this paper. Financial support for this project from the Social Science and Humanities Research Council of Canada (Grant 864-2007-0263) is gratefully acknowledged.

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Authors and Affiliations

  1. Newcastle Business School, University of Newcastle, Callaghan, Australia

    Majid Abdi

  2. Schulich School of Business, York University, Toronto, Canada

    Preet S Aulakh

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  1. Majid Abdi
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  2. Preet S Aulakh
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Correspondence to Majid Abdi.

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Accepted by Gabriel Szulanski, Area Editor, 20 January 2012. This paper has been with the authors for two revisions.

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Abdi, M., Aulakh, P. Do country-level institutional frameworks and interfirm governance arrangements substitute or complement in international business relationships?. J Int Bus Stud 43, 477–497 (2012). https://doi.org/10.1057/jibs.2012.11

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  • DOI: https://doi.org/10.1057/jibs.2012.11

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