Interface between context and theory: the application and development of Agency Theory in the Chinese context

Purpose - This paper explores the contextual factors involved in the development and application of paradigmatic theories in general, and the application and development of Agency Theory in the Chinese context in particular. Design/methodology/approach - Referring to four templates for the design of conceptual papers as outlined by Jaakkola (2020), i.e. theory synthesis, theory adaptation, typology and model – we adopt an approach combining theory/literature synthesis and model establishment. Based on a thorough analysis and discussion of the literature on the topics of “context effect “, “interface between theory and context”, “special characteristics of Chinese context” and “invalid application of Agency Theory in a Chinese context”, we use Agency Theory as the lens to discuss the importance of context in applying and developing paradigmatic theory specifically. We start from the contextualization of Agency Theory and then explore approaches to theorizing the Chinese context by developing a conflict coefficient model. Findings - First, the application validity of paradigmatic theories is not sustainable; contextual factors are critical in applying and developing not only propositional but also paradigmatic theories, such as Agency Theory. Second, the Chinese context requires special attention when applying paradigmatic theories originating from Western countries. Third, the traditional application logic of Agency Theory is invalid in the Chinese context due to the coexistence of principal-agent conflicts (PAC) and principal–principal conflicts (PPC), and changeable dominance status of two conflicts according to the contexts. Based on these observations, a model of contextualization theory of PAC and PPC (i.e. conflict coefficient model) is developed from a dynamic perspective, which connects the separated situation states and allows the identification and measurement of the relative severity of the two types of agency conflicts. Practical implications - Practitioners can also use this model to identify and measure the relative strength of the two conflicts and determine the direction of control and improvement. Moreover, analysis of Chinese context and agency problems of Chinese firms also has great practical significance considering the increased importance of the Chinese market and the increasingly important role played by Chinese firms in the international economy in general, and in specific host countries in particular. Originality/value - First, in general, this study expands Whetten's (2009) study of the interface between theory and context. It specifically discusses approaches to considering contextual factors in the development and application of the relatively overlooked paradigmatic theories, using traditional and widely used Agency Theory as a lens. Our study suggests that typical Agency Theory, developed based on Western-centric assumptions, does not completely hold in the context of Chinese business practices because of different cultural, legal and governance realities. Second, it improves and extends the application of Agency Theory by proposing the new perspective that PAC and PPC coexist in specific contexts and positing that the relative severity of two types of agency conflicts depends on the context variables. Third, it puts forward a conflict coefficient model offering a more comprehensive, intuitive and quantifiable method for comparing the extent of the two conflicts in different scenarios, providing a reference for empirical studies of corporate governance.