Transactional characteristics, institutional environment and joint venture contracts

This study examines how transactional characteristics and the institutional environment influence contractual governance for international joint ventures (IJVs). Unlike previous studies that view joint venture contractual governance as a unidimensional construct (clause specificity), thus causing a debate upon whether IJV contracts should be more specific, contractual governance herein is defined as a three-dimensional construct that includes the extent to which contractual terms are clearly specified (term specificity), possible contingencies are accounted for (contingency adaptability), and joint venture parties are legally bound to the contract (contractual obligatoriness). Our analysis of IJVs in China suggests that term specificity and contractual obligatoriness increase when the proprietariness of resources to be invested in the IJV or the incompleteness of the host country's legal system increase. Contractual obligatoriness appears to be an increasing function of economic exposure and environmental volatility, whereas contingency adaptability in a contract rises when interparty dependency, investment uncertainty, and knowledge proprietariness intensify or when environmental hazards escalate. These results suggest that an IJV contract, if structured multidimensionally as above, can curtail opportunism and guide venture evolution at the same time. These contractual dimensions should not be prefixed but properly aligned with transactional and institutional characteristics. This alignment has strong implications in reducing transaction costs and spurring IJV evolution in the complex and volatile institutional environment. Journal of International Business Studies (2005) 36, 209–230. doi:10.1057/palgrave.jibs.8400125