Relational ties or customized contracts? An examination of alternative governance choices in China

As business transactions become more complex in China - an increasingly market-driven economy - are managers more likely to employ relational ties or contracts? Consistent with the view that personal institutions govern transactions in China, our analysis of 361 buyer-supplier exchanges indicates that managers rely more on relational ties as asset specificity and uncertainty increase. We also find some support that impersonal institutions govern market transactions: as uncertainty increases, managers craft more customized contracts. Surprisingly, there is no association between contracts and asset specificity. These results hold for both local and foreign firms.