Understanding the governance of high-performing international buyer-supplier relationships in China using complexity-based contingencies

Given that buyer-supplier relationships are increasingly becoming international in nature, designing appropriate governance forms for ensuring high-performing cross-national relationships is of paramount importance to gain competitive advantage. Most of the studies involving inter-firm exchanges in non-Western economies predominantly consider the case of Western companies in China (e.g., Li et al., 2010; Salmi, 2006; Zhou and Xu, 2012). Typically, past studies that investigate governance of the Western buyer-Chinese supplier (WB-CS) exchange have remarked the importance of relational governance as a prevalent practice, in light of both Institutional weakness of the Chinese legal system (that would reduce the effectiveness of formal contracts) and China's heritage of personal-based approach to business conduct (Li et al., 2008, 2010; Zhou and Xu, 2012). However, whether this conclusion applies to every sourcing activity in China remains unclear. On the one hand, Western firms generally adopt formal contracts (i.e., transactional governance mechanism) in managing cross-border relationships (Burkert et al., 2012; Cavusgil et al., 2004) as they may be reluctant to give up the protection offered by these contracts. On the other hand, the development of strong ties in itself may be extremely difficult and time consuming in light of the different cultural background of the Chinese and Western firms (Li et al., 2010; Millington et al., 2005). These contrasting views make it difficult to understand which form(s) of governance will be effective in WB-CS relationships. Indeed, the choice of governance mechanisms could be contingent on specific contextual factors under which the relationship is operated, since it is likely that the main objective of these governance forms would be to overcome the challenges posed by such factors. In effect, various scholars (Li et al., 2008; Lihong and Goffin, 2001; Liu et al., 2009) recommend to account for context-specific factors when examining the governance forms adopted in WB-CS relationships. Among other contextual factors, complexity could be a key contingency that could have a significant effect on governance forms. Specifically, Nassimbeni and Sartor (2007) recognize that complexity dimensions (particularly, product and supply context complexity) influence the choice between “traditional” and “collaborative” sourcing forms by Western firms in China. Also, though not related to the specific context of Chinese suppliers, scholars have considered complexity as a key contingency that could explicate the adoption of appropriate governance mechanisms (e.g., Handley and Benton, 2013; Roehrich and Lewis, 2014). Against this backdrop, the aim of our study is to understand the governance of high-performing WB-CS relationships through context-specific factors. Towards this end, we propose sourcing structural complexity and sourcing process complexity as two dimensions of complexity to help explain the adoption of different governance forms. Sourcing structural complexity refers to the complexity inherent in how the international buyer-supplier relationship is configured, and is reflected by the number of entities involved in the relationship, geographical distance between them, as well as the geographical dispersion of such entities (Anderson, 1999; Larsen et al., 2013; Schmoltzi and Wallenburg, 2012). Sourcing process complexity refers to the task complexities inherent in the different phases that make up the sourcing process, namely: profiling the purchasing category, supplier selection, negotiation, and compliance (Monczka et al., 2011; Tate and Ellram, 2009). We characterize high-performing relationship as one that shows good supplier operational performance (Giannakis et al., 2012), negligible opportunistic behaviour (Wang et al., 2016; Zhou and Xu, 2012), and a general overall satisfaction with the relationship (Li et al., 2010). Specifically, we use four cases of WB-CS relationships to address the following research question: RQ: How do different levels of structural and process sourcing complexity help explain the governance of high-performing WB-CS relationships? While studying the WB-CS context, scholars have also tried to examine the right choice and combinations of transactional and relational governance mechanisms in such relationships. However, these results have been mixed: particularly, while Luo (2002) and Zhou and Xu (2012) found that a simultaneous adoption of formal contracts and relational governance enhance effectiveness in curtailing supplier's opportunism, Li et al. (2010) did not find support for the benefits of combined contracts and relational governance in improving exchange performance. Accordingly, the mixed results and ensuing confusion around the combination of different governance mechanisms could potentially be explained by taking a contingent approach based on complexity (e.g., Roehrich and Lewis, 2014). With this belief in mind, we also try to shed light on this conundrum as part of our main research question. Our study makes three major contributions to the literature on WB-CS relationships. First, it shows that the extent of the various governance mechanisms (i.e., centralized control, formalized contracts, structural and process relational governance) is distinctly different under different levels of structural and process sourcing complexity – which is influenced also by the specific peculiarities of the Chinese context. Second, it also clearly illustrates when (i.e., under which conditions) and how to combine these governance mechanisms in managing high-performing WB-CS relationships. Finally, though not the primary aspiration, our study also contributes to the limited stream of literature linking complexity and relationship governance by empirically showcasing that complexity significantly influences the choice of governance mechanisms.