Embeddedness and Contractual Relationships in China's Transitional Economy

Abstract

Interfirm contracts represent common economic relations in the marketplace; they are also deeply embedded in social relations and social institutions. In the context of China's transitional economy, this study examines how three mechanisms—economizing transaction costs, network-based social relations, and institutional links—affect interfirm contractual relationships in (1) the choice of search channels for contractual partners, (2) the formality and provisions in a contract, and (3) the intensity of social interaction in contract implementation. Empirical evidence is drawn from information collected on 877 contracts from 620 firms in two Chinese cities, Beijing and Guangzhou. The authors find distinct roles of social relations, institutional links, and regulatory environments in the initiation of contractual partners and the forms of contracts adopted, whereas transaction-specific factors play a significant role in the intensity of social interaction in contract implementation. These findings suggest the interplay among economic calculativeness, social networks and institutional links, and the complementarity in the underlying theoretical ideas.