Relational Contract Governance

In recent years, an increasing number of business relationships are emerging, including industrial clusters, enterprise groups, strategic alliance and networks. It is worth to study why these non-traditional business relationships can substitute for the traditional integrated big business. Based on the background of industrial clusters, we start from relational contract governance which is a new entry point of deepening business relationship research, and discuss how the industrial clusters composed of small and medium sized enterprises can compete with the areas centred on big business. In the industrial clusters, the parties of relational contract could be nonintegration, or integration, depending mostly on which organizational form facilitates the superior relational contract. We mainly study about the following question:which organization form (integration or nonintegration) is adopted to governance the uncertainty to ensure the implement of relational contract, and the effect on cluster competitiveness.We induce the organizational characteristics and define the organization governance nature of industrial cluster. We develop repeated-game models to analyze the mechanism of relational contracts governance within (vertical integration) and between (nonintegration) cluster firms, and in what conditions integration or nonintegration is the most efficient organizational form. We also discuss the relationship between organization governance and cluster competitiveness, and make an empirical test on Taizhou sewing machine industry cluster.The main findings are as follows:(1) The transaction attribute between cluster firms is relational-outsourcing contract. The organization governance of industrial cluster is a kind of diversified dynamic mode, composed of relational employment and relational outsourcing.(2) The parties of relational contract in the industrial cluster can achieve the best action and maximize the total surplus by choosing appropriate asset ownership (integration or nonintegration). There are certain conditons for the relational contracts under two alternative asset ownerships to be self-enforcing. (3) Variability of market price and incentive intensity affect the uncertainty of relational contracts in the industrial cluster, and the parties can reduce uncertainty by choosing proper asset ownership. When the market price is stable, relational outsourcing is the most efficient organizational form. When the market price is wildly varying, nonintegration is not more efficient than integration, but the best relational-outsourcing contract can achieve higher incentive and action than the best relational-employment contract. Then integration can help clusters to keep low-cost advantage, while nonintegration can help clusters with technology innovation and industry upgrading by high-powered incentives.We find empirical support for our developed theory in the context of Taizhou sewing machine industry cluster. We also put forward policy suggestions aiming at the existing problems of the cluster governance. In order to promote the innovation ability of the whole cluster and make the cluster to a higher stage, the assembly enterprises need to outsource the spare parts, including the core ones, to external suppliers; strengthen the incentive effect of the relational-outsourcing contract; provide technology and capital support to the parts enterprises. If so, the parts companies would get the ability and motivation to equipment renewal and technology R&D, enhance the quality and level of the spare parts produced locally. Both parties establish a high level of trust and extensive cooperation. When the assembly firms develop high-end product market, local suppliers can play their R&D ability and enthusiasm for production, providing all kinds of qualified spare parts.In particular, the outstanding innovations of this paper are as follow. First, we point out that there are two governance structures, relational employment and relational outsourcing, of relational contract governance in industrial cluster. We analyze the mechanism of these two governance structures and the conditions for them to be self-enforcing. Second, we indicate that the relational contract governance in industrial cluster can form different competitive advantage of industrial cluster in different governance structure. That is to say, it's necessary to adopt appropriate governance structure of relational contract, corresponding to the various stage of cluster development. Third, we discuss the current situation of relational contract governance and the effect on competitiveness advantages of industrial cluster for the first time in the specific industry in our country. The research findings and policy suggestions of this paper have certain practical implications for optimizing the relational contract governance in industrial clusters in China to realize the transformation and upgrading.