1. ¹School of Business, The University of Hong Kong, Pokfulam, Hong Kong
2. ²School of Business, University of Kansas, Lawrence, USA
3. ³Department of Marketing, City University of Hong Kong, Hong Kong

Correspondence: KZ Zhou, School of Business, The University of Hong Kong, Pokfulam, Hong Kong. Tel: +852 2859 1011; Fax: +852 2858 5614; E-mail: kevinzhou@business.hku.hk

Received 13 November 2006; Revised 16 July 2007; Accepted 21 August 2007; Published online 7 February 2008.

Abstract

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.