Formal international contracts in the presence of cultural distance: An empirical analysis of biopharmaceutical alliances

• Author: Hélène Delerue,Hélène Sicotte
• Date: 01 July 2019
• Published date: 01 July 2019
• DOI: http://doi.org/10.1002/tie.21976

RESEARCH ARTICLE

Formal international contracts in the presence of cultural

distance: An empirical analysis of biopharmaceutical alliances

Hélène Delerue | Hélène Sicotte

Department Management and Technology,

ESG-UQAM, Montreal, Quebec, Canada

Correspondence

Hélène Delerue, Department Management

and Technology, ESG-UQAM, 315 Sainte-

Catherine East, Montreal, QC Canada H2X

3X2

Email: vidot-delerue.helene@uqam.ca

Formal contracts are designed to manage the moral hazard issues and inherent risks that come

with relationships between organizations. These contracts play an important role in nonequity

international alliances, where greater cultural distance between the partners gives rise to more

uncertainty in the relationship. At the same time, the contract is the outcome of a negotiation

process, and this process is affected by the cultural distance between the partners. This article

addresses whether cultural distance affects contract design and content. Rather than test an

established model, we use an inductive approach to conduct a detailed empirical analysis of

135 two-party international research-and-development contracts for clinical development in

the biopharmaceutical industry. The results show that cultural distance wields complex effects

on the contract and its content. They also indicate that a contract will be less detailed—with

fewer monitoring clauses and a narrower definition of the collaborative scope—when the part-

nering firms operate in highly distant national cultures.

KEYWORDS

biopharmaceutical, contractual provisions, cultural distance, enforcement, governance,

monitoring, scope of the alliance

1|INTRODUCTION

In international contractual alliances, partners that operate in differing

institutional environments and comply with diverse business operat-

ing standards interact directly with each other. To mediate cultural

interfaces as well as the bulk of the interactions, the partners use for-

mal contracts. Such contracts represent promises or obligations to

perform specific actions in the future (Poppo & Zenger, 2002) and

are key mechanisms for governing interorganizational relationships

(Lumineau & Malhotra, 2011). Nevertheless, differences in cultural

institutional values can lead to discrepancies in both processes and

outcomes (Gammelgaard, Kumar, & Worm, 2013). They may also

affect negotiation styles and contracting behaviors (Fraser &

Zarkada-Fraser, 2002; Kumar, 1999).

Previous empirical studies have failed to reach a consensus on

the differences between domestic and international alliance contract

designs. Some studies find no significant links between partner for-

eignness and contract design (Dormans, Hagedoorn, & Hesen, 2011;

Reuer & Ariño, 2007; Malhotra & Lumineau, 2011). Indeed, many aca-

demic researchers have stressed the extent to which globalization—in

the sense of increased economic interdependence among nations—

reduces cultural diversity due to cultural homogenization and

standardization based on modern Western values (e.g., Buckley &

Ghauri, 2004).

On the other hand, recent literature shows a systematic relation-

ship between a country's institutional environment and the design of

venture contracts (e.g., Lerner & Schoar, 2005; Stefanidis, Banai, &

Shetach, 2015), revealing that contract designs reflect the regional

and national cultures in which the firms are located (Bengtsson &

Ravid, 2009; Teegen & Doh, 2002). Comparing national and interna-

tional contracts, other researchers such as Ryall and Sampson (2009)

find that contracts for cross-border deals tend to be more detailed.

A contract can be viewed as the outcome of a combination of

clauses (Argyres & Mayer, 2007; Reuer & Ariño, 2007; Ryall &

Sampson, 2009). In this sense, the contract is not just an instrument

for enforcing and controlling the agreement; it is also a way to coor-

dinate the partners' efforts (Lumineau & Malhotra, 2011; Reuer &

Ariño, 2007). Moreover, contractual provisions help mitigate alliance

risks (Mellewigt, Madhok, & Weibel, 2007; Parkhe, 1993). Das and

Teng (1996) distinguish between two types of alliance risks: relational

DOI: 10.1002/tie.21976

Thunderbird Int. Bus. Rev. 2019;61:595–607. wileyonlinelibrary.com/journal/tie © 2018 Wiley Periodicals, Inc. 595