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Chapter 5. Theoretical framework

5.4 Review conclusions

norm-based in various contractual relationships. Based on the norms’ reliance on situations and contexts, some studies in the “red” cluster devised a third mode of exchange – situational exchange – as a middle ground between discrete and relational exchanges (Tuusjarvi and Möller, 2009).

5.3.4 Operationalization of norms by studies in the “yellow” cluster

The “yellow” cluster is the smallest group, consisting of three legal studies that discuss the nature of business contracts. This group only marginally contributes to the purpose of my review. The studies discuss the business contracts in terms of being guarded by either explicit legal norms or implicit social norms. The authors conclude that most of the business contracts cannot rely strictly on one or the other group of norms, but rather incorporate the both legal and social norms (Raskolnikov, 2008; Beheshti, 2016). The studies in the “yellow” cluster follow the ten contractual norms in Macneil’s original terms.

Below, I present my review conclusions, where I also add my reflections on relational contracting theory usage in entrepreneurship research.

the critical evaluation of discrepancies, Ivens and Blois conclude. Similarly, my own review demonstrates that Kaufmann’s operationalization of Macneil’s contractual norms is frequently referred to, but even so, the survey instruments developed based on Kaufmann’s work vary vastly in my review studies. The terminology used in review studies is not always coherent, even between the studies in the same bibliometric cluster.

The authors may term the norms differently, while using them to describe the same or similar relationships. For instance, Paulin et al. (1997), Zhou et al. (2015), Huo et al.

(2016) have all developed their own specific terminology for what they called “purely relational norms”.

Most of studies across all the bibliometric clusters employed cross-sectional quantitative methodologies, and developed context-specific operationalization of norms that could only be used in their respective studies (Ferguson et al., 2005;

Ferguson et al., 2015; Eckerd and Eckerd, 2017). Prevailing fields of research in my review studies were industrial marketing, innovation management, transaction cost economics, organizational and financial management. Researchers studied established firms, dealing with repetitive purchases, commodity goods, and standardized relationships within their internal and external stakeholders. Thus, I conclude that operationalizations developed by the authors of my review studies cannot be directly applied to research on new firms – or to my study specifically.

There are also methodological discrepancies in my reviewed studies. Paulin et al.

(1997) note that dyadic research is lacking, and studies to date have mostly considered a one-sided perspective. Even though there has been a considerable increase in multi-perspective research, only 30% of the studies in my review studied the dyads, and in many of these the authors claim that they studied the dyads, but have in fact only surveyed one party, most often the supplier (Blois and Ivens, 2007). Thus, I conclude that my study cannot methodologically rely on the empirical studies in my review either.

5.4.2 Relational contracting in entrepreneurship research

There are not many entrepreneurship studies that explicitly rely on relational contracting theory. Most of the entrepreneurship studies that utilize relational contracting perspective looked at the entrepreneur-investor relationships, and investments’ antecedents and outcomes (e.g., Uehara, 1990; Hudson and McArthur, 1994; Sapienza and Korsgaard, 1996; Blatt, 2009; Huang and Knight, 2017), thus departing from the financial management research domain. By scanning the frames of reference in bootstrapping studies clustered under so-called network approaches (see Chapter 2), I find some binding theoretical concepts – the relational or social contracting (Macneil, 1978; Starr and Macmillan, 1990), and social exchange theory

(Blau, 1964/2017; Levi-Strauss, 1969). In this section, I will present some of the entrepreneurship studies that relied on these concepts. These studies are not included in my bibliometric review, as they did not develop operationalizations of Macneil’s contractual norms. My purpose behind this part of the review is to become informed of some of the challenges that are specific to exchanges in new firms.

Leblebici and Shalley (1996) point out the condition of high uncertainty in contracts between new and small firms and their external stakeholders, where at least one party is always an entrepreneur venturing into the highly unpredictable prospects of business.

The authors specifically look at franchising contracts, which can be discrete in some provisions – for example, the start and end date of the agreement, but can only be relational when it comes to operational provisions, as there is simply not a good way to foresee the possible contingencies and opportunities within the exchange. The authors find that it is the explicit agreement regarding dispute resolution that predetermines the relationship’s success and sustainability over time. The successful relational contract is one in which the parties from the start lay the explicit groundwork to minimize the costs of upcoming disputes. Failing to do so may lead to weakening of the network ties, as is also argued in Larson (1991). The weakening of network ties might limit the entrepreneur’s ability to build and sustain the small and dense network of partners and supporters, and, consequently, decrease the new firm’s chances to survive, grow, and combat the larger competitors.

Sustaining and transferring the relational contracting experiences have been an object of interest for Hite (2005). The author argues that entrepreneurial phenomena should be viewed as a process that is (a) social and contextual, and (b) developing over time rather than statically observed. To that extent, the network theory (Granovetter, 1985) is arguably limited in its static view of networks and ties, while relational contracting prospective assumes the process view, and is thus more suitable for entrepreneurship research. The same process view is more suitable for studying the resource acquisition and management, as concluded by Aldrich and Fiol (1994). Hite (2005) differentiates three stages in which entrepreneurs become efficient actors in contractual exchanges:

(1) the emergence of ties or the process of networking;

(2) leveraging of the social components (e.g., “I like you, so I will introduce you to my network” or “you helped me before, so I will reciprocate”); and

(3) facilitation of trust (in Lee and Jones, 2008, discussed as “relational social capital”).

As important as relationships are for new firms, entrepreneurs do have significant limitations in establishing and taking care of their network (Aldrich and Fiol, 1994).

After all, the new firm is often highly reliant on the individual founder or a small

founding team, and it can be impossible – due to limitations in experiences, expertise, and time – to incorporate the processes perspective on exchange relationships. There is therefore a high degree of dependence on a small number of external stakeholders, as Yli-Renko et al. (2001, 2008) suggest. To extract the maximum utility from the exchange relationship, Yli-Renko et al. conclude, entrepreneurs employ so-called contractual governance flexibility, meaning that explicit terms and conditions of exchange are given less weight as the network becomes broader and ties become stronger with time, and the implicit norms of reciprocity and trust become more important.

Reuer et al. (2006) further suggest that successful entrepreneurs learn to find the balance between “too much” and “too little” contractual governance simply by weighing the costs against the opportunities – for example, the probability of one partner betraying the entrepreneur’s trust versus the cumulative costs of switching to another partner. This brings an important perspective on process character of exchanges, but does not correspond to my study’s argumentation against the strategic, calculated choice of opportunities.

In the selected sample of entrepreneurship studies, there are some of the already familiar bootstrapping researchers – Jonsson, Lindbergh, Patel, and Bosse. These specifically examine the relational contracting in resource acquisition and management – through bootstrapping (Jonsson, 2015) and bank loans (Bosse, 2009). Here, relational social capital is specifically discussed as a necessary precondition for entrepreneurs to access the external resources, as it is the relational social capital that helps to mitigate the negative impact of information asymmetry and liabilities of age and scale (Bosse, 2009). Venture capital acquisition studies (e.g., Lim and Cu, 2010, Strätling et al., 2012) reach similar conclusions, but in relation to attaining investment funding.

In summary, the empirical studies within the domain of entrepreneurship research propose that successful contractual relationships for a new firm are such where:

1. The formation and termination provisions are as discrete as possible, while the operational provisions are as relational as possible (Leblebici and Shalley, 1996). Here, the linking norms implementation of planning and effectuation of consent are the primary guarding norms.

2. The instance of exchange is treated by parties as a dynamic, evolutionary process of building and retaining the relational social capital, rather than as one-time opportunity utilization (Hite, 2005). Here, the norms of stakeholders’ role integrity and reciprocity are the primary guarding norms.

3. The contractual governance flexibility is observed (Yli-Renko et al., 2001) so as to extract the most favorable cost-value ratio from dependence on a small number of close partners, rather than a large number of distant ones (Reuer et

al., 2006). Here, the norms of flexibility and contractual solidarity are the primary guarding norms.

I should note that my review conclusions at this stage are already sensitized by insights from my empirical phase 1. In other words, I identify the ongoing discussions that resonate with my data. Interestingly, all of the empirical studies similarly conclude that the formal contracts are not the driving force behind successful and sustainable stakeholder engagement in new firms. Although there usually are explicit agreements in place, the researchers conclude that explicit contracts are not as important for contractual exchanges in new firms as the relational (e.g., Larson, 1991). I now reflect on how the conclusions from the literature review might help to shape my study’s conceptual framework. In the upcoming section, I will also to present my argumentation as to why relational contracting is relevant for bootstrapping.