Design of contracts between knowledge-intensive service firms in comparative property right settings

Abstract

Purpose – This article aims to explore how knowledge-intensive service firms design inter-firm contracts to govern the exchange of highly intangible and inseparable knowledge under varying degrees of property right protection. Design/methodology/approach – This research uses a multiple case study of management consulting firms domiciled in Serbia and Albania. Findings – Firms domiciled in relatively weak property right settings prefer more informal contracts, whereas those in settings of superior property right protection favour greater formality as a means of encouraging the creation and sharing of knowledge, whilst concurrently mitigating the threat of opportunism. Research limitations/implications – This article contributes new knowledge with regard to the design of inter-firm contracts to govern the sharing of highly intangible and inseparable knowledge. In terms of theory, it employs a transaction cost economics approach in which inter-firm contracts are decomposed into five requisite provisions, which are then related to the degree of formality. Practical implications – Knowledge-intensive service firm managers should assess the degree of property right protection when considering the degree of formality of inter-firm contracts. Originality/value – The study constitutes the first attempt to empirically examine how knowledge-intensive service firms craft contracts in different property right settings. With the burgeoning number of cross-border collaborative partnerships between such firms, it offers important insights into the choice of governance mechanism in different property right protection settings.