Effect of Formal Contracts, Relational Norms and Trust on Performance of Joint Research and Development Projects

Abstract

This paper examines the effect of governance mechanisms – formal contracts, relational norms and trust – on the performance of exploration and exploitation joint research and development (R&D) projects. While the authors acknowledge the need for a twofold approach, transactional and relational, to understand the interfirm exchange governance, the joint action of formal contracts and relational governance has been caught between the complementary or substitutive forces involved in interorganizational relationships. Using survey data on joint exploration and exploitation R&D projects developed by the European biotechnology companies, the synergies of both mechanisms and their effects in improving project performance are investigated. The analysis suggests that contracts and relational norms and trust act as complementary mechanisms, but while contracts are more effective in exploitation projects, relational norms and trust are more powerful in improving the performance of exploration projects.