On Designing Contracts to Guarantee Enforceability: Theory and Evidence from East-West Trade
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JOURNAL OF INTERNATIONAL BUSINESS STUDIES, SPRING 1986
particulargoods, but also contractual mechanisms by which it can acquire risk-shifting and managerial services. On the other hand, the western firm is concerned not only with the pricing of the contract, but also with the enforceability of its terms. The selection of a one type contract over another depends, therefore, upon the extent to which it provides these services within a framework which assures enforceability. The relevance of contract selection is particularly important when placed in the wider context of the growing use of countertrade agreements that serve as conduits for world trade. For example, some recent estimates published in the popular press have indicated that countertrade may be responsible for 20 percent of world trade. The impetus behind the apparent growth in countertrade stems clearly from the financial constraints facing many countries. No matter what the impetus, however, the existence of these contracts rests on the use of contracts to shift risk onto one of the partners in order to finance and market the payment in kind. Despite the relative novelty in the expansion of these activities, there exists tremendous information on the nature and risks of these contracts from East-Westtrade. Yet, whereas there has been substantial descriptive information on the motives for and problems of cooperative ventures (which include countertrade and other long-term agreements entailing coordination between two or more firms), there has been no attempt to analyze these activities in the context of a more general theory of the governance design of the economic activities of the firm. As a result, it is theoretically impossible to extend our understanding of East-Westtrade to explain the existence and structure of similar kinds of activities in other regions of the world. This article moves in the direction of creating a more comprehensive explanation of contract design in East-Westtrade by developing a link between the literature on contract enforceability to recent theories of foreign direct investment and economic governance. In developing this link, this paper avoids much of the contractual complexity and concentrates upon three features which are of analytic interest. Two of these features are managerial and risk-shifting services. They characterize the substance of the contract. Managerial services involve the transfer of technology or the provision of superior market information and distribution access. Risk-shifting involves the transfer of price and/or sales volume variability from the easternto the western partner. The demand for these services, it is shown in section one, is derived from structuralweaknesses in centrally-planned economies to trade on world markets. In addition to managerial and risk-shiftingservices, a third feature of contract choice is the question of enfo
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