No. 016/2020/MAN

Does Information Technology Usage Substitute or Complement Formal
Control in Digital Platform Relationships?

Qian Yang
School of Management
Northwestern Polytechnical University

Liping Qian*
School of Economics and Business Administration
Chongqing University

Xiande Zhao
Department of Economics and Decision Sciences
China Europe International Business School (CEIBS)May 2020––––––––––––––––––––––––––––––––––––––––* Corresponding author: Liping Qian (qlp@cqu.edu.cn). Address: School of Economics andBusiness Administration, Chongqing University, 174 Shazheng Street, Shapingba District,
Chongqing 400044, China.

Does Information Technology Usage Substitute or Complement Formal Control in
Digital Platform Relationships?
Abstract: Regarding information technology usage as an alternative control mechanism, thisstudy attempts to investigate the role of information technology usage, formal contracts, andtheir interaction on platform participants firms’ financial performance in a digital platform
relationship setting. Using data collected from 384 platform participant-platform builder
relationships from China’s two largest digital product platforms, hierarchical regression isused to investigate the direct effects of formal contracts and information technology usage aswell as the moderating effects of technology on formal contracts-financial performance link.
The results show that contract completeness and information technology usage can
independently improve financial performance, while contract enforcement has an inverted
U-shape effect on financial performance. Furthermore, information technology usage
amplifies the positive effect of contract completeness but not of contract enforcement on
financial performance. This study advances the literature in partnership control by revealing
the role of information technology usage as a control mechanism. Simultaneously, this study
enriches the research on technology by offering an integrated perspective concerning how
technology benefits business partnerships. Finally, this study extends transaction cost theory
by demonstrating that different dimensions of contracts have different effects on governinginterfirm exchange relationships.

Keywords: control; digital platform; information technology usage; contract completeness;
contract enforcement; financial performance1Managerial relevance statement: The findings offer helpful managerial implications for
managers regarding partnership control in the digital platform setting. First, managers areencouraged to implement information technologies to govern platform partnership. By
facilitating transparency, information technology can promote cooperation efficiency andfoster financial performance. Thus, mangers should recognize that information technology
usage can play as an alternative and cost saving control mechanism in the digital platformsetting. Second, the empirical results suggest that different dimensions of formal contracts
have distinct effects on financial performance. Given the positive linear relationships between
contract completeness and participants’ financial performance, managers from both platform
builder and participant can agree to design detailed contracts. Furthermore, managers cansimultaneously use information technology to amplify the positive effect of contract
completeness. Yet when contract enforcement is preferred, the key issue for managers fromplatform builders is to decide the optimum extent of contract enforcement. Too little contract
enforcement is not enough to exert a deterrence effect on platform participants, while toomuch may harm platform participants’ interests which may reduce the participants’willingness to cooperate.

2

Does Information Technology Usage Substitute or Complement Formal Control in
Digital Platform Relationships?

I. INTRODUCTION
Control, aiming at restraining opportunism and improving performance, is vital to various
interfirm relationships, such as supply chains, marketing channels, and alliances [1-3]. By
virtue of either economic incentives or social disciplines, control is achieved by influencing
the controlee to behave in a way that the controller wants [1]. However, contrary to thecommon wisdom, the recent popular firms of digital platform builders seem to haveestablished and maintained good partnerships with platform participant firms without muchuse of formal control [4-5]. For example, Tencent cooperates with its millions of independent
developers of software application or digital game via its open platform. Tencent’s contract
with each of these developers only addresses the legitimacy of the content of the applications
or games, without much details on cooperation procedure or behavior monitoring. One
possible reason for this change may lie in the widespread usage of information technology inthe operations of digital platforms.
In platform builder-platform participant collaborations, nearly every aspect, such as
negotiation, products/services posting, behavior supervision, and benefits distribution, isfacilitated by information technology [5]. Cooperation procedures and interfaces are clearly
defined by technology specifications. The effects of technology in business partnerships aremainly acknowledged by two logics in previous literature. On one hand, thetechnology-based view asserts that technology coordinates firms to interact more effectively
3and efficiently with each other via advanced information storage and transfer techniques [6-8].
On the other hand, the ‘subsystems decoupling’ perspective posits that technology safeguards
partners’ interests by timely regulating firm behaviors and noticing opportunism via strictly
codified technical specifications and interfaces [4]. All told, information technology usage
serves ‘coordination’ and ‘safeguard’ functions, which are the two main functions of formal
control [9]. An interesting research question thus arises: can information technology usage
substitute or complement formal control in digital platform relationships in promoting firm
financial performance?
Thus, using data from Chinese digital platform builder–platform participant
relationships, this study proposes an integrated model to investigate the direct effect andinteractions of information technology usage and formal contract control on platform
participant firms’ financial performance. In doing so, we treat formal contract control as a
two-dimensional construct involving contract completeness and contract enforcement todistinguish the ‘coordination’ and ‘safeguard’ functions based on previous literature. The
former focuses on the terms and clauses included in the contractual agreement and can be
regarded as an ex ante governance [10]; the latter insists on the application and execution of
the formal agreements in daily interfirm operations and can be considered as an ex post
governance [11].
This study aims to provide new insight into how control is achieved in digital platforms.
We argue that if information technology usage is integral to the effective coordination andsafeguard of platform cooperation, then it should substitute or complement formal control tosome extent. In contrast to formal contract, which induces high costs in ax ante negotiation,4

whole process monitoring, and ex post mal-adaption, information technology usage provides
a less costly and equal effective control mechanism. Managers just need to well devise andimplement operation facilitating technical system. The aim of control is achieved naturally.
As such, this study extends the existing framework of interfirm control mechanisms [1, 9, 12]
and redirects prior efforts to technology in business partnerships [4-5]. The conceptual model
is depicted in Figure 1.
II. THEORETICAL BACKGROUND
A. Formal contract control
Contracts, defined as the agreements between exchange parties [1], is a universal formal
control mechanism to regulate interfirm relationships and have various forms, such as
informal promises or formalized agreements, incomplete or complete task execution [13]. For
example, a formal contract provides a legally binding institutional framework in which
partners’ rights, duties, and responsibilities are codified and the goals and polices underlying
their exchange relationships are specified [14]. Accordingly, control is achieved throughmonitoring and incentive-based systems [1].
As the prominent theoretical lens on the roles of contract in interfirm relationships,
transaction cost economics mainly emphasizes the safeguarding functions of contracts [13,15]. Specifically, since firms are always “bounded rationally” and “self-interest pursuing,”
they are likely to behave opportunistically in market transactions where internal hierarchicalauthority is absent, resulting in the need for alternative governance mechanisms such asformal contract [16]. Other theoretical perspectives (i.e. relational and firm capabilities)
contend that the main purpose of the use of contracts is to coordinate exchange relationships,
5thus, contracts not only serve as a means of safeguarding but also function as the approaches
to coordination and adaptation [13]. In detail, through various penalties for noncompliance,
contracts can safeguard each partner’s interests; by allocating the exchange partner’s task,
roles, and obligations, and clear provisions for the monitoring, process, contracts can foster
coordination between exchange partners [17]; by incorporating contingency planning,
contracts can help exchange partners adapt to exogenous disturbances.
One dimension of formal contract is completeness which concerns how specific anddetailed contractual terms are. Because it is impossible to predict all future states, hazards
also trigger clauses that help to address unexpected events [18]. Contract completeness also
includes contingency adaptability, which involves how to respond to future problems,
conflicts, and contingencies [14]. From a theoretical perspective, most studies argue that
contract completeness can improve financial performance (i.e., sales volume, profit, andreturn on investments) by specifying roles and obligations and by facilitating adjustment.
However, empirical studies have offered mixed results. For example, Liu et al. [1], Mesquita
and Brush [19], and Ferguson et al. [20] found that contract completeness can foster financial
performance, while Li et al. [21] and Rhee et al. [22] found that contract completenesscannot.
However, some other scholars note that no matter how complete a contract is, if therelevant parties do not apply it to their daily operations, it remains useless [23]; as a result
they insist that the effectiveness of a contract depends to a large extent on sound enforcement
practices. Contract enforcement, the second dimension of contract, defined as the severity ofthe platform builder’s disciplinary response to platform participants’ violation of the6contractual agreement [23], is the action aimed at remedying problems resulting fromviolations of contractual agreements [11].
B. Technology usage in interfirm partnershipTechnology, especially information technology, plays an increasing critical role in interfirm
relationships, such as supply chain, buyer-supplier, and digital platforms [5, 24-26]. However,systematic theoretical and empirical investigation concerning its effectiveness in business
partnerships is still scarce. Originated as an information processing tool, the traditional
technology-based view focuses on technology’s ability in increasing firms’ ease of
information storage and transfer, connection to external resources, and the effectiveness ofinteraction with partners [7, 26-27]. In the platform setting, technology facilitatescommunication, accelerates resource matching, simplifies cooperation procedure, andreduces human involvement in the relationship between a platform builder and its participants[27-28]. By authorizing participants to access and utilize a variety of information, resources,
and capabilities on the platform, technology helps participants to coordinate various
interfaces and fulfil their operation processes autonomously [29-30]. As a result, a‘coordination’ function of technology usage is thus achieved. As indicated in Zhang et al.’s[31] research, positive effects are found between technology usage and coordination in both
operation and strategy. Similarly, Benitez et al.’s [32] research indicates that technology
usage can facilitate coordination between employees by providing accurate real-time
information and improving knowledge exchange.
The ‘subsystems decoupling’ logic provides another perspective on how technology
impacts business partnerships. According to this logic, any complex system is composed of7many distinct but interdependent subsystems [33]. It is the interactions among thosesubsystems that support the operation of the whole. Reflected in business partnerships,
interfirm collaboration (complex system) is achieved by the well coupling of various businessactivities (subsystems) across intrafirm function units and interfirm boundaries [4, 34]. The
controlee of the partnership needs to utilize and regulate these coupling behaviors toaccomplish tasks and enhance performance [4]. Technology helps here in that, intechnology-dominant interfirm partnerships such as the digital platforms, cooperation
procedures and interfaces are clearly defined by technology specifications [35]. The only way
for behaviors or processes to be recognized and executed by the transaction system is tostrictly comply with the codified technical specifications. Firms have little room to shirk their
obligations. Violating behaviors are easily noticed by the technical system and the need forthe controlee to supervise and monitor the controller’s behaviors is thus reduced. Per thisnotion, technology usage fulfils the role of ‘safeguard’ in interfirm partnerships.
In addition to the above technique and system perspectives, more recent studies explain
the ‘coordination’ and ‘safeguard’ effects of technology in business partnerships from a
relational view. By codifying operation procedure, interface, and benefit distribution
specifications, technology increases the transparency of collaboration clauses to all parties
involved and ensure that such clauses will be executed in a consistent way [5]. A controller
thus can easily know whether it is treated equally as compared with other controllers by thecontrolee, how its duties are required, and how much benefit it can get from the partnership.
Such transparency and consistency guarantees help firms feel confident about the partnership,
willing to consciously resist opportunistic behaviour and conduct knowledge sharing or8

investment within the partnership [36-37]. Accordingly, participants will be more likely tofulfil their obligations; and thus, technology usage serves as coordination and safeguardmechanisms.
Regarding the widespread information technology usage in digital platforms, the above‘coordination’ and ‘safeguard’ functions of technology are likely to co-exist and jointly aid
platform operations. However, relevant investigations remain lacking. By proposing an
integrated model, we simultaneously explore how the ‘coordination’ and ‘safeguard’
functions of technology influence formal contract control in fostering firm financial
performance, and how the ‘coordination’ and ‘safeguard’ function of technology istransferred to favourable firm financial performance. Such a comprehensive understanding
may better explain why platform builders control their partnerships with platform participants
with less formal contract control.
III. HYPOTHESES
A. Contract control and financial performance
In the platform setting, a complete contract outlines the objectives of the platform, specifies
the rights and obligations of each party, and defines the rules and procedures of platform
operations [13, 14, 38]. Partners’ behaviours become explicit and transparent. Violating
behaviours is easily noticed; thus, incentives for opportunism and needs for monitoring both
decline. A complete contract also clarifies how future contingencies and disputes will behandled, which helps to reduce difficulties in conflict resolution and maladaptation.
According to transaction cost theory, less opportunism, less monitoring, and easier
maladaptation all reduce transaction costs and accordingly boost the financial performance of9the platform participant [16, 39].
Clearly and completely articulated clauses indicate that platform builder and participants
have reached a mutual understanding of each other’s roles, obligations, and responsibilities,
which limits the domain of firm behaviours and narrows the operational risks to which an
exchange may be exposed [38, 39]. Serving as the foundation of cooperation, a complete
contract can guide partners’ actions and leads firms to believe that their partners are applying
sincere efforts to fulfil their obligations [13, 40]. Thus, firms will be more likely to shareresources, make specific investments, and conduct integration to exploit market opportunities[41]. These activities ensure the transfer and utilization of important internal organizational
resources and capabilities across organizational boundaries [42]. Therefore, suchcollaborative behaviour promotes better financial performance, such as higher sales volume,
high profits, and more customers. Taken together, we suggest:
H1: Contract completeness will have a positive effect on platform participants’ financial
performance in platform collaboration.
Unlike contract completeness, we suggest an inverted U-shape effect between contract
enforcement and financial performance in a platform based on the following arguments. As
the severity of contract enforcement increases from low to moderately high, exchange
partners gain a greater awareness of their expected roles and actions in the relationship [10]and are aware that both platform building and platform operation are constrained by thecontract [23]. By emphasizing that any contract-violating behaviour will induce serious
sanctions from the other side, contract enforcement sends a signal that each partner should
pay attention to their assigned duties and responsibilities and consciously avoid opportunism
or conflicts [11, 14]. Each partner’s awareness of its own responsibility and limits of activity
10reduces transaction costs and promotes financial performance. Similarly, in the presence ofdeterrence against economic sanctions, each party must fulfil its assigned duties. A firm does
not need to take a “wait and see” attitude in an exchange relationship, waiting to perform its
obligations until its partner has already obeyed certain rules. Thus, contract enforcement
enhances partners’ confidence in its counterparts and self-awareness in cooperation [43].
Having more self-discipline, each side will take its own duties and responsibilities seriously
and be eager to fulfil them in a timely and qualified manner, which in turn enhances financial
performance.
Although contract enforcement enhances financial performance, beyond a certain level,
the positive effect may fade. When the extent of contract enforcement moves frommoderately high to particularly high, firms’ behaviours are strictly constrained and monitoredby the contract terms. To avoid punishment for breaching contracts carelessly, firms may
become sensitive and cautious in their behaviours [11] and prefer to behave in accordancewith established procedures, transferring information and making decisions hierarchically.
Such an attitude and behaviour harms flexibility and result in rigid organizational structure
and low responsiveness to the market [2, 44]. Firms are likely to miss new market
opportunities and be outflanked by competitors and are thus unlikely to obtain high profit
margins. Moreover, fixed operations, information transfer, and decision-making processes
signal a lack of trust between exchange partners [2], undermine the intention to cooperationin the future, and will occupy a large amount of organizational resources in manpower,
capital, and time, leading to an increase in transaction costs. Per this notion, exorbitantcontract enforcement may harm financial performance. Thus, there is a threshold extent of
11

contract enforcement. Below the threshold, financial performance will increase along withincreased contract enforcement, while above the threshold, financial performance will
decrease when contract enforcement continually increases. As a result, we postulate:
H2: Contract enforcement will have an inverted U-shape effect on platform participants’financial performance in platform collaboration.
B. Information Technology usage and financial performance
In the presence of information technology usage, the cooperation process between platform
participant and platform builder is strictly codified and constrained by clear technicalprocedures and interfaces [5]. Transaction details become transparent to each side andpartners know exactly how interfirm interactions, decision making, and conflict resolution
will be executed. Thus, each participant not only know its own obligations but also
understand partner’s responsibilities, which promotes their cooperation and fosters better
financial performance.
In addition, due to information technology usage, a platform builder cooperates withdifferent participants using consistent technical standards and interfaces. Participants aretreated as equals by the platform. Such transparency and fairness encourage participants’
perception that they are being treated fairly by the platform compared to other participants or
the overall market [45]. Then, they will believe that their cooperation outcomes are easy to
predict and that their interests are protected by policies. Consequently, they will be willing tocommunicate, share information, and invest to continue the relationship [36]. Communication
deepens firms’ mutual understanding, increases their confidence in cooperation, andencourages firms to expect joint goals, norms and reciprocity; this in turn fosters financial
performance [46]. Specific investment provides firms with complementary resources to12

nurture their unique capabilities and upgrade the efficiency of their core functions [42], which
contributes to firms’ competitiveness and ultimately benefits financial performance [36, 45].
Moreover, the mutual recognition and transparent procedures guarantee both sides fair
opportunities to express their expectations and concerns, and each side’s pursuits andinterests can be accommodated [37], which promotes to fulfil their obligations and thenenhances financial performance. Thus, we posit the following:
H3: Information technology usage will have a positive effect on platform participant
firms’ financial performance.
C. Interaction between information technology usage and contract control
Information technology usage and contract completenessAccording to the technology-based view and the transaction cost economy, we posit that theinteraction of information technology usage and contract completeness exerts a positive effecton platform participants’ financial performance. First, contract completeness flushes out boththe explicit clauses and unspoken assumptions about each partner’s rights, duties andresponsibilities in a partnership [14]. Its effectiveness largely depends on to what extent thecontrolees can comply with it. Information technology usage helps to clearly codify thosepartners’ duties, responsibilities, exchange interfaces and procedures at a technical level,
effectively avoiding human intervention, which provides the controller more power to portraya coordination framework and ensure that certain organizational routines are implemented
and partners’ tasks are accomplished in the pre-designed way [5]. Thus, information
technology usage encourages exchange partners to take contracts seriously and to abide bycontractual clauses; in turn, the effectiveness of contract completeness will be enhanced [4].
Second, advanced technologies facilitate improved interfirm communications and13

simplified cooperation procedures between platform and participants, enabling them tointeract more effectively and efficiently [27]. Such rapid and thorough communication
enhances each partner’s understanding of contractual terms and resolves ambiguity or
conflicts surrounding duties and rights allocation. Advanced technical facilities and betterawareness about contractual terms in turn improves firms’ efficiency in fulfilling assigned
duties and cooperation procedures [47], which also enhance the effectiveness of terms
specified in a complete contract. In summary:
H4: Information technology usage will have a positive moderating effect on therelationship between contract completeness and platform participant firms’ financial
performance in platform collaboration.
Information technology usage and contract enforcement
In contrast, we suggest that the optimal level of contract enforcement is likely to decrease
when information technology usage is high rather than low. The main purpose of contract
enforcement is to ensure that each party’s behaviors are restrained by the specific clauses of acontract [11-12]. Its effectiveness is achieved by rewarding compliance behaviors andpunishing violating behaviors of the controlee. Information technology usage embeds specificcontractual requirements in technical routines and interfirm/functional interfaces [7, 27].
Only by completely complying with certain criteria and procedures can a firm conduct andremain in business [5]. Thus, information technology usage guarantees the effectiveness ofcontract enforcement in a more autonomous manner without much enforcement from theplatform builder to the participants. Likewise, information technology usage also lowers theneed for monitoring and the threat of opportunism, as rigid technical programs make it easier
to detect and punish violating behaviors. Once one side’s online procedures are stopped at
one step due to a violation, no further steps can be taken. As a result, partners’ incentives to14

behave opportunistically are reduced, and they are more attentive to fulfilling their assigned
duties and responsibilities. Hence the necessity of maintaining a high level of contract
enforcement is reduced.
Moreover, information technology usage also eliminates the possibility of personal
interactions, which hinder the building of personal ties between platform builder and platform
participants [5]. Although this may result in rigid organizational structure, it successfully
avoids shirking by personal favors or reciprocity in fulfilling contractual terms [48]. In thisway, contract clauses can be enforced more strictly and completely. Thus, for a specific levelof financial performance, due to the increased efficiency of contract enforcement, the extent
of contract enforcement need not remain as high as it was previously. The foregoingarguments lead to:
H5: Information technology usage will have a negative moderating effect on therelationship between contract enforcement and platform participant firms’ financial
performance in platform collaboration.
IV. METHOD
A. Data collection
The proposed model is tested using data collected from participants on two of the largest
platforms in China. China is now the world's largest online retail market with the most online
consumers. The ever-growing e-market has propelled the emergence of many platforms, suchas Taobao, Tencent, China Mobile, Jing Dong, etc. Fierce competition forces platforms to lay
great emphasis on partnership control, to increase their efficiency and performance. This
makes China an ideal context for examining control issues in platform relationships. To
ensure consistency, we choose the two largest application platforms for PC and mobile
15phones, Tencent and China Mobile, as the data sources for this study. Tencent has billions ofusers all over the world, on both PC and mobile. Tencent’s open platform is used to develop
creative social games, utilities, and applications for its customers. China Mobile is the largest
communications business operator in China. Its mobile market is a mobile app download
platform its 700 million customers. Due to the huge number of customers and diversified
customer preferences, these two platforms cannot satisfy their customers using just their own
development capability. They have to cooperate with numerous platform participants (mobile
software developers) to get products.
To learn about the platform context and relevant control issues, we conducted fieldinterviews with eight managers from Tencent, China Mobile, and their participants, asking
them several open-ended questions concerning the relationships between participants andbuilders, and the roles of contracts and technology. Our field interviews revealed that theeffects of contract completeness and contract enforcement change a lot on platforms due tothe emergence of technology, which enables us to examine control issues for platform. All thequestionnaire items were borrowed from past research. Since the questionnaire wasadministered in China, the questionnaire was first developed in English, translated into
Chinese, and then translated back to English to ensure accuracy.
To ensure content validity, we conducted five in-depth discussions with two professional
scholars and three industry operations managers to verify the relevance and accuracy of themeasures. To enhance clarity, we reworded some of the items based on their responses. Next,a pilot study was conducted with 17 volunteers from “Tencent developer (Beijing) Salon” and“China Mobile Global Developers Conference”. They completed the questionnaire and16

provided oral feedback on the design and wording of the survey. The questionnaire was thenfinalized according to this feedback.
Tencent and China Mobile supported formal data collection the process. A sample of 200
platform participants was randomly selected from three tiers1 (regular, semi-close, and close
based on their value contribution to the platform) of both Tencent and China Mobile, with a
total of 1200 samples. In each sample, the operations manager in charge of the collaboration
process served as the key informant. Managers were contacted by an email sent from Tencent
and China Mobile on our behalf via their daily communication channels. The questionnaires
were filled in anonymously. To encourage participation, a cover letter with a description of
the research intent, a confidential agreement, and a willingness to offer a summary report wasoffered. After eliminating surveys with missing data, we obtained 384 complete responses,
with an effective response rate of 32.0% in three weeks. A comparison between the early andlate responding samples indicates no significant differences in firm characteristics,
eliminating concerns over non-response bias in our study.
B. Measurement reliability and validity
All latent variables are operationalized through multi-item scales and measured on a 7-point
Likert scale ranging between “strongly disagree” and “strongly agree” (see Table 1). Fourmeasures for contract completeness were adapted from Jap and Ganesan [49], Liu et al. [1],Li et al. [21]. Another four items measuring contract enforcement were adapted from Antia
and Frazier [23]. Four items from Narasimhan and Kim [50] and Geyskens and Steenkamp[51] were used to capture financial performance, which focuses on platform participants’
The tier of a participant is determined by the comprehensive evaluation of its cooperation time span with the online market,
quantity of online products, online sales volume, customer feedbacks, etc. Participants of different tiers are given different
online privileges and accordingly the scope and extent of technology usage are diversified among different tiers.
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sales volume, profit, return on investment and the number of customers. As for information
technology usage, we began with De et al.’s [52] description of technology usage in online
sales and Tiwana’s [4] technology modularity scales. We refined the wording and finalized
five items based on the suggestions and feedback from interviews with both market builders
and participants.
Given that the dependent variable in this model will be influenced by other factors, we
included another six constructs as control variables. First, previous studies claim theimportance of relationship duration in interfirm relationships. The longer the relationshiplength, the more familiar the exchange partners; exchange partners can then cooperate witheach other more easily, which in turn promotes financial performance [53]. Thus, relationshipduration (the lifespan of cooperation between platform and participant) is added as a control
variable. Second, we control firm size (the number of full-time employees at the time of
conducting the survey) or sales volume (total sales in one year). Firm size and sales volume
represent participants’ dependence and will impact the cooperation between exchange
partners [54]. Third, product type and firm ownership are included since this implies thetransaction complexity and influences the outcomes of interfirm relationships. Lastly,
relational norms, considered the most recognized relational governance mechanism [44], arealso included to avoid their potential influence on financial performance.
The high Cronbach’s alpha values (all > 0.91) verified the internal reliability of all
constructs (see Table 1). Because all the measurements were borrowed from prior studies andadapted after feedback from interviews, content validity was ensured. An exploratory factor
analysis was conducted on all items using principal component analysis with a varimax
18

rotation. The results were successful, with five eigenvalues larger than 1, and exclude thepossibility of cross-loading. We ran confirmatory factor analysis using AMOS 24.0 for theoverall five-factor model with all the items included. The results show a good overall
construct structure fit (χ2/df = 2.09, CFI = 0.98, GFI = 0.93, NFI = 0.96, IFI = 0.98, and
RMSEA = 0.05). The composition values are well above the usual 0.70 benchmark (all > 0.91)
and the average variance extracted values are all higher than the 0.50 cut off (all > 0.71).
Thus, convergent validity is satisfactorily demonstrated. Regarding discriminant validity, we
first assessed it using this rule: the squared correlation between each pair of constructs is lessthan the AVE value for each construct. Next, we compared the fit between the one-factor andtwo-factor CFA models, as suggested by Dabholkar and Bagozzi [55]. The results of theanalysis showed that the chi-square difference tests for each pair of constructs (with 1 degreeof freedom) were statistically significant (Δχ2 (1) > 3.84), demonstrating satisfactory
discriminant validity. We then checked the 95% confidence interval of the correlations
between two randomly selected factors and found that 1.0 did not exist at any interval, alsosuggesting good discriminant validity.
As data for both dependent and independent variables were collected from a single
respondent, we employed multiple techniques to test the threat of common method bias. First,
we ran the Harman's one-factor model. No single factor accounted for most of the variance.
Next, we compared the fit index of two measurement models. One model included traits only,
while the other included traits and a method factor [56]. The fit of the method factor model
was only marginally better than the fit of the traits model (CFI by 0.00, GFI by 0.01, RMSEA
by 0.005). Then, we followed Podsakoff et al. [57] and added a common method factor to the19structural model, which did not substantially modify the estimates and the significance ofeach path, which indicates that the common method factor only accounts for a small variance.
Thus, common method variance bias should not be of major concern in this study. Table 2
presents the descriptive statistics and correlations among all constructs used in this study.
-------------------------------------Insert Table 1 and 2 about here-------------------------------------C. Analysis and results
To mitigate the potential threat of multicollinearity among the interaction terms andother variables in the regression model, all independent variables are mean-centred andhierarchical regression analysis is used to test hypotheses. H1 and H2 examine the direct
effects of contract completeness and contract enforcement on financial performance
respectively. As shown in Model 2 of Table 3, contract completeness has significant positiveeffects on financial performance (β=0.276, p<0.001), supporting H1. For contract
enforcement, its direct effect on financial performance is not significant (β=-0.056, p>0.05),
while its squared term exerts a significant negative effect on financial performance (β=-0.095,
p<0.05), representing an inverted U-shape effect. Thus, H2 is also supported.
H3 concerns the direct effect of information technology usage on platform participant
firms’ financial performance. The positive significant effect (β=0.207, p<0.01) well support
H3.
H4 and H5 address the interaction effects of information technology usage and contract
control on financial performance. As Model 3 in Table 3 show, the interaction term CC×ITU
has significant positive effects on financial performance (β=0.217, p<0.05), which lend
support to H4. To better understand this moderation effect, we plot the moderation of20

information technology usage on contract completeness. As shown in Figure 2, the positive
relationship between contract completeness and financial performance becomes stronger
when information technology usage is higher. While, the effect of the interaction term
CU2×ITU on financial performance is not significant. Accordingly, H5 is not supported. We
further divided the sample into two groups based on the median value of contract
enforcement and then test the moderation effects in the two groups. Below the threshold,information technology usage significantly and negatively moderates the relationshipbetween contract enforcement and financial performance. While, after the threshold, themoderation effect of information technology usage is non-significant. Since the interaction
effects from below the threshold and after the threshold are different, the total interaction
effect is non-significant which validate the result of H5.
----------------------------------------------Insert Table 3 and Figure 2 about Here----------------------------------------------V. DISCUSSION AND CONCLUSION
The emergence of digital platforms and the widespread use of technology in facilitating
platform operations are likely to induce changes in relationship management between
partners. This study investigates this issue using an empirical approach to examine the role ofinformation technology usage on platform participants’ financial performance and its
influences on the effectiveness of formal control, in terms of both contract completeness andcontract enforcement in the Chinese digital platform setting. The results show that
information technology usage not only directly contributes to platform participants’ financial
performance, but also influences the effectiveness of formal contract. Specifically,21

information technology usage is a perfect complement of contract completeness. While, thesubstitute effect of information technology usage on contract enforcement is not significant.
A. Theoretical implications
Our findings contribute to the current literature in the following ways. First, our study
advanced the literature in partnership control by asserting information technology usage as analternative control mechanism in digital platforms. In existing literature, control in interfirm
relationships is typically achieved by either formal contract or corresponding relational
endeavors [1, 9, 12]. Although it is widely noticed that controllers in platform operations are
increasingly reducing the use of formal control in their partnerships with controlees,
theoretical and empirical verifications are still lacking. To answer this call, we explored both
the direct effect and interactions of information technology usage and formal contract control
on platform participant firms’ financial performance. The empirical findings show that
information technology usage is, both individually and interpedently with contract
completeness, positively related to platform participants’ financial performance. However, theeffect of the interaction between information technology usage and overall contract
enforcement on platform participants’ financial performance is not significant. These results
suggest that information technology usage can contribute to platform participants’ financial
performance, enhance the effectiveness of control completeness but does not lower the abilityof contract enforcement in impacting platform participants’ financial performance. As such,information technology usage can well serve a low-cost and high-performance control
mechanism in the digital platform setting, enriching the existing framework of control
mechanisms.
22

Second, this study enriches the technology study by providing an integrated perspective
concerning how technology benefits business partnerships. Great benefits in practicenotwithstanding, associated theoretical and empirical explanations regarding the effects oftechnology in business partnerships are relatively lag and disperse [7, 24, 25, 47]. By adding
the lens of interfirm partnership control, this study theoretically and empirically proposes that
information technology usage contributes to firm performance by ‘coordinating’ partnercooperative behaviors (i.e. H3 and H4 is supported), and ‘safeguarding’ for benefits andagainst opportunism (i.e. H3 is supported, and in the subsample analysis, H5 is supported
when contract enforcement is under the median value). Such a perspective well transfers
technology from an information processing tool into a control mechanism that is an importantpart of firm strategy and partnership development.
The third contribution of our study derives from the results that different dimensions offormal contract control contribute to firm financial performance differently, enrichingtransaction costs theory and corresponding control literature. Although some recent study
proposes the distinction between ex ante contract completeness and ex post enforcement ofcontract [12], most previous studies, which generally see formal contract control as aunidimensional construct [1, 19, 21, 22]. Our study divides contract control into two
sub-dimensions and finds that not all sub-dimensions always benefit firm financial
performance (see H1-2). Yet our findings suggest that although contract completeness
contributes to financial performance, contract enforcement exerts an inverted U-shape effecton financial performance. This finding cautions firms to pay significant attention to the extent
of contract enforcement. Too much contract enforcement may result in rigid organizational23

structure and low responsiveness, which may in turn harm financial performance.
Determining a proper level of contract enforcement is thus critical to the success of firm
financial performance. Therefore, our findings extend transaction cost theory and confirm torecent calls that different dimensions of contract control have different control effects on
interfirm exchange relationships in platforms [12].
B. Managerial Implications
Our findings also provide important implications for managers regarding partnership control
in the digital platform setting. First, the positive effects of information technology usage andits interaction with contract completeness on platform participants’ financial performancesuggest managers that when implementing platform partnership control, they are encouraged
to use information technologies. The increased transparency and efficiency of cooperation
procedures facilitated by information technology not only give the controlees confidence
about the controllers’ justice and cooperation sincere which induce higher compliance, butalso save costs for controllers in process monitoring. Although the substitution effect of
information technology usage on contract enforcement is not supported in the whole sample,
the significant negative interaction effect in the subsample implies that when the need ofcontract enforcement is not high (<median value), information technology usage can indeed
exert similar enforcement effect and replace the role of contract enforcement. These all
together suggest information technology usage as an alternative and cost saving control
mechanism in the digital platform setting.
Our results also suggest managers that business partnerships must deploy certain control
mechanisms to enhance performance and guard against potential risks. Our study divides
24formal contract control into two dimensions and highlights their diverse effects in platform
participants’ financial performance. Given the positive linear relationships between contract
completeness and participants’ financial performance, managers from both platform builder
and participant can agree to design detailed contracts. Yet when contract enforcement ispreferred, the key issue for managers from platform builders is to decide the optimum extent
of contract enforcement. Too little contract enforcement is not enough to exert a deterrence
effect on platform participants, while too much may harm platform participants’ interests
which may reduce the participants’ willingness to cooperate.
C. Limitations and Further Research
Our study is an initial effort to examine control issues in the emerging digital platform setting.
Further research is thus necessary. First, we only use the cross-sectional data fromparticipants in two platforms to test our conceptual model and hypotheses, which may limit
the generalizability of our findings. Although our conclusions may not be generalizable to all
platform transactions, our key assumptions, theoretical model, and empirical findings arelikely applicable to mobile apps and game platforms, as the two platforms in our study are
two of the largest ones in the current Chinese market. Future studies may employ alongitudinal design and collect panel data from different kinds of platforms to validate orenrich the model.
Two, we focus only on contractual control and neglect relational control (treated only as
control variables). Previous research maintains the critical role of relational control incoordinating exchange partners’ behaviour and promoting collaborative effectiveness andefficiency [1, 38, 58]. Thus, future research could explore the direct effect of relational25

control and the interaction effect of contractual and relational control in a platform
transaction.
Finally, this study focuses on the effects of information technology usage, but does notanalyse the determinants of information technology usage. Given that information technology
usage is obvious in the digital platform setting, future studies may investigate whichcharacteristics of platform transactions facilitate the implementation of technology.
Understanding the formation conditions of information technology usage would provide
managers with clear guidelines for making arrangements and allocating resources fortechnology implementation, and for better managing information technology usage after
implementation.

26

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30

Table 1
Construct Reliability and Validity
Construct

Cronbach αContract completeness
CC1: We and the platform define the overall cooperation objectives and key performance indicators in thecontract.
CC2: We and the platform emphasize specifying every transaction detail in the contract.
CC3: We and the platform emphasize specifying what will happen in the case of events occurring thatwere not planned in the contract.
CC4: The respective rights and responsibilities of us and the platform are clearly specified in the contract.

0.910

Contract enforcement
CU1: If we break contract terms, the platform will take tough action in response.
CU2: If we break contract terms, the platform will severely punish us.
CU3: If we break contract terms, the platform will warn us to change our behavior; otherwise they willterminate the cooperative relationship with us.
CU4: If we break contract terms, the platform will take legal action against us.

0.930

Information technology usage
ITU1: The platform evaluates our application and qualification through the information technology
system.
ITU2: The platform’s testing of our products is accomplished by information technology.
ITU3: The on-line process of our products onto this platform is accomplished by information technology.
ITU4: Our daily communication with the platform is accomplished by information technology.
TU5: Support and services from the platform are provided through information technology channels.

0.920

Financial performance
FP1: More sales volume
FP2: Higher profit
FP3: Higher rate of return on investment
FP4: More customers

0.918

Factor Loading

AVE

0.717

0.910

0.731

0.915

0.738

0.934

0.724

0.913

0.899
0.746
0.829
0.903
0.933
0.948
0.789
0.729
0.901
0.808
0.874
0.879
0.829

0.796
0.858
0.873
0.874
31

CR

Table 1 (continued)
Construct Reliability and Validity
Construct

Cronbach α

Relational norms
RN1: We face difficulties and challenges together with the platform.
RN2: We and the platform believe that we should provide each other the information they need.
RN3: Our relationship with the platform is based on mutual trust and common interests.
RN4: When conflicts emerge, both sides are willing to make changes to adapt to each other.
Relationship duration: We have maintained
Firm size: 1) less than 10;2) 11–20;

Sales volume: 1) less than 1 million;
Product type: 1) games;

Firm ownership: 1) state-owned;

0.873

CR

AVE

0.728

0.914

0.833
0.885
0.851
0.843

years of cooperation with the platform.

3) 21–50;

4) 51–100;

2) 1–5 million;2) applications;

Factor Loading5) more than 1003) 5–20 million;4) 20–50 million;5) more than 50 million3) multiple

2) Sino-foreign joint venture;3) wholly foreign owned enterprise;

Note: AVE = average variance extracted; CR = composite reliability

324) privately-owned;5) individual ownership

Table 2
Descriptive Statistics and Pearson’s Correlation Matrix (N = 384)

Mean

S.D

1

2

4

5

6

Contract completeness

5.056

1.144

1

Contract enforcement

5.145

1.143

0.727**

1

Information technology
usage

5.866

1.086

**

0.318

0.321**

1Financial performance

4.974

1.211

0.376**

0.264**

0.399**

1

0.115**

0.085

0.001

1

**

**

7

8

9

Relationship duration

1.738

1.344

0.130**

Firm size

3.497

1.335

0.143

0.119

0.099

-0.0120.309**

1

Sales volume

3.089

1.388

0.007

0.056

0.021

-0.0890.252

0.767**

1

Product type

1.628

0.759

**

0.103

0.088

0.046

-0.026

0.199

0.149

0.020

1

Firm ownership

3.796

0.760

0.040

0.050

-0.038Relational norms

5.954

0.073

0.466

0.365

0.520

**

**

**

33

**
**

**

10

0.058

**

-0.276-0.209-0.213-0.142**

1

0.416-0.070

0.005

0.007

-0.133

0.075

**

**

**

**

11

1

Table 3
Hypotheses Testing: Regression Results of Moderation (N = 384)
Financial performance
Variable

Model 1Model 2Model 3Firm size

0.124+

0.089

0.093

Relationship duration

0.047

0.017

0.016

Sales volume-0.194**-0.168*-0.172*

Product type

0.009

0.012

0.013

Firm ownership

0.025

0.006

0.001

Relational norms

0.419***

0.161*

0.165*

Contract completeness0.276***

0.299***

Contract enforcement-0.056-0.043Contract enforcement 2-0.095*-0.161*

Information technology usage0.207***

0.228***

Controls

Main effects

Moderation
Contract completeness × Information technology usage0.217*

Contract enforcement ×Information technology usage-0.202+Contract enforcement ×Information technology usage-0.0842

Model fit
F-value
R2
Adjusted R

2

Note: The coefficients in the model are all standardized values.
+ p<0.1; * p<0.05; ** p<0.01; *** p<0.001.

34

14.857***13.181

10.671

0.191

0.261

0.273

0.178

0.241

0.247

Figure 1
Conceptual model

35

Figure 2
The interaction effect of contract completeness and information technology usage36