This paper introduces a cost-based, dichotomous theoretical framework of governance to the studies of strategic management and international business. Our paper compares the nature and dynamics of relation-based governance with those of rule-based governance. The framework is applied to provide new insights into international and firm-level differences in industry structure, management systems, strategic practices, innovation, and the international flow of capital, human assets, and trades. We also discuss the evolutionary transformation of relation-based systems of governance into rule-based systems of governance under conditions of economic development and intensified competition. Policy and strategic recommendations are made based on the theory.
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Li et al. (2006) studied this question.