Impact of managers' psychological contract breach on firm operation: A case study of a German auto-parts subsidiary in Suzhou China

The purpose of this case study was to evaluate the impact of line manager psychological contracts on organization within a German automotive subsidiary in Yangtze River Delta Economic Zone in China (one of two key economic development areas in China hosting thousands of foreign manufacturing subsidiaries). We carried out a six-month in-depth case study and collected data through documentary study, participant observation, and in-depth interviews with all managers including a newly recruited manager. Findings add empirical evidence to support the claim that managers' psychological contract breach create more negative impact on firm internal communication and operation. It further highlights that such breach is an accumulative outcome of lack of clear management framework within small to medium enterprises (SMEs) in particular. From the perspectives of cultural differences, Chinese managers are accustomed to 'following' orders hence their psychological contracts are breached when firm is required to take more strategic initiatives in response to a fast changing market in China. As new employees go through recruitment processes they develop a set of expectations based upon factors, such as previous work experience and information communicated by recruiting managers acting as 'agents'. The study finds that improper management of employee expectations throughout this initial period and beyond results in psychological contract breach, whereby obligations owed to employees by the firm are perceived to have been unmet or specific promises broken. Breach can lead to negative impacts on both individual and firm, ranging from mistrust and cynicism towards the organisation, to leaving the organisation outright. Findings are representative and can be generalized to understand and explain similar issues felt by foreign manufacturing SME subsidiaries in the area. The study implies that psychological contract breach is necessary when changes happen, and level of the breach impact on firms reflects level of clarity in organizational structure and internal communication. SMEs experience negative impact more than larger and more established corporations and thus the study bears practical value to SME managers on effectively managing internal communication and their employees through organizational change.