Leader Member Exchange Theory and Psychological Contract Fulfillment: An Empirical Study in a Vietnamese Organization

Abstract: Background:  Leader member exchange (LMX) theory focuses on the different associations established by the leaders with their followers through a system of exchanges (high quality and low exchanges), whereas a psychological contract is a tacit agreement between the employer and employee and comprises of employee's beliefs regarding the mutual obligations between the employee and an employer. Since an organization communicates and negotiates through its representatives which indicates people in managerial positions, it is meaningful to draw that the relationship quality between employee and their supervisors may affect the tacit agreement between the employee and organization. Though prior integration of Leader Member Exchange theory and Psychological contract has established the link between these two area of literature, as well as LMX dimensions to Psychological contract fulfilment, there is no empirical study taken place in Asia where Anand, Hu, Liden and Vidyarthi (2011) once observed that LMX and its dimensions may operate differently in more collectivistic and higher power distance cultures. Therefore, this research aims to examine the two main aspects of literature in one of the leading construction management of Asia located in Vietnam.   Research questions: Does LMX improve psychological contracts between the organization and the employees? Sub-research question: What is the effect of LMX dimensions on psychological contract fulfilment? Is there any right mix of LMX dimensions in the organization that positively affects the psychological contract?   Purpose: The purpose of this study is to examine the interaction effects of leader-member exchange (LMX) and its dimensions on psychological contracts in one specific organization, in other words, it investigates to answer if the different quality exchanges between the leaders/managers with employees support to enhance better mutual obligations between them and give negative or positive effects to the psychological contracts. Secondly, it figures out what exactly is the effect of LMX dimensions on psychological contract fulfilment. Practically, it is to help the researchers and practitioners recognize the increasingly important role of psychological contract which is normally unwritten in formal contract but otherwise gives huge negative influence which results in losing employee’s retention and loyalty. Accordingly, by generating “leader-member exchange” more effectively, the leaders will distribute and/or exchange resources toward the employees better which results in better employee retention and talent management strategies, directly contributing to the organization’s long term sustainable development.   Theoretical framework:  Articles were used for this thesis were meticulously chosen, focusing on reliable sources and quality content that cover the theoretical background of both main research area of Psychological contracts and Leader-Member Exchange during their historical research until recent. Particular information of the empirical organization and the related industry were brought from the organization and related reports and professional analysis from industry experts.   Method: This is a cross-sectional study whose methodology choice is a Mixed methods research which inquires the involvement of both quantitative and qualitative data, integrating these two forms of data with narrative analysis. The data was collected from a construction management organization consists of 385 employees. It adopted interpretivism philosophy in order to create new, richer understandings and interpretations of issues related to social worlds and context, in particular exploring the issue of whether LMX theory have an influence on psychological contracts fulfilment. It follows a deductive reasoning as its main approach.   Discussion and Conclusion: Based on the results of respondents’ surveys and the interpretation of the attendants from Focus Group, the discussion was structured and analyzed in line with the structure of the theoretical framework. The study reveals that the psychological contract fulfillment depends not only on the right combination of LMX dimensions and the concern of those most important dimensions but also the distinct characteristics of the organization which concern about their organization behavior and industry features. The study also provides solutions to leaders in order to overcome the problems associated with LMX that can lead to psychological contract breach.   Originality/Value – This is the first study that focuses on examining the effect of LMX and its dimensions on psychological contract fulfilment in an Asian country.