Abstract: Market mechanisms are inefficient in industry-university cooperation because of inability to specific investment in advance and high coordination cost. Drawing on social exchange theory and transaction cost economics, this article provides a conceptual framework to explain why the two sides of the industry-university are most likely to make a deal by the bilateral governance which is constructed jointly by trust and contract. By identifying conditions under which the bilateral governance is effective and efficient, the government role has been made clear. At the end, this article provides some implications to science and technology policy.