Culture and Global Sourcing

Gérard Roland and Yuriy Gorodnichenko

No 10620, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper develops a model of global sourcing with culturally dissimilar countries. Production of final goods requires the coordination of decisions between the headquarter of a multinational firm and managers of their component suppliers. Managers of both units are assumed to have strong beliefs about the right course of action and are reluctant to adjust their decisions. We characterize the optimal allocation of decision rights across firms when contracts are incomplete. Our theoretical model delivers two key predictions: the incentive of a firm to integrate (rather than outsource) its input supply is decreasing in the cultural distance between the home and the host country and decreasing in trade costs between the two countries. Combining data from the U.S. Census Bureau's Related Party Trade with various measures for cultural distance and trade cost, we find empirical evidence strongly supportive of these two predictions.

Keywords: Cultural distance; Global sourcing; Organization of multinational firms; Property rights; Vertical integration (search for similar items in EconPapers)
JEL-codes: F14 F23 P14 Z1 (search for similar items in EconPapers)
Date: 2015-05
New Economics Papers: this item is included in nep-cul and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Culture and Global Sourcing (2015)
Working Paper: Culture and Global Sourcing (2015)
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