Achieving Economically Sustainable Subcontracting through the Hotelling Model by Considering the Spillover Effect

Jianbo Zhu, Qianqian Shi, Peng Wu, Zhaohan Sheng and Xiangyu Wang
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Jianbo Zhu: School of Management and Engineering, Nanjing University, Nanjing 210093, China
Qianqian Shi: School of Management and Engineering, Nanjing University, Nanjing 210093, China
Peng Wu: School of Design and the Built Environment, Curtin University, Bentley, WA 6102, Australia
Zhaohan Sheng: School of Management and Engineering, Nanjing University, Nanjing 210093, China
Xiangyu Wang: School of Mathematical Sciences, Chongqing Normal University, Chongqing 400700, China

Sustainability, 2018, vol. 10, issue 9, 1-17

Abstract: In the process of internationalization of construction contractors, international enterprises as main contractors (IMC) need to consider whether part of the contract should be subcontracted to local subcontractors (LSC) to gain a competitive advantage when competing with local main contractors (LMC). The involvement of local subcontractors can usually help reduce cost through the cost spillover effect. However, it should be noted that the share of local subcontractors with local main contractors with an inferior quality may lead to quality spillover. The Hotelling model is therefore adopted to investigate the subcontracting decisions of main contractors considering both cost and quality spillover effects. Many scenarios are simulated and the results show that LMCs with inferior quality can always choose the subcontracting strategy to obtain increased profit regardless of the strategy that IMCs adopt. On the other hand, IMCs need to balance the cost spillover of subcontracting and the quality spillover for improving the quality level of LSCs. The results are useful for contractors to make decisions that are relevant to the adoption of subcontracting strategies to obtain competitive advantages.

Keywords: spillover effect; subcontracting; decision making; hotelling model; internationalization (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2018
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