 Cultural distance, firm boundaries, and global sourcingYuriy Gorodnichenko, Bohdan Kukharskyy and Gérard Roland Journal of Development Economics, 2024, vol. 166, issue C Abstract: Casual observation suggests that cultural differences play an important role in business transactions, yet systematic evidence on this relationship is scarce. This paper provides a novel investigation of the effect of cultural distance on multinational firms’ decisions to integrate their cooperation partners into firm boundaries, rather than transact with independent companies at arm’s-length. To guide our empirical analysis, we develop a simple theoretical model which suggests that (i) cultural distance between contracting parties decreases the relative attractiveness of integration, and (ii) this effect is mitigated in more productive firms. We test these predictions using extensive product-, industry-, and firm-level data. We find a robust negative relationship between cultural distance and the relative attractiveness of integration. In line with our theoretical predictions, we also find that the effect of cultural distance on firm boundaries is less pronounced the higher firm’s productivity. Keywords: Cultural distance; Firm boundaries; International make-or-buy decision; Firm productivity (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:166:y:2024:i:c:s0304387823001311 DOI: 10.1016/j.jdeveco.2023.103175 Access Statistics for this article Journal of Development Economics is currently edited by M. R. Rosenzweig More articles in Journal of Development Economics from Elsevier |
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