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Relational contracts and global sourcing

Bohdan Kukharskyy

Journal of International Economics, 2016, vol. 101, issue C, 123-147

Abstract: Relational contracts – informal agreements sustained by the value of future relationships – are integral parts of global production processes. This paper develops a repeated-game model of global sourcing in which final good producers decide whether to engage with their suppliers in relational contracting and whether to integrate a supplier into a firm's boundaries or deal with the latter at arm's-length. The model predicts that the relative prevalence of vertical integration increases in the long-term orientation of the headquarters' and suppliers' managers. It further suggests that the share of a foreign subsidiary owned by a final good producer increases in the headquarters' long-term orientation. Combining industry-level data from the U.S. Census Bureau's Related Party Trade database with measures for long-term orientation from Hofstede et al. (2010) and the World Management Survey, I find empirical evidence supportive of the positive link between the long-term orientation of cooperation parties and the relative prevalence of vertical integration. Using information on managerial composition of firms and ownership stakes from the Bureau van Dijk's Orbis database, I find that firms led by long-term oriented managers own higher shares of their foreign subsidiaries.

Keywords: Relational contracts; Long-term orientation; International make-or-buy decision (search for similar items in EconPapers)
JEL-codes: D02 D23 F14 F23 L14 L22 (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:eee:inecon:v:101:y:2016:i:c:p:123-147