Relational contracts and global sourcing

Bohdan Kukharskyy

No 83, University of Tübingen Working Papers in Business and Economics from University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics

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 goods 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 likelihood of vertical integration increases in the long-term orientation of cooperation parties. Combining data from the U.S. Census Bureau's Related Party Trade database with measures for long-term orientation from Hofstede et al. (2010) and World Values Survey, I find empirical evidence supportive of this paper's key prediction. To better understand if the relationship is causal, I apply instrumental variables approach using genetic proxies and inherited components of long-term orientation as instruments. Taken together, the evidence suggests that the level of long-term orientation of the home and host country has a positive effect on the relative prevalence of vertical integration.

Keywords: relational contracts; long-term orientation; international make-or-buy decision (search for similar items in EconPapers)
JEL-codes: D02 D23 F14 F23 L22 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-cta and nep-int
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuewef:83

DOI: 10.15496/publikation-5576

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