Culture and Global Sourcing

Bohdan Kukharskyy, Yuriy Gorodnichenko and Gérard Roland

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

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 then characterize the optimal allocation of decision rights across firms when contracts are incomplete. Our theoretical model delivers two key predictions: An incentive of a firm to integrate (rather than outsource) its input supply is decreasing in cultural distance between the home and the host country and decreasing in trade cost 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 broadly supportive of these two predictions.

JEL-codes: F14 F23 L23 (search for similar items in EconPapers)
Date: 2015
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 (5)

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Related works:
Working Paper: Culture and Global Sourcing (2015)
Working Paper: Culture and Global Sourcing (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:113015

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