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Culture and Global Sourcing

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  • Roland, Gérard
  • Gorodnichenko, Yuriy

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

Suggested Citation

  • Roland, Gérard & Gorodnichenko, Yuriy, 2015. "Culture and Global Sourcing," CEPR Discussion Papers 10620, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:10620
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    Cited by:

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    2. Schlaile, Michael P. & Bogner, Kristina & Muelder, Laura, 2021. "It’s more than complicated! Using organizational memetics to capture the complexity of organizational culture," Journal of Business Research, Elsevier, vol. 129(C), pages 801-812.
    3. Kukharskyy, Bohdan, 2016. "Relational contracts and global sourcing," Journal of International Economics, Elsevier, vol. 101(C), pages 123-147.
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    5. Kukharskyy, Bohdan, 2015. "Relational contracts and global sourcing," University of Tübingen Working Papers in Business and Economics 83, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.

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    More about this item

    Keywords

    Cultural distance; Global sourcing; Organization of multinational firms; Property rights; Vertical integration;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • P14 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Property Rights
    • Z1 - Other Special Topics - - Cultural Economics

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