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Generalized Trust, External Sourcing, and Firm Performance in Economic Downturns

Author

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  • Bart S. Vanneste

    (UCL School of Management, University College London, London E14 5AA, United Kingdom)

  • Ranjay Gulati

    (Harvard Business School, Harvard University, Boston, Massachusetts 02163)

Abstract

Going beyond prior research that has focused on dyadic, party-specific trust, this study investigates the importance of generalized trust, which is not specific to a counterparty and originates from a broader context. We analyze how generalized trust at the regional level affects the extent to which a firm relies on external suppliers and the performance effects of doing so. Furthermore, we assess how these relationships are impacted by an economic downturn. We exploit differences in generalized trust across 145 regions in 12 European countries and use data on more than a million small- and medium-sized enterprises (SMEs) before and during the Great Financial Crisis (from 2008 to 2010). Control variables are selected via a double-selection procedure based on machine learning. We find that firms in high generalized trust regions, compared with those in low generalized trust regions, source more externally (but do not reduce external sourcing less in an economic downturn) and benefit more from external sourcing during an economic downturn.

Suggested Citation

  • Bart S. Vanneste & Ranjay Gulati, 2022. "Generalized Trust, External Sourcing, and Firm Performance in Economic Downturns," Organization Science, INFORMS, vol. 33(4), pages 1599-1619, July.
    • Handle: RePEc:inm:ororsc:v:33:y:2022:i:4:p:1599-1619
    DOI: 10.1287/orsc.2021.1500
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