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Starting Small in an Unfamiliar Environment

  • James E. Rauch
  • Joel Watson

Motivated by a characteristic way in which firms in developed countries make their decisions regarding cooperation with potential partners from less developed countries, we design a simple model of a DC firm's search for an LDC partner/supplier and the subsequent relationship between the two parties. Matched firms can start small' with a trial order or pilot project of variable size in order to gain information about the ability of the LDC firm to successfully carry out a large project. We derive results relating whether and how the parties start small to the characteristics of the large project and to the matching environment. Among other results, we show how risk and search cost are associated with the propensity to start small and we establish a connection between starting small and the expected longevity of successful partnerships. We also address methods of contract enforcement and demonstrate the relationship between starting small and monitoring.

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File URL: http://www.nber.org/papers/w7053.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7053.

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Date of creation: Mar 1999
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Publication status: published as Rauch, James E. & Watson, Joel, 2003. "Starting small in an unfamiliar environment," International Journal of Industrial Organization, Elsevier, vol. 21(7), pages 1021-1042, September.
Handle: RePEc:nbr:nberwo:7053
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