Culture and Global Sourcing

35 Pages Posted: 26 May 2015 Last revised: 4 Jun 2022

See all articles by Yuriy Gorodnichenko

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Bohdan Kukharskyy

City University of New York (CUNY)

Gérard Roland

University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2015

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

Gorodnichenko, Yuriy and Kukharskyy, Bohdan and Roland, Gérard, Culture and Global Sourcing (May 2015). NBER Working Paper No. w21198, Available at SSRN: https://ssrn.com/abstract=2610495

Yuriy Gorodnichenko (Contact Author)

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Bohdan Kukharskyy

City University of New York (CUNY) ( email )

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Gérard Roland

University of California, Berkeley - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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