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

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 to 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.

Keywords: generalized trust, trust, interorganizational relationships, strategic alliances, partnerships, external sourcing, economic downturn, Great Financial Crisis, small- and medium-sized enterprises (SMEs), regional studies, machine learning.