DP14549 Testing predictions on supplier governance from the global value chains literature

Author(s): Alexander Schmitt, Johannes Van Biesebroeck
Publication Date: April 2020
Keyword(s): GVC, Outsourcing, PRT, TCE, Theory of the firm
JEL(s): L22, L23, M11
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14549

A vast empirical literature analyzes the determinants of the make-or-buy decision, but firms also need to decide how to organize their supplier relationships when they choose to buy. The global value chains framework provides predictions on the nature of buyer-supplier collaboration. We use a unique transaction-level dataset of outsourced automotive components to study carmakers' choice between four distinct types of supplier governance: market, captive, relational, or modular. The theory formulates predictions based on three characteristics: the complexity or contractibility of a transaction, the capabilities of suppliers, and how objectively codifiable performance requirements are. The results illustrate that sourcing relationships differ systematically and that proxies for the three characteristics have effects in line with the theory.