Global Sourcing if Contracts are Reference Points

Arbeitspapier

This paper presents econometric evidence for a link between a country's level of egalitarianism and its inward foreign direct investment. In order to provide a theoretical rationale for this relationship, I embed Hart and Moore's (2008) novel contractual foundation into a simple model of global sourcing with culturally dissimilar countries. Entrepreneurs can cooperate with foreign suppliers under two contractual modes: rigid and flexible. If suppliers consider original contracts as reference points and future is uncertain, a fundamental tradeoff arises between these two modes. By stipulating a range of possible outcomes, a flexible contract allows for future adaptation but is associated with ex post haggling cost. By specifying a single outcome, a rigid contract eliminates future disagreement but precludes beneficial adjustments to the occurring shocks. The key message of this paper is twofold: Due to lower haggling cost, the degree of contractual flexibility is higher in egalitarian countries. If future is uncertain, these countries are more attractive for international investors than less egalitarian ones.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: BGPE Discussion Paper ; No. 129

Classification and Topics

• Classification: Wirtschaft ; Organizational Behavior; Transaction Costs; Property Rights ; Equity, Justice, Inequality, and Other Normative Criteria and Measurement ; Multinational Firms; International Business ; Organization of Production
• Subject: Foreign direct investment ; cross-country cultural differences ; egalitarianism ; risk ; contracts as reference points ; haggling ; contractual rigidity vs. flexibility

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kukharskyy, Bohdan
• Event: Veröffentlichung
• (who): Friedrich-Alexander-Universität Erlangen-Nürnberg, Bavarian Graduate Program in Economics (BGPE)
• (where): Nürnberg
• (when): 2012

Further information

• Handle: http://hdl.handle.net/10419/73434
• Last update: 10.03.2025, 11:42 AM CET