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Cultural Distance, Firm Boundaries, and Global Sourcing

Author

Listed:
  • Yuriy Gorodnichenko
  • Bohdan Kukharskyy
  • Gerard Roland
Abstract
Casual observation suggests that cultural differences play an important role in business transactions, yet systematic evidence on this relationship is scarce. This paper provides a novel investigation of the effect of cultural distance on multinational firms’ decisions to integrate their cooperation partners into firm boundaries, rather than transact with independent companies at arm’s-length. To guide our empirical analysis, we develop a simple theoretical model which suggests that (i) cultural distance between contracting parties decreases the relative attractiveness of integration, and (ii) this effect is mitigated in more productive firms. We test these predictions using extensive product-, industry-, and firm-level data. We find a robust negative relationship between cultural distance and the relative attractiveness of integration. In line with our theoretical predictions, we also find that the effect of cultural distance on firm boundaries is less pronounced the higher firm’s productivity.

Suggested Citation

  • Yuriy Gorodnichenko & Bohdan Kukharskyy & Gerard Roland, 2023. "Cultural Distance, Firm Boundaries, and Global Sourcing," CESifo Working Paper Series 10560, CESifo.
    • Handle: RePEc:ces:ceswps:_10560
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    More about this item

    Keywords

    cultural distance; firm boundaries; international make-or-buy decision; firm productivity;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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