Breaking up the Global Value Chain by unknow

Author:unknow
Language: eng
Format: epub
Publisher: Emerald Publishing Limited
Published: 2017-08-02T00:00:00+00:00

DISCUSSION AND CONCLUSION

Our inductive empirical study and formal economic model combine to provide strong suggestive evidence that a global buyer that enters supplier markets characterized by weak formal contract enforcement is committing itself to relational contracts that will constrain its global strategic options when forced to adjust purchasing during a negative global demand shock. The basic intuition behind the finding is that relationships with suppliers in weak institutional settings are only tenable when the promise of future business is sufficient to resist temptations to renege on agreed upon effort and quality. In this context, a global buyer’s cessation of orders from a supplier in a weak institution country represents a violation of the terms of their relational contract and makes it too expensive, if not effectively impossible, for the two sides to resume commercial relations after demand recovers. Consequently, a forward-looking global buyer facing a negative demand shock is likely to preserve relational contracts in weak enforcement settings and temporarily drop more market-based relations in strong enforcement settings.

Our chapter has significant implications for both theory and managerial practice. With regard to understanding firm boundaries and the specific practice of outsourcing, our findings indicate that the obligations of relational contracting reduce the practical differences between outsourcing and internalization of activities carried out in countries characterized by weak institutions. As such, our model also serves as a challenge to arguments in favor of using real options theory as a tool for analyzing outsourcing across country borders. Connelly et al. (2013), for example, suggest that seeing diversification across a range of new supply sources as the exercise of a real option strategy may be a way to move forward our understanding of supply chain management. Our work indicates that this strategy could work when the strength of formal enforcement institutions is comparable across supplier countries, but is likely to prove problematic when there is diversity on this dimension. As such, we also add to a nascent literature on the hidden costs of outsourcing decisions (Larsen, Manning, & Pedersen, 2013).

Our findings also contribute to the modern theory of the firm by showing how firm scope can be influenced by institutional context. Research on the unrelated diversification of business groups in emerging economies has documented how weak institutions can result in expansion of firm boundaries in emerging economies across unrelated industries (Anand & Khanna, 2000; Khanna & Rivkin, 2001). However, while this work has thus far focused on domestic-only businesses, the idea that institutional context can shape firm boundaries has particular relevance for understanding of firm boundaries that cross country boundaries. MNEs frequently and increasingly manage subsidiaries across a diverse range of institutional contexts, and our results indicate that this involves not only dealing with the variance in country-specific environments they must navigate, but also managing the resulting variance in their own scope of operations across these countries. The challenge of managing this internal complexity may be another reason behind the finding that new MNEs originating in emerging economies are playing an increasingly large role across countries with weak formal institutions (Cuervo-Cazurra & Genc, 2008).

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