Alexander Schmitt and Johannes Van Biesebroeck, K.U.Leuven

Governing Supply Relationships: Evidence from the Automotive Sector

Many empirical studies analyze a firm's make-or-buy decision in an incomplete contracting framework. Transaction Cost Economics has highlighted the role of asset specificity, while the Property Rights Theory stresses the role of the contracting firms' relative marginal contribution to joint surplus creation. Schmitt and Van Biesebroeck show that proxies for both explanatory factors can also be used to distinguish between different ways of organizing an outsourcing relationship. Making the link with the literature on Global Value Chains, the authors' framework predicts that the choice among five possible governance modes depends on three key variables: the complexity of the transaction, its codifiability, and the capability of the supplier. The researchers' evidence using contract information from the automotive industry suggests that not all 'buy' relationships are alike and that the predictive value of their variables goes beyond the make-or-buy distinction.