Governing Supply Relationships: Evidence from the Automotive Industry

Abstract

A large empirical literature analyzes determinants of the make-or-buy decision. Transaction cost economics highlights the role of asset specificity, the property rights theory focuses on the relative marginal contributions to joint surplus creation, and some evidence suggests that making transactions more contractible facilitates outsourcing. We use a unique transaction-level dataset of outsourced automotive components to predict carmakers’ choices between four distinct ways of organizing sourcing relationships. We derive conditional predictions for three characteristics: (i) the complexity or contractibility of a transaction, (ii) how objectively codifiable performance is, and (iii) the supplier’s capabilities. For example, while dominant buyer investments might predict vertical integration, as in the property rights theory, other characteristics might convince a buyer to simply re-organize the collaboration with the supplier in a more suitable way. Our results suggest that “buy” relationships differ systematically and that the predictive power of our variables extend from the make-or-buy decision to how-to-buy.