Economies of scope and relational contracts: Exploring global value chains in the automotive industry

Most economic theories of value-chain governance examine one transaction at a time and focus on transaction type as the key determinant of governance. We instead consider several transactions jointly, suggesting that lead firms experience economies of scope in developing relational contracts with suppliers. A key determinant of governance is thus organization strategy (e.g., Toyota collaborates with all suppliers, including commodity-suppliers). Using U.S. Customs data on every component imported by vehicle manufacturers, we find that Japanese vehicle manufacturers have half as many suppliers per part as U.S. vehicle manufacturers and 70 percent longer relationships, even after controlling for product attributes.