Twenty-third International Conference on Knowledge, Culture, and Change in Organizations

Abstract

This paper introduces morality within the empirically relevant property rights theory of the firm, where organizational form can be used to generate incentives to invest. We use the framework to first study firms’ organizational choice in societies with different cultural traits, distinguishing between decisions in sectors where customization effort rather than technology is relevant, and those where valuable intangible assets play a pivotal role and face the risk of expropriation. We then explore the role of legal enforcement of contracts as a tool to eliminate information asymmetry between the two parties, and explore the circumstances in which it could be advantageous or disruptive to supplier relations. Whether the use of law consolidates relationships under different organizational modes depends on the level of morality present in the society. Our testable predictions are accompanied by evidence from comprehensive transaction level data, exploiting data on firms’ annual import transactions allows us to estimate the length of product-market-specific import spells as a proxy for the survival rate of buyer-supplier relationships. We use this to show how the legal enforcement of contracts impacts the stability of relationship with suppliers that come from different backgrounds in terms of morality, measured by Hofstede’s cultural dimension of individualism, as a proxy for the degree to which a society values property rights. The information is also merged with detailed data on firms’ FDI to study how the integration decision of firms varies with the level of morality in the supplier country for inputs of different technological characteristics.