Yuriy Gorodnichenko, Bohdan Kukharskyy, Gérard Roland, 14 June 2015

Multinational firms often have to grapple with ‘make-or-buy’ decisions – whether to integrate certain activities or source them out. This column argues that culture is a neglected but important determinant of a multinational firm’s global sourcing decisions. Using US data, it shows that there is a negative relationship between cultural distance and intra-firm trade. Firms are more likely to integrate their foreign suppliers into firm boundaries if they are based in a country that is culturally similar to the US.

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