Supplier-buyer relationships in global value chains (with Miklos Koren, Balazs Muraközy and Almos Telegdy)
Abstract
Relational contracting is an important feature of global value chains because it can facilitate investment into and sharing of intangible assets between buyers and suppliers. Existing measurements focus on several key implications of relational contracting, such as long-lived buyer-supplier relationships and the trading of complex products. But there is little direct evidence on intangible investments in buyer-supplier relationships, their economic determinants and effect on firm performance. This paper uses the novel Business Relations Survey, covering the key buyers and suppliers of 1,500 manufacturing firms in three countries, to measure relational links. We define a link as relational if the supplier produces a product specific to the buyer or has modified the product or process at the buyer's request. Vertically integrated links are identified based on ownership information. We find that only a third of links are market based, while more than half are relational and 17\% are vertically integrated. Relational links are more likely to form between more productive firms, between firms in different countries, especially when the buyer is outside the EU, and when the product is complex. Suppliers with many relational links expand their sales and improve their total factor productivity faster. Our results are relevant for the extent and heterogeneity of shock propagation and also for policies which aim at promoting firms integration into global value chains.