How Trust, Incentives and IT Shape Global Supplier Networks: Theory and Evidence from IT Services Procurement

We develop an integrated, multi-period model of the optimal number of suppliers that combines considerations from search and coordination theory, transaction cost economics, and incomplete contracts theory. We assess our theoretical predictions using a new dataset on the global IT sourcing decisions of 1355 firms in 12 countries collected using a survey that we specifically designed to test our theory. Our empirical results support three key theoretical predictions about trust, fit and IT. First, repeated relationships and trust play a major role in supply chain governance. Several results together support this conclusion: (a) as firms work with fewer suppliers they also engage in more repeated relationships with those suppliers; (b) organizational and technological asset specificityand the need to induce relationship-specific investments are correlated not only with fewer suppliers, but also with a larger fraction of repeated relationships; and (c) under conditions of greater asset specificity, engaging a smaller number of suppliers is even more strongly associated with repeated relationships. Second, the need to optimize fit between firm needs and supplier skills is associated with the use of a greater number of suppliers. As firms’ needs become more idiosyncratic and diverse, they engage more suppliers. Third, different types of IT have different implications for supply chain structure. Investments in technologies that reduce search costs and transaction costs are correlated with using more suppliers, while use of vendor-specific IT is associated with fewer suppliers. Our work extends the literature on the role of IT in supply chain governance by integrating multiple lines of theory in a repeated setting and using new large scale empirical evidence to test predictions about how IT use relates to both the number of suppliers and repetition in supply chain relationships.