Contracting Abroad: A Comparative Analysis of Contract Design in Host and Home Country Outsourcing Relations

Cross-border business relationships often involve significant risk because they entail greater information asymmetry and complexity to manage collaboration than domestic relationships. Yet, little is known about the contractual design of such relationships. We examine a prominent form of cross-border collaboration − firms’ strategic outsourcing in a host country where they operate − and contrast contracting choices with those made for similar home country relations. We collect survey data from Japanese subsidiaries operating and outsourcing in the Netherlands, and from Japanese firms outsourcing in Japan. Results show that contract complexity does not differ between similar home and host country relationships; however, consistent with our hypotheses, host country contracts have a shorter duration, more renewal provisions, less flexibility, and relatively greater contracting costs.