Spilling secrets and shrinking chains: How weak laws narrow supply networks

Modern manufacturing often requires firms to share confidential information with outside suppliers, some of whom also supply their competitors. Using more than 160,000 contracts from the global automotive industry, this column examines how manufacturers respond to this risk and the costs of doing so. The findings suggest that when legal protection is weak, firms may instead turn to contractual exclusivity by limiting the number of manufacturers their suppliers can serve, reducing the suppliers’ customer base and bargaining power and potentially weakening their incentives to invest. Stronger legal protection reduces the need for this contractual response and can therefore support broader supplier networks.