Subcontracting relations in the Korean automotive industry: risk sharing and technological capability

Abstract This paper employs a simple principal–agent framework to examine subcontracting relations in the Korean automotive industry. The primary objective is to understand how technological capabilities of small component suppliers affect the nature of contracts and in turn, are affected by the buyer–supplier relationship. Kinds of contracts or subcontracting relations are categorized on the basis of the degree of risk sharing. The risk sharing parameter is estimated and the determinants of risk sharing such as supplier's attitude towards risk, cost variability and technological capability are explored.