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Outsourcing when Investments are Specific and Complementary

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  • Alla Lileeva
  • Johannes Van Biesebroeck

Abstract

Using the universe of large Canadian manufacturing firms in 1988 and 1996, we investigate to what extent outsourcing decision can be explained by a simple property rights model. The unique availability of disaggregate information on outputs as well as inputs permits the construction of a very detailed measure of vertical integration. We also construct five different measures of technological intensity to proxy for investments that are likely to be specific to a buyer-seller relationship. A theoretical model that allows for varying degrees of investment specificity and for complementarities---an externality between buyer and supplier investments---guides the analysis. Our main findings are that (i) greater specificity makes outsourcing less likely; (ii) complementarities between the investments of the buyer and the seller are also associated with less outsourcing; (iii) property rights predictions on the link between investment intensities and optimal ownership are only supported for transactions with low complementarities. High specificity and a low risk of appropriation strengthen the predictions in the model and in the data.

Suggested Citation

  • Alla Lileeva & Johannes Van Biesebroeck, 2008. "Outsourcing when Investments are Specific and Complementary," NBER Working Papers 14477, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:14477
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    References listed on IDEAS

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    Cited by:

    1. Hyunbae Chun & Jung Hur & Doyoung Kim & Nyeong Seon Son, 2020. "Cross‐Border Vertical Integration and Technology in Factory Asia: Evidence from Korea," The Developing Economies, Institute of Developing Economies, vol. 58(2), pages 99-133, June.
    2. Ann Bartel & Saul Lach & Nachum Sicherman, 2005. "Outsourcing and Technological Change," NBER Working Papers 11158, National Bureau of Economic Research, Inc.
    3. Arturs Kalnins & Stephen F. Lin & Catherine Thomas, 2018. "In-house and arms length: productivity heterogeneity and variation in organizational form," CEP Discussion Papers dp1579, Centre for Economic Performance, LSE.
    4. Luigi Benfratello & Tiziano Razzolini & Alessandro Sembenelli, 2009. "Does ICT Investment Spur or Hamper Offshoring? Empirical Evidence from Microdata," Working papers 05, Former Department of Economics and Public Finance "G. Prato", University of Torino.
    5. Van Biesebroeck, Johannes & Zhang, Lijun, 2014. "Interdependent product cycles for globally sourced intermediates," Journal of International Economics, Elsevier, vol. 94(1), pages 143-156.
    6. Emanuel Ornelas & John L. Turner, 2012. "Protection and International Sourcing," Economic Journal, Royal Economic Society, vol. 122(559), pages 26-63, March.
    7. Egger, Peter H. & Erhardt, Katharina & Masllorens, Gerard, 2023. "Backward versus forward integration of firms in global value chains," European Economic Review, Elsevier, vol. 153(C).
    8. Lin, Stephen F. & Thomas, Catherine & Kalnins, Arturs, 2020. "In-house and arm's length: productivity heterogeneity and variation in organizational form," LSE Research Online Documents on Economics 115327, London School of Economics and Political Science, LSE Library.
    9. Holger Görg & Aoife Hanley & Ingrid Ott, 2015. "Outsourcing Foreign Services and the Internet: Evidence from Firm Level Data," The Economic and Social Review, Economic and Social Studies, vol. 46(3), pages 367-387.
    10. Sasan Bakhtiari, 2013. "Firm Size Evolution and Outsourcing," Discussion Papers 2013-07, School of Economics, The University of New South Wales.
    11. repec:tur:wpaper:5 is not listed on IDEAS
    12. Дзагурова Наталия Борисовна & Невидомская Мария Александровна, 2015. "«Запаздывание» Специфических Инвестиций Как Временной Аналог Недоинвестирования," Journal of Institutional Studies Journal of Institutional Studies (Журнал институциональных исследований), CyberLeninka;Общество с ограниченной ответственностью «Гуманитарные перспективы», vol. 7(3), pages 76-91.

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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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