Outsourcing, Complementary Innovations and Growth

Gianmarco Ottaviano and Alireza Naghavi

No 5925, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyzes the organization of firms in a dynamic setting with endogenous growth to shed light on the link between economic growth and the parallel creation and adoption of complementary innovations by independent labs and plants. In the presence of search friction and incomplete outsourcing contracts, we show that the ex-post bargaining power of upstream and downstream parties at the production stage feeds back into innovation and growth. Our dynamic perspective reveals a tension between the static and dynamic effects of outsourcing. The reason is that firms make their organizational choices weighting the higher searching and contracting costs of outsourcing against the higher entry and foregone specialization costs of vertical integration. In so doing, they neglect the effects of their choices on innovation and growth. Hence, when outsourcing is selected, the static gains from specialized production may at times be associated with relevant dynamic losses for consumers.

Keywords: Incomplete contracts; Growth; Organization of firms; Welfare; Outsourcing; Complementary innovations (search for similar items in EconPapers)
JEL-codes: D91 L14 L23 O32 (search for similar items in EconPapers)
Date: 2006-11
New Economics Papers: this item is included in nep-bec, nep-cse, nep-ino and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Outsourcing, complementary innovations, and growth (2010)
Working Paper: Outsourcing, Complementary Innovations and Growth (2008)
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