On the Organizational Structure of Multinational Firms: Which Sourcing Mode for Which Input?

Jens Suedekum, Verena Nowak and Christian Schwarz ()
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Christian Schwarz: University of Duisburg-Essen

No 6564, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Recent studies indicate that firms often outsource standard and simple tasks, while keeping complex and important inputs inside their boundaries. This observation is difficult to reconcile with the property rights approach of the firm, which suggests that important components should be outsourced in order to properly incentivize the respective suppliers. In this paper we introduce economies of scope into a property rights model where a producer contracts with two suppliers. The organizational decision is driven by two countervailing effects: the ownership rights effect favors outsourcing, while the "indirect" effect via the suppliers' costs favors vertical integration of both inputs. If production is highly component intensive, and if one input is much more important than the other, we show that vertical integration of the "more important" and outsourcing of the "less important" supplier is chosen in equilibrium. We also consider an open economy setup where the producer decides whether to offshore inputs.

Keywords: intra-firm trade; outsourcing; multinational firms; property rights approach (search for similar items in EconPapers)
JEL-codes: D23 F12 L23 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2012-05
New Economics Papers: this item is included in nep-bec, nep-com, nep-int and nep-knm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published - revised version published as 'Asymmetric spiders: Supplier heterogeneity and the organization of firms' in: Canadian Journal of Economics, 2016, 49 (2), 663 - 684

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Working Paper: On the Organizational Structure of Multinational Firms - Which Sourcing Mode for which Input? (2012)
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