Outsourcing when Investments are Specific and Complementary

Alla Lileeva and Johannes Van Biesebroeck

Working Papers from University of Toronto, Department of Economics

Abstract: Using the universe of large Canadian manufacturing firms in 1988 and 1996, we investigate to what extent firms' outsourcing decision can be explained by a simple property rights model. A novel aspect of the data is the availability of component level information on outputs as well as inputs which permits the construction of a very detailed measure of vertical integration. Moreover, we construct five different measures of technological intensity to proxy for investments that are likely to be specific to a buyer-seller relationship. 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) only when we focus on the range of transactions with low complementarities do we find support for several nuanced predictions of the property rights model.

Keywords: Property rights theory; complementarity; asset specificity; vertical integration (search for similar items in EconPapers)
JEL-codes: L14 D23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-ipr
Date: Written 2007-05-22
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