Outsourcing and Downstream R&D under Economies of Scale

Chen Yutian () and Debapriya Sen
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Chen Yutian: California State University, Long Beach

The B.E. Journal of Theoretical Economics, 2012, vol. 12, issue 1, 33

Abstract: While the significance of economies of scale in outsourcing has been well-documented, the consequences of outsourcing on firms' R&D efforts, when outsourcing is driven by scale economies, remains unexplored. We investigate a simple model where downstream competitors outsource to a common upstream supplier out of their incentive to better exploit scale economies. We find that the efficiency gain of outsourcing in virtue of economies of scale helps to internalize R&D spillovers, which tends to enhance outsourcing firms' R&D incentives. On the other hand, outsourcing also mitigates downstream competition, which imposes an ambiguous impact on outsourcing firms' R&D incentives. The aggregate effect is that outsourcing enhances R&D investments only when R&D spillovers are sufficiently large, or when upstream economies of scale are sufficiently small.

Keywords: Outsourcing; Economies of Scale; Spillovers (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1515/1935-1704.1837

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