Outsourcing versus vertical integration: Ethier–Markusen meets the property-rights approach

James Markusen and Yiqing Xie

International Journal of Economic Theory, 2014, vol. 10, issue 1, 75-90

Abstract: type="main" xml:lang="en">

Early analyses of direct investment versus outsourcing focused on the existence of knowledge-based assets, knowledge being non-rivaled and non-excludable. Ethier was the first to formally model the consequences of non-excludability for the vertical integration versus outsourcing decision. Later authors took a different approach, modeling physical capital as fully excludable but relationship-specific. This paper further develops a model with both non-excludable knowledge capital and fully excludable physical capital. Results show that vertical integration tends to be chosen when (a) the technology is relatively knowledge intensive and/or when (b) knowledge and physical capital are strong complements.

Date: 2014
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