Outsourcing when Investments are Specific and Complementary

Alla Lileeva () and Johannes Van Biesebroeck

No 14477, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using the universe of large Canadian manufacturing firms in 1988 and 1996, we investigate to what extent outsourcing decision can be explained by a simple property rights model. The unique availability of disaggregate information on outputs as well as inputs permits the construction of a very detailed measure of vertical integration. We also construct five different measures of technological intensity to proxy for investments that are likely to be specific to a buyer-seller relationship. A theoretical model that allows for varying degrees of investment specificity and for complementarities---an externality between buyer and supplier investments---guides the analysis. 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) property rights predictions on the link between investment intensities and optimal ownership are only supported for transactions with low complementarities. High specificity and a low risk of appropriation strengthen the predictions in the model and in the data.

JEL-codes: D23 L14 (search for similar items in EconPapers)
Date: 2008-11
New Economics Papers: this item is included in nep-bec
Note: IO PR
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Citations: View citations in EconPapers (7)

Published as Alla Lileeva & Johannes Van Biesebroeck, 2013. "Outsourcing When Investments Are Specific And Interrelated," Journal of the European Economic Association, European Economic Association, vol. 11(4), pages 871-896, 08.

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Related works:
Journal Article: OUTSOURCING WHEN INVESTMENTS ARE SPECIFIC AND INTERRELATED (2013)
Working Paper: Outsourcing when Investments are Specific and Complementary (2007)
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