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

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  • James R. Markusen
  • Yiqing Xie

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.

Suggested Citation

  • James R. Markusen & Yiqing Xie, 2014. "Outsourcing versus vertical integration: Ethier–Markusen meets the property-rights approach," International Journal of Economic Theory, The International Society for Economic Theory, vol. 10(1), pages 75-90, March.
    • Handle: RePEc:bla:ijethy:v:10:y:2014:i:1:p:75-90
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    Cited by:

    1. Zhu, Kunfu & Guo, Xuefan & Zhang, Zengkai, 2022. "Reevaluation of the carbon emissions embodied in global value chains based on an inter-country input-output model with multinational enterprises," Applied Energy, Elsevier, vol. 307(C).
    2. Kukharskyy, Bohdan, 2020. "A tale of two property rights: Knowledge, physical assets, and multinational firm boundaries," Journal of International Economics, Elsevier, vol. 122(C).
    3. Nowak, Verena, 2016. "Integration or Outsourcing: Combining Ex Ante Distortions and Ex Post Inefficiencies," VfS Annual Conference 2016 (Augsburg): Demographic Change 145897, Verein für Socialpolitik / German Economic Association.
    4. Ambashi, Masahito & Régibeau, Pierre & Rockett, Katharine E., 2019. "Grantbacks, territorial restraints, and innovation," International Journal of Industrial Organization, Elsevier, vol. 67(C).
    5. Benjamin Bridgman, 2017. "Market Entry Mode: Evidence From The Golden Age Of Hollywood," Economic Inquiry, Western Economic Association International, vol. 55(2), pages 778-793, April.

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