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Outsourcing, complementary innovations, and growth

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  • Alireza Naghavi
  • Gianmarco I. P. Ottaviano

Abstract

This article studies the parallel creation of complementary innovations serving the upstream and downstream stages of a production chain with the aim of shedding light on the impact of outsourcing on R&D when supply contracts are incomplete. We argue that outsourced upstream production contributes to the emergence of innovation networks by creating a demand for upstream R&D. The bargaining weight of the two parties determines whether outsourcing decisions that lead to static specialization gains also generate dynamic gains when compared with vertically integrated production that relies on integrated R&D. In particular, growth is maximized when the bargaining power is split in a way that search and hold-up frictions are minimized. Putting this result next to the decision of firms to outsource, we conclude that complementary innovations are more likely to foster growth in Schumpeterian Mark I sectors, while vertical integration does so in Schumpeterian Mark II sectors. Copyright 2010 The Author 2010. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved., Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Industrial and Corporate Change.

Volume (Year): 19 (2010)
Issue (Month): 4 (August)
Pages: 1009-1035

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Handle: RePEc:oup:indcch:v:19:y:2010:i:4:p:1009-1035

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  1. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing versus FDI in Industry Equilibrium?," Harvard Institute of Economic Research Working Papers 1965, Harvard - Institute of Economic Research.
  3. Marin, Dalia & Verdier, Thierry, 2002. "Globalization and the 'New Enterprise'," CEPR Discussion Papers 3640, C.E.P.R. Discussion Papers.
  4. Helpman, Elhanan, 2006. "Trade, FDI and the Organization of Firms," CEPR Discussion Papers 5589, C.E.P.R. Discussion Papers.
  5. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
  6. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," NBER Working Papers 9740, National Bureau of Economic Research, Inc.
  7. Ottaviano, Gianmarco Ireo Paolo, 2007. "Contract Enforcement, Comparative Advantage and Long-Run Growth," CEPR Discussion Papers 6419, C.E.P.R. Discussion Papers.
  8. Robert Feenstra, 2003. "Integration Of Trade And Disintegration Of Production In The Global Economy," Working Papers 986, University of California, Davis, Department of Economics.
  9. Zilibotti, Fabrizio & Aghion, Philippe & Acemoglu, Daron, 2006. "Distance to Frontier, Selection, and Economic Growth," Scholarly Articles 4554122, Harvard University Department of Economics.
  10. Robert C. Feenstra & Gordon H. Hanson, 2004. "Ownership and Control in Outsourcing to China: Estimating the Property-Rights Theory of the Firm," NBER Working Papers 10198, National Bureau of Economic Research, Inc.
  11. Edwin Lai & Raymond Riezman & Ping Wang, 2009. "Outsourcing of innovation," Economic Theory, Springer, vol. 38(3), pages 485-515, March.
  12. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  13. Naghavi, Alireza & Ottaviano, Gianmarco Ireo Paolo, 2006. "Outsourcing, Contracts and Innovation Networks," CEPR Discussion Papers 5681, C.E.P.R. Discussion Papers.
  14. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
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Cited by:
  1. Lionel Fontagné & Guillaume Gaulier & Soledad Zignago, 2007. "Specialisation across Varieties within Products and North-South Competition," Working Papers 2007-06, CEPII research center.
  2. Carlo Altomonte & Tommaso Aquilante & Gábor Békés & Gianmarco I.P. Ottaviano, 2013. "Internationalization and innovation of firms: evidence and policy," Economic Policy, CEPR & CES & MSH, vol. 28(76), pages 663-700, October.
  3. Naghavi, Alireza & Ottaviano, Gianmarco Ireo Paolo, 2006. "Offshoring and Product Innovation," CEPR Discussion Papers 6008, C.E.P.R. Discussion Papers.
  4. Fabrice Defever, . "Incomplete Contracts and the Impact of Globalization on Consumer Welfare," Discussion Papers 11/08, University of Nottingham, GEP.
  5. Cassey LEE, 2012. "Knowledge Flows, Organization and Innovation: Firm-Level Evidence from Malaysia," Working Papers DP-2012-11, Economic Research Institute for ASEAN and East Asia (ERIA).
  6. Ottaviano, Gianmarco Ireo Paolo, 2007. "Contract Enforcement, Comparative Advantage and Long-Run Growth," CEPR Discussion Papers 6419, C.E.P.R. Discussion Papers.

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