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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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  • Alireza Naghavi & Gianmarco I. P. Ottaviano, 2010. "Outsourcing, complementary innovations, and growth," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 19(4), pages 1009-1035, August.
    • Handle: RePEc:oup:indcch:v:19:y:2010:i:4:p:1009-1035
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    Cited by:

    1. Carlo Altomonte & Tommaso Aquilante & Gábor Békés & Gianmarco I.P. Ottaviano, 2013. "Internationalization and innovation of firms: evidence and policy [Managing knowledge within and outside the multinational corporation]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 28(76), pages 663-700.
    2. Mohammad Yamin, 2011. "A Commentary on Peter Buckley’s Writings on the Global Factory," Management International Review, Springer, vol. 51(2), pages 285-293, April.
    3. Fabrice Defever, 2011. "Incomplete Contracts and the Impact of Globalization on Consumer Welfare," CESifo Working Paper Series 3484, CESifo.
    4. Cassey Lee & Dionisius Narjoko, 2015. "Escaping the Middle-Income Trap in Southeast Asia: Micro Evidence on Innovation, Productivity, and Globalization," Asian Economic Policy Review, Japan Center for Economic Research, vol. 10(1), pages 124-147, January.
    5. Alireza Naghavi & Gianmarco Ottaviano, 2009. "Offshoring and product innovation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(3), pages 517-532, March.
    6. 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).
    7. García-Vega, María & Huergo, Elena, 2019. "The role of international and domestic R&D outsourcing for firm innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 775-792.
    8. Riccardo Crescenzi & George Petrakos, 2016. "The European Union and its neighboring countries: The economic geography of trade, Foreign Direct Investment and development," Environment and Planning C, , vol. 34(4), pages 581-591, June.
    9. E. Loukis & N. Kyriakou & K. Pazalos & S. Popa, 2017. "Inter-organizational innovation and cloud computing," Electronic Commerce Research, Springer, vol. 17(3), pages 379-401, September.
    10. Ottaviano, Gianmarco, 2007. "Contract Enforcement, Comparative Advantage and Long-Run Growth," CEPR Discussion Papers 6419, C.E.P.R. Discussion Papers.
    11. Lionel Fontagné & Guillaume Gaulier & Soledad Zignago, 2007. "Specialisation across Varieties within Products and North-South Competition," Working Papers 2007-06, CEPII research center.

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    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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