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Outsourcing when Investments are Specific and Complementary

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  • Alla Lileeva
  • Johannes Van Biesebroeck

Abstract

Using the universe of large Canadian manufacturing firms in 1988 and 1996, we investigate to what extent firms' outsourcing decision can be explained by a simple property rights model. A novel aspect of the data is the availability of component level information on outputs as well as inputs which permits the construction of a very detailed measure of vertical integration. Moreover, we construct five different measures of technological intensity to proxy for investments that are likely to be specific to a buyer-seller relationship. 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) only when we focus on the range of transactions with low complementarities do we find support for several nuanced predictions of the property rights model.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-287.

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Length: 45 pages
Date of creation: 22 May 2007
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Handle: RePEc:tor:tecipa:tecipa-287

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Keywords: Property rights theory; complementarity; asset specificity; vertical integration;

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References

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Cited by:
  1. Luigi Benfratello & Tiziano Razzolini & Alessandro Sembenelli, 2009. "Does ICT Investment Spur or Hamper Offshoring? Empirical Evidence from Microdata," Working papers 5, Former Department of Economics and Public Finance "G. Prato", University of Torino.
  2. Ornelas, Emanuel & Turner, John L., 2010. "Protection and International Sourcing," CEPR Discussion Papers 8070, C.E.P.R. Discussion Papers.
  3. Johannes Van Biesebroeck & Lijun ZHANG, 2011. "Global sourcing of a complex good," Center for Economic Studies - Discussion papers ces11.26, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  4. Bartel, Ann P & Lach, Saul & Sicherman, Nachum, 2005. "Outsourcing and Technological Change," CEPR Discussion Papers 5082, C.E.P.R. Discussion Papers.

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