Outsourcing and Downstream R&D under Economies of Scale
While the significance of economies of scale in outsourcing has been well-documented, the consequences of outsourcing on firms' R&D efforts, when outsourcing is driven by scale economies, remains unexplored. We investigate a simple model where downstream competitors outsource to a common upstream supplier out of their incentive to better exploit scale economies. We find that the efficiency gain of outsourcing in virtue of economies of scale helps to internalize R&D spillovers, which tends to enhance outsourcing firms' R&D incentives. On the other hand, outsourcing also mitigates downstream competition, which imposes an ambiguous impact on outsourcing firms' R&D incentives. The aggregate effect is that outsourcing enhances R&D investments only when R&D spillovers are sufficiently large, or when upstream economies of scale are sufficiently small.
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Volume (Year): 12 (2012)
Issue (Month): 1 (September)
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