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Outsourcing and Downstream R&D under Economies of Scale

Author

Listed:
  • Chen Yutian

    (California State University, Long Beach)

  • Sen Debapriya

    (Ryerson University)

Abstract

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.

Suggested Citation

  • Chen Yutian & Sen Debapriya, 2012. "Outsourcing and Downstream R&D under Economies of Scale," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 12(1), pages 1-33, September.
  • Handle: RePEc:bpj:bejtec:v:12:y:2012:i:1:n:29
    DOI: 10.1515/1935-1704.1837
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    References listed on IDEAS

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