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Outsourcing versus joint venture from vendor's perspective

  • Moon, Yongma
  • Yao, Tao
  • Jiang, Bin
Registered author(s):

    Even though many studies have discussed outsourcing contracts from the client's perspective, little research has been done from the vendor's perspective. In this paper, we consider a vendor's outsourcing contract decision-making process, during which the market price and the vendor's operation cost are uncertain. This paper develops real option models to investigate whether a vendor firm should sign an outsourcing contract from its client or establish a joint venture with this client. Our results show that, while the feasibility of an outsourcing contract to the vendor increases with a higher contract price offered by the client, the feasibility of a joint venture depends on market conditions. We also find that there are loss-by-acceptance regions, in which either an outsourcing or a joint venture contract is currently feasible to start, but a vendor may sustain a loss by accepting such a contract.

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    Article provided by Elsevier in its journal International Journal of Production Economics.

    Volume (Year): 129 (2011)
    Issue (Month): 1 (January)
    Pages: 23-31

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    Handle: RePEc:eee:proeco:v:129:y:2011:i:1:p:23-31
    Contact details of provider: Web page: http://www.elsevier.com/locate/ijpe

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    1. David Johnstone, 2002. "Public Sector Outsourcing as an Exchange Option," Abacus, Accounting Foundation, University of Sydney, vol. 38(2), pages 153-176.
    2. Lenos Trigeorgis, 1993. "Real Options and Interactions With Financial Flexibility," Financial Management, Financial Management Association, vol. 22(3), Fall.
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    6. Alvarez, Luis H.R. & Stenbacka, Rune, 2007. "Partial outsourcing: A real options perspective," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 91-102, February.
    7. Nalini Dayanand & Rema Padman, 2001. "Project Contracts and Payment Schedules: The Client's Problem," Management Science, INFORMS, vol. 47(12), pages 1654-1667, December.
    8. Andrew B. Abel & Janice C. Eberly, 1993. "A Unified Model of Investment Under Uncertainty," NBER Working Papers 4296, National Bureau of Economic Research, Inc.
    9. Jiang, Bin & Reinhardt, Gilles & Young, Scott T., 2008. "BOCOG's outsourcing contracts: The vendor's perspective," Omega, Elsevier, vol. 36(6), pages 941-949, December.
    10. Paul R. Bergin & Robert C. Feenstra & Gordon H. Hanson, 2007. "Outsourcing and Volatility," NBER Working Papers 13144, National Bureau of Economic Research, Inc.
    11. Arnd Huchzermeier & Christoph H. Loch, 2001. "Project Management Under Risk: Using the Real Options Approach to Evaluate Flexibility in R...D," Management Science, INFORMS, vol. 47(1), pages 85-101, January.
    12. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April.
    13. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June.
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