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Outsourcing, complementary innovations, and growth

  • Alireza Naghavi
  • Gianmarco I. P. Ottaviano

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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Article provided by Oxford University Press in its journal Industrial and Corporate Change.

Volume (Year): 19 (2010)
Issue (Month): 4 (August)
Pages: 1009-1035

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Handle: RePEc:oup:indcch:v:19:y:2010:i:4:p:1009-1035
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  1. Robert C. Feenstra & Gordon H. Hanson, 2004. "Ownership and Control in Outsourcing to China: Estimating the Property-Rights Theory of the Firm," NBER Working Papers 10198, National Bureau of Economic Research, Inc.
  2. Robert C. Feenstra, . "Integration Of Trade And Disintegration Of Production In The Global Economy," Department of Economics 98-06, California Davis - Department of Economics.
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  8. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing versus FDI in Industry Equilibrium?," Harvard Institute of Economic Research Working Papers 1965, Harvard - Institute of Economic Research.
  9. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Ottaviano, Gianmarco, 2007. "Contract Enforcement, Comparative Advantage and Long-Run Growth," CEPR Discussion Papers 6419, C.E.P.R. Discussion Papers.
  11. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," Harvard Institute of Economic Research Working Papers 2118, Harvard - Institute of Economic Research.
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