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Technological Change and the Make-or-Buy Decision

Author

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  • Ann P. Bartel
  • Saul Lach
  • Nachum Sicherman

Abstract

A central decision faced by firms is whether to make intermediate components internally or to buy them from specialized producers. We argue that firms producing products for which rapid technological change is characteristic will benefit from outsourcing to avoid the risk of not recouping their sunk cost investments when new production technologies appear. This risk is exacerbated when firms produce for low volume internal use, and is mitigated for those firms that sell to larger markets. Hence, products characterized by higher rates of technological change will be more likely to be produced by mass specialized firms to which other firms outsource production. Using a 1990–2002 panel data set on Spanish firms and an exogenous proxy for technological change, we provide causal evidence that technological change increases the likelihood of outsourcing. JEL Codes: O33, L24.

Suggested Citation

  • Ann P. Bartel & Saul Lach & Nachum Sicherman, 2014. "Technological Change and the Make-or-Buy Decision," Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(1), pages 165-192.
  • Handle: RePEc:oup:jleorg:v:30:y:2014:i:1:p:165-192.
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    File URL: http://hdl.handle.net/10.1093/jleo/ews035
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    Cited by:

    1. Holger Görg & Aoife Hanley & Ingrid Ott, 2015. "Outsourcing Foreign Services and the Internet: Evidence from Firm Level Data," The Economic and Social Review, Economic and Social Studies, vol. 46(3), pages 367-387.

    More about this item

    JEL classification:

    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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