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Outsourcing, Complementary Innovations and Growth

  • Naghavi, Alireza
  • Ottaviano, Gianmarco

This paper analyzes the organization of firms in a dynamic setting with endogenous growth to shed light on the link between economic growth and the parallel creation and adoption of complementary innovations by independent labs and plants. In the presence of search friction and incomplete outsourcing contracts, we show that the ex-post bargaining power of upstream and downstream parties at the production stage feeds back into innovation and growth. Our dynamic perspective reveals a tension between the static and dynamic effects of outsourcing. The reason is that firms make their organizational choices weighting the higher searching and contracting costs of outsourcing against the higher entry and foregone specialization costs of vertical integration. In so doing, they neglect the effects of their choices on innovation and growth. Hence, when outsourcing is selected, the static gains from specialized production may at times be associated with relevant dynamic losses for consumers.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5925.

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Date of creation: Nov 2006
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Handle: RePEc:cpr:ceprdp:5925
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  1. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing versus FDI in Industry Equilibrium," Working Papers 148, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  2. Acemoglu, Daron & Aghion, Philippe & Zilibotti, Fabrizio, 2002. "Distance to Frontier, Selection, and Economic Growth," CEPR Discussion Papers 3467, C.E.P.R. Discussion Papers.
  3. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
  4. Robert C. Feenstra & Gordon H. Hanson, 2005. "Ownership and Control in Outsourcing to China: Estimating the Property-Rights Theory of the Firm," The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 729-761, May.
  5. Robert C. Feenstra, 1998. "Integration of Trade and Disintegration of Production in the Global Economy," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 31-50, Fall.
  6. Ottaviano, Gianmarco, 2007. "Contract Enforcement, Comparative Advantage and Long-Run Growth," CEPR Discussion Papers 6419, C.E.P.R. Discussion Papers.
  7. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
  8. Marin, Dalia & Verdier, Thierry, 2003. "Globalization and the new enterprise," Munich Reprints in Economics 19256, University of Munich, Department of Economics.
  9. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  10. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," NBER Working Papers 12091, National Bureau of Economic Research, Inc.
  11. Pol Antràs, 2003. "Firms, Contracts, And Trade Structure," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1375-1418, November.
  12. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Naghavi, Alireza & Ottaviano, Gianmarco, 2006. "Outsourcing, Contracts and Innovation Networks," CEPR Discussion Papers 5681, C.E.P.R. Discussion Papers.
  14. Edwin Lai & Raymond Riezman & Ping Wang, 2009. "Outsourcing of innovation," Economic Theory, Springer, vol. 38(3), pages 485-515, March.
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