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Outsourcing and R&D Investment with Costly Patent Protection

  • Che, XiaoGang
  • Yang, Yibai
  • Zhang, Haoyu

We analyse decisions of firms on outsourcing of intermediate goods and R&D investment. If firms choose in-house production, a high profit discount is incurred due to the inefficiency of producing the intermediate goods, whereas if firms search for and outsource to specialists, the production costs decrease, but an imitation risk arises by specialists, who may become competitors in the final-good market. Accordingly, patents are used to mitigate this possibility, which are costly. We show that in outsourcing, all firms outsource to the same specialist to minimise the possibility of successful imitation in equilibrium. Moreover, firms still invest in R\&D activities and outsource their intermediate goods with some patent protection even though the selected specialist put effort into imitation.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25516.

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Date of creation: 28 Sep 2010
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Handle: RePEc:pra:mprapa:25516
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  1. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," NBER Working Papers 9740, National Bureau of Economic Research, Inc.
  2. Nancy T. Gallini, 1992. "Patent Policy and Costly Imitation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 52-63, Spring.
  3. Grossman, Sanford J. & Hart, Oliver D., 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Scholarly Articles 3450060, Harvard University Department of Economics.
  4. Pol Antr�s, 2005. "Incomplete Contracts and the Product Cycle," American Economic Review, American Economic Association, vol. 95(4), pages 1054-1073, September.
  5. Robert M. Hunt, 2006. "When Do More Patents Reduce R&D?," Levine's Bibliography 122247000000001065, UCLA Department of Economics.
  6. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  7. Acemoglu, Daron & Aghion, Philippe & Zilibotti, Fabrizio, 2002. "Vertical Integration and Distance to Frontier," CEPR Discussion Papers 3565, C.E.P.R. Discussion Papers.
  8. Edwin Lai & Raymond Riezman & Ping Wang, 2009. "Outsourcing of innovation," Economic Theory, Springer, vol. 38(3), pages 485-515, March.
  9. Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
  10. Bengt Holmstrom & John Roberts, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 73-94, Fall.
  11. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Aghion, P. & Tirole, J., 1993. "On the Management of Innovation," Working papers 93-12, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Robert M. Hunt, 1999. "Nonobviousness and the incentive to innovate: an economic analysis of intellectual property reform," Working Papers 99-3, Federal Reserve Bank of Philadelphia.
  14. repec:hrv:faseco:4784029 is not listed on IDEAS
  15. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February.
  16. Pol Antras & Elhanan Helpman, 2004. "Global Sourcing," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 552-580, June.
  17. Aghion, Philippe & Tirole, Jean, 1994. "The Management of Innovation," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1185-1209, November.
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