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Firms' organizational modes with productivity heterogeneity, demand uncertainty and production capacity

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  • Sun, Churen
  • Tian, Guoqiang

Abstract

This paper investigates how firms' demand uncertainty with capacity constraints and their productivity heterogeneity affect their making-or-buying organizational choices in a general equilibrium framework with incomplete contracts. It shows that a final-good producer may adopt integrating a part of the production of its intermediate input in-house and outsource it at arm's length domestically or abroad simultaneously. Moreover, Five organizational modes, exiting the market, outsourcing in the North, outsourcing in the South, integrating and outsourcing in the North simultaneously, and integrating in the North and outsourcing in the South simultaneously, in turn occur with increase of firm-level productivity, as well as its demand uncertainty. Influences of uncertainty and productivity on prevalence of various organizational modes are also explored.

Suggested Citation

  • Sun, Churen & Tian, Guoqiang, 2011. "Firms' organizational modes with productivity heterogeneity, demand uncertainty and production capacity," MPRA Paper 35667, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:35667
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    File URL: https://mpra.ub.uni-muenchen.de/35667/1/MPRA_paper_35667.pdf
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    References listed on IDEAS

    as
    1. Du, Julan & Lu, Yi & Tao, Zhigang, 2006. "Why do firms conduct bi-sourcing?," Economics Letters, Elsevier, vol. 92(2), pages 245-249, August.
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    3. Gene M. Grossman & Elhanan Helpman, 2003. "Outsourcing Versus FDI in Industry Equilibrium," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 317-327, 04/05.
    4. Grossman, Gene M. & Helpman, Elhanan, 2004. "Managerial incentives and the international organization of production," Journal of International Economics, Elsevier, vol. 63(2), pages 237-262, July.
    5. Oliver Hart & John Moore, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 115-138.
    6. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    7. Pol Antras & Elhanan Helpman, 2004. "Global Sourcing," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 552-580, June.
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    9. Spencer, Barbara J & Raubitschek, Ruth S, 1996. "High-Cost Domestic Joint Ventures and International Competition: Do Domestic Firms Gain?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 315-340, May.
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    11. repec:hrv:faseco:4784029 is not listed on IDEAS
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    13. Hamid Beladi & Arijit Mukherjee, "undated". "Strategic bi-sourcing," Discussion Papers 08/06, University of Nottingham, School of Economics.
    14. Gene M. Grossman & Elhanan Helpman, 2002. "Integration versus Outsourcing in Industry Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 85-120.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Uncertainty; organizational mode; productivity heterogeneity; incomplete contract; outsourcing; integration;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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