Working Paper: NBER ID: w14477
Authors: Alla Lileeva; Johannes Van Biesebroeck
Abstract: Using the universe of large Canadian manufacturing firms in 1988 and 1996, we investigate to what extent outsourcing decision can be explained by a simple property rights model. The unique availability of disaggregate information on outputs as well as inputs permits the construction of a very detailed measure of vertical integration. We also construct five different measures of technological intensity to proxy for investments that are likely to be specific to a buyer-seller relationship. A theoretical model that allows for varying degrees of investment specificity and for complementarities---an externality between buyer and supplier investments---guides the analysis. Our main findings are that (i) greater specificity makes outsourcing less likely; (ii) complementarities between the investments of the buyer and the seller are also associated with less outsourcing; (iii) property rights predictions on the link between investment intensities and optimal ownership are only supported for transactions with low complementarities. High specificity and a low risk of appropriation strengthen the predictions in the model and in the data.
Keywords: outsourcing; property rights; investment specificity; complementarity; technological intensity
JEL Codes: D23; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| greater specificity in investments (G11) | less likelihood of outsourcing (L24) |
| higher levels of investment complementarity (E22) | lower outsourcing rates (L24) |
| low complementarities, high specificity, low risk of appropriation (L15) | support for property rights predictions (P14) |
| higher specificity and complementary investments (L15) | strengthen predictions in both model and data (C52) |