Outsourcing When Investments are Specific and Complementary

48 Pages Posted: 17 Nov 2008 Last revised: 29 Oct 2014

See all articles by Alla Lileeva

Alla Lileeva

York University - Department of Economics

Johannes Van Biesebroeck

K.U.Leuven; Centre for Economic Policy Research (CEPR)

Date Written: November 2008

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.

Suggested Citation

Lileeva, Alla and Van Biesebroeck, Johannes, Outsourcing When Investments are Specific and Complementary (November 2008). NBER Working Paper No. w14477. Available at SSRN: https://ssrn.com/abstract=1301925

Alla Lileeva

York University - Department of Economics ( email )

4700 Keele St.
Toronto, Ontario M3J 1P3
Canada

Johannes Van Biesebroeck (Contact Author)

K.U.Leuven ( email )

Naamsestraat 69
B-3000 Leuven
Belgium
+3216326793 (Phone)
+3216326796 (Fax)

HOME PAGE: http://www.econ.kuleuven.be/public/N07057/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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