Technological Change and the Make-or-Buy Decision

40 Pages Posted: 3 May 2012

See all articles by Ann P. Bartel

Ann P. Bartel

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Saul Lach

Hebrew University of Jerusalem - Department of Economics; CEPR

Nachum Sicherman

Columbia University; IZA Institute of Labor Economics

Date Written: March 27, 2012

Abstract

A central decision faced by firms is whether to make intermediate components internally or to buy them from specialized producers. We argue that firms producing products for which rapid technological change is characteristic will benefit from outsourcing to avoid the risk of not recouping their sunk cost investments when new production technologies appear. This risk is exacerbated when firms produce for low volume internal use, and is mitigated for those firms which sell to larger markets. Hence, products characterized by higher rates of technological change will be more likely to be produced by mass specialized firms to which other firms outsource production. Using a 1990-2002 panel data set on Spanish firms and an exogenous proxy for technological change, we provide causal evidence that technological change increases the likelihood of outsourcing.

Suggested Citation

Bartel, Ann P. and Lach, Saul and Sicherman, Nachum, Technological Change and the Make-or-Buy Decision (March 27, 2012). Columbia Business School Research Paper No. 12/24. Available at SSRN: https://ssrn.com/abstract=2049904 or http://dx.doi.org/10.2139/ssrn.2049904

Ann P. Bartel (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Saul Lach

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem, 91905
Israel
+972 2 588 3253 (Phone)
+972 2 581 6071 (Fax)

HOME PAGE: http://economics.huji.ac.il/facultye/saul/saul.html

CEPR

London
United Kingdom

Nachum Sicherman

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States
212-854-4464 (Phone)
212-316-9355 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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