On the Organizational Structure of Multinational Firms - Which Sourcing Mode for Which Input?

32 Pages Posted: 24 May 2012

See all articles by Verena Nowak

Verena Nowak

University of Duisburg-Essen

Christian Schwarz

University of Applied Sciences Duesseldorf

Jens Suedekum

University of Duisburg-Essen

Date Written: May 24, 2012

Abstract

Recent studies indicate that firms often outsource standard and simple tasks, while keeping complex and important inputs inside their boundaries. This observation is difficult to reconcile with the property rights approach of the firm, which suggests that important components should be outsourced in order to properly incentivize the respective suppliers. In this paper we introduce economies of scope into a property rights model where a producer contracts with two suppliers. The organizational decision is driven by two countervailing effects: the ownership rights effect favors outsourcing, while the 'indirect' effect via the suppliers’ costs favors vertical integration of both inputs. If production is highly component-intensive, and if one input is much more important than the other, we show that vertical integration of the 'more important' and outsourcing of the 'less important' supplier is chosen in equilibrium. We also consider an open economy setup where the producer decides whether to offshore inputs.

Keywords: multinational firms, outsourcing, intra-firm trade, property rights approach

JEL Classification: D230, F120, L230

Suggested Citation

Nowak, Verena and Schwarz, Christian and Suedekum, Jens, On the Organizational Structure of Multinational Firms - Which Sourcing Mode for Which Input? (May 24, 2012). CESifo Working Paper Series No. 3823. Available at SSRN: https://ssrn.com/abstract=2065713

Verena Nowak

University of Duisburg-Essen ( email )

Lotharstrasse 1
Duisburg, 47048
Germany

Christian Schwarz

University of Applied Sciences Duesseldorf ( email )

Münsterstraße
156
Düsseldorf, 40476
Germany

HOME PAGE: http://https://wiwi.hs-duesseldorf.de/personen/christian.schwarz/Seiten/default.aspx

Jens Suedekum (Contact Author)

University of Duisburg-Essen

Lotharstrasse 1
Duisburg, 47048
Germany

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