The Effect of Coordination Requirements on Sourcing Decisions: Evidence from Patent Prosecution Services

Abstract

Although the link between coordination requirements and vertical integration is theoretically well established, empirical tests of this relationship are hard to implement due to the simultaneous determination of both variables. In this study, we take advantage of regulatory changes in patent prosecution in the US to provide plausibly causal evidence linking increases in coordination requirements with insourcing. Moreover, we examine the role of plural sourcing, i.e. simultaneously making and buying, when responding to changes in coordination requirements. We find that the move towards insourcing is more pronounced for plural sourcing firms as compared to firms relying on outsourcing. These results are consistent with the view that plural sourcing provides firms with flexibility to switch between sourcing modes when facing changing coordination requirements.

Keywords: vertical integration, coordination, plural sourcing, AIPA, patent prosecution

JEL Classification: L20, O32, O34