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 that 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. JEL Codes: O33, L24.
| Original language | English |
|---|---|
| Pages (from-to) | 165-192 |
| Number of pages | 28 |
| Journal | Journal of Law, Economics, and Organization |
| Volume | 30 |
| Issue number | 1 |
| DOIs | |
| State | Published - Mar 2014 |
Bibliographical note
Funding Information:The authors gratefully acknowledge the generous support of grants from the Columbia University Institute for Social and Economic Research and Policy, Columbia Business School’s Center for International Business Education and Research, and the European Commission (Grant # CIT5-CT-2006-028942). We thank Diego Rodriguez Rodriguez for his assistance with the ESSE data and Daniel Johnson and William Kerr for providing us with their algorithms for converting patent data from industry of origin to industry of use. We received extremely helpful comments from Maria Guadalupe, Steven Tadelis, Catherine Thomas, and participants in the February 2009 “Innovation, Internationalization and Global Labor Markets” Conference in Torino, Italy. Outstanding research assistance was provided by Ricardo Correa, Cecilia Machado, Raymond Lim, and Abraham Bae. Saul Lach thanks the Wolfson Family Charitable Trust.