On the role of sunk costs and transaction costs in utsourcing decisions.

In this paper we report the results of two experiments examining the influence of sunk historical investments for internal production on the outsourcing decision. Outsourcing activities to external companies in an important issue in today's competitive environment. Transaction cost economics offers a theoretical explanation taking into account future transaction and production costs. In this theoretical framework, asset specificity and uncertainly are the main explanatory variables for the choice between producing internally or outsourcing to suppliers. We study the additional influence of internal sunk costs on outsourcing. We conclude that, contrary to accounting norms and standard economic theory , sunk costs are an additional explanatory factor in the outsourcing decision.Costs; Outsourcing; Decisions; Investments; Companies; Economics;

Outsourcing in Contests

We study ex post outsourcing of production in an imperfectly discriminating contest, interpreted here as a research tournament or a procurement contest for being awarded some production contract. We find that the possibility of outsourcing increases competition between the contestants, leading to higher total contest effort, unless the ex-post bargaining strength of the contest winner is sufficiently low and/or there are very few contestants. However, even in the case of two contestants, outsourcing reduces the procurement costs of inducing a given level of effort if the contest organizer can collect entry fees. With respect to contest design, this suggests that outsourcing should generally be allowed if the objective is to induce stronger competition.contests, outsourcing, bargaining, contest design

Tendering Universal Service Obligations in Liberalized Network Industries

In the past decades, several countries have introduced reverse auctions for allocating universal service or public mission subsidies in various industries. Examples include urban transport, air transport and telecommunications. Recently, such mechanisms have also been envisioned in liberalized postal markets. Issuing an invitation to tender for obligations in otherwise liberalized markets significantly differs from auctioning off a monopolistic provision of services or goods (competition for the market), as is e.g. the case with spectrum auctions in the telecommunications sector. We discuss the rationale for introducing such a regulatory regime as well as conceptual and practical issues concerning its implementation. It turns out that designing an efficient tender for universal service subsidies in liberalized markets is considerably more difficult than tendering e.g. a monopoly franchise. A first reason is that the cost assessment is more complex in the former case as future competitive market outcomes have to be anticipated; in the case with franchise bidding, at least the number of competitors is given by the tender itself. Hence, revenue effects caused by competitors are easier to calculate. Second, the threat of a winner’s moral hazard requires more detailed ex ante regulations. These raise the social cost of universal service provision. Compared to direct designation of universal services with ex post compensation, tendering causes a series of fundamental concerns and trade-offs that make the application of auctions less attractive than in other sectors.Procurement, Tendering, Reverse Auctions, Universal Service Obligation, Liberalization, Network Industries

From the Theory of the Firm to FDI and Internalisation: A Survey

This paper surveys recent contributions on the Internalisation issue, based on different theories of the firm, to show how the make-or-buy decision, at an international level, has been assessed through the opening up of the “black box” - traditionally explored by the theorists of the firm – and the simultaneous endogenization of the market environment – as in the International Economics tradition. In particular, we consider three Archetypes – Grossman-Hart-Moore treatment of hold-up and contractual incompleteness, Holmstrom-Milgrom view of the firm as an incentive system, Aghion-Tirole conceptualisation of formal and real authority in organisations – and show how they have been embedded in industry and general equilibrium models of FDI to explain the boundaries of global firms.FDI, Internalisation, International Economics, Incomplete contracts

Production Technology, Information Technology, and Vertical Integration under Asymmetric Information

The paper addresses the effect of technological progress on the frontiers of the firm, building on transaction cost theory and agency theory. The model incorporates four types of costs: production, coordination, management, and transaction costs. The market has lower production costs, but higher coordination costs, than the firm. A principal-two agents framework with adverse selection and moral hazard is adopted. It is found that technological progress in production and information technologies tend to have diametrically opposite effects on procurement. In general, progress in production technology leads to more vertical integration, whereas progress in information technology leads to more subcontracting. When technological change concerns the level of costs, its effect on procurement depends on the cost differential between the firm and the market, and on the relative importance of production and coordination costs; whereas, when technological change affects the effect or disutility of effort, its impact on procurement is unambiguous. The paper provides an explanation for the changing effect of technological progress on procurement throughout the twentieth century: why it favoured vertical integration historically, and why it favours subcontracting (or has a mixed effect) today. This explanation relies on the implication of the evolution of the relative importance of production and coordination activities for the relationship between technological progress and vertical integration. The paper constitutes a bridge between contractual explanations and technological explanations of the existence and frontiers of the firm. Cet article analyse l'effet du changement technologique sur les frontières de la firme en se basant sur la théorie des coûts de transaction et la théorie de l'agence. Le modèle incorpore quatre types de coûts: coûts de production, de coordination, de management et de transaction. Le marché a des coûts de production plus faibles, mais des coûts de coordination plus élevés, que la firme. L'analyse est effectuée dans un cadre principal-deux agents, avec antisélection et risque moral. Les changement technologiques concernant la technologie de production et les technologies de l'information entraînent des effets diamétralement opposés sur l'intégration verticale. En général, le changement technique concernant la technologie de production se traduit par davantage d'intégration verticale, alors que le changement technique concernant les technologies de l'information se traduit par davantage d'impartition. Lorsque le changement technologique concerne le niveau des coûts, son effet sur l'impartition dépend du différentiel de coûts entre la firme et le marché, et de l'importance relative des coûts de production et de coordination; tandis que, lorsque le changement technologique concerne les efforts de réduction des coûts, son effet est sans ambiguïté. Le papier propose une explication du changement dans l'effet du progrès technique sur l'impartition durant le vingtième siècle: pourquoi il a favorisé l'intégration verticale historiquement, et favorise l'impartition (ou du moins a un effet ambigu) aujourd'hui. L'explication repose sur l'impact de l'évolution de l'importance relative des activités de production et de coordination sur la relation entre le progrès technique et l'intégration verticale. Cet article constitue un mariage entre les explications contractuelles et les explications technologiques de l'existence et des frontières de la firme.Transaction costs, Asymmetric and private information, Markets vs. hierarchies, Vertical integration, Technological change, Information technology, Coûts de transaction, Information privée et asymétrique, Marchés vs. hiérarchies, Intégration verticale, Changement Technologique, Technologies de l'information

Market Frictions, Governance and Economic Rents: Taking Stock and Looking Ahead

This paper develops a more unified organizational economics theory within Strategy. We begin with perfectly competitive markets derived from the first fundamental welfare theorem of economics, and develop a parsimonious typology of market frictions. We show how two primary questions in Strategy--why firms exist and why some firms outperform others--can be evaluated from this market frictions logic. Building on this logic enables more systematic explanations and predictions concerning governance structures and economic rents in Strategy research.

How Sustainable are Benefits from Global Production Networks? Malaysia's Upgrading Prospects in the Electronics Industry

The paper introduces an operational definition of industrial upgrading (IU and documents the emergence of complex, multi-tier "networks of networks" which provide new opportunities for IU, but which also raise threshold requirements for participating in these networks. I highlight structural weaknesses of the Malaysian electronics industry that constrain its upgrading prospects; assess current policies that try to link cluster development and global network integration; discuss adjustments in linkages with global brand leaders (OEMs); and ask to what degree linkages with contract manufacturers (CMs) can broaden network benefits. The paper concludes, by exploring new opportunities for international knowledge sourcing that could complement Malaysia's linkages with GPNs. A completely revised and updated version has been published as: "Global Production Networks and Industrial Upgrading -Malaysia's Electronics Industry", in: J. Kidd and F.J. Richter, eds., Trust and Anti-Trust in Cross-Cultural Alliances, published for the World Economic Forum, Palgrave, London, 2003.

Drivers of the Offshore Outsourcing of R&D: Empirical Evidence from French Manufacturers

The pace of technological change and the challenges faced by companies to remain competitive in global markets have contributed to a global expansion of R&D transactions. This paper shows that French companies engaged in the offshore outsourcing of R&D are outward oriented essentially through exports. Further, single unit companies seem more active in this type of R&D transaction than companies belonging to a group. These findings suggest a stronger integration of small and medium size exporting companies into international networks of innovation. Technological sourcing seems to be leading this phenomenon more than cost-opportunities motivations.R&D Outsourcing, Offshore of Research and Development Activities, Globalization.