Outsourcing versus FDI in oligopoly equilibrium

Dermot Leahy, Catia Montagna

Research output: Contribution to journalArticle

5 Citations (Scopus)

Abstract

We consider the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialized inputs. Factor price considerations dictate that firms acquire the intermediate abroad, by either producing it in a wholly owned subsidiary or outsourcing it to a supplier who must make a relationship-specific investment. Firms’ internationalization mode depends on cost and strategic considerations. Crucially, asymmetric equilibria emerge, with firms choosing different modes of internationalization, even when they are ex ante identical. With ex ante asymmetries, lower cost producers have a stronger incentive to vertically integrate (FDI), while higher cost firms are more likely to outsource.
Original languageEnglish
Pages (from-to)149-166
Number of pages18
JournalSpatial Economic Analysis
Volume4
Issue number2
DOIs
Publication statusPublished - Jun 2009

Fingerprint

Outsourcing
Oligopoly
Costs
Internationalization
Industry
Suppliers
Wholly owned subsidiary
Asymmetry
Make or buy decisions
Incentives
Relationship-specific investments
Asymmetric equilibria
Factor prices

Cite this

Outsourcing versus FDI in oligopoly equilibrium. / Leahy, Dermot; Montagna, Catia.

In: Spatial Economic Analysis, Vol. 4, No. 2, 06.2009, p. 149-166.

Research output: Contribution to journalArticle

@article{91aa8fdc5c4547949e7d2c8c8beaf54c,
title = "Outsourcing versus FDI in oligopoly equilibrium",
abstract = "We consider the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialized inputs. Factor price considerations dictate that firms acquire the intermediate abroad, by either producing it in a wholly owned subsidiary or outsourcing it to a supplier who must make a relationship-specific investment. Firms’ internationalization mode depends on cost and strategic considerations. Crucially, asymmetric equilibria emerge, with firms choosing different modes of internationalization, even when they are ex ante identical. With ex ante asymmetries, lower cost producers have a stronger incentive to vertically integrate (FDI), while higher cost firms are more likely to outsource.",
author = "Dermot Leahy and Catia Montagna",
year = "2009",
month = "6",
doi = "10.1080/17421770902833964",
language = "English",
volume = "4",
pages = "149--166",
journal = "Spatial Economic Analysis",
number = "2",

}

TY - JOUR

T1 - Outsourcing versus FDI in oligopoly equilibrium

AU - Leahy, Dermot

AU - Montagna, Catia

PY - 2009/6

Y1 - 2009/6

N2 - We consider the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialized inputs. Factor price considerations dictate that firms acquire the intermediate abroad, by either producing it in a wholly owned subsidiary or outsourcing it to a supplier who must make a relationship-specific investment. Firms’ internationalization mode depends on cost and strategic considerations. Crucially, asymmetric equilibria emerge, with firms choosing different modes of internationalization, even when they are ex ante identical. With ex ante asymmetries, lower cost producers have a stronger incentive to vertically integrate (FDI), while higher cost firms are more likely to outsource.

AB - We consider the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialized inputs. Factor price considerations dictate that firms acquire the intermediate abroad, by either producing it in a wholly owned subsidiary or outsourcing it to a supplier who must make a relationship-specific investment. Firms’ internationalization mode depends on cost and strategic considerations. Crucially, asymmetric equilibria emerge, with firms choosing different modes of internationalization, even when they are ex ante identical. With ex ante asymmetries, lower cost producers have a stronger incentive to vertically integrate (FDI), while higher cost firms are more likely to outsource.

U2 - 10.1080/17421770902833964

DO - 10.1080/17421770902833964

M3 - Article

VL - 4

SP - 149

EP - 166

JO - Spatial Economic Analysis

JF - Spatial Economic Analysis

IS - 2

ER -