of supplier and assembler entrants are similar. This suggests that outsourcing tends to take place
in situations where it accelerates innovation. Nonetheless, the overlap is not complete. Recall from
inequality (26) that all firms choose to outsource if λ is sufficiently high. On the other hand, (27),
(29) and (30) reveal that whether outsourcing promotes faster innovation than vertical integration
is independent from λ. The reason is that, once all firms have chosen to vertically integrate or
outsource, λ no longer enters their profits, as they all enjoy the same market share (E∕v or E∕f
respectively). This creates circumstances under which all firms outsource when vertical integration
would lead to a higher speed of innovation. Specifically, using (27), (29) and (30) to set glf = g&
and g& = g,ff, we can determine the range of ω in which outsourcing speeds innovation. The upper
and lower bounds of this range are
ks L(l — a) ʌ km L(l — a) — apkυ
ωs = l---and ωm =----------------.
kυ L T apks ky L(l — a) — apkm
They correspond to the two scenarios of η(r) = l and η(r) < l respectively and can be ranked
ωs > ωm as long as kυ > L[ks(l — a) + km]/ (L + apks). The range [ωmpωs] in which outsourcing
brings faster innovation is wider the higher the relative R&D cost advantage for specialized blueprints
with respect to vertically integrated ones (the smaller ks∕kυ and km∕kυ). We can then write:
Proposition 2 Firms choose outsourcing rather than vertical integration and their decision leads
to accelerated innovation if and only if λ> λ and ω m < ω < ω s.
If λ > λ and ω < ωm or ω > ωs, firms choose outsourcing when vertical integration maximizes the
speed of innovation. If λ < λ and ωm < ω < ωs, firms choose vertical integration when outsourcing
maximizes the speed of innovation. If λ < λ and ω < ωm or ω > ωs, firms choose vertical integration
and this promotes innovation.
The patterned region in Figure 3 represents the combinations of λ and ω where outsourcing is
chosen by firms for given parameter values. The figure then illustrates whether the organizational
decisions of firms coincide with a higher speed of innovation in the economy. The shaded pattern
area shows the region where firms outsource and their decision to do so accelerates the rate of
innovation. On the other hand, the white patterned area shows the area where firms’ decision to
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