Outsourcing, Complementary Innovations and Growth



(‘innovation networks’). The model has allowed us to characterize the conditions under which the
organizational choices of firms in terms of production foster or hamper innovation.

The analysis has highlighted the importance of the bargaining conditions between upstream and
downstream producers in the course of the formation of networks for the latter to promote innovation
and growth. We have shown that the long run effects of fragmented production on innovation are
sector specific and depend on the structure of the market. In particular, in sectors in which the R&D
costs of upstream innovations are large (resp. small) with respect to the R&D cost of downstream
innovations, outsourcing is likely promote growth only when the bargaining weight of intermediate
suppliers is also large (resp. small) with respect to the bargaining weight of final assemblers. As
the bargaining weights diverges from these scenarios, it becomes more likely for the static gains
from outsourced production to lead to dynamic losses due to slower innovation. This stems from
the fact that producers partially neglect the impact of their organizational choices on innovation.
Hence, although the interests of firms and labs are generally aligned, the positive link between the
organization of firms and the speed of innovation cannot be taken for granted.

References

[1] Acemoglu D., P. Aghion and F. Zilibotti (2006) Distance to Frontier, Selection, and Economic
Growth,
Journal of European Economic Association 4, 37-74.

[2] Antras P. (2003) Firms, Contracts, and Trade Structure, Quarterly Journal of Economics 118,
1375-1418.

[3] Barba Navaretti, G. and A. Venables (2004) Multinational Firms in the World Economy
(Princeton: Princeton Univ. Press).

[4] Engardio P. and B. Einhorn (2005) Outsourcing Innovation, Business Week, March 21.

[5] Feenstra R. (1998) Integration of Trade and Disintegration of Production in the Global Econ-
omy,
Journal of Economic Perspectives 12, 31-50.

21



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