In or Out: How Insourcing Foreign Input Production Affects Domestic Production

When a firm imports inputs from foreign countries, the management faces two options: buying from unaffiliated firms or insourcing the foreign production. This paper suggests that this decision directly affects domestic production because international insourcing affects the operational flexibility and the firms' opportunities for accessing knowledge and capabilities developed abroad. Empirical results based on firm-level data of Swiss firms confirm this hypothesis. Concretely, the insourcing of international production increases domestic productivity, decreases (at least in the short run) domestic employment and possibly investments. In line with transaction cost literature, we observe that contractual hazards moderate these effects.