Input specificity and global sourcing

This paper identifies a new industry-equilibrium channel through which a firm's productivity affects its organizational choice. In a two-country model with firm heterogeneity and incomplete contracts, we show that the degree of input specificity and the hold-up friction in an outsourcing relation become a function of the final good firm's productivity when inputs are not completely specific. We examine the implications for the equilibrium international sorting pattern of firms. J. Japanese Int. Economies 24 (1) (2010) 69-85. HEC Montreal, Department of International Business, 3000 Chemin de la Cote-Sainte-Catherine, Montreal, Quebec, H3T-2A7 Canada; University of California, Berkeley, Department of Electrical Engineering and Computer Sciences, 253 Cory Hall, Berkeley, California 94720, United States. (C) 2009 Elsevier Inc. All rights reserved.