Input Specificity and Global Sourcing

This paper investigates the role of productivity on a firm’s organizational choice. We set up an industry-equilibrium model in which heterogeneous firms concurrently choose their type of inputs, ownership structure and location of production. In choosing their type of inputs, firms trade off the extra customization costs of adopting generic inputs against the reduced hold-up friction that generic outsourcing entails. We demonstrate that the hold-up friction under generic outsourcing increases with a firm’s productivity. In our model, this implies that: (i) high productivity firms choose vertical integration to the South, (ii) medium-high productivity firms choose ideal outsourcing to the South, (iii) medium-low productivity firms choose generic outsourcing to the South, and low productivity firms choose generic outsourcing to the North. JEL Codes: F23, F12.