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Keywords:

  • outsourcing;
  • vertical integration;
  • innovation

Abstract

This paper investigates how firms' decisions to outsource or internalize production affect their technological performance. While several popular arguments and some anecdotal evidence suggest a direct association between outsourcing and technological performance, the effects of firms' governance decisions are likely to be contingent upon several specific attributes underlying a given exchange. This paper first demonstrates how standard performance models can improperly suggest a positive relationship between firms' outsourcing decisions and their technological performance. Models that account for firm- and transaction-specific features are then presented, which indicate that neither outsourcing nor internalization per se result in superior performance; rather, a firm's technological performance is contingent upon the alignment between firms' governance decisions and the degree of contractual hazards. Copyright © 2002 John Wiley & Sons, Ltd.