Heterogeneity and Information Spillovers in Web Service Sourcing

This paper studies the role of firm heterogeneity and information spillovers in the sourcing decision to provide web services. To this end, we develop a theoretical model that relates these factors to firms' decisions to outsource or use in-house resources (insource). Based on this theoretical framework, we further construct an econometric model. Using our estimated model, we investigate why insourcing of web services is much more prevalent than outsourcing. We find that insourcing is likely to generate the higher value for most firms, and lack of information on the efficacy of outsourcing is unlikely to account for the dominance of insourcing over outsourcing. Therefore, differences in firm choices with regard to web services provision is primarily driven by firm heterogeneity, rather than by information spillovers.